RCEP explained: The 16-country free-trade agreement that India may sign

While countries have been negotiating since 2013, India has also been facing opposition from multiple domestic industries.

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India is on the cusp of signing a massive free-trade agreement involving 16 nations that are home to nearly 50% of the world’s population. Known as RCEP, or The Regional Comprehensive Economic Partnership, the agreement would position India as a major player in a huge trading bloc.

Though Commerce Minister Piyush Goyal has voiced his support for India’s involvement in the RCEP, a number of Indian industries that are adamantly against the agreement and the changes it will inflict upon the country’s markets.

Here’s an explainer on the RCEP, what’s at stake for India and why many domestic industries are worried about it:

The Regional Comprehensive Economic Partnership (RCEP) is a proposed free-trade agreement.

The countries in RCEP include the 10 ASEAN countries — Indonesia, Thailand, Singapore, Malaysia, the Philippines, Vietnam, Myanmar, Brunei, Cambodia, Laos — and the six countries these countries have free-trade agreements with — Australia, China, India, Japan, New Zealand and Korea.

This 16-country bloc reportedly comprises 25% of global GDP, 30% of global trade and 26% of foreign direct investment flows.

A free-trade agreement is essentially an agreement that two or more countries reach with regard to import and export of goods. It aims to reduce the number of processes in place. Usually, this also implies that there are little to no tariffs, quotas etc on the import and export of products.

According to ASEAN, this deal will provide “a framework aimed at lowering trade barriers and securing improved market access for goods and services for businesses in the region”.

Negotiations for this agreement have been ongoing since 2013, with several countries, including India, trying to resolve problems with other countries with regard to tariffs. There are a total of 14 issues that countries need to sort out, five of which pertain to India.

Now, after multiple rounds of negotiations, it is finally near completion. But there are multiple unresolved issues between countries, and India has the most number of them. Currently, India has time to sort out its problems before October 22. If an agreement isn’t reached, Prime Minister Modi will reportedly take the final decision.

After that, it is expected that negotiations and the agreement will be completed by November, and the deal will be signed next year.

India has also been facing opposition from several domestic industries over RCEP. They fear that this agreement will sound the death knell to several industries.

What some of India’s conditions for RCEP are

Base year for tariffs: The RCEP will result in all countries reducing their tariffs. Since negotiations began in 2013, the pact has proposed that the base year, based on which tariffs will be reduced, be 2013. But India wants to change the base year applied to reduced tariffs to 2019.

This is because India has raised customs duties on scores of products since 2014, and so prefers 2019 as a base rate, so that it can charge a higher customs duty. Negotiations which began in 2013 have obviously stretched, and according to Mint, India’s tariffs have increased, on average, from 13% to 17% because of an increase in tariffs on sectors such as textiles, auto components and electronic items.

Auto-trigger: In case there is a sudden surge in imports due to the trade pact, India wants an auto-trigger mechanism to be in place, which will allow it to decide which products it doesn’t want to offer the same concessions to.

Ratchet obligations: It also wants exemptions on ratchet obligations. A ratchet mechanism means that if a country signs a trade agreement with another country where it liberalises (i.e., removes or reduces) tariffs, quotas, etc on import and export of products, it cannot go back on them and bring in measures that are more restrictive.

In this case, wanting an exemption on ratchet obligations would mean that India wants to be able to bring in restrictive measures in the future, if required. Meaning, it wants to be able to increase tariffs in the future.

Data localisation: As part of the RCEP, India wants all countries to have the rights to protect data. The government also reportedly said that by this, countries may prevent the transfer of information across borders, and will share only where it is “necessary to achieve a legitimate public policy objective” or “necessary in the country's opinion, for the protection of its essential security interests or national interests”. However, this was opposed by 14 out of 16 countries.

Opposition to RCEP within India

There has also been talk about India eventually not signing the agreement as well, and not without cause. Multiple sectors have shown abundant resistance to the agreement. The RCEP proposes that 92% of India’s goods would be tariff-free over the next 15 years. Most countries wanted India to slash existing tariffs on up to 90% of all goods.

While being a part of a bloc such as this may certainly be of strategic importance, there have been concerns that with most custom tariffs being reduced or removed, India’s industries will suffer and will specifically see an influx of cheaper goods from China.

The industry reservations aren’t unfounded, given India’s huge trade deficit with China. Trade deficit means that what we import from China exceeds what we export to them. India’s largest trade deficit with China is at $53 billion. This has left people worried that in the absence of tariffs, the market could be flooded with Chinese goods. According to reports, India had agreed to remove tariffs on 74% of the goods it trades with China over 20 years. However, China is unwilling to “commensurate to India’s demands,” an official told Business Standard.

But this isn’t all that India has to worry about.

Industries worried

Dairy: Dairy is important to India, given the place milk and other derivatives hold in Indian households. In a statement, RSS affiliate Swadeshi Jagaran Manch even said that this would “prove to be the most suicidal step by the government of India since independence”.

New Zealand is a major exporter of dairy products, and will be eyeing India primarily to sell milk powder and fat products. India, one of the largest consumers of milk and milk products, has so far been self-sustainable and has sometimes produced surplus, but a situation where New Zealand enters the market could change things. According to the Indian Express, 93.4% of New Zealand’s milk powder, 94.5% of its butter, and 83.6% of its cheese production was exported in 2018. India’s export of milk products doesn’t match up.

According to SJM, RCEP could lead to 50 million rural people losing their jobs, which will push up the need for importing.

Union Minister for Animal Husbandry, Dairying and Fisheries, Giriraj Singh, even requested the government to keep dairy out of the RCEP.

Automobile: Industry body Society of Indian Automobile Manufacturers (SIAM) and the Automotive Component Manufacturers Association of India (ACMA) have both expressed their reservations about RCEP. In July, ACMA said that the RCEP could allow a “back-door entry route” for China. Earlier this month, SIAM president Rajan Wadhera said that RCEP should not lead to job losses, and should not hurt the Union government’s Make In India scheme.

Textile: The RCEP will reportedly allow free import of polyester fabrics from China, Vietnam, Bangladesh and other countries, which could lead to cheaper textiles, affecting an already-hit sector. “India's trade deficit with China in the textiles and clothing sector is likely to be widened once RCEP is concluded and could be detrimental for its domestic textile manufacturers,” said Confederation of Indian Textile Industry Chairman Sanjay Jain said in May.

Steel: The steel industry also has concerns regarding China if they are included under the RCEP — that excessive imports could harm the domestic market. The Confederation of All India Traders also said: “It (RCEP) will damage India’s export competitiveness since the trade balance in the country is already skewed to a greater extent. Therefore, we are of the considered view that India should not enter into any RCEP agreement on steel and other allied products”.

Agriculture: A study by the United Planters' Association of Southern India, an apex body of planters of tea, coffee, rubber, cardamom and pepper said that RCEP will make things worse for the sector, which is already experiencing a downturn. According to the study, the products will be under intense competition and imports into the country will likely increase over time.

The Indian Coordination Committee of Farmers’ Movements (ICCFM) also stepped in and said that the RCEP threatens their livelihood.

The Kerala government has also now stepped in, with Chief Minister Pinarayi Vijayan, who said that the RCEP would affect the agricultural and industrial sectors.

How past free-trade agreements have worked out

A report by NITI Aayog showed that India imports more than it exports to countries with whom it has free-trade agreements, and exporters don’t use regional trade agreements. The note also showed that after the ASEAN-China Free Trade Agreement was enacted in 2010, goods trade of the countries — Indonesia, Malaysia, Thailand, Vietnam, Philippines and Singapore — with China went from a surplus of $53 bn to a deficit of $54 bn in 2016.

“Given India’s inability to negotiate a good services deal in the past, RCEP negotiations especially with China need a second thought. Indian industry will have more to lose than gain if it agrees to a liberal tariff elimination schedule specially w.r.t China,” the report said.

The government's stance

Earlier this week, PM Modi held a meeting with senior Cabinet ministers to decide India’s final stand. While India is reportedly trying hard to protect the country’s interests, Commerce Minister Piyush Goyal defended the RCEP saying that India cannot stay isolated in a globalised world and that it cannot stop its engagements and trade with the rest of the world.

“If India remains out of RCEP, we will be left isolated from this large trading bloc. The trade among RCEP countries is about $2.8 trillion. If India sits outside RCEP, whether it is in our interest or against our interest, it is also the responsibility of the government to see. You will want us to engage to find solutions which is in national interest," A Mint report quoted Goyal as saying at an event last week. But, Goyal said that the government will ensure India is not flooded with cheap Chinese goods.