Regional Comprehensive Economic Partnership (RCEP)- the mega-regional trade agreement of 10 ASEAN countries and six major economies: China, India, New Zealand, Australia, South Korea, and Japan. These 16 countries account for over one-third of the world’s gross domestic product (GDP) and 40 percent of world trade. The region is home to more than half of the world’s population.
RCEP is gigantic in size and scope. The huge population size makes this region a big market for world trade, including textile and apparel. RCEP aims to achieve a modern, high-quality, comprehensive, and mutually beneficial economic partnership agreement among the ASEAN member states and its FTA partners.
In the recent decade, India has taken many initiatives to chase development and growth. And that’s why India cannot settle for anything less than a win-win game. RCEP is not addressing the Indian Trade Issue.
“India Decided to Quit RCEP”. Click to Tweet
Data shows that RCEP hasn’t proven to be very beneficial for India. For six years (2014-2019), India has improved its trade only with SAFTA countries. With ASEAN countries, India’s merchandise trade deficits have widened in this period.
An analysis by ICICI Securities Ltd shows in FY19, India registered a trade deficit with 11 out of the 16 RCEP countries. India’s trade loss with RCEP countries stood at $105 billion, where China alone accounted for $52 billion.
India cannot ignore these numbers to make any expensive deal. Some major concerns involved in the decision are:
- The economy loss far exceeds the short-term perceived benefits of staying out of the pact.
- The action signals a shift towards a protectionist stance.
- India should have convinced other countries to carve-outs for other sectors, and for allowing a gradual phasing out of tariffs to ease domestic fears.
- India should have used the opportunity to push through contentious but necessary reforms to boost competitiveness.
- India wants to become a manufacturing hub. And staying out of RCEP reduces its opportunities for trading with these countries.
- Manufacturing requires greater integration with global supply chains.
- Signing the agreement would have signaled an embrace of freer trade. It could have aided in the shift of companies out of China to India.
(Know more on: India To Stay Out of RCEP)
Impact on China and other ASIAN countries
For the other participants in the negotiations, it is worth thinking about how to persuade India to reconsider the trade deal. Other RCEP countries want India to join RCEP to achieve its super dream.
For these countries, RCEP negotiations are at a critical moment to win back India’s support. One of the major reasons why countries would love to have India on board is the country’s vision towards a big consumer market.
The Confederation of Indian Textile Industry (CITI) has cautioned the government to trade carefully while ceding space to China in the global textile and clothing sector. Half
of India’s textile and clothing trade is with China, and it caused a big trade deficit of around $1 billion in 2018.
India’s export of readymade apparels has fallen over the past fiscal year, contracted by 2.44 percent in August. The sector has shown signs of a steady recovery in July this year with 7.66 percent growth, after months of continuous contraction.
For the textile and clothing industry, China, South Korea, and the major ASEAN market may become large destinations for India. “The RCEP accounts for nearly 30 percent (USD 50 Billion) of global trade in man-made fibre textile and this share is growing rapidly. The shift in textile production from west to east is increasing both intra and inter-national textile trade in the region, according to the Synthetics and Rayon Textiles Export Promotion Council.
The outcomes of RCEP can be assessed in two indirect ways:
- These assessments would rely on information provided by the government. India’s initial negotiating position on eliminating import tariffs on goods and prepared by the presents government in 2015.
- Secondly, a NITI Aayog note, which pointed to the disquieting trend of growing trade deficits with the ASEAN after India began implementing the India-ASEAN FTA.
Although, India signed Comprehensive Partnership Agreements (CPAs) with Korea and Japan, and the country’s trade balance has steadily declined with both these countries.
India planned to eliminate tariffs on nearly 80 percent of its products imported from the ASEAN and Australia. For China, the corresponding figure was only 42.5 percent.
However, India’s initial offers were not accepted by the RCEPs and though the revised offers were not made public. It is now well-known that most RPCs are seeking a substantial-high level of tariff eliminations than what India has proposed. This implies that India could eventually eliminate a much large share of import tariffs than it was intending to, especially on imports from China.
(Read more on: RCEP talks stay inconclusive; some negotiators blame India. )
The government has expressed its concern about the rising trade deficits with ASEAN and is now seeking to review its FTA with the other 10 countries. But, the trade deficits with ASEAN was only a part of the problem; in the other two agreements with Korea and Japan, India finds itself in an equally acutely adverse situation.
Trade deficits with ASEAN have grown four-fold during the implementation of ASEAN-India FTA, deficits with Japan and Korea has roughly doubled after the two CEPAs were implemented.
Since 2018, the government has recognized that low levels of tariffs are hurting India’s manufacturing in two ways:
- They are discouraging domestics manufacturing and hurting the “Make in India” initiative.
- Major industries, including textile and clothing, have struggled to face import competition.
Consequently, tariffs have been increased in a range of manufacturing sectors, resulting in an increase in average tariffs on industrial products from 10.8 percent in 2017t to 13.6 percent in 2018.
Thus, trade liberalization via the RCEP militates against the government’s policies of promoting and protecting manufacturing industries.
The competitiveness of the manufacturing sector must be improved at least since the middle of the previous decade and that the share of the sector in the FDP should be increased from 17 percent to 25 percent.
However, even after several policy pronouncements, including the National Manufacturing Policy in 2011 and the Make in India in 2014, the share of the sector slipped to 16 percent in 2018-19.
The ASEAN-India FTA and the CEPAs with Japan and Korea did not work in India’s favor. That’s because of the lack of competitiveness of Indian products have held India’s exports back.
Thus, Joining the RCEP could result in far worse outcomes if the government does not take prompt measures to reverse the existing inefficiencies of Indian manufacturers.
India’s policymakers need to take a cue from these forward-looking policies and adopt them for preparing the domestic producers to take up the RCEP challenge.
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