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Galwan Valley dispute affects India’s participation in RCEP

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It was on Sunday when Regional Comprehensive Economic Partnership, commonly abbreviated as RCEP, witnessed solidification of participation of as many as fifteen countries while the Indian subcontinent had opted to stay out after walking out of discussions last year. The trading bloc, however, has made it clear that India could anytime return to the negotiating table.

What is Regional Comprehensive Economic Partnership or RCEP?

Regional Comprehensive Economic Partnership, originally being negotiated between 16 countries, has been described as the “largest” regional trading agreement to this day. The sixteen countries include the ASEAN members and countries with which they have FTAs or free trade agreements. Such countries are Korea, Australia, China, Japan, New Zealand, and India.

Why is it formulated?

RCEP is created as a means to easily facilitate the availability of products and services of each of these countries across this region. The negotiations to craft out this deal has been put on the table since 2013. India was also expected to sign the deal until its decision last November.

Why did India withdraw its consent?

India made a decision to exit deliberations over “significant outstanding issues” on November 4, 2019, and according to a government official, the country had been “consistently and incessantly” raising fundamental issues throughout the deliberations and negotiations among the countries. It was intrigued to take this decision to withdraw from the deal as they had not been resolved by the deadline to commit to be a signatory to the pact. The decision was taken to safeguard and protect the interests of industries such as dairy and agriculture. Another reason is to give an additional benefit to India’s services sector. However, the government officials say that the current structure of the pact still does not point out and address these crucial issues and concerns raised by the Indian authorities.

Is China’s presence an affecting factor in India’s decision to withdraw from the pact?

One of the major reasons for India to back out from the deal is escalating tensions with China, especially when China’s participation in the deal had already posed hardships for India to deal with various economic threats. The months ago border clash at Galwan Valley has bittered economic relations between the two countries with India taking uo various measures to reduce its exposure to China. This would have been utterly against the motive of RCEP and with its trade commitments under the pact.

Fundamental issues that remained unresolved during the negotiations to form RCEP were related to India’s trade and economic exposure to China including the possibility of having “inadequate” protections against the rising level of its imports from China.

Above it, India also feared the chances of circumvention of the criteria used to determine the national source of a product, that is the rules of origin, without which some countries could throw away their products. This is done by routing these products through other countries with lower tariffs.

Being unable to guarantee measures to counter-attack these concerns, India had no other option left. One such countermeasure was an auto-trigger mechanism. This mechanism would facilitate an increase in tariffs on products when their imports crossed a certain threshold. The framework also lacked clarity in assurance over non-tariff barriers on Indian companies and market access issues in countries such as China.

Another demand set up by India was to exclude most-favored-nation or MFN obligations from the investment chapter of RCEP. It did not want to share the additional benefits it was giving to its strategic allies or to other countries for geopolitical reasons, especially to those with which it has border disputes such as China. Signing into this agreement would force it to extend these advantages to all the RCEP members which are currently provided only to other countries for sensitive sectors like defense.

How will this decision affect India?

People fear that this step taken by the Indian authorities to withdraw as a signatory from RCEP would impact its bilateral trade ties with RCEP member nations. The heaviness of the impact can be ascertained by the fact that these countries involved in RCEP account for over 2 billion of the world’s total population. This would be on account of these member countries being more inclined to focus on bolstering economic ties within the bloc which would potentially leave India with fewer and fewer chances to tap and benefit from the large market that RCEP presents.

India’s decision could impact the Australia-India-Japan network in the Indo-Pacific as countries like Japan have been trying to get India back into the deal. There are also worries that India’s decision could potentially put a spanner on informal talks to encourage a Supply Chain Resilience Initiative among the three nations.

However, this stand is a result of learnings from unfavorable trade balances that India holds with members of RCEP. India also has FTAs with a few of these nations.

The growth in trade (CAGR) with partners over the last five financial years stood at 7.1%. The details and records show that while there has been growth in both imports from and exports to these FTA partners across sectors, the “utilization rate” of FTAs has been “moderate” both for India and its partners covering pacts with Singapore, Sri Lanka, Afghanistan, Thailand, Japan, Bhutan, Nepal, Republic of Korea and Malaysia.

With trade deficits with 11 of the 15 RCEP countries, experts believe that India has been unable to leverage benefits from its existing free trade agreements with a lot of these RCEP members to surge exports.

Trade expert Biswajit Dhar, professor at JNU’s Centre for Economic Studies and Planning, says “You don’t get into bilateral Foreign Trade Agreements juts to provide your market to your partner countries and while you accommodate your partner countries, your objective is also to increase the presence of your products in the markets of your partners, and India hasn’t been able to achieve the latter objective; the share in the imports of RCEP partner countries have either stagnated or fallen.”

What are the options left with India now?

Being the frontrunner and an original negotiating participant of RCEP, India has the liberty to come back and sign the agreement without having to wait 18 months as stipulated for new members, according to the terms of the pact.

The pact signatory states plan to start back deliberations with India after it posts its intention to join the pact “in writing”. India would also have to participate in meetings as an observer prior to its accession.

 

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