India should renegotiate RCEP in the near future

Prof Amita Batra, Centre for South Asian Studies, JNU, asserts that while US and EU have been traditionally large markets for India, integrating with the countries of East Asia and Southeast Asia is important for value chain participation. Therefore, India should keep its options open for negotiating its concerns and rejoining the mega regional agreement.

IBT: How has the relevance of RCEP changed post-COVID, considering the reset in global trade growth and the fact that WTO remains dysfunctional?
Prof Amita Batra: I think the significance remains, and RCEP continues to be the mega regional trade agreement that it was. It is minus India of course, something we had accepted since India walked out of negotiations last November. Also irrespective of what the pandemic has done to the Asia Pacific region, it retains the characteristics of being one of the most dynamic regions in the world today. In fact, I think some of the countries in East Asia and Southeast Asia have fared relatively better to the others as far as controlling the pandemic is concerned. Both in terms of the health crisis and retention of economic dynamism, the region retains its significance and RCEP continues to be an important instrument of trade.

Added to this, as you pointed out, the WTO has been dysfunctional for quite some time due to the US stalling appointment of judges to its Appellate Committee. So it is severely constrained in its ability to contribute to global trade at the moment. But we should be looking forward to a possible revival of the WTO because of the regime change in the US.
Despite that, RCEP continues to be relevant, as value chains continue to be important. And aligning with value chains in East Asia and Southeast Asia continues to be important as far as our aim of continued value chain integration is concerned.

IBT: Do you think there remains sufficient complementarity in terms of trade between RCEP nations without India?
Prof Amita Batra: Value chain is what engenders trade today. Since the turn of this century, we have known trade to be led by global value chains and regional value chains. That’s the main vehicle of trade today. Yes, in the recent few years, particularly post the Global Financial Crisis, we have seen a greater consolidation and shortening of the length of value chains.

Some studies do conclude that probably value chains have become less important as far as global trade is concerned. But that’s not true. The character and nature of global value chains has changed, but trade continues to be led by the multiple border crossings of commodities that the value chains lead to.

So the complementarity remains as far as nations in East and Southeast Asia are concerned – intra-regional trade remains among the highest. I think RCEP is going to provide a fillip to this regional production network, because it is going to give external investors preferential access to a large market with similar or uniform rules of origin. That will be a huge advantage to any investor in this region.

IBT: What is your view on India’s concerns that have prevented it from signing on to the agreement?
Prof Amita Batra: The Indian concerns in RCEP are two-fold. The first is that earlier FTAs with some of the constituent members of the RCEP have not proved to be very fruitful for India. It is true that we have not seen a commensurate export increase as compared to the rise in imports from these countries. The main factor that we need to consider for this is Indian industry’s competitiveness. It’s not that there is something wrong with an FTA as an instrument of taking trade forward, or that FTAs with the region will not prove useful. But it will be difficult to have a fruitful FTA with any region unless India improves its manufacturing competitiveness.

The other concern we have often expressed is that of RCEP being a China-led regional trade agreement. I wouldn’t call it a China-led agreement as it was always conceptualised to be an ASEAN-centric regional trade agreement. But you cannot deny that China is the dominant trade partner in RCEP either. That is where the Indian industry has expressed concern about being flooded with Chinese imports, and hence we wanted safeguard measures, trigger mechanism, etc.

While the apprehension is true, Indian industry cannot have this fear forever. If China doesn’t come through the RCEP, it will come through some other entry point, as it is the largest trading partner for many countries around the world. You cannot escape China-centricity to global trade and global supply chains today.

IBT: How feasible is it to diversify from China, as has been the expressed aspiration of many countries post-COVID?
Prof Amita Batra: This is what I have said since the beginning of the pandemic, when everybody started talking about decoupling from China. I have my doubts on the extent to which this disassociation from China can actually happen in real terms. Some of it was already there. As I said earlier, the length and nature of value chains has been changing in the last 5-7 years. For countries in East Asian, Southeast Asian region and China, there has been a lot of substitution of imports with domestic production.

Increasingly, there are efforts to supply from within rather than outside, thereby ensuring a greater consolidation of supply chains domestically. That has also happened because they have moved up the technology ladder. Also, China-centricity in value chains was already coming down as its worker wages had started to rise.

The pandemic may have accelerated that, but I do not see it as leading to move away from the region, because it is too high cost an operation for any large multinational. Also, it is practically difficult for a large organisation to identify its suppliers all over the world, as these are very complex supply chains. Some nearshoring to destinations like Vietnam and Cambodia is possible and has already been happening.

IBT: India is looking at expediting agreements with markets where we have greater complementarity like US and EU. How do you see the prospects of these agreements?
Prof Amita Batra: It is true that these regions have traditionally been important markets for India. Over the past one year, we have been talking about having a bilateral trade agreement of some kind with the US, which is being called the mini trade deal. But the talks haven’t been concluded. They have complained about India’s high tariffs in the past and removed GSP benefits.

Simultaneously, we have also been trying to negotiate the India-EU FTA. That has been on for thirteen years and talks were even suspended in between. These are more advanced markets, who would want more advanced elements to the FTA, which we may or may not be able to agree to.

So I don’t think it works to talk of one deal vis-à-vis the other. We must have some agreement with Southeast and East Asian countries, even as we continue to work with our traditional markets of US and EU.

IBT: It is being expected that the US could rejoin CPTPP under Joe Biden. Do you foresee a scenario where RCEP and TPP could then literally dominate global trade, which would make staying away from them virtually impossible?
Prof Amita Batra: Yes I think that not being in any of these or other trade agreements (as India has put existing ones under review) is an area of concern for India. RCEP was the easiest for us, because it has relatively lower standards or WTO-specified standards. The CPTPP is a much higher standards-based agreement.

Originally, it was conceptualised in terms of trying to keep away from China. Going forward, I don’t think it can be carried out without China. You already have RCEP as a major mega regional agreement. If the US does consider joining CPTPP, it will get a renewed life of its own.

Conversion of TPP to CPTPP happened because of Japan’s initiative. Now that you have the RCEP, I don’t know how interested will Japan be in the CPTPP, as most of the members are overlapping in these two agreements.

The Biden administration will have other priorities initially on trade like the US-China trade war, but if the US thinks of joining the CPTPP, these two will indeed be mega regionals. But since there are so many overlapping countries and because the advanced economies in the region would prefer higher standards like Japan, Australia, New Zealand, my fear is that the CPTPP could be a more preferred trade arrangement compared to the RCEP.

IBT: Can these mega regionals carry on some of the unfinished agenda of WTO, as the latter seems to be losing its relevance?
Prof Amita Batra: Regarding being concerned about the WTO losing its relevance, I think the Biden Administration would be interested in the revival of multilateral institutions unlike President Trump. I think an overarching organisation like the WTO at the supranational level is essential to global trade. You cannot just operate on the basis of mega regional agreements. So the WTO needs to be revived and reformed to be in tune with the changing needs of global trade. India has a major role to play in ensuring that this happens.

The other point about issues like e-commerce, S&DT, subsidies, state-owned enterprises, etc being dealt by mega regionals, indeed these are already a part of CPTPP. Many of the issues that the WTO has been unable to resolve, will naturally come to the mega regionals. The multinationals will want to deal with all of them and would undertake trade only if these are dealt with. E-commerce is one of the most significant aspects of international trade, wherein rules need to be set and the regulatory mechanisms need to be appropriately designed.

IBT: There are concerns that India could be left out of the next leap of industrial and technological development if it stays out of the RCEP. What are the options before it in that case?
Prof Amita Batra: I think firstly, the RCEP opening still remains and we should try to negotiate our way into the agreement in the near future. Secondly, we have to further facilitate our own business environment to make it attractive to foreign investors and somehow integrate with global value chains and regional value chains. In this context, it will be necessary for India to have an open, more liberal trade policy to the extent possible without having to rely on protectionist instruments. It should develop an environment that ensures ease of business as well as trade and in terms of reforms, ensure these in regulations, tariffs, land, labour markets, etc.

We have to look at that as a means to increasing our value share in global trade. It is not feasible to build entire value chains on our own within the country. The high share of MSMEs also makes it tough, because they are the ones we want to integrate into value chains. But they have been hit severely due to COVID. Therefore policy focus should be particularly on the needs of MSMEs and ensuring their revival.

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