RCEP stands for Regional Comprehensive Economic Partnership which is a free trade agreement (FTA) initiated by Indonesia between the Asia-Pacific Nations of Australia, Brunei, Cambodia, China, Indonesia, Japan, Laos, Malaysia, Myanmar, New Zealand, the Philippines, Singapore, South Korea, Thailand, and Vietnam. These 15 countries make up 30% of the world’s population and 30% of the global GDP making it the current biggest trade bloc in world.

Why does it exist?

This partnership unified the already existing bilateral agreements between the 10-member ASEAN and five of its six major trading partners excluding India. It is expected to eliminate 90% of the tariffs on imports between the signatories within 20 years of coming into force, and establish common rules for e-commerce trade, and intellectual property

Why did India leave?

When RCEP was initiated India was also involved and part of the partnership however, last year in November India decided to opt out as guarantees such as China not taking advantage of the situation or India’s industries provided assurances and protection from the impacts it may face were not provided.

China and other bigger nations in RCEP such as South Korea and Japan will have an advantageous position in the partnership as India has major trade deficits with 11 of the 15 RCEP countries such as the $48.66bn trade deficit with China. Over the past few years as the new Indian Government has started to question India’s position in RCEP this trade deficit has started to decrease. This will mean that a FTA will only cause this trade deficit to grow causing national savings and domestic incomes to decrease, and not reduce as it has done over the past couple of years. However, a trade deficit may not be bad for the standard of living as more goods can be consumed however this is only a short term benefit as in the long run if trade deficit continues to grow the effect could be very problematic.

While there is a significant trade deficit with China, it is important to recognise that a significant driver of this deficit is oil - this makes up a plurality of imports (37% of India’s imports is crude oil). As the world prepares for the COP26 Climate Conference in 2021 and the importance of switching to renewable energy is realised across the developing world, one can easily see that the reliance on oil (which forms 30% of India’s energy consumption) will surely decrease in the future, reducing the dependence that India has on foreign producers for its energy.

The RCEP is the biggest trading bloc in the world and is very likely to be one of the biggest in history. Contrary to what is sometimes peddled by the Indian media, this is not a China-centric treaty. Although China is the biggest signatory, this treaty includes a vast array of South-East Asian countries including notable allies of India including Japan and Australia.

Despite 37% of India’s imports being oil Indian state refiners have stopped buying crude oil from China-linked companies, however India imports around $20bn worth of electrical and electronic equipment and nearly $14bn worth of machinery, nuclear reactors and boilers. This will surely increase if there is a FTA as there won’t be any tariffs in place on Chinese companies who can produce the same goods for cheaper in comparison to the domestic Indian industries in these areas.

Yes, the RCEP may be the biggest trading bloc in the world so far, however India is currently developing stronger economic relations with the US and with a US-China trade war currently going on India would have to side with China if they were part of RCEP as would other countries. This would possibly harm the relations that India may be able to develop with the US. Concerning the other point about the other notable allies like japan and South-Korea, India still have bi-lateral agreements with them which have been successful in fulfilling their purpose of encouraging economic growth between the countries.

Another reason India does not benefit from RCEP is that India has not benefitted from its previous FTAs it has had with 3 of the ASEAN countries such as Singapore which only led to a merchandise export growth of 2.5% between 2010-11 to 2019-20. In the period they have held FTAs their trade deficits have risen sharply with the main reason being that domestic industries in India such as agriculture and dairy are unorganised and would not be able to compete with the other such as Australia and New Zealand in the agricultural and dairy sector. These countries are more developed and more organised meaning they can produce the goods for cheaper meaning that an FTA would lead to a flood of cheap foreign imports causing domestic companies to lose out and not profit at all.

The point on the US-China trade war may become increasingly redundant as a Biden presidency prepares to enter the White House in 2021. Although it is not yet fully known the Biden administration’s attitudes toward China, one can reasonably assume that it will certainly be more conciliatory than the brash Cold War-esque diplomacy and trade embargoes employed by the Trump presidency. Furthermore, Australia, New Zealand and Japan are all members of a security treaty with the US primarily against China, but they are all members of the RCEP - these three countries undoubtedly have stronger relations with the US than India but are still members of the deal, showing that national security is an irrelevant concern when it comes to the RCEP.

Your point about the free trade agreement with Singapore is valid, but you fail to note that the biggest change in India’s international trade policy throughout its 80-year history is the massive economic liberalisation that took place in the early 1990s. This was a notable initiative led by then-PM Rao and has had massive economic consequences for India; by reducing tariffs from foreign countries and opening up stagnant Indian companies to foreign competition, the liberalisation is one of the biggest drivers in Indian economic growth. Foreign investment into India increased by 361% between 1991 and 2005 and the real GDP of India increased from $266bn in 1991 to $2.3 trillion in 2018. The promotion of free trade has expanded India’s middle classes and lifted many poor Indians from poverty.

The RCEP trade deal should provide an opportunity to introduce some competition to many sectors of India’s economy that have characteristics of an oligopoly. With an economy that has faced a falling growth rate since 2016, the competition from the RCEP, as well as the opportunities provided by a huge export market should be a key driver in the economic growth of India.

The opportunities the RCEP trade deal could provide are only for some sectors of India’s economy and would definitely cause those sectors to benefit greatly and flourish, however the other sectors which may not be as developed as the same sectors for other countries causing those sectors to be dominated by the foreign economies. With up to 45% of the Indian workforce working in these sectors this is a major issue as these jobs would be put at risk. India were also given no assurances for market access in countries like China or non-tariff barriers for Indian companies while also having to extend benefits to these countries for sensitive sectors such as defence despite the current issues currently between India and China. India were also refused the right to impose tariffs if their own domestic industries started failing due to the flood of cheaper foreign imports from other countries which was a major reason in India deciding to opt out.

Despite there being limited FTAs before 2005 the first comprehensive FTA came mid 2005 which showcases that the majority of the economic growth and foreign investment that you stated earlier proves that FTAs are not required for economic growth.

While there would definitely be short-term concerns over the effects of RCEP on India’s domestic producers there is also a lack of drivers for longer-term innovation in large Indian corporations. Market theory dictates that efficiency increases and consumer benefit when there is increased competition in a market – this is not present in India with huge oligopolies present in the cement, steel and aluminium markets. These oligopolies, assisted by a bureaucracy plagued with corrupt practices, can take part in anticompetitive price-fixing practices (such as the 2018 cement price-fixing case where 11 large cement companies were fined $1.1bn for price fixing) and passing on the price to smaller firms. While these bottlenecks exist in the economy and the government seems reluctant to combat them head on, surely competition from the fastest growing and future global economic centre of East and South east Asia will improve India’s economic health in the long-run.

Overall RCEP should not be seen as an option right now as despite the possible benefit for the huge oligopolies mentioned above other sectors such as the agriculture, dairy or textile sector would suffer due to the domination by foreign economies which would lead to a flood in imports putting at risk the jobs of over 45% of the India workforce. India also needs to focus on first reducing the trade deficits with other countries by pushing the ‘Made in India’ initiative undertaken by the Indian Government to reduce imports and increase exports before India can try and do this as part of a free trade agreement. India’s imports are also more receptive to income changes than price changes so a cut in tariffs does not boost India’s exports significantly. Existing FTAs have also led to greater imports than exports which would be harmful for India. Therefore, India should currently not join the RCEP and first try and improve economic health before aiming for major economic growth in the long-run.