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India rejects RCEP’s reasons for Modi’s ultimate need to look to China

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The ASEAN Regional Comprehensive Economic Partnership Agreement (RCEP) was finally reached at the just-concluded Bangkok-ASEAN summit in Thailand after eight years of negotiations. However, India finally decided not to join the agreement.

On November 4th, 15 countries participating in the RCEP have completed the text negotiation of the agreement and virtually all market access negotiations, and will officially sign it in 2020.

The success of the RCEP negotiations means that countries and regions with nearly half of the world’s population are expected to achieve low tariffs and even zero tariffs, opening up new space for the high-quality development of China’s foreign trade. RCEP will promote economic cooperation among member countries in several major areas such as merchandise trade, service trade and investment. Why is the world’s most promising trade agreement rejected by India?

India’s exit is not due to China

Indian Prime Minister Narendra Modi pointed out on the 4th that the current form of RCEP does not fully reflect the basic spirit and guiding principles of the agreement, nor can it solve India’s outstanding issues. India will not join the RCEP agreement. Modi said he believes this is the right choice for India.

As a result, the RCEP has changed from 16 countries to 15 countries. Although all countries have welcomed India to join in the following, they decided to reach an agreement without India, and also made the previous differences on China-India negotiations and India suddenly made an agreement before reaching an agreement. The new requirements and other news appear more credible.

It is reported that in late September, the Indian side has basically reached a preliminary plan for RCEP tariff reduction with Beijing. However, some Indian officials pointed out that the country’s Minister of Commerce and Industry Piyush Goyal had “unconventionally proposed many unexpected protective measures” on the previously agreed anti-dumping mechanism at the RCEP ministerial meeting in early October.

On October 28th before the summit began, Indian media reported that Japan was trying to persuade China to lower India’s import tariffs and other requirements. On October 30, an informed source revealed to the US media that India’s constant request at the last minute may lead to the failure of the agreement.

Many outsiders believe that the reason why India does not want to join the RCEP is the differences with China in the negotiations. Some of the RCEP’s provisions to eliminate tariffs and market access are not acceptable to India, while China is putting pressure on India.

However, the results of the final agreement reached by the 15 countries have already indicated that the content of the RCEP agreement is a consensus that has been negotiated by all 15 countries. India’s final decision not to participate is due to certain national interests and is not the result of the breakdown of China-Indian negotiations. .

Although the entry of Chinese products into the Indian market is one of the issues that Modi is worried about, the root of this problem lies in India’s industrial structure and economic status.

India’s economic ills behind RCEP

On the surface, the “China threat” is a concern behind India’s failure to join the RCEP. India is worried that China will “take advantage of it” and eat its own “lunch”, and so on. In fact, India will not sign RCEP for the time being, and will not have a negative impact on China-India economic relations. The trade volume between China and India has been rising. This trend should continue to be maintained in the future. China-India economic and trade cooperation can also open up new space.

So, what disagreements and concerns does India have against RCEP? According to information disclosed by the parties during the negotiations, RCEP asked India to cut tariffs on goods currently imported into the country by about 90% in the next 15 years, which is the main concern in the Indian negotiations. India also hopes that the agreement will automatically trigger the protection mechanism, and hope to protect the data, which is also related to the protection of its own industry.

It is reported that India’s base year for tariff reduction is pushed back from 2013 to 2019, because in the past six years, India has raised import tariffs on many products such as textiles and electronics. Once the tariffs are lowered, the Indian market will have more mobile phones, steel, industrial products and textiles from China, as well as dairy products from Australia and New Zealand.

India’s agriculture, steel, and electronic products all have many protective measures. Many industries survive and grow in protection. For example, India has successively introduced protection measures for the steel trade in 2015 and 2016, and Japan has therefore threatened to appeal to the WTO. This year India has temporarily imposed a 70% tax on photovoltaic products, affecting China-Indian trade.

These protective measures may be necessary for Modi. From 2018 to 2019, India experienced a trade deficit with 11 RCEP member countries. India’s steel, dairy and other industries have publicly opposed joining RCEP. The domestic voice of India believes that joining the RCEP will continue to increase the deficit and damage the interests of Indian farmers, businesses, workers and consumers.

In fact, before this, India has signed free trade agreements with a number of countries or groups of countries including South Korea, Japan and ASEAN, ranking among the countries with the largest number of Asian Free Trade Agreements. However, the facts prove that after the signing of the FTA, India’s trade deficit with these economies has increased substantially. For example, after the signing of the India-Korea Comprehensive Economic Partnership Agreement (CEPA), India’s imports from South Korea grew faster than its average global import rate, which led to a trade deficit between India and South Korea from around $5 billion in 2009. Significantly increased to $12 billion in fiscal year 2018-19. This “free trade agreement, the more the losses, the greater the loss” is the root cause of India’s stagnation on the RCEP issue. If coupled with New Zealand, Australia, which is highly developed in agriculture and animal husbandry, and China, which is highly developed in industrial manufacturing, Indian policymakers are worried that the national economy will suffer severely.

However, this also precisely exposed the structural problems of the Indian economy. India’s manufacturing industry is not competitive enough. The problem stems from the irrational economic structure. The manufacturing industry accounts for 14% of the three major industries, accounting for 15% of GDP. Industrial development is slow, far less than the rapidly growing service industry. However, relying on outsourcing orders from the middle and lower reaches of the service industries in the western developed countries does not allow the Indian economy to have endogenous growth drivers.

In fact, the protection measures taken by India today and the government’s decision-making are also derived from the “lessons” of other industries. Not only does the service industry depend on foreign countries, but India’s arms manufacturing is also lagging behind due to the market being occupied by foreign countries. It can be said that this is the real difficulty for India not to join RCEP.

Modi has to cooperate with China

Although India’s decision-making has its own reasons, being excluded from the RCEP is not a “victory” for Indian interests.

A major constraint to India’s industrial development is the backwardness of infrastructure, where roads, railways and ports cannot meet capacity and efficiency requirements. When Modi came to power, he proposed plans such as “Made in India” to expand opening up and attract foreign investment. He took the “Gujarat model” he once took to the extreme and set a record of “building an average of 27 kilometers per day”. It is also a big goal of the Modi desk.

Whether it is attracting investment, talent training, technology introduction, and all aspects of infrastructure improvement, Modi is looking overseas. Although India and the European Union and Japan all cooperate in railway technology equipment and manufacturing investors, China is the only partner with capital, technology, efficiency, experience and action.

The “Belt and Road” has already entered Southeast Asia, and the successful example of the Central European train should also allow India to see the potential of infrastructure cooperation with China. Although the process of China-Indian cooperation must have many obstacles in politics, this is actually the reason why India must approach China.

The weakness of infrastructure and industrial systems is the reason why India’s industrial competitiveness is not enough, and China that can help India is China. In the long run, India still needs to be more open to a certain extent. Although RCEP has opened up the Indian market, the trade links will also promote cooperation between India and the contracting countries in other fields. The New Delhi account needs to be calculated from a long-term perspective.


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