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Monday, April 12, 2021

China-led trade deal: Here’s why India didn’t sign the global pact

A major development took place at the international trade front on Sunday. Fifteen Asia-Pacific nations signed a China-led deal to boost trade. But India did not sign the deal, rather it withdrew itself from the pact months ago. As one can clearly assume China’s doubtful image at the global level, along with the Dragons aggressive initiatives at the international border and all other related factors could have played a role behind PM Narendra Modi’s decision to reject the offer to sign the free trade pact. In this article, we shall discuss all about the trade pact and all its nuances.

China-led trade deal: Here’s why India didn’t sign the global pact

1. What is the new development?

Fifteen Asia-Pacific countries — with a combined gross domestic product (GDP) of over $26 trillion and comprising nearly one-third of the world’s population — signed the world’s biggest trade deal at the 37th Association of Southeast Asian Nations (Asean) Summit on November 15. The Regional Comprehensive Economic Partnership (RCEP) aims to achieve a modern, comprehensive, high-quality and mutually beneficial economic partnership agreement among the Asean member states and its FTA (free trade agreement) partners. However, as negotiations to finalise the long-overdue agreement entered its final stages, in November 2019, Prime Minister Narendra Modi surprised fellow member nations by choosing to opt out of it.

After India withdrew, the remaining 15 nations signed the RCEP on Sunday on the sidelines of the annual summit of the 10-nation Association of Southeast Asian Nations, which Vietnam was hosting virtually. However, many participating nations are also becoming too economically dependent on China with the pact seen as a coup for it in extending its influence across the region.

2. What is RCEP

The RCEP negotiations were launched by leaders from 10 Asean member states (Brunei Darussalam, Cambodia, Indonesia, Loas, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam) and six Asean FTA partners (Australia, China, India, Japan, Korea and New Zealand) during the 21st Asean summit in Phnom Penh in Cambodia in November 2012.

The agreement allows for common one set of rules of origin to qualify for tariffs reduction with other RCEP members. This means less procedures and easier movement of goods. That should encourage multinational firms to invest more in the region, including building supply chains and distribution hubs. Since China is the key source of imports and is also the main export destination for most member nations, the deal is likely to it in a better position to shape the region’s trade rules. The new tariff regime will kick in from 2022 and will see duties go back to 2014 levels.

The pact will most likely formalise, rather than remake, business between the countries. The RCEP eliminates tariffs mainly for goods that already qualify for duty-free treatment under existing free trade agreements. It allows countries to keep tariffs for imports in sectors they regard as especially important or sensitive. The pact’s so-called rules of origin will set common standards for how much of a product must be produced within the region for the final product to qualify for duty-free treatment. These rules could make it simpler for companies to set up supply chains that span several different countries. It has little impact on legal work, accounting or other services that cross borders, and does not venture far into the often-divisive issue of ensuring greater intellectual property protections. The RCEP also skirts broad issues like protecting independent labor unions and the environment and limiting government subsidies to state-owned enterprises.

3. How India’s withdrew from RCEP

India pulled out of the China-backed trade agreement as negotiations failed to address its core concerns. These were threat of circumvention of rules of origin due to tariff differential, inclusion of fair agreement to address the issues of trade deficits and opening of services. The deal would have brought down import duties on 80% to 90% of the goods, along with easier service and investment rules. Some in Indian industry feared that reduced customs duty would result in a flood of imports, especially from China with which it has a massive trade deficit. India’s trade deficit with other RCEP countries were also rising. Prime Minister Narendra Modi said India’s decision was guided by the impact it would have on the lives and livelihoods of all Indians, especially vulnerable sections of society. Despite its withdrawal, officials have said India could rejoin talks if it chooses to do so at a later date.

4. What does this exit mean for India

India would have the third biggest economy in the RCEP. Analysts believe that India might lose investments while its consumers may end up paying more than they should, especially when global trade, investment and supply chains face unprecedented challenges due to the Covid-19 pandemic. Countries in the RCEP agreement would also lose out on an opportunity to access the Indian market that is notoriously hard to get into especially during the current global economic situation. For India, it will be an opportunity to strengthen its domestic industries and move towards its dream of becoming self-reliant. A large number of sectors including dairy, agriculture, steel, plastics, copper, aluminium, machine tools, paper, automobiles, chemicals and others had expressed serious apprehensions on RCEP citing dominance of cheap foreign goods would dampen its businesses.

5. Will this exit affect India-Asean ties?

India’s relationship with Asean is a key pillar of its foreign policy and the foundation of the Act East Policy. Its focus on a strengthened and multi-faceted relationship with Asean is an outcome of the significant changes in the world’s political and economic scenario since the early 1990s and India’s own march towards economic liberalisation. In 2012, Asean and India had commemorated 20 years of dialogue partnership and 10 years of Summit level partnership with a Commemorative Summit held in New Delhi under the theme ‘ASEAN-India Partnership for Peace and Shared Prosperity’ on 20-21 December 2012.

India-Asean trade and investment relations have been growing steadily, with Asean being India’s fourth-largest trading partner. Its trade with Asean stands at $81.33 billion, which is approximately 10.6 per cent of India’s overall trade. While, India’s exports to Asean stand at 11.28 per cent of our total exports. The pact, the Regional Comprehensive Economic Partnership, or RCEP, is limited in scope. Still, it carries considerable symbolic heft. The pact covers more of humanity — 2.2 billion people — than any previous regional free trade agreement and could help further cement China’s image as the dominant economic power in its neighborhood.

6. US too refrained from signing the pact

Nearly four years ago, President Donald Trump pulled the United States out of the Trans-Pacific Partnership, or TPP, a broader agreement than the RCEP that was widely seen as a Washington-led response to China’s growing sway in the Asia-Pacific region. Joe Biden, the president-elect, has been noncommittal on whether he would join the TPP’s successor. The RCEP’s lower trade barriers could encourage global companies trying to avoid Trump’s tariffs on Chinese-made goods to keep work in Asia rather than shift it to North America, said Mary Lovely, a senior fellow at the Peterson Institute for International Economics in Washington.

The prospect of China’s forging closer economic ties with its neighbors has prompted concern in Washington. President Barack Obama’s response was the TPP, which had extensive provisions on services, intellectual property, independent labor unions and environmental protection. It also called for limits on state sponsorship of industries, serving as both a challenge to China and an enticement for Beijing to relax its grip on its economy, the world’s second largest. The TPP did not include China but encompassed many of its biggest trading partners, like Japan and Australia, as well as Chinese neighbors like Vietnam and Malaysia. After Trump pulled the United States out of that arrangement, the other 11 countries then went ahead with it on their own.

China has been eager to move into that vacuum. Still, it must navigate India’s ambitions. India’s relations with China have deteriorated considerably in recent months amid clashes between troops on their mountainous shared border. Beijing had initially tried to sway New Delhi into joining the RCEP. However, Indian politicians were wary of lowering their country’s steep tariffs and admitting a further flood of Chinese manufactured goods. China ships $60 billion a year more in goods to India than it receives. India sought more flexibility to increase tariffs if imports surged. It also sought tariff reductions for low-end, labor-intensive industrial goods for which production has already been moving out of China. But Beijing has been wary of letting high-employment industries like shoe and shirt manufacturing move out of China too quickly.

It is unclear how the United States will respond to the new trade pact. While Biden is set to assume office in January, trade and China have become fraught issues. The TPP came under fire from both Republicans and Democrats for exposing U.S. businesses to foreign competition. It remains contentious, and Biden has not said whether he would rejoin the deal — renamed the Comprehensive and Progressive Agreement for Trans-Pacific Partnership — once he enters office. But analysts say it is unlikely to be a high priority.

Biden has said he would wait to negotiate any new trade deals. He wants to focus his energy on the pandemic, the economic recovery and investing in American manufacturing and technology. But to some trade experts, the signing of the RCEP shows that the rest of the world will not wait around for the United States. The European Union has also pursued trade negotiations at an aggressive pace. As other countries sign new deals, U.S. exporters may gradually lose ground.

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