India ASEAN

Regional Comprehensive economic partnership

• proposed pact between 10 ASEAN economies and six FTA partners New Zealand, Australia, China, India, Japan, and South Korea. India has withdrawn from the same.
• objective:to achieve a modern, comprehensive, high-quality, and mutually beneficial economic partnership agreement
• aimed at lowering trade barriers and securing improved market access for goods and services for businesses in the region, through:  
• Recognition to ASEAN Centrality in the emerging regional economic architecture and the interests of ASEAN’s FTA partners in enhancing economic integration and strengthening economic cooperation among the participating countries
• Facilitation of trade and investment and enhanced transparency between the participating countries.
• Facilitation of SMEs’ engagements in global and regional supply chains
• Broaden and deepen ASEAN’s economic engagements with its FTA partners.  

Potential of RCEP

• opportunities for businesses in the East Asia region making it the world’s largest trading bloc.
• account for almost half of the world’s population
• 30 per cent of global GDP and over a quarter of world exports. 27% global trade
• SMEs make up more than 90 per cent of business establishments across all RCEP participating countries.

Benefits for India 

• Market Access: for India’s goods and services exports and encourage greater investments and technology into India.
• Enhance MSME sector: leverage on the agreement and cope with challenges arising from globalisation and trade liberalisation, facilitate India’s MSMEs to effectively integrate into the regional value and supply chains.
• Alternative to APEC:on economic front in which India has not got the membership.
• FDI gains:harmonise the trade-related rules, investment and competition regimes of India, boost to inward and outward foreign direct investment, export-oriented FDI.
• Increase in Trade
• Increasing hold in Indo-Pacific region: rebalancing the Asia strategy and an acknowledgement of linkage between the Indian and Pacific Oceans.
• Aligned with India’s initiative of ‘Make in India’ & to become a global success- must participate to create Asian value and supply chain which either begins or ends in India.
• aligns with Act East Policy
• Growth of supply chains: enable India to enter the global supply chain helped by frictionless movement between 16 members.
• encourage regional supply chains involving BIMSTEC countries and ASEAN members in products that the region specialises like bamboo and wood products, leather goods, garments, silk, handicrafts and jewellery.  
• Beneficial for labour market: opportunity for labour intensive manufacturing as multinationals would be attracted to set up manufacturing base in India and enable them to access the large RCEP market.  

Why did India pull out of RCEP?

• Trade imbalance with RCEP members: India’s trade deficit with RCEP countries has almost doubled in the last five-six years – from $54 billion in 2013-14 to $105 billion in 2018-19, of which China alone accounts for $53 billion.
• Geopolitical considerations: India wanted RCEP to exclude most-favoured nation (MFN) obligations from the investment chapter, as it did not want to hand out, especially to countries with which it has border disputes (China), the benefits it was giving to strategic allies or for geopolitical reasons.
• Security considerations: Closer economic ties under RCEP have the potential to make the countries of the region even more vulnerable to China’s economic and political coercion. This could impact India’s security interests in Southeast Asia.
• Lack of adequate protection for domestic industries: India’s proposals for strict rules of origin (ROO)and an auto-trigger mechanism to impose tariffs when imports crossed a certain threshold were not accepted
• Losing flexibility to raise tariffs coupled with lack of strong protection measures and threat of circumvention of ROO through rerouting products from countries with lower tariffs can endanger growth of domestic industries by flooding Indian markets with foreign products
• Lack of Service component: Most developed RCEP countries where India can export services, have been unwilling to negotiate wide-ranging disciplines in services that can create new market access for trade in services in this region.
• Impact on local industries: 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.
• impact of earlier FTAs on India’s trade balance has been ambiguous: Several trends in the existing FTAs that does not favour signing another FTA, include
• NITI Aayog report- India’s exports to its FTAs partners have not outperformed exports to the rest of the world and have generally led to greater imports than exports, giving rise to high trade deficits with FTA partners like South Korea, Japan and ASEAN
• Lack of credible assurances on market access and non-tariff barriers.
• Differences over tariff structure with China on goods
• India already has bilateral FTAs with ASEAN, Korea and Japan and negotiations are underway with Australia and New Zealand
• The e-commerce chapter has some clauses that affect data localization norms in India.

Possible Implications of not joining RCEP

• Protectionist image: Withdrawal from RCEP along with other recent measures such call for self-reliance under Atmanirbhar Abhiyan, revised public procurement order giving preference to local content etc. can be perceived as India taking a protectionist stance in terms of trade policy.
• Impact on India’s export sector: Isolation, loss of potential investments and lack of competition might affect India’s performance in terms of exports and growth.
• Lost opportunity in securing a position in the post COVID world: help member countries emerge from the economic devastation caused by the pandemic through access to regional supply chains
• Effect on bilateral ties with RCEP countries: as they would be inclined to bolster trade within the bloc. Also it could affect India’s relation with Japan and Australia with regards to their coordinated efforts in the Indo-Pacific
• Loss for consumers: products might become more expensive for Indian consumers, especially when global trade, investment and supply chains face unprecedented challenges due to the Covid-19 pandemic.

Way Forward

• Discussing benefits and costs of signing RCEP
• Making India’s export sector globally competitive: Reducing the cost of doing business through infrastructure investment and improving the business environment
• Focusing on negotiating bilateral FTAs with countries where trade complementarities and margin of preference is high for example- European Union, USA. 

Rationale for joining FTAs

• With tariff liberalization commitments under FTA, the additional market access propels a process of scale expansion in the domestic manufacturing which help reaping economies of scale
• enhances price-competitiveness & trade diversion
• employment generation.
• Due to inter-sectoral linkages, greater economic activity in other sectors because of backward and forward linkages of the firms
• It generate opportunities that opens up Global Value Chain (GVC) which brings investments and technology besides the other benefits of domestic manufacturing and services

However, according to NITI Aayog report, in 2017, had pointed out that free trade agreements have not worked well for India.

Problems of India with FTA

• Widening of India’s Trade Deficit with FTA Partners: issue of complete tariff elimination existing trade deficit of over $106 billion with RCEP negotiators
• Rules of Origin: concerns for exporters.
• Improper Standards of import: Concerns of quality norms for import of processed food products from ASEAN countries resulting in import and consumption of cheap ASEAN processed food products at the cost of domestic food processing sector.
• No major impact of FTAs on exports: India’s exports are much more responsive to income changes as compared to price changes and thus a tariff reduction/elimination does not boost exports significantly
• Difference in economic efficiency of a country: Without an import wall, many firms may shift production to the more efficient FTA partner.

Way forward

• Integrated Approach under FTAs recognizing interdependence between trade in goods, trade in services and investment
• Going beyond Tariffs: subsequent layers of nontariff policies, regulatory mechanisms and legal frameworks.extensive programme on technical regulations based on international standards.stronger framework for intellectual property law enforcement
• Circumvention of rules of origin should be strictly dealt with by the authorities
• Go beyond Mode IV: covers natural persons who are either service suppliers (such as independent professionals) or who work for a service supplier and who are present in another WTO member to supply a service.
• Using Trade Remedies under FTAs: Like anti-dumping and countervailing duties.
• Data on Trade under FTAs
• Institutionalize the process of Stakeholders’ Consultation for getting timely feedback
• Reducing compliance cost and administrative delays is extremely critical to increase utilisation rate of FTAs.  

Key Highlights of the 17th Summit

• India announced a contribution of US$ 1 million to the COVID-19 ASEAN Response Fund.
• Both India and ASEAN welcomed the adoption of the new ASEAN-India Plan of Action for 2021-2025.
• India reiterated its offer of US$ 1 billion Line of Credit to support ASEAN connectivity for greater physical and digital connectivity between ASEAN and India.
• Both sides also started discussions for determining the scope of review of India-ASEAN free trade agreement (FTA) at the earliest.