RCEP explainer: Why Modi government did not join the world’s largest trading bloc

On the agenda when Prime Minister Narendra Modi flew to Bangkok on Sunday was a crucial trade deal that could hugely impact the Indian economy: The Regional Comprehensive Economic Partnership or RCEP. Eventually on Monday, it emerged that the Indian government was not going to sign the pact.

Here’s what the deal is and why everyone in India was so wary of it.

What is the RCEP?

The Regional Comprehensive Economic Partnership is a free trade agreement originally devised to consist of 16 countries across the Asia-Pacific region. The pact looks to drop tariffs and duties between the members so that goods and services can flow freely between them.

At the RCEP’s administrative core is ASEAN: an intergovernmental grouping of 10 Southeast Asian countries – Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam. It was proosed that the ASEAN bloc will be joined with six dialogue partners: China, Japan, India, South Korea, Australia and New Zealand.

Free trade agreements aren’t new. But the sheer scale of the RCEP sought to change the game. With its original 16-country composition, it would have been the world’s largest trading bloc with half the world’s population and around a third of global GDP.

While the RCEP is administratively built around ASEAN, the main mover is actually China. It was pushed by Beijing starting 2012 in order to counter another free trade agreement that was in the works at the time: the Trans Pacific Partnership. The US-led Trans Pacific Partnership excluded China and hence the RCEP was Beijing’s balancing act. However, in 2016, when Donald Trump took control of the US federal government, the US itself withdrew from the Trans Pacific Partnership.

Even now, however, the RCEP is a major tool for Beijing in order to counter the United States efforts to stymie trade with China. Under a protectionist President Donald Trump, the US has since 2018 began setting tariffs and trade barriers to Chinese goods, an economic conflict that has been called the China-US trade war.

Why was there opposition in India towards it?

While free trade is meat for China, it could end up being poison for India.

Many Indians fear that once import barriers are demolished, its industries would be unable to compete with China and Chinese goods would flood Indian markets.

This is not an unfounded fear. More than two-thirds of the total value of trade between India and China consists of Chinese exports to India. To make matters worse, much of what India exports is raw, unprocessed material such as cotton yarn and iron ore, which add little value to India’s domestic economy. On the other hand, China exports high value goods such as electronic devices and electrical equipment.

If this is the situation with tariffs, trade with lower or even no tariffs would leave Indian industry gasping.

But it’s not only industrialists. India’s farmers were worried too given that they also would be unable to compete on a global scale. Particularly worried is the milk sector. A huge source of income for crores of farmers, India’s milk industry would struggle to compete if forced to face off against the highly developed dairy industry of New Zealand and Australia.

To make matters worse, India is under an intense slowdown in the wake of demonetisation and the new Goods and Services tax. For example, the output of eight core sectors of the Indian industry – coal, crude oil, natural gas, refinery products, fertiliser, steel, cement and electricity – declined by 5.2% in September.

How is the politics playing out?

Sensing an opportunity to voice popular discontent, the largely moribund political opposition stirred to life on this issue. On Saturday, the Congress president Sonia Gandhi attacked the government for considering the RCEP. Gandhi argued that the free trade agreement would deal a “body blow” to the Indian economy and will result in “untold hardship for farmers, shopkeepers, and small and medium enterprises”. Earlier, the Congress had characterised the RCEP as the “third jolt” to the economy after demonetisation and the introduction of the Goods and Services Tax.

The Left had also opposed the RCEP. The Communist Party of India (Marxist)’s farmer wing, the Kisan Sabha announced a nationwide protest on against the bloc on Monday.

Even the Rashtriya Swayamsevak Sangh, the parent body of the ruling Bharatiya Janata Party, had raised red flags about the RCEP as part of its long-standing economically protectionist agenda.

This opposition made the Modi government quite wary of rushing into a deal. As a result, India made a number of last-minute demands, eventually rejecting the RCEP itself.

What arguments were being pushed in favour of India signing the RCEP?

As protectionist forces from both the left and right oppose the RCEP, liberal advocates of laissez-faire have pushed for the free trade agreement.

An editorial on American business website Bloomberg.com argued that “objections [to the RCEP] reflect a more deep-seated suspicion of free trade”. Calling for “more trade, not less” the editorial went on to argue that free trade “raises productivity, boosts output, creates jobs and ultimately stimulates demand”.

Given India’s low-industrial base, the RCEP would help it “make the transition from an agriculture-based economy”.

Moreover, the RCEP would have benefited Indian consumers, offering them a greater range of products and services at lower prices.

Note: This article has been lightly edited to reflect that India eventually chose to not sign the RCEP on November 4, 2019.