Say hello to the newest and biggest trading bloc
The TLDR: Fifteen countries have come together to form the Regional Comprehensive Economic Partnership—the world’s largest trading bloc. It is a huge win for China and a sign of the increasing irrelevance of the United States—which was never invited to the party. India isn’t part of this new powerhouse either, having opted out of the treaty negotiations last year. Smart move or self goal? We explain.
What is this treaty?
The fifteen partner countries include 10 members of the Association of Southeast Asian Nations (ASEAN) plus South Korea, China, Japan, Australia and New Zealand. RCEP negotiations began back in 2012 and it was finally signed on Sunday on the sidelines of an ASEAN meeting.
How it works: Now, while RCEP is far bigger, it doesn’t create a unified market like the EU.
- The agreement will eliminate 90% of tariffs on imports between signatory nations within 20 years—and establish common rules for e-commerce, trade and intellectual property.
- It doesn’t do as much in the area of services—i.e. make it easier to seek employment in member countries.
- It allows countries to keep import tariffs for sectors they deem as important or sensitive.
- Most importantly, it does not set common standards for labour laws or environmental protections.
Why is this a big deal?
One, it’s huuuge: Members of the RCEP represent nearly a third of the world's population and 29% of global gross domestic product. The new bloc will be bigger than the US-Mexico-Canada trading bloc and the European Union. Some experts say the deal could increase the global national income by $186 billion per year by 2030. Just ASEAN is slated to be the fourth-largest economy in the world by the end of the decade. The region had a combined GDP of $2.57 trillion last year.
Two, the free trade bonanza: has to do with something called ‘rules of origin’. In a globalised economy, a product may be manufactured with components sourced from multiple countries. This makes bilateral trade agreements very tricky.
As per the chart below, Australia and Japan have a free trade agreement. But a product made in Australia may have components made in China or South Korea—which do not have deals with Japan. As a result, many products may end up subject to import duties irrespective:
All these countries—excluding India—are part of one trading bloc thanks to RCEP. Companies can now build vast regional supply chains that span borders—and sell their products anywhere in this one gargantuan market.
Three, a big China win: RCEP is Beijing’s big move against Washington. And here’s why:
- Back in 2015, President Obama crafted the Trans-Pacific Partnership (TPP). A mega-trade partnership that brought together 12 nations, covered 40% of the world's economy—and deliberately excluded China.
- It was supposed to be the US-led version of the EU, aimed at reining in Beijing.
- But Donald Trump pulled the US out of the TPP in 2017. His wild threats to hike trade tariffs to “protect” Americans also made a lot of Asian countries anxious.
- China stepped into that vacuum to argue that Asian countries must create a self-reliant economic bloc—and not place their trust in an unreliable partner whose mood swings with each election.
- The signing of RCEP after years of hesitation shows that they finally bought that argument.
- As Reuters sums it up: “But at a time of growing concerns over China’s might, it cements its position more firmly as an economic partner with East and Southeast Asia. It will also be better placed to shape the region’s trade rules.”
Point to note: This will be Beijing’s first ever free trade agreement with South Korea and Japan—which aren’t very fond of China. And it has an increasingly stormy relationship with Australia. As one expert puts it: "You can both cooperate with someone and just loathe them, even as a human being. RCEP has done an impressive job of separating itself from other things.”
So why did we opt out?
India was a big part of the negotiations from the very beginning. And others—especially Japan—were keen that New Delhi act as a counter-balance to Beijing. But in the end, New Delhi decisively opted out last year. At the time, PM Modi said: "When I measure the RCEP Agreement with respect to the interests of all Indians, I do not get a positive answer.” And he has good reasons for that assessment.
One: India will be flooded with cheap Chinese goods—which will exponentially increase an already huge trade deficit with Beijing—$53 billion as of 2019, and larger than any other country. And we can ill-afford this incoming deluge at this time:
“Those worries appear against a backdrop where growth is slowing down, small-and-medium-sized businesses are still reeling from the effects of important reforms, and the Indian economy is struggling to create enough jobs for its workforce.”
Two: The government’s mantra of an atmanirbhar Bharat is aimed at strengthening domestic manufacturing. Also: encouraging multinational companies to move their factories to India. All of its big-ticket initiatives in recent months are focused on these two goals.
Three: There is huge domestic opposition—especially from farmers who made their anger clear during negotiations. As Deutsche Welle noted last year:
“Indian agriculture is largely subsistence-based and beset by alarmingly low levels of modern technology, packaging, processing and storage facilities. Opening it up to competition from much more advanced agriculture producers in places like Australia, New Zealand and Japan would have led to an economic and social crisis in the South Asian nation. That would have been the case even with agriculture-related sub-sectors like dairy and food processing.”
Four: While ‘Made in India’ goods are not competitive at the global level, Indians themselves have been our most successful export. RCEP mainly removes tariffs on goods—not restrictions on services, i.e. employment. In this, it is similar to New Delhi’s deal with ASEAN—which resulted in a massive trade deficit with few benefits.
Five: China. As one expert spells it out: “The reasons for which India walked out of RCEP last year have not changed. They haven’t improved and, in fact, have gotten worse, because there was earlier only an economic threat from China. Now, it exists on the political front as well.” Signing on to RCEP would make any kind of economic retaliation—like an anti-China boycott—impossible.
But will staying out hurt us?
Yes, there is a definite downside.
One: While we are trying to protect domestic manufacturing, the same factories will be left out of these regional supply chains. So multinationals trying to minimise tariffs may prefer to set up shop in Vietnam which is part of RCEP. One of the biggest industry lobbying group is unhappy at the pullout:
“The Confederation of Indian Industry (CII) for instance recently said that if India dropped out, it would be cut off from the RCEP region in terms of preferential access and that this would ‘hinder investments from many RCEP countries’.
‘Not being part of the block is tantamount to not having an even footing in terms of preferential access and losing export competitiveness. This will only harm India’s export and investment flow in the future,’ the CII said in a statement.”
Two: RCEP will create a large unified market that favours its members—and Indian manufacturers will be at a serious disadvantage. Economists—including former economic adviser Arvind Subramanian—warn that India can’t afford to turn its back on exports for two reasons. One, foreign demand will always be bigger than domestic demand for any country with a growing economy. Second, Indian products that are efficient and low cost will do well both in foreign markets and at home. The reverse—in the case of Made in India products made for Indians—is not true.
“As India contemplates atmanirbharta, two deeper advantages of export orientation are always worth remembering. First, foreign demand will always be bigger than domestic demand for any country. Second, there is also a fundamental asymmetry: If domestic producers are competitive internationally, they will be competitive domestically and domestic consumers and firms will also benefit. The reverse is not true: Being competitive only domestically is no guarantee of efficiency and low cost.”
The bottomline: Soon after RCEP was signed, External Affairs Minister S Jaishankar lashed out against trade agreements:
“In the name of openness, we have allowed subsidised products and unfair production advantages from abroad to prevail. And all the while, this was justified by the mantra of an open and globalised economy.”
The new plan: an “aatmanirbhar Bharat” where India makes the rules and builds its “comprehensive national power”.
Reading list
The Hindu has Jaishankar’s latest remarks on free trade. These older Deutsche Welle and CNBC stories have the best overview of India’s concerns regarding RCEP. This Hindu Business Line op-ed makes a strong case for opting out. This Business Standard op-ed makes the opposite case. The Hindu also reports on a potential trilateral agreement between India, Japan and Australia. New York Times looks at the implications for the US.