India’s significance as the ‘missing elephant’

India holds a vital position in the RCEP for several reasons. India is one of largest regional and economic powers in the Asia Pacific region and would have been the third largest economy in the RCEP. In 2018 (the financial year prior to India’s withdrawal from RCEP), India enjoyed a higher GDP growth rate than its RCEP counterparts such as China, Japan, Australia and Singapore – only falling short of Cambodia and Vietnam.^[2] India’s position as the second largest country by population after China also gives RCEP States access to its huge consumer base. This is also strategically important to counter China’s hegemony in the region and prevent overreliance on China as a trading partner. Further, India’s geographical position gives RCEP States easier access to South Asian markets through India’s membership in the South Asian Free Trade Agreement. Given these metrics, India’s withdrawal is undoubtedly a huge setback for the RCEP.

India’s reasons for withdrawal India attributed its withdrawal to its unresolved concerns with the RCEP Agreement during the previous rounds of negotiations. At the outset, India was concerned by the proposed tariff rules in the RCEP Agreement, which would progressively abolish 90% of all tariffs on goods between the member States. India previously had a disappointing experience with FTAs with several RCEP States, such as ASEAN, Korea and Japan, which led to an increase in trade deficit as the FTAs failed to increase India’s exports in those countries.^[3] While this is attributable to several factors such as India’s failure to adequately leverage the FTAs, India feared that RCEP could result in Indian markets being flooded with cheaper and lower tariff products, especially from China (with whom India has the highest trade deficit).

To address this, India proposed an auto-trigger mechanism, which would entail automatic application of special safeguard duties in situations where imports from a member nation exceeded a threshold limit. This proposal however was not accepted by RCEP countries. This, coupled with India’s escalating border dispute with China, also resulted in apprehensions about the potential conflict between RCEP obligations and any economic sanctions that India may need to impose on China.

Equally, India felt it was receiving little in return. Under the RCEP Agreement, the States agreed to slash tariffs by using the base date of 2014. India wanted to use a more updated base date of 2019, when it had revised tariffs on various products. Likewise, India’s push for more stringent rules of origin, to protect against surges in imports, was also unsuccessful. Under international trade law, rules of origin are used to trace the national origin of a product, which is used to determine trade duties on imports. The RCEP Agreement proposes common rules of origin for all member States, which would enable manufacturers to import from any State at reduced costs. India wanted stricter rules of origin to ensure that States cannot route their goods through a third State which enjoys lower tariffs pursuant to its FTA with India. India was also opposed to the most-favoured nation clause in the RCEP Agreement, which meant that it could not discriminate between its trading partners. India did not wish to confer the same benefits on all RCEP States, especially China with whom it had an ongoing border dispute.

Way forward for India

Keeping in mind India’s strategic importance, the RCEP has left open the option for India to join the RCEP Agreement. India’s decision to exit the RCEP is one in a series of protectionist actions, such as its ‘Make in India’ campaign and widespread termination of its bilateral investment treaties. However, India also has a lot to lose by staying out of the RCEP in the long term, particularly during the present economic recession exacerbated by COVID-19. The RCEP is a unique and an extremely critical FTA for India. It involves four of the five largest economies in Asia (i.e. China, Indonesia, Japan and South Korea), which represent 45% of the world’s population and account for 25% of the global GDP, 30% of the global trade and 27% of India’s total trade.^[4] Critics warn that India’s withdrawal may affect its trade ties with individual RCEP States, as they may prioritize strengthening economic trade within the bloc. By exiting the RCEP, India may lose out on immense potential arising from trade & investment opportunities within this bloc.

A more pragmatic approach for both India and the RCEP would be to find a middle ground that addresses their key concerns. India’s policy of protectionism is neither desirable nor effective in today’s globalized economy. While India has alternative options such as bilateral trade agreements, they do not carry the same potential of investment and trade opportunities as the RCEP, and entail greater time and resources for negotiation. Likewise, for the reasons discussed above, the RCEP would be a much stronger trade bloc if it includes India. To that end, the RCEP may wish to reconsider its decisions on India’s key concerns such as auto-trigger mechanism and other safeguard tools, or propose other effective alternatives. Aside from access to India’s large consumer base, India’s inclusion is also important to balance China’s dominance within the RCEP and attain the goal of integrating Asia Pacific economies. India’s return to the RCEP would undoubtedly be a win-win situation for both sides.

Footnote

[1] RCEP trade deal a no-go, PM Modi says conscience doesn’t allow, Hindustan Times, available at www.hindustantimes.com/india-news/neither-gandhi-stalisman-nor-my-conscience-allows-to-join-rcep-pmmodi/story-MwoYlJchVp3S1OK1EKilHK.html

[2] P. Gaur, India’s Withdrawal from RCEP: Neutralizing National Trade Concerns, Journal of the Asia Pacific Economy (2020),

[3] NITI Ayog, A Note on Free Trade Agreements and their Costs, p. 7-9, available at https://niti.gov.in/writereaddata/files/document_publication/FTA-NITI-FINAL.pdf

[4] NITI Ayog, A Note on Free Trade Agreements and their Costs, p. 14, available at https://niti.gov.in/writereaddata/files/document_publication/FTA-NITI-FINAL.pdf

This article was originally published in American Society of International Law on 30 June 2021 Co-written by: Rishab Gupta, Partner; Shreya Jain, Senior Associate. Click here for original article

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