Why RCEP Is Vital for India

By Bipul Chatterjee and Surendar Singh

March 03, 2015

The regional trade deal could boost India’s strategic and economic position in the Asia-Pacific. 

Mega regional trade deals are in vogue in an otherwise fragile global economy. In an environment of falling aggregate demand, these trade deals are seen as a means to insulate economies from market uncertainties. Three important mega regionals are currently under negotiation: the Regional Comprehensive Economic Partnership of Asia and the Pacific (RCEP), the Trans-Pacific Partnership (TPP), and the Trans-Atlantic Trade and Investment Partnership (TTIP). It is expected that these agreements, once concluded and implemented, will set the stage for a new generation of global trade and investment rules.

From India’s point of view, the RCEP presents a decisive platform which could influence its strategic and economic status in the Asia-Pacific region and bring to fruition its “Act East Policy.” It is expected to be an ambitious agreement bringing the five biggest economies of the region – Australia, China, India, Japan and South Korea – into a regional trading arrangement.

It would be the world’s largest trading bloc covering a broad spectrum of issues such as trade in goods, services, investment, competition, intellectual property rights, and other areas of economic and technical cooperation. Together, the RCEP group of countries accounts for a third of the world’s gross domestic product, and 27.4 per cent and 23.0 per cent of the world’s goods and services trade, respectively.

It is interesting to note that, compared with the TPP and TTIP groups of countries, India’s trade share with the RCEP group of countries as a percentage of its total trade has increased over the past decade and half, underlining the importance of its trade with key countries in this group.

For India, the RCEP offers ample opportunity. There are three immediate benefits that its trade policymakers should note. First, the RCEP agreement would complement India’s existing free trade agreements with the Association of South East Asian Nations and some of its member countries, as it would deals with Japan and South Korea. It can address challenges emanating from implementation concerns vis-à-vis overlapping agreements, which is creating a “noodle bowl” situation obstructing effective utilization of these FTAs.

In this respect, the RCEP would help India streamline the rules and regulations of doing trade, which will reduce trade costs. It will also help achieve its goal of greater economic integration with countries East and South East of India through better access to a vast regional market ranging from Japan to Australia. The RCEP can be a stepping stone to India’s “Act East Policy.”

This is particularly important because India is not a party to two important regional economic blocs: the Asia-Pacific Economic Cooperation and the Trans-Pacific Partnership. The RCEP would enable India to strengthen its trade ties with Australia, China, Japan and South Korea, and should reduce the potential negative impacts of TPP and TTIP on the Indian economy.

Second, the RCEP will facilitate India’s integration into sophisticated “regional production networks” that make Asia the world’s factory. The RCEP is expected to harmonize trade-related rules, investment and competition regimes of India with those of other countries of the group. Through domestic policy reforms on these areas, this harmonization of rules and regulations would help Indian companies plug into regional and global value chains and would unlock the true potential of the Indian economy. There would be a boost to inward and outward foreign direct investment, particularly export-oriented FDI.

Third, India enjoys a comparative advantage in areas such as information and communication technology, IT-enabled services, professional services, healthcare, and education services. In addition to facilitating foreign direct investment, the RCEP will create opportunities for Indian companies to access new markets. This is because the structure of manufacturing in many of these countries is becoming more and more sophisticated, resulting in a “servicification” of manufacturing. India is well placed to contribute to other countries in RCEP through its expertise in services, not only consolidating the position of the region as the world’s factory but also developing it as the world’s hub for services.

It is vital for India to ensure that the RCEP is truly comprehensive and does not just focus on market access for goods. Keeping these benefits in mind, India will need second-generation reforms of its domestic economic policies, including those that reform its factor markets, to make its trade more competitive. These reforms will help India better access other markets, and will mitigate some of the repercussions for the Indian economy of the other two mega regionals.

Bipul Chatterjee is Deputy Executive Director of CUTS International; Surendar Singh is Policy Analyst, CUTS Centre for International Trade, Economics & Environment. They can be contacted at bc@cuts.org andsus@cuts.org.