What India does on RCEP, China on CPTPP will decide global trade in the post-Covid-19 world
Updated: Jun 6, 2020
In November 2019, India opted out of the Regional Comprehensive Economic Partnership (RCEP), after seven years of negotiations. At the brink of a landmark decision on joining the world’s biggest regional trade deal at a summit in Bangkok, India withdrew based on its stand that its “core interests remained unresolved”. “The present form of the RCEP Agreement does not fully reflect the basic spirit and the agreed guiding principles of RCEP,” Prime Minister Narendra Modi said in his address at the RCEP summit.
The sprawling pact would have covered 45 per cent of the world’s population and roughly 40 per cent of world trade. According to the Deepa Kumar, a senior analyst at IHS Markit, “the Indian government is likely to have decided that without completing key domestic reforms, India’s capacity to boost domestic manufacturing would have remained limited, leaving its market vulnerable to Chinese dumping.”
India already has free trade agreements (FTAs) with 12 of the other 15 RCEP countries and is negotiating an FTA with Australia. There are concerns that India’s entry into the RCEP would have created an India-China FTA via the backdoor, even as the Indian government seeks to reshape global supply chains with friendly trade partners such as Japan, Australia, and Vietnam - countries that are also strong advocates of RCEP.
At the time of India’s RCEP withdrawal in late 2019 China, hoping for a quick deal to ease pressures from its trade war with the United States, had said that the other 15 countries should move forward with a signing next year, but leave the door open for India to join when it is ready. Japan has maintained that it would prefer India’s participation as a founding member in the regional trade pact. “It is meaningful from the economic, political and potentially the national security point of view,” Deputy Minister for Economy, Trade and Industry Hideki Makihara said last year of the inclusion of the world’s largest democracy in the pact. From the Japanese perspective, an RCEP without India would likely damage the balance of both economic and political power within the region. Japan and India have intrinsic ties as they are both strategic and global partners that share similar norms and values, with the potential to play more vocal global roles.
There are now signs of strategic attempts to thaw positions with regard to trade in Asia. The 29th RCEP Trade Negotiating Committee Meeting was held via video conference in April 2020 and attended by 15 RCEP Participating Countries (RPCs). In a significant development, the joint statement by the 15 RPCs stated their commitment “to continue working with India to address its outstanding issues” and that they would “welcome India’s return to the RCEP negotiations.”
Additionally, according to recent media reports a regional trade bloc appears to have offered concessions to urge India back to RCEP negotiations. The bloc, comprising 15 nations -- Asean countries, Japan, Australia, New Zealand, South Korea and China -- has written a letter seeking India’s return and expressed willingness to discuss the option of deferring commitments related to opening up its market. Reports on the RCEP development have come even as Indian Prime Minister Narendra Modi and Australian Prime Minister Scott Morrison held historic online talks on June 4.
Meanwhile, as political and trade tensions with the United States rise, for the first time China has indicated it willingness to join the Comprehensive and Progressive Trans Pacific Partnership (CPTPP), the 11 nation-strong trade agreement that is the largest free trade zone in the Asia-Pacific region and the third-largest in the world. The CPTPP, which was bolstered by Japan and Australia, was developed from the US-led TPP. Although the US withdrew from it after US President Donald Trump took office, the influence of the new CPTPP on the Asia-Pacific region cannot be underestimated. Chinese Premier Li Keqiang’s comment at a press conference that “China has a positive and open attitude toward joining the CPTPP” appears to be the first time that a Chinese leader has publicly confirmed China’s interest in joining the partnership.
These are early indications and may come to naught given that CPTPP rules would require China to make state-owned companies more transparent and to be more cooperative on issues such as intellectual property, environmental protection, management of data flow, and labor standards. Aligning Chinese practices with the CPTPP would require major reforms, something that China has not been willing to budge on so far. Also, Chinese membership could be resisted by other CPTPP members, and possibly by the US. Secretary of State Mike Pompeo had warned Australia in November 2019 that “you can sell your soul for a pile of soybeans, or you can protect your people,” referring to Australia's tolerant position on China.
What is certain is that with globalization under fire from populism and protectionism, and the lower profile that the United States now has in the East Asian region under the Trump administration, China appears to be seeking ways to bolster trade ties for regional economic integration. The US withdrawal from the TPP has created a vacuum that China is eager to fill.
For India, the issue with RCEP remains one of balancing domestic requirements with its Act East Policy and the grouping's hope to see India as a countervailing force in major power competition. India offers a sizable market of 1.3 billion people. In a post-pandemic world, it could well be key to the success of RCEP as economies shrink and protectionism creeps across the globe. However, it would not be a stretch to state that China’s unfair trade practices undermine Indian manufacturing and competitiveness, with the result that Modi’s vaunted Make in India initiative has yet to seriously take off. On the other hand, RCEP could be an effective tool to channel much-needed FDI into India and provide respite to trade partners such as Japan that have component manufacturing bases across multiple countries in Asia.
According to World Trade Organisation projections global trade is set to fall between 13 per cent - 32 per cent in 2020 because of the disruption of normal economic activity. It remains to be seen how the current rumblings in the two most populous nations of Asia will translate into concrete trade ties, and what this will mean for international cooperation and multilateralism, both areas where there are clear signs of a strategic retreat by the Trump administration.
(Richa Jayal is a senior researcher on India-Japan affairs, and an entrepreneur in linguistics. She has worked for Goldman Sachs, and is a graduate of the Jawaharlal Nehru University and Osaka University).