RCEP without India poses new hurdles

RCEP without India poses new hurdles

On the face of it, the Regional Comprehensive Economic Partnership is an Indo-Pacific trade pact that would shore up the stalled world trade liberalisation and stem the rising tide of protectionism in the global economy. India's withdrawal from the RCEP -- whose other 15 members comprise the 10 Asean economies along with China, Japan, South Korea, Australia and New Zealand -- is a major setback, posing new challenges for the Asean-centred trade bloc. Asean should persuade India to return to the RCEP fold, while preparing for a much less promising RCEP15 as second-best outcome.

Around midyear during the 34th Asean Summit, it looked like RCEP had a chance to be finalised by year-end. Most of its chapters under negotiations were being completed in an expeditious fashion. Expectations were raised that RCEP could be achieved under Thailand's chairmanship. If realised accordingly, RCEP would represent around one third of global GDP and 40% of global trade. It would link up the three largest Asian economies -- China, Japan, and India -- through freer trade, yielding interdependent benefits for regional peace and stability.

Unlike the Comprehensive and Progressive Trans-Pacific Partnership, or CPTPP, Asean could claim some ownership of RCEP. CPTPP includes just four Asean economies, whereas RCEP brings in all 10. The RCEP economies are also dynamic, with promising growth trajectories. In the years ahead, RCEP economies could expand and altogether combine for the bulk of global trade and world GDP.

But India's pullback has thrown a spanner into RCEP. In the lead-up to the 35th Asean Summit last week, India's domestic political situation and political economy shifted. Prime Minister Narendra Modi and his Bharatiya Janata Party (BJP) won re-election from the majority of the Indian electorate last April-May. Suddenly, trade liberalisation along RCEP lines became less attractive. The Indian economy faces trade deficits with a range of RCEP countries, particularly China. Wider market access will only exacerbate these trade deficits, while local protectionist sentiments remain strong, reinforced by Mr Modi's nationalist impulses and the BJP's roots.

Prime Minister Modi's first term was beset with a number of major policy missteps. In 2016, his government demonetisation programme to weed out the corrupt rich ended up hurting the rural and urban poor who relied on the informal sector and a cash economy. In the event, the wealthy parked much of their money in assets, some outside the country. In the following year, the Modi government introduced a controversial goods and services tax (GST), tantamount to a consumption tax. It was a bold fiscal gamble, unpopular in the short term but perhaps needed in the longer term. In addition, the Modi first term also brought inflation under control and changed much of India's patronage to a rules-based system.

It is surprising that the Modi government still went along with the RCEP negotiations in the face of his domestic challenges. Now in his second term, Mr Modi appears to want to consolidate his structural reforms at home without complications from further trade liberalisation. A major reform going forward will be to divest from government-owned enterprises, such as Air India and Bharat Petroleum.

With a long and uphill domestic policy agenda, the Modi government's pullout from RCEP will mean that the now 15-member trade bloc may lack balance. The inclusion of China on one hand and India and Japan on the other provided a semblance of economic balance to the smaller RCEP economies. India represents just over 10% of the combined RCEP GDP but nearly 40% of the trade bloc's market size owing to India's second-largest population in the world after China. Without India, RCEP will also come across more as an Asia-Pacific, rather than an Indo-Pacific, trade bloc.

RCEP15 reportedly will move ahead and sign the pact next year under Vietnam's chairmanship of Asean. But the composition, balance and potential of the group will not be the same without India. The Modi government should also realise that its "act east" geostrategy for engagement in and with Asia will be hindered if India ultimately stays out of RCEP. A firm anchor in RCEP would validate and burnish India's credentials as an Indo-Pacific major power. It would be India's lost opportunity if it turns away from RCEP for good.

For China, RCEP is a boon because China faces mounting challenges at home and tensions abroad with the US on bilateral trade and technology. Japan has been instrumental in peddling RCEP to its fruition, and wants to deepen its trade role in the region. For Asean, RCEP provides not just trade liberalisation that can promote domestic policy reforms but also political momentum that can boost Asean's central role as the main platform for Asian regionalism.

Whether India returns, the Asean economies, especially Thailand, should now try to streamline RCEP and the CPTPP. Vietnam and Malaysia benefit the most because they are members of both. Thailand at this point should try to accede to the CPTPP, having missed the boat earlier due to a lack of domestic political stability and continuity.

Unless it returns to a group of 16 again, RCEP will miss India but not as much as India will miss RCEP, not just on trade but also geostrategic grounds. It behoves the Modi government to rethink and reconsider despite protectionist sentiments at home.

Thitinan Pongsudhirak

An associate professor at Chulalongkorn University

An associate professor and director of the Institute of Security and International Studies at Chulalongkorn University’s Faculty of Political Science, with more than 25 years of university service. He earned his MA from The Johns Hopkins School of Advanced International Studies and PhD from the London School of Economics where he was awarded the UK’s top dissertation prize in 2002.

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