India decided to withdraw from the Regional Comprehensive Economic Partnership (RCEP) last year. What impact will this decision have on its engagements with ASEAN nations now that the 15-party trade agreement has been approved?
India opted out of the Regional Comprehensive Economic Partnership (RCEP) that 15 countries signed on November 15 at the virtual ASEAN Summit. All 10 ASEAN members (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam) are signatories along with Australia, China, Japan, New Zealand and South Korea.
India participated in RCEP negotiations before pulling out last year. While it remains on the sidelines for now, the RCEP members have stated that India could in the future become an observer or a member if it so chooses.
For some time, India has been working to increase its outreach to Southeast Asian countries, but it is hard to see how withdrawing from the RCEP helps those efforts. In fact, its concerns about the deal and its decision to withdraw could seriously affect its relations with Southeast Asian countries.
India had several concerns about the RCEP’s impact on trade
India had both economic and strategic concerns about the RCEP. When it walked out of negotiations in November 2019, India justified its withdrawal by claiming that eliminating tariffs as per the RCEP would create a trade imbalance between India and other RCEP members that would adversely affect Indian businesses.
More specifically, China remains the primary cause of India’s concerns. India’s principal objection is that the RCEP would pave the way for Chinese products to infiltrate the market, either directly or indirectly routed through other RCEP countries.
Furthermore, the RCEP does not have provisions for separate tariffs for products which have components originating from different countries. Therefore, India’s trade deficit with China prevented it from joining the RCEP, which it considers to be a China-led forum that would hurt India’s economic interests.
How will India’s decision affect its relations with Southeast Asian countries?
India has been focusing on closer engagement with Southeast Asia through its Act East Policy. But even prior to the Act East Policy and the RCEP, India had a free trade agreement (FTA) in place with ASEAN. The initial agreement between India and ASEAN was signed in 2003 and the final agreement was signed in 2009. The ASEAN-India Free Trade Area came into effect in 2010.
Joining the RCEP would have required India to eliminate tariffs on almost 90% of the items it trades with ASEAN as well as with Japan and South Korea. Therefore, India’s decision to remain out of the RCEP will push ASEAN countries towards prioritizing trade with RCEP members instead.
India’s total trade with ASEAN countries was around US$87 billion in 2019-20, of which about $32 billion were exports and $55 billion were imports. India’s trade deficit with ASEAN nations stood at $24 billion.
Trade between India and ASEAN is regulated by the FTAs that India has with ASEAN as a bloc as well as bilateral agreements with Malaysia and Singapore. India’s trade deficits with Malaysia and Singapore stood at US$ 3.42 billion and US$ 5.83 billion respectively.
Meanwhile, India has been pushing for a review of its existing FTAs, including the one it has with ASEAN. However, ASEAN countries are unlikely to enter into negotiations any time soon because they will—understandably—prioritize the RCEP.
India risks finding itself isolated and resetting its relations with ASEAN countries is a potential consequence of its refusal to sign up to the RCEP. Might India be willing to take that chance? After all, it is currently putting in place a comprehensive review of all of its bilateral and multilateral free trade agreements, most of which its government feels are heavily tilted against India.
How India’s relations with China contributed to its withdrawal
India’s RCEP decision was also partly motivated by its ongoing conflict with China as well as its stance on addressing domestic economic concerns. India has been involved in a border stand-off with China in Ladakh since May. Anti-China sentiment in the country is running high and some Indian citizens have called for boycotts of Chinese products.
As well as reviewing its FTAs, Indian Prime Minister Narendra Modi has called for increased self-reliance in economic matters in order to boost local businesses. Anti-China sentiment resulted in India reducing the trade deficit with China by 50% between April and August.
The Indian government has also initiated agricultural reforms to offer more benefits to its farmers. This is part of moves to make its small and medium businesses and its agricultural sector more competitive. These sectors would have been unable to effectively compete with the imports that RCEP would have brought to the Indian market; it is one of the primary reasons why India refused to sign the RCEP. However, making these sectors competitive could be a slow process.
Nevertheless, the RCEP is likely to lead to ASEAN countries engaging more with China economically than India. Since India has put its security and domestic economic concerns ahead of signing the RCEP, it needs to prepare to reset its status with Southeast Asian nations. For India, not signing the RCEP means it must now come up with fresh ways of engaging with the region.