The 10 members of the Association of Southeast Asian Nations, Australia, China, Japan, New Zealand and South Korea on Sunday in Hanoi inked a historic deal to create the world’s largest free-trade bloc in terms of gross domestic product.
The Regional Comprehensive Economic Partnership (RCEP) includes nearly one-third of the global population and accounts for about 30% of global GDP.
It is larger than United States-Mexico-Canada Agreement (USMCA) and the European Union in GDP terms.
The RCEP pact covers trade in goods, trade in services, investment, economic and technical cooperation, intellectual property rights, competition, dispute settlement, and other trade-related issues.
Many see the deal as increasing China’s sphere of influence in the region amid the trade and tech war between the world’s largest and second-largest economies, the US and China.
Not surprisingly, the RCEP bloc excludes the world’s second-most-populous country and Asia’s third-biggest economy, India.
Indian Prime Minister Narendra Modi pulled his country out of RCEP negotiations on November 3, 2019, after participating in 28 of the 31 rounds of talks over six years.
Also read: India has good reason to reject the RCEP
There are a lot of similarities between Modi and US President Donald Trump. Just like Trump quit the Trans-Pacific Partnership, Modi walked away from the RCEP negotiating table, showing his strongman image for making tough decisions. They also share similar anti-Chinese rhetoric.
Modi defended his decision to quit the negotiation process in a recent interview with The Economic Times.
Modi said, “In the case of RCEP, India made its best efforts for a final conclusion. We wanted a level playing field based on fair trade practices and transparency. We expressed serious concerns over non-tariff barriers and the opaqueness of subsidy regimes in some RCEP countries.
“India took a considered position not to join RCEP, highlighting the fact that the current structure did not reflect RCEP guiding principles nor address outstanding issues.”
What does it mean for India to stay out of the world’s largest free-trade bloc? Will India’s absence affect RCEP’s full-blown implementation? Is India leaning toward Nehru-era protectionism?
These are the most recent relevant questions.
India’s rejection of the agreement means that it has closed its doors to future economic growth, poverty reduction, and enhancement of the living standards of its people. India opted for autarky by keeping out of the RCEP because it will be isolated from the opportunity of regional economic integration and a new round of globalization.
First, India’s withdrawal from the agreement means India has lost another opportunity to become an economy worth US$5 trillion by 2024 and $10 trillion by 2050, as Modi often claims.
Where will India get the technology to expand its economy faster? Modi misled Indian voters into believing that because of his bonhomie with Trump, the US would provide technology to India. Thousands of American companies would rush to India.
However, now that Joe Biden has won the US presidential election, the illusion given to the people by Modi is about to be shattered.
Second, the US will not repeat the same mistake it committed in the past by giving China access to technology and markets. By doing so, the US would slip from the world’s second-largest economy to the third-largest by 2050. Many American scholars like John Mearsheimer believe that the US made this mistake.
Third, no matter how friendly Modi was with Trump, the US imposed sanctions on India. The US terminated India’s entitlement to the Generalized System of Preferences (GSP) in May 2019. India had been buying cheap oil from Iran, but the US imposed a ban that same month.
Fourth, foreign trade is the most crucial aspect of transforming an economy. International trade promotes long-term economic growth and poverty alleviation, and improves living standards. It helps to bring technology and innovation, and increases productivity and overall economic development.
Forget about China; from Vietnam and Bangladesh, India must learn that economic growth and poverty reduction are almost impossible without international trade.
Experience so far suggests that Indian strategists believe their country should get concessions to help the country export smoothly. However, they have an attitude that other countries should not be allowed to export to India.
So they want a trade agreement that permits a one-way flow of goods and services in which India can export to its counterpart, but the other party of the pact should not have the right to export to India. This kind of mindset is incompatible with modern-day trade theory.
For instance, the South Asian Free Trade Agreement (SAFTA), initiated and led by India, looks to be dead, as suggested by Yaswant Sinha, former external affairs minister, because of India’s mindset of a one-way trading system.
Fifth, consumers are key drivers of economic growth. India needs domestic and foreign consumers of its goods and services. Where are those consumers now? Where will they be in the future?
The countries in the RCEP have a significant number of both consumers and producers. The Asia-Pacific region currently has a middle-class population of 2.023 billion. That figure is estimated to reach 3.492 billion by 2030. That is double the number of middle-class people in the rest of the world. So it is easy to see where the future consumers will be.
In India, the middle-class population is projected to number around 200 million this year. That number is expected to reach only 475 million by 2030. So India’s middle-class population by 2030 will be only half of what China’s is in 2020.
There is an argument from Indian economists that RCEP will not succeed if India does not open its market. However, this assessment is subjective and not based on facts on the ground, because India has too few consumers domestically. That is why two American companies, General Motors three years ago and Harley-Davidson more recently, exited India. India can only grow its middle-class population by joining in regional integration and riding a new globalization wave.
Besides, without foreign investment and production technology, India cannot grow economically. Without economic growth, the number of middle-class citizens cannot increase.
India needs to transform the incomes of the approximately 60% of the population with an income of less than $3 a day to $10 a day.
Sixth, China, Japan and South Korea are among the parties to the RCEP. India needs partnerships with those countries not only for imports but also for exports. If it were included in the bloc, India would enjoy more investment and technology transfer.
By opting out of RCEP, India appears to have failed to make itself a future investment destination. The Modi government has proved again that India is not an investment-friendly country.
Even before the Covid-19 outbreak, India’s economy had declined for eight consecutive quarters. This year, the economy shrank by about 24% in the first three months and 8.6% in the second quarter. Where will the economic stimulus needed to reverse this shrinkage come from?
Where will India get the investment it needs to build a $5 trillion economy by 2024, as Modi vowed in the last election? Will the investment be made by Modi out of his own pocket?
Rational investors do not trust India very much now.
US companies did not rush from China to India after the trade war started in March 2018. European companies are not coming either, because in their understanding, India is not a country worthy of investment as long as its policymakers are hesitant to open up the economy.
If this agreement had been ratified by New Delhi, the world would have been more likely to perceive India positively as an investment destination.
In the past, China was reluctant to open its economy. At first, the Chinese used to compare the Western companies that were entering China to invading wolves. But in the end, China took the risk. There is no longer much need to discuss the outcome of that risk-taking decision to open up its economy in 2001.
Competitive capacity cannot be gained without risk. However, India seems to be moving in the opposite direction.
Australia and Japan, which have participated in the Quad and the Malabar drills with India, have also joined RCEP. Tokyo and Canberra understand where the current and future market is.
The future market will not be North America or Europe but the Asia-Pacific region. This region will be the center of technology, innovation, investment, production, and consumption.
It is difficult to understand how India believes it can achieve economic growth by being isolated from this vast regional pact.
India’s decision to abandon the RCEP trade deal is a historic blunder. The decision not to participate in the pact tends to cement the global understanding that India is a difficult country to deal with.
India’s rejection of the RCEP shows that its political and strategic elites’ priority is not the people and their standard of living, but only to slow China’s rise.