Why the RCEP is the opportunity India needs

East Asia Forum, April 08, 2015

By Bipul Chatterjee and Kyle Robert Cote

As two mega-regional preferential trade agreements — the Trans-Pacific Partnership (TPP) and Transatlantic Trade and Investment Partnership (TTIP) — loom closer to completion, India must move towards higher trade standards. Trade diversion from non-member countries of these mega-regional trade agreements is likely to occur and could be detrimental. This is a serious concern for developing countries cut out of the talks.

Indian fruit vendors wait for customers as they sell bananas on the roadside in Amritsar on 1 April 2015. (Photo: AAP)

India could lose out in some key areas. A number of export areas could be affected, including grains and other crops, processed food, textiles and apparel, and both light and heavy manufacturing. Imports are expected to slow down, affecting the competitiveness of many domestic industries. And there will be negative impacts on inward and outward foreign direct investment. This will have consequences for India’s outputs, product prices and income generation.

In this context, the Regional Comprehensive Economic Partnership (RCEP), a proposed comprehensive trade agreement among 16 nations in the Asia Pacific, is exactly the kind of opportunity India needs. Through the RCEP, India can develop the higher trade standards promoted in mega-regional agreements, while ensuring support for its domestic constituencies.

But many of the negotiating members of these mega-regional agreements, including some of those in RCEP, already have low tariff rates. In contrast, India has to maintain relatively high tariffs because of high cost of inputs. What would India gain if its partners’ tariffs are already low? Especially as India will be pressed to lower its own tariffs and further open its market.

The challenge before India is about balancing its negotiations with RCEP partners, and utilising both promotional and conditional offers in a number of sectors. India can showcase to its regional partners, and indeed the world, that some of its domestic producers are ready for greater competition — especially those that have a comparative or competitive advantage and can connect with global value chains. This should include linking India’s high-quality information technology sector with manufacturing and commodity processing in regional value chains.

At the same time, due to greater flexibility in the RCEP, India can continue to support its domestic industry to give certain sectors the time to prepare for greater foreign competition. This should be done through a sensitive list approach, product-specific rules of origin criteria and offer extended phases for tariff reductions.

Ever-evolving trade-related standards — from packaging requirements to sanitary rules for exporting melons — are sharply affecting India’s trade in many products. While differential treatment on standards will not be possible, long phase-in periods are one way to promote greater competition and also address various domestic anti-competitive market distortions. This can be done while supporting domestic industries, giving them time to adapt. India’s government and industry will have to work together.

Conditional offers will also be needed to build industry’s capacity to deal with potentially stringent rules, such as Intellectual Property (IP) rights, which will affect India’s vital pharmaceutical industry. Affordable generic drugs are critical for India and other developing countries struggling with large low-income populations in need of better healthcare.

While certain IP rules may benefit transnational pharmaceutical companies, India can take that first step to prepare for those strict regulations. India can begin the process by upgrading its own domestic IP policy, by both relaxing rules on certain products, such as music or film, and ensuring support for its generic medicines. The RCEP agreement gives India an opportunity to cement IP rules that are more attuned to the needs of developing countries.

India’s emerging place in the global trading system is not a choice between liberalising its trade through agreements, and focusing on domestic reforms before entering into trade agreements. India is both a strong emerging economy, which is active in the international and regional arena, and a developing country with pressing welfare needs. It must find a balance in its trade policy to take the necessary steps to partake, and indeed prosper, in the new and elevated trade regimes based on mega-regional agreements.

India has to find a new kind of policy space for doing trade. And RCEP gives it an opportunity to take a balanced but progressive approach, while simultaneously implementing domestic reforms to reduce the cost of producing goods, services and technologies. Both Indian producers and consumers will gain in the medium-term. But if India is to benefit, it must be cautious.

Bipul Chatterjee is the Deputy Executive Director at CUTS Centre for International Trade, Economics and Environment.

Kyle Robert Cote is an Assistant Policy Analyst at CUTS Centre for International Trade, Economics and Environment.

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