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#4704, 20 October 2014

Regional Economy

Regional Economic Architecture: Is India Ready?
Amita Batra
Professor of Economics, Centre for South Asian Studies, School of International Studies, JNU, New Delhi.

Two mega regional trade agreements – the Regional Comprehensive Economic Partnership (RCEP) and the Trans Pacific Partnership (TPP) – are currently under negotiation in Asia. The RCEP, launched at the East Asia Summit in November 2012, is a comprehensive goods, services and investment agreement among the 10-member ASEAN and its six Free Trade Agreement (FTA) partners, namely Australia, New Zealand, China, Japan, Korea, and India. Aimed at deeper integration, the RCEP is accommodative of developmental differentials among the member economies and allows for open accession according to the level of preparation.

The ASEAN is central to the RCEP process. The TPP that began as a four-member FTA with Brunei, Chile, New Zealand and Singapore now includes eight more countries: the US, Australia, Canada, Japan, Malaysia, Mexico, Peru and Vietnam. The TPP is a far more ambitious agreement with an agenda beyond liberalisation to include regulatory compatibility and facilitating investment and business climate. The initiative, now in its final rounds of negotiations is aimed at achieving ‘WTO plus provisions’ in areas like goods, services, investment, Intellectual Property Rights (IPR), competition, dispute resolution, trade remedies, customs procedures, government procurement, labour standards and environment.  India is a member of the RCEP but not of the TPP. The RCEP will hold its fifth round of negotiations in New Delhi in December 2014, preceded by the India-ASEAN and East Asia Summits in November 2014 in Myanmar.

The RCEP will help India integrate into the regional production networks. This is a significant advantage as global trade patterns are changing in response to production fragmentation across borders and India’s parts and components trade, that is integral to regional production networks, is currently less than 10 per cent of its total trade with the ASEAN. Also, as the ASEAN moves closer to achieving its vision of an economic community and becoming a globally integrated, highly competitive, single market and production base by 2015, India will gain through its membership of the mega-regional agreement. The 2010 ASEAN-India FTA will further contribute to this process of economic integration.

There are, however, the following concerns regarding India’s preparedness to take on the challenges of participation in the evolving regional economic architecture: 

First is the challenge that overlapping members of the RCEP and TPP will pose for India. Notwithstanding the large-scale differences in the agenda of the two agreements, the spill-over effects of the TPP on the RCEP will be evident in terms of the higher liberalisation and regulatory standards that the common members having accepted in the TPP, would demand of their RCEP partners. This would imply necessary cost-bearing reforms in the non-TPP member economies of the RCEP like India. In the past, New Delhi has put up a stiff resistance or found it difficult to negotiate regulatory issues in agreements at both global and regional levels. In that context, the stance that has been evident on issues involving IPR may not be sustainable once the mega regional agreements conclude. Vis-à-vis customs procedures, the Word Bank’s 2014 global logistics performance index shows India with the lowest score among all common members across the RCEP and the TPP. While India may have concrete reasons to not accept the WTO trade facilitation deal, credible domestic reforms on this front cannot be deferred for too long.

Second, is the inevitability of giving preferential market access to China under the RCEP, a prospect that India, fearing an import surge, has otherwise resisted. In 2014, India had a $ 36.2 billion with China, even as bilateral trade stood at $66 billion. While India’s proposed ‘safeguard duty’ on Chinese imports can only be a short-term corrective measure, China’s offer to take up tariff cuts for some products under the Asia-Pacific Trade Agreement (APTA) may not even happen. The APTA has been a slow-moving agreement with less than satisfactory performance in terms of goods coverage and consequent trade enhancement. Its fourth round of product negotiations that started in 2007 is yet to be concluded. It may be a far better strategy for India to aim at export diversification through enhanced domestic manufacturing capabilities. 

Third, the success of the RCEP would to a large extent be a function of the credibility of the ASEAN objective of creating an integrated economic community by 2015 and the reconciliation among its FTAs with the other RCEP members. While the former involves further liberalisation in the services and FDI sectors alongside overcoming the internal development differentials among ASEAN member nations, the latter demands grappling with the not-so-easy task of overlapping rules and differential rates and timing of tariff elimination of the ‘plus one’ FTAs. For India, that has among the lowest tariff coverage relative to the ASEAN’s other FTA partners, this will require a rationalising of its tariff structure beyond the current ASEAN-India FTA levels. Again, the domestic manufacturing sector needs to be prepared to face the outcome of the thus-increased competition.

India must therefore take its membership of the RCEP as an opportunity to lock in domestic reforms that will then make it more capable of benefiting from the evolving regional economic architecture in Asia.

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