snapshots

India Opts Out of the Chinese-Backed RCEP Deal -- For Now

3 MINS READNov 4, 2019 | 21:53 GMT
The Big Picture

Rising protectionist sentiment in the United States is driving Asia's largest economies to forge their own trading pact that would cover a third of the world economy. India's concerns over granting China wider access to its market, however, have continued to serve as the main sticking point in negotiations. 

What Happened

After seven years of talks, the push to finalize the world's largest free trade zone has been delayed by at least several months. On Nov. 4, Indian Prime Minister Narendra Modi refused to sign the Regional Comprehensive Economic Partnership (RCEP) at the Association of Southeast Asian Nations (ASEAN) summit in Bangkok, alluding to long-standing concerns over China's widening trade surplus with India and demands for enhanced market access for Indian exporters. Thailand has since highlighted a "commitment" by all ASEAN member nations to now sign the RCEP agreement with their six free trade partners (India, China, Japan, Australia, South Korea and New Zealand) by sometime next year. 

Why It Matters

In RCEP negotiations, India has pushed to only gradually grant bloc members (namely, China) wider access to its market, fearing that a sudden surge of imports could cut domestic jobs. Specifically, India has sought to implement its tariff cuts under the free trade deal over the span of at least 20 years, in order to give Indian manufacturers and farmers time to build their competitiveness.

But both India and China — the two largest consumer markets in the pact — still broadly agree on the overall benefits of joining a regional trading bloc to hedge against protectionism in the United States. Thus, India will continue to hold talks in search of a deal, though it will not fully sign on until it receives sufficient safeguards and reciprocal market access for its service exports.

India will continue to hold talks in search of a deal, though it will not fully sign on until it receives sufficient safeguards and reciprocal market access for its service exports.

New Delhi's hardball strategy, however, will come at the risk of being temporarily shut out of a deal, as China sees the RCEP as a valuable trade bloc to counter U.S. trade salvos. Its ongoing trade war with Washington will compel Beijing to finalize an agreement as early as possible, even if it means drafting a modified form without India. India's massive market, however, would significantly strengthen the Asian bloc's efficacy, meaning Beijing and the other RCEP countries would almost certainly leave the door open for New Delhi to rejoin at a later date.

Background

For India, the RCEP has the potential to support its broader aim of boosting the country's $2.6 trillion economy under Modi's "Make in India" campaign by boosting exports, creating jobs and spurring manufacturing. But the country's politically sensitive trade deficit with China — which has nearly tripled over a decade from $20 billion in 2009 to $57 billion last year — has forced Modi to tread lightly in negotiations. Indian policymakers have already criticized the government's existing agreements, including its pact with ASEAN countries, for failing to significantly benefit Indian exporters. And there are fears the RCEP deal could do the same. 

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