The weekly report of our trade correspondent, L.C.
The Regional Comprehensive Economic Partnership achieved a success, of sorts, at the RCEP leaders summit in Bangkok on November 5th. Fifteen of the sixteen participating countries agreed to finalize the deal and sign it next year – but India opted out.
The fifteen went out of their way to insist that India’s exclusion is not final. Japan, not wanting China to completely dominate the pact, got language into the final joint communiqué saying the fifteen will work with India to try to bring it in. Tokyo had been encouraging Beijing to meet some of New Delhi’s demands in order to keep it in RCEP, but Beijing did not do so. China fears that if India gets its economic act together, in a number of decades it will replace China as Asia’s leading economy.
Although the leaders’ joint statement said they have concluded “text-based negotiations for all 20 chapters and essentially all their issues of market access,” no text has been released and the precise provisions of the pact are not yet public. Some observers think it could still be tricky to work out remaining issues. The last pieces of a trade deal to be tackled are always the touchiest issues — those that had to await everything else being worked out. If India remains outside, some countries may have a tough time winning domestic approval of the pact, as their populations will be wary of joining a China-dominated bloc. So although it is expected, it is not assured that the RCEP will come into existence in the near future.
Despite intense talks leading up to the summit, Indian prime minister Narendra Modi said at the event that he was withdrawing because the agreement doesn’t “fully reflect the basic spirit and agreed guiding principles” of the negotiations and doesn’t address India’s key concerns. He declared that the deal would create “unsustainable trade deficits” for his country and “When I measure the RCEP with respect to the interests of all Indians, I do not get a positive answer.” A foreign ministry official told the press, “Our decision was guided by the impact this agreement will have on the ordinary human beings of India and livelihood of people including the poorest of the poor.”
As the deal’s conclusion approached, opposition across the political and economic spectrum grew within India, making Modi’s decision perhaps inevitable. The country’s growth has been weakening and exports declining. This made trade opening an even harder sell, especially after reports that among the Indian demands that weren’t accepted was the request for robust safeguards to allow India to respond to import surges.
The absence of India is a blow not just because it lowers the amount of the world’s population and GDP covered by the RCEP but also because most other participants wanted India to be in the deal in as a counterbalance to China – so that China would have a harder time dominating the pact.
If China could have had its way, it would have preferred to have India included in the pact to keep it part of a regional arrangement that excludes the US, thus undercutting the US vision for a non-China “Indo-Pacific.” It also would have shown that China was able to conclude a deal with India before the US concludes a trade deal with India. And it would have fit into risible Chinese efforts to portray itself as a leader in promoting globalization and a rules-based trading system. Nonetheless, Beijing wasn’t willing to concede to Indian demands, most of which focused on restricting Chinese access to India and opening Indian access to China.
Some analysts noted that the fact that New Delhi was close to joining the RCEP highlights how unambitious and low-standard the agreement must be. That has been known for awhile. In fact, Japan, supported by Australia, Singapore, and some others, has long complained about the low level of RCEP ambition and pushed to have it emulate the high-ambition Trans-Pacific Partnership (TPP), with which it shares seven members. From its inception, the RCEP has been centered around the free-trade agreements (FTAs) that Japan, China, India, South Korea, Australia, and New Zealand already has with ASEAN, which are not high-level.
Commerce Secretary Wilbur Ross dismissed the report of RCEP’s imminent conclusion by saying, “It’s a very low-grade treaty.” That may be the case – yet it is more comprehensive than any new agreement that the Trump Administration has negotiated or is currently discussing – including with Japan, the EU, China, or India. Moreover, there already exists a high-grade, comprehensive free-trade agreement encompassing much of the region included in the RCEP, namely, the Trans-Pacific Partnership (TPP). President Trump, in one of his first official acts, dismissed that treaty precisely because it was too high-standard and comprehensive and therefore would, he asserted, require too much from the US.
The RCEP’s main focus has been on reducing tariffs, but it also addresses non-tariff barriers and includes many other components, such as dispute settlement and services. The US does not have an FTA with the Association of Southeast Asian Nations (ASEAN), and thus any further tariff cuts among nations in the region will put US exporters at a disadvantage – so that even a low-level RCEP makes the US less competitive. Of RCEP countries, the US has an FTA only with South Korea, Australia, and Singapore. RCEP could also potentially boost the value-chain integration among China and some of its less-developed neighbors. Japan’s regional value chains could also get a boost, a development that could give it leverage in any future talks with the US.
On cue, Chinese Vice Commerce Minister Wang Shouwen told Chinese reporters that the RCEP, with its diversified mix of the most- and least-developed countries, would have profound significance for the future formation of global trade rules. That’s a key point: the US, as well as Japan, the EU, and many others, don’t want China making the rules. An important motivation for the TPP was to assure that more open, free-market-oriented economies would take the lead on rule-making. Criticism of the Trump White House’s pullback from engagement on the multilateral trade front has highlighted the danger of leaving the field to the Chinese.
Wang took full advantage of the US retreat to tout alleged China’s leadership, declaring that the RCEP will provide a “very significant boost” to investor confidence in the global economy against the rise of unilateralism and protectionism that has depressed trade growth across the world.
Indian Commerce Minister Piyush Goyal will be in the US this coming week, meeting with Lighthizer in Washington and with US and Indian companies in New York and San Francisco. He then travels to Brasilia for the Brazil-Russia-India-China-South Africa (“BRICS”) summit and trade ministerial. Goyal and Lighthizer are expected to try to finalize the small-bore US-India trade deal that has been eluding them. Consistent with the approach the Trump Administration now takes to trade deals, the goal is to complete a narrow, limited agreement for purposes of domestic grandstanding (“my HUUGE win”) and then – presumably – to reengage immediately for a second-stage, more comprehensive agreement.
India’s withdrawal from the RCEP might put it under greater pressure to get a deal with Washington so as not to be entirely isolated. On the other hand, it should put Washington on notice that the Modi government is highly sensitive to how trade concessions play domestically. It showed that it is fully capable of saying no to trading partners that make difficult demands – especially in the area of market access, the key US demand to India, and refusal to give work visas to Indian skilled workers, a sensitive issue for Washington.
L.C. has many years’ experience consulting on trade and economic matters for Japanese business.
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