Why India rejected Asia’s Biggest Free Trade Agreement RCEP

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Explained: Why India rejected Asia’s Biggest Free Trade Agreement?

India withdrew from Asia’s version of ‘EU-like free trade’ and the decision not only aims to safeguard its domestic industries but is influenced by the growing western trend of the nation-first and protectionist approach to trade.

After 28 rounds of negotiations in 7 years, Indian Prime Minister Narendra Modi decided to walk out as India withdrew from the World’s Biggest Regional Free Trade Deal. Whether India rejecting Regional Comprehensive Economic Partnership (RCEP) is the right decision is still up for debate. None the less, the initial reaction inside the country is positive.  

India’s decision to withdraw from RCEP aims to safeguard its domestic industries but is also influenced by the growing trend of the protectionist approach to trade.

The official announcement not to finalize the world’s biggest regional trade deal was praised by the agricultural community as well as the MSME sector. The future of the two core sectors heavily influenced the move to withdraw. Another factor is the rising trade deficit. The third is a newfound trajectory heavily linked to the current trade approach of the US and the UK.



What is the RCEP?

Regional Comprehensive Economic Partnership (RCEP) is a free trade agreement (FTA) spanning across the Asia-Pacific region. Initial negotiations included 16 APAC countries. Of these, 10 are ASEAN (Association of Southeast Asian Nations) countries and also 6 other countries that have Free Trade Agreements with the ASEAN group. So, these include India, China, South Korea, Australia, Japan, and New Zealand.


RCEP is a free trade agreement (FTA) spanning across the Asia-Pacific region. | Newsline | DKODING | Image Credits: Bloomberg

RCEP’s purpose is to provide an ‘integrated market’. This means making it easier to exchange goods and services between the region’s nations through lower trade barriers, tariffs, and duties. Furthermore, the move aims to improve business growth across the region. It also deals with investments, economic and technical cooperation, and intellectual property rights.

Why India withdrew from RCEP?

#1 The Growing Deficit and Protection from Being a Dumping Ground

  • India trade deficit with all the RCEP nations amounted to $105 billion in 2018-19, China alone counts $54 billion.
  • India is wary that with RCEP it’s domestic market will make it a dumping ground for cheaper goods from China. Consequently, this might further increase the trade deficit.
  • India only exports 20% to the RCEP countries, while the import is accounted for 35%. RCEP member China is well known for using non-tariff barriers against Indian products to prevent the growth of exports from India.

Trade-Deficit-India-China-Newsline-DKODING
Growing trade deficit with China is one of the biggest concerns for the Indian economy. | Credits: The New Horizon

  • Farmers and other small businesses and industries such as MSMEs could have been in danger of being washed out because of the cheaper flow of products from China and other economies.
  • Furthermore, India’s economic crisis triggered by demonetization and also GST implementation has worsened with the growing liquidity crunch in the market.

Video Credits: NDTV

  • The government opines that the current economic scenario is precarious for India to open its market. Moreover, there is rising discontent with China and other regional partners.
  • Hence, the government withdrew from negotiations making the decision an ‘auto-triggered mechanism’ to protect the Indian market from a surge in imports.

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#2 The US and UK trade approach and influence on India’s Decision to exit

  • After India withdrew from RCEP, the Modi government turned the narrative from trade setback into a victory for India’s poorer sections.
  • This is similar to US President Donald Trump’s step of withdrawing the US from the Trans-Pacific Partnership Trade deal to protect the US workers. The US also chose to exit from NAFTA (North American Free Trade Agreement), the oldest free trade agreement in the world.

Video Credits: WSJ

  • Similarly, the UK opted to disintegrate itself from the European Union in order to protect the country’s trade interests. The supporters see globalization and free trade as ‘job snatchers’ for their countrymen who also suffer from the advent of cheap labour, and employees from different countries.
  • Likewise, India, with its growing western ties, sees no point in free trade agreements and globalization when the Western countries are themselves withdrawing from similar ongoing agreements.
  • Therefore, the Indian government claims that backing out from a bad deal is far better than accepting it just because of the ‘fear of isolation’ from the regional trade.


Is there still a chance that India joins the RCEP?

The 15 country members involved in the negotiation are expected to sign the trade deal in 2020. However, as India withdrew, the decision came as a disappointment for the other RCEP nations. Many of the members see it as an important player in ensuring fair negotiations.

Japan, in particular, expressed hope that India can still join RCEP. The island nation sees India as an important country that can counterweight China’s influence while negotiating the deals. 

Furthermore, with a year left in the signing of the agreement, RCEP members will try to resolve issues with India.



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