Industry and trade

Why Indian business should embrace the RCEP

Why Indian business should embrace the RCEP?Mega regional trade deals are in vogue in a fragile world economy as a means to spur trade and growth. Asia’s mega regional trade deal—the Regional Comprehensive Economic Partnership (RCEP), which includes India—is quietly being negotiated. But it deserves more press because the RCEP would create the world’s largest trading bloc and have major implications for Asian countries and the world economy.

India is an important player in the RCEP negotiations but some Indian businesses are concerned about the prospect of further Indian trade with, particularly imports from, the People’s Republic of China (PRC). What would the RCEP cover and will Indian business benefit? What are the barriers to success and what should be done to overcome the hurdles?

Origin and goal of RCEP

The RCEP was first proposed at the November 2011 ASEAN leaders summit in Bali, Indonesia. While the partnership would expand ASEAN’s role in coordinating regional trade, the RCEP’s key purpose is to reconcile two long-standing proposals into a large region-wide trade agreement: the East Asia Free Trade Agreement, which includes ASEAN, the PRC, Japan, and the Republic of Korea; and the Comprehensive Economic Partnership for East Asia, which has added Australia, India, and New Zealand. The RCEP bridges the two proposals by adopting an open accession scheme. Negotiations among the 16 parties began in early 2013 and are scheduled to be concluded by the end of 2015.

The parties say the goal is to achieve a modern and comprehensive trade agreement, and the agenda covers trade in goods, services, investment, economic and technical cooperation, and dispute settlement. Compatibility with WTO trade rules on goods and services is also a principle for RCEP negotiations.

Assessing benefits

Because the RCEP will contain three of the largest economies in the world—the PRC, India, and Japan—it is globally important. The bloc represents 49% of the world’s population and accounts for 30% of global GDP. It also accounts for 29% of world trade and 26% of world foreign direct investment (FDI) inflows. Conservative estimates using various computable general equilibrium models suggest that if the RCEP were to be implemented it would bring large income gains to the world economy of $260 billion to $644 billion in a decade or so.

The RCEP can help regionalize the sophisticated global production networks that make Asia the world’s factory. It will also reduce the overlap among Asian FTAs, lest Asia become a confusing “noodle bowl” of multiple trade rules. If a comprehensive agreement can be reached, trade barriers in Asia will come down and the new rules will be consistent with WTO agreements. Rules of origin could be rationalized and made more flexible, and be better administered through electronic means. In the area of investment rules, where no WTO agreement exists, the RCEP will promote easier FDI flows and technology transfers by multinational corporations.

A competing mega-regional proposal is the Trans-Pacific Partnership (TPP) among 12 economies (Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States and Vietnam). TPP seeks to be a high standard 21st Century trade agreement covering many new trade issues (including competition, government procurement, labour, the environment and intellectual property). The RCEP is less ambitious than the Trans-Pacific Partnership (TPP) and the prospect of development assistance for adjustment means developing countries will find it easier to join. Both TPP and RCEP support open accession by new members and thus open regionalism in Asia. Additionally, RCEP, along with the TPP, will influence the emerging regional trade architecture toward achieving a free trade area in the Asia and Pacific region.

Implications for Indian business

India should be very active in these trade negotiations because RCEP could eventually create access to a bigger regional market and it will help link dynamic India with dynamic East Asia.

At present, RCEP focuses on three issues—goods, services, and investment. If the political will exists, there will be a common agreement. RCEP will provide for India-PRC trade, which will offer an important advantage for India. Some Indian businesses are concerned, particularly among manufacturers, about expanding imports from the PRC. In the short run, the PRC appears to have price, quality, and standards that few Indian firms can match, but India has shown growth on world markets in several manufacturing sectors such as automotive, food processing, and pharmaceuticals.

RCEP would also provide inroads for Indian services, which India has a comparative advantage on world markets. These include: information and communication technology, professional services, lawyers, and bankers. Accordingly, India should push for lower barriers to services trade and more transparent investment rules in the RCEP negotiations.

In the final analysis, RCEP is a major opportunity for small and large Indian businesses. But Indian businesses need to gear up for RCEP by investing in price, quality, and delivery of international standards. Above all, Indian business needs to invest in new technology, quality management systems, just in time procurement systems, and relationships with overseas buyers of output. The Indian government can support business process reengineering by Indian business by investing more in trade-related infrastructure, implementing second generation structural reforms, and providing access to competitive industrial finance.

RCEP negotiations started this year and India has adopted a positive approach to the negotiations. The good thing about RCEP is it is a step-by-step process, so any country that meets the template can join. RCEP should be relatively easy for India because it already has free trade agreements with Japan and the Republic of Korea. So, Indian business should embrace RCEP as this has all the ASEAN countries in it and others as well.

Barriers to success and way forward

There are several barriers to realizing these benefits. First, the RCEP risks achieving only limited trade and investment liberalization if parties with different levels of development and interests negotiate exclusions to protect sensitive sectors. Furthermore, murky non-tariff protectionism (e.g., public procurement schemes, export subsidies, and incentives for “green protectionism”) may increase as countries attempt to shield domestic firms from foreign competition. Second, the RCEP will need to improve its coverage of new trade issues such as competition policy, and environment and labor standards. These problems are increasingly being addressed by the most comprehensive trade agreements internationally. Third, there is a risk that firms, particularly small and medium-sized enterprises (SMEs), may under-use the RCEP due to a limited understanding of its legal provisions. Lastly, many countries will find it difficult to pay for physical infrastructure and improve trade facilitation so goods and services can be transported smoothly across RCEP member countries.

RCEP negotiations should focus on a template with the best features of existing Asian FTAs (including existing ASEAN+1 FTAs), set a clear timetable for concluding negotiations, and involve the private sector in the negotiations. Afterward, significant outreach and business services will be needed for SMEs to lower the cost of using the RCEP. Implementation of domestic structural reforms can help lock-in the benefits of liberalization through RCEP. Expanding the Asian Bond Market Initiative and supporting public–private partnerships for infrastructure projects are also useful to increase regional infrastructure financing.

Ganeshan Wignaraja

About the Author

Ganeshan Wignaraja is Advisor in the Economic Research and Regional Cooperation Department at the Asian Development Bank, and prior to that was Director of Research at Asian Development Bank Institute.
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