On November 15th, 22, 15 countries including ten ASEAN countries, Australia, China, Japan, New Zealand and South Korea signed the Regional Comprehensive Economic Partnership Agreement (RCEP). (Source: Network)

Author:

Nilanjan Ghosh Xi, chairman of the Observer Research Foundation (Kolkata), whose research interests are ecological economics, water resources management, international trade, development economics and governance, financial markets, etc.

on November 15th, 22, 15 countries including 1 ASEAN countries, Australia, China, Japan, New Zealand and South Korea signed the Regional Comprehensive Economic Partnership Agreement (RCEP).

the story of India's withdrawal from RCEP is long. Just a few weeks before the ASEAN summit, large-scale anti-RCEP protests broke out in India. On November 4, 219, the Indian government suddenly announced that it would not join RCEP. All parties understand India's withdrawal and hope that India can join the agreement in the future.

At the same time, there are many voices supporting RCEP in India. They believe that RCEP can promote the integration of Indian SMEs into the ASEAN value chain, attract more capital into India, and let Indian goods and services enter the huge RCEP market. Secondly, the capital outflow and supply chain transfer caused by COVID-19 epidemic may also benefit India.

This article will comment on the above viewpoints one by one.

the view that rcep can promote the integration of Indian SMEs into the ASEAN value chain is an effective assumption in itself and does not need any data or empirical analysis. However, compared with enterprises in ASEAN or other RCEP member countries, Indian enterprises are seriously less competitive. The reasons for this situation are: the market is over-regulated, which leads to the decentralization of labor, low production efficiency and rising trade costs.

the impact is not limited to the factor market, but also extends to the product market. Surprisingly, even after 3 years of economic reform, the ability of Indian manufacturing industry to resist international trade risks is still insufficient.

one of the main reasons for this situation is that the Indian government has been unable to effectively reform the product and factor markets. Although the implementation of goods and services tax is a good start, which is conducive to optimizing the supply chain and eliminating the dispersion of labor force, the market is restricted by the existing laws and regulations. Because commodity exchanges need to collect commodity transaction tax, India's hedging cost in commodity trade is even higher than that of any RCEP member country, while there is no such tax in Europe and America.

if India wants to attract capital from all walks of life, it must solve the problem of high trade costs and formulate laws and regulations that are beneficial to foreign businessmen. Some people think that India can use the opportunity of RCEP to open the market to enhance the competitiveness of Indian enterprises, but this is not the case.

In terms of business convenience index, all RCEP member countries (except Cambodia, Laos and the Philippines) are ahead of India, which means that their investment environment is better than India. Therefore, from the perspective of the "India Self-reliance Plan" recently adopted by the Indian government, joining RCEP is unlikely to benefit India. In other words, RCEP cannot allow India to benefit from the capital outflow and supply chain transfer effects caused by the epidemic.

in terms of geopolitics, the influence of the Trans-Pacific Partnership Agreement (TPP) without the participation of the United States has been greatly reduced, and RCEP will undoubtedly become the largest and most important free trade agreement negotiation in Asia. Japan, Singapore and ASEAN believe that the successful signing of RCEP means that a new world economic order has been born, and India, as one of the founding members of RCEP, has important strategic significance for building a deeper and broader regional value chain. Since RCEP is so important, is it advisable to sacrifice economic interests for geopolitical interests?

Another important reason for India's refusal to join RCEP is that the trade deficit between India and RCEP member countries is increasing year by year. India is worried that once the market is opened, the influx of a large number of foreign goods will further worsen its fragile economic field. Some analysts pointed out that joining RCEP can increase India's gross domestic product, trade and investment, but its pulling effect on India's overall economic growth is not outstanding, and it may even have a negative impact.

this paper holds that policy makers need to give priority to the cost of India's entry into RCEP, rather than the benefits.

In addition, some analysts pointed out that joining RCEP will give Indian enterprises equal and reciprocal market access opportunities and expand the trade volume between India and RCEP member countries. The resulting trade diversion effect will form trade barriers for India's other trading partners, resulting in a long-term decline in India's trade volume. However, up to now, there is no literature about the impact of RCEP on the value chain for reference.

This paper holds that a comprehensive cost-benefit analysis is needed to evaluate the advantages and disadvantages of India's joining RCEP, but some studies have overemphasized the short-term geopolitical benefits brought by joining RCEP. India urgently needs to expand the market access of service trade mode 4 (movement of natural persons) to offset China's trade surplus in goods with India. If this goal is not achieved, India will not be able to join RCEP.

RCEP's attitude towards India

As we all know, India is the pillar of Indo-Pacific region and is called the second most populous country in the world after China. India's withdrawal is indeed a big blow to RCEP.

According to the data released by the United Nations Population Division, India's demographic dividend window will last until 255. Although India's GDP has recently experienced negative growth due to the epidemic, its per capita income has increased at a rate of 6%~8% in the past few years.

India's economy has achieved organic growth driven by consumption and demand. No RCEP member country has such a fast-growing market as India. From the perspective of long-term market growth, it is logical for all parties to hope that India will join RCEP, because in this regard, economic factors are more important than geopolitical factors.

To sum up, this paper holds that India needs to reform its market first, and then weigh the advantages and disadvantages of joining RCEP to make a decision that is in India's interest.

This article is an exclusive translation by IPP. To read the original, please click "Read the original" below.

Translation: Ceng Hui, Research Assistant, Public Policy Research Institute, South China University of Technology.