This piece on RCEP appeared on the 1st of November:
On Diwali day, farmer groups in multiple states in India protested the RCEP (Regional Comprehensive Economic Partnership) – a proposed free trade agreement between ASEAN- that has 10 member countries – and a group of 6 other nations – China, Japan, India, Australia, New Zealand, and South Korea. These 16 countries account for almost half the world’s population, and a third of its GDP. The RCEP, if it goes through, is expected to transform trade in the entire geography, and improve growth. It is expected to create a single market, allowing goods and services to trade freely across borders, boosting choice, increasing consumption, and propelling prosperity across the 16 countries.
Spearheaded by China, the RCEP, first proposed in 2011, is often seen as the Chinese response to the now defunct, Trans Pacific Partnership (TPP) put forth by the US and that promised to create a massive free trade zone. The United States, under President Trump, withdrew from the TPP and has begun an onslaught against free trade, in general, and trade with China in particular. The Chinese push to operationalize RCCEP should be seen in this context.
The deal if it comes through, it will have a tremendous impact on free trade in goods, services, investments, and even Intellectual Property. At the very basic level RCEP hopes to start with standardising tariff rates – the rate of tax on imports – across all member countries.
Like all trade deals, there will be winners and losers. In India the major impact will be felt by small industrial units that manufacture lots of little things- plastic buckets, steel utensils, plug points, torches, clothing. Given rising labour costs in India and given the economies of scale that China has achieved in manufacturing, this sector of small industries is likely to face the brunt of free trade. At the other end of the spectrum, you will see the extremely strong services sector in India being given a fair playing ground in other countries. Indian Pharma may attract new markets, and cars and mobiles manufactured in India efficiently, can be sold across markets. We may see India become a hub for large manufacturing. If we look at the economy as a whole, it will benefit. But there will be sectors that lose out. That is inevitable. The government needs to look at how to mitigate this, while enabling those who benefit from free trade to expand to maximum potential.
One area likely to be protected is agriculture. Even the European Community when it started, treated agriculture with kid gloves. It protected agriculture then, it continues to protect agriculture now. The EU’s Common Agricultural Policy (CAP) has a twin pronged goal, one is food security for all, the second is to ensure a decent standard of living to families involved in agriculture. It has aid billions in subsidies to achieve both. While farmers are protesting in India against RCEP, worried that cheap imports of cash crops,palm oil, coffee, tea, coconuts and other produce would destroy their livelihood, it is likely other countries are facing similar protests. And this could see agriculture being kept out of the equation.
One big concern is the economic disparity between the countries. Countries like Australia, New, Zealand Japan, South Korea, that have a high standard of living, and strict pollution controls will compete against nations with lower standards of living, and little pollution control. Environmental standards are not a part of this deal, nor are labour rights. Therefore, countries that guarantee a fair standard of living for its inhabitants – minimum wages, labour rights – may find themselves being less competitive than nations that have no such guarantees.
However, it is better to begin and build, rather than try to achieve everything from day one. Governments should look at the RCEP as a beta release, continuously adding features and upgrading. It is better to start small and build, than to get over ambitious and fall flat.
As the clouds of trade war loom between the United States of America, and China; and as Europe goes through its own uncertainties in the post Brexit era; the rest of the world is scrambling to create some form of insurance against the trade fall out of the biggest economies pulling up their drawbridges. India has to choose, draw up the trade barriers and go it alone, or become part of a larger alliance that grows together. The Indian government has to choose the latter.