Leaving RCEP: A missed opportunity?

Topics RCEP | RCEP deal | RCEP negotiations

In November 2019, India decided to opt out of the Regional Comprehensive Economic Partnership (RCEP), the latest and the world’s largest trading bloc comprising one-third of global GDP and trade. Indian industries and farmers’ associations have widely hailed this decision. The government’s reasons for opting out of the RCEP include possible flooding of cheap imports from China, increase in competition for Indian dairy farmers from New Zealand and Australia, and the existing trade deficit of $100 billion with RCEP countries.

In this article, we look specifically at India’s prospects in RCEP focusing on agricultural trade (RCEP accounts for one-fifth of the global agricultural trade). Was India’s decision to exit a hurried one without considering the long-term implications or was it good strategy?

Our opinion is that had India stayed in the RCEP, the country could have expanded trade and explored greater opportunities to export more of the existing products to current partners (that is, intensive margin). More importantly, India could have also expanded trade with new products, new markets and new varieties (that is, extensive margin), the latter margin being the primal one for all successful large traders.

Within the RCEP, India would have had an opportunity to realise the untapped potential in existing exports through either lower or no tariff. The table, Top 5 Indian exports and export potential with RCEP , shows India’s top agricultural exports and their potential (estimated as the difference between overall imports of the country and current exports of India). The RCEP account for 28 per cent of India’s total agricultural exports (triennium ending 2017). India’s top exports to the RCEP are meat products, accounting for 30 per cent, marine products fish and crustaceans (24 per cent), oilseeds (9 per cent), coffee and tea (8 per cent), and animal or vegetable fats and oils (5 per cent). There are significant export potential, that is, unserved markets in existing trade.

Historically in trade, the biggest expansion has happened when new products, new partners and new varieties lead the trade. This has been the reason for the rise of China, Korea, Thailand and now Vietnam. Trade economists (Kehoe et al, 2013) have found rigorous evidence to this effect while studying the trade patterns of most successful performers, namely, Chile, Republic of Korea and China. Madhusudan Ghosh (2017) shows significant transformation in the composition of Indian exports and imports after trade liberalisation in 1994/1995. India’s traditional exports such as tea and coffee, and marine products shrank, and the exports of food grains (including non-basmati rice, wheat), groundnut, sugar and cotton improved substantially.

Openness to trade endogenises innovation to access high value markets. In 2006, the Agricultural and Processed Food Products Export Development Authority (APEDA), an apex government agency, developed GrapeNet, a traceability software system, to address the “quality of grapes” complaints of importers in European Union (EU). This web-based system helped boost the grape exports to EU. This was made possible through monitoring residues at plot level and product standardisation. A study by the Indian Council for Research on International Economic Relations (ICRIER, 2019) shows that in 2015/2016, India’s table grape exports to EU reached an all-time high of 84,482 tonne. The growth in exports, facilitated by GrapeNet, was more than double the previous year exports. 

APEDA has also developed MeatNet. If India, the second-largest exporter of frozen bovine meat, were to join the RCEP, it would mean direct access to the largest importer, that is, the Chinese market. Currently, Indian bovine meat reaches China through Vietnam. Similarly, products like pomegranate,for which India is the largest producer, would have found larger markets to access, the typical extensive margin expansion.

Top 5 indian exports and export potential with rcep

Any trade agreement, including the RCEP, should not be looked as a zero-sum game — that is, increase in imports reducing domestic production. Examples from other cases can help understand the argument of market creation. Today, India is the fourth-largest automotive market globally. When the Indian automotive market opened in the early 1990s, global automakers set up their base here. Slowly, as the localisation needs of these OEMs (original equipment manufacturers) grew, a strong auto component manufacturing (ACM) base followed. ACMs had to meet global standards. Many ACMs are tier 1 suppliers to the likes of Bosch, and for cars like Mercedes, Audi, Mazda, Jaguar, and Renault-Nissan. Many are also tier II and III suppliers to companies like Magna International, Denso, Continental, Hyundai Mobis, and ZF Lenksysteme among others.

India feared staying in the RCEP anticipating it would lead to withering away of the sunshine sectors in the face of competition. The Indian dairy cooperatives in particular, would have faltered, trying to compete with multinationals such as Fonterra (New Zealand). Ultimately, this would have adversely affected the livelihood of Indian farmers. However, the real threat emanates from the lack of competitiveness. The RCEP would have created a competitive environment. This would have led Indian dairy to invest in improving the efficiency and productivity. Similarly, the Indian poultry sector would have faced competition from Charoen Pokphand (CP) Thailand among others. Poultry, like dairy, would have benefitted from pro-competitive effects. 

According to the Global Competitiveness Index 2019, within the RCEP, India is the third least competitive, only above Cambodia and Lao PDR. Further, in the Ease of Doing Business, the Indian cost to trade is higher than even the least developed nations such as Cambodia and Myanmar (the average trade cost of India between 2006 and 2015 is $1,441/container compared to $951, $681 and $900 for Cambodia, Myanmar and Asean).

Opting out of the RCEP because of the fear of increased competition at home can hurt India in several ways. First, we have foregone the market opportunities from integrating in the regional and global value chains. Second, we could have had access to new markets for our products and third, by way of the trade deflection that will happen from opting out of RCEP. There can be less direct trade deficit but a large circumlocutory one. 

Ajmani and Choudhary are research analysts at IFPRI, South Asia Office; Roy is a senior research fellow at IFPRI. Views are personal

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