Trade

A preliminary 16-country trade pact could be announced next week — if India plays along

Key Points
  • A "substantial conclusion" to years-long negotiations over the Regional Comprehensive Economic Partnership could be reached next week — if India does not back away at the last minute. 
  • Leaders of 16 countries in Asia Pacific, including China, India and ASEAN member states are due to meet on Monday in Bangkok, Thailand.
  • India's reluctance to open up its markets has been one of the major sticking factors in the talks — that has tested the patience of other members. 
Narendra Modi, India's prime minister, reacts during a news conference at the Baratiya Janata Party (BJP) headquarters in New Delhi, India, on Friday, May 17, 2019.
T. Narayan | Bloomberg | Getty Images

A "substantial conclusion" to years-long negotiations over a mega Asia Pacific trade pact could be reached next week — if India does not back away from signing the agreement at the last minute.

The Regional Comprehensive Economic Partnership (RCEP) involves 16 countries in the Asia Pacific, including all ten Southeast Asian nations and six of their large trading partners: China, Japan, South Korea, India, Australia, and New Zealand.

Leaders of those countries are due to meet on Monday in Bangkok, Thailand, where many are hoping that at least some tangible progress on RCEP would be announced.

Eurasia Group analysts wrote in a Thursday note that after two months of intense negotiations, "the likelihood of 'substantial conclusion' (or words to similar effect)— meaning most, but not all, of the text has been agreed—at the RCEP Summit on 4 November has significantly increased and now seems likely." Further talks to resolve outstanding issues could see the deal be completed in 2020, the analysts said.

RCEP negotiations have been ongoing since 2013 and if the agreement is finalized, those countries will form a major trading bloc covering about a third of the world's gross domestic product.

India's reluctance to open up its markets has been one of the major sticking factors in the talks — that has tested the patience of other members.

What is India worried about?

There are concerns within India that a trade agreement like RCEP could be detrimental to domestic producers as they compete against relatively cheaper goods coming in from other markets.

Those worries appear against a backdrop where growth is slowing down, small-and-medium-sized business are still reeling from the effects of important reforms, and the Indian economy is struggling to create enough jobs for its workforce.

India has had a "large and chronic trade deficit" with China for many years, Rajiv Biswas, Asia Pacific chief economist at IHS Markit, told CNBC.

It "fears that removing tariff barriers for Chinese imports would further erode India's domestic manufacturing market share at a time when the Indian government is trying to accelerate the development of India's manufacturing sector," Biswas said.

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He explained Indian manufacturers are facing "considerable challenges" this year — automakers, in particular, face a "severe crisis due to slumping vehicle sales." The macroeconomic environment has heightened concerns among Indian manufacturers about the potential negative impact of an RCEP deal on their own domestic market shares, Biswas said.

Eurasia Group analysts added: "There are also concerns about competition from Australia and New Zealand dairy producers, among other issues."

Those fears have led to the pact being criticized by powerful unions and farmers' groups in India. Local media reports said agricultural groups have announced protests against any move by the government to join RCEP. They claim the trade pact will abolish import duties on most agricultural products and farmers would be liable for intellectual property challenges from seed companies, Indian news outlet The Hindu reported.

"New Delhi has also long pushed for freer movement of professionals; China and ASEAN have been more willing to make concessions on this in recent months," the Eurasia Group analysts added.

Data from the Indian Commerce Ministry showed exports declined 6.57% to $26.03 billion in September while imports fell 13.85% to $36.89 billion.

What happens next?

Indian Prime Minister Narendra Modi will visit Bangkok from Nov. 2 to Nov. 4 to attend a number of diplomatic events that include a meeting between the leaders of the RCEP members.

In a media briefing on Thursday, a spokesperson for the Indian Ministry of External Affairs said some "critical issues" around the agreement remain outstanding and that "efforts are being made to resolve them, to provide a fair and a transparent trading environment."

"India remains engaged to find a resolution of these issues and we expect that there would be greater clarity in that regard after the ministerial talks and the RCEP Summit," she added.

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Eurasia Group analysts said it appeared that Modi had "finally given the green light to Indian negotiators to seek a 'substantial conclusion' settlement in Bangkok, likely for several reasons." Those include:

  • India securing the exclusion of sensitive agricultural goods from the pact and long lead time to reduce tariffs on many other products
  • Chinese President Xi Jinping's recent visit to India and his commitment to work with Modi to reduce the bilateral trade imbalance eased some of India concerns
  • Modi is aware that delaying RCEP further could affect India's relations with ASEAN
  • A "substantial conclusion" is non-binding and would provide India wiggle room in the event of a major domestic backlash

Economists generally agree that the long-term benefits of India joining RCEP outweigh the short-term concerns within the country.

"The early phase of adjustment will be an uphill task as few import tariffs will have to be dismantled, leading to higher competition from imports and in turn hurting export competitiveness," Radhika Rao, an economist at Singapore's DBS Group, wrote in a note on Oct. 9. But, being part of multilateral trade agreements like RCEP will "help improve India's integration to the global supply chains and market access opportunities."

IHS Markit's Biswas explained that while India's long-term economic gains from RCEP in the trade of goods are estimated to be relatively moderate, the country will still benefit from trade in services and investment flows. Not being a part of RCEP risks "suffering negative trade diversion effects as trade flows intensify" among the member countries.

Eurasia Group analysts added that global trade tensions have added "impetus" to RCEP negotiations as China sees its conclusion as part of its resilience strategy amid the ongoing trade war between Beijing and Washington.

"For the other members, RCEP is viewed as a way of mitigating, at least in the medium term, the negative impact of the US-China 'trade war' and the risk of US protectionist action against them," the analysts said.