India in the Regional Comprehensive Economic Partnership (RCEP) – Need for Caution

Introduction

Regional Comprehensive Economic Cooperation Partnership (RCEP) is an initiative of economic cooperation among 10-member ASEAN countries and six Free Trade Agreement (FTA) partners of ASEAN. A broader Asian regional free trade area was contemplated and East Asia Vision Group (EAVG) recommended the establishment of an East Asian Free Trade Area (EAFTA) to the leaders of ASEAN+3 while Japan proposed Comprehensive Economic Partnership for East Asia (CEPEA) based on East Asia Summit framework. In November 2011, ASEAN proposed its own model for an ASEAN centric regional FTA – the RCEP. RECP was conceived as a competitor for TPP agreement. However, TPP agreement faces deadlock and put under backburner and RCEP is receiving more global attention.

The countries participating in the RCEP also signed a number of bilateral FTAs with other member countries. Since there are a number of cross-country FTAs signed between members, the outcome of RECP may not be substantial. But RCEP is expected to improve efficient functioning of the production networks of the region. Also, the coverage of the RCEP should be substantial compared to FTA+1 for sustainable benefit from the agreement.

RCEP negotiations cover trade in goods, trade in services, investment, economic and technical cooperation, intellectual property, competition, dispute settlement, e-commerce, and other issues.

RCEP negotiations will follow eight principles: (1) consistency with the WTO; (2) significant improvements over the existing ASEAN+1 FTAs; (3) facilitation of trade and investment; (4) flexibility (e.g., special and differential treatment) to the least developed asean Member States (AMSs); (5) continuation of existing FTAs; (6) open accession clause; (7) technical assistance and capacity building to the developing and least-developed countries; and (8) parallel negotiation. RCEP negotiations were launched in November 2012, and 18 rounds of negotiation have been held, along with six ministerial meetings and three inter-sessional meetings. But there is limited progress as members have disagreements on the tariff reduction on goods, liberalisation of services and investment framework.

Economic and Trade Profile of ASEAN+6 Countries

Table-1 provides the economic and trade profile of ASEAN countries and its six FTA partners. In terms of land area China, Australia and India are the large economies where China, India and Indonesia are the most populous countries in the group. In terms of GDP size, China is by far the largest economy with 11 trillion US $ in 2015 followed by India which is a 2.9 trillion economy. Australia got the highest per capita income followed by New Zealand and Japan. India and China are the fastest growing economies among bigger countries. FDI inflows into China is way high with 133 billion US$ followed by India at 44 billion US$ in 2015. Trade GDP ratio is highest in Singapore as trade is almost three times the GDP of Singapore.

Table 1 : Economic and Trade Profile of ASEAN+6 Countries, 2016

Source: UNCTAD & World Bank

Trade by ASEAN+6 Countries       

Singapore is the dominant country in the ASEAN region with regard to international trade. Singapore is having an export of 346 billion US$ and imports worth 296 billion US$ with a trade surplus of 46 billion US$. Thailand, Malaysia, Vietnam and Indonesia are the other important ASEAN countries having larger trade share in the region. With regard to services also Singapore plays a dominant role.

Table 2 :Merchandise trade and services by ASEAN and its FTA Partners, 2015 (Million US $)

Source: Extracted from WITS, World Bank

With regard to FTA partners of ASEAN, China enjoys a dominant position with a trade surplus of 510 billion US$. Japan, Korea and India are the other prominent countries with large trade performance. China’s trade performance is very large and other countries shares are much smaller in relative terms.

Top 5 Trade Partners of  India ASEAN+6 Countries

Table 3 gives the top five exports and import partners of ASEAN countries and its six FTA partners. With regard to Brunei, the top export and import partners are primarily from the Asian region with Japan as the major export destination and whereas Malaysia is the largest import partner.  For almost all countries, China is the largest import partner. For Indonesia, Myanmar, Singapore, Australia, Korea and New Zealand, China is the largest export and import partner. The table shows that for most of the ASEAN plus countries a large proportion of trade is happening among themselves.

Table 3 :Top 5 Trade Partners of ASEAN Plus economies for the year 2016.

Source: Extracted from WITS, World Bank

ASEAN PLUS Export Share

The table shows the intra-regional export share of ASEAN six countries. China, Japan and Korea are the largest trade partners of Australia. China is having larger export share with Japan. China, Japan, India and Singapore are the important export destinations of Indonesia. India does not enjoy large export share with the ASEAN plus region. For Japan, China if the large export market followed by Korea. More than one-fourth of Korea’s export is going to China only. For Malaysia, China and Singapore are the important trade partners followed by Japan. For New Zealand, Australia and China are important while Singapore is having larger export share with China and Malaysia. China and Japan are the important export destinations for Thailand whereas China, Japan and Korea are important for Vietnam.

Table 4 :Export Share of ASEAN Plus Countries for the year 2015

Source: Computed based on data extracted from WITS

ASEAN PLUS IMPORT SHARE

Australia’s imports are coming mainly from China and Japan. Malaysia is the largest import partner of Brunei. China’s largest import partner from the region are Korea and Japan. India imports substantially from China. Indonesia imports large share from China, Singapore, Japan, Korea and Malaysia. One-fourth of the Japanese imports are coming from China. Imports from China are dominant in ASEAN countries and the FTA partners of ASEAN.

Table 5 :Import Share of ASEAN Plus Economies for the year 2015

Source: Computed based on data extracted from WITS

India’s trade with ASEAN PLUS Countries

India’s exports to ASEAN increased from U.S. $ 10.41 billion in 2005-06 to US$ 25.20 billion in 2015-16 and imports over the same period quadrupled from US$ 10.81 billion in 2005-06 to US$ 39.84 billion. This reflects a compound annual growth rate (CAGR) of about 9.2 percent in exports to the ASEAN region and close to 14 percent per annum growth in imports during 2005-06 to 2015-16. Concomitantly, India’s trade deficit with the ASEAN surged from US$ 0.5 billion in 2005-06 to US$ 14.6 billion. In terms of market share, the share of imports in India’s total imports from ASEAN went up from 7.3 percent in 2005-06 to 10.5 percent in 2015-16, over the same period share of exports to ASEAN in India’s total exports fell from 10.1 percent to 9.6 percent. With regard to India’s trade with individual countries of the region, India runs in to trade deficit with major countries of Southeast Asia. With regard to ASEAN plus countries, India has a trade deficit of 88 billion US$ of which China alone accounts for 52 billion US$. India also has trade deficits with Australia (6.15Bn. US$), Indonesia (11 Bn. US$), Korea (9.48 Bn. US$),Japan (5.10 Bn. US$), Malaysia (4.67 Bn. US$). India got trade surplus with Vietnam (2.68 Bn. US$) and a marginal trade surplus with Cambodia, Philippines and Singapore.

Table 6 : India’s Trade with ASEAN Plus Economies

Source: Data extracted from WITS

Impact of India ASEAN Plus FTA – Smart Simulation Analysis

The economic impact of proposed India-ASEAN plus Free Trade Agreement is analysed using World Integrated Trade Solutions (WITS) tool. WITS is a data extraction and tariff simulation software using databases maintained by UNSD COMTRADE, UNCTAD TRAINS, and WTO IDB/CTS. The SMART simulation model of the WITS allows users to estimate the partial equilibrium impact of tariff reductions for a single market at a time. WITS simulation is largely used to simulate the impact of preferential trade agreements. This simulation involves two aspects. First, a database has to be extracted to conduct simulation exercise. Secondly, simulation parameters are defined to get the impact of a tariff cut arising out of a Free Trade Agreement (FTA).

The simulation exercise for the study used bilateral trade data between India and ASEAN plus countries for the year 2015. India is cutting tariff and the beneficiary Countries are ASEAN and its five FTA partners. Tariff cut is done across the board and all products are affected by that. Since the attempt is to understand the impact of FTA, the new tariff rate is kept at zero percent. There arise five results from the simulation exercise. They are total trade effect, export effect on partners, effect on average duty, welfare effect and tariff revenue effect.

When India initiates100 percent tariff cut against ASEAN plus countries as part of the Free Trade Agreement, they gain access to theIndian market and the exports to India will increase substantially. Table-7 provideschanges in the exports of10-member ASEAN countries and five FTA partners of ASEANdue to 100 percent tariff reduction by India. The biggest trade gains are arising to countries against which the tariff cuts are effected by India. China gains most with an increase of 13.52 billion (22.49 percent), followed by Malaysia, a (4.74 billion $), Korea (3.36 billion $), Thailand (2.19 billion) and Japan (2.18 billion US$). The countries which are losing most from India ASEAN plus FTA is Indonesia (2.77 billion), US (532 million), Germany (523 million), Italy (180 million). Interestingly, Indonesia which is an FTA partner is losing out asubstantial trade to other members of the ASEAN plus group.

Table 7 :Major Gainers from India ASEAN Plus FTA – Smart Simulation

Source: Calculated based on WITS SMART simulations

Table 8 :Major Losers from India ASEAN Plus FTA – Smart Simulation

Source: Calculated based on WITS SMART simulations

The simulations show that India’s imports will increase by 23.58 billion if theFTA is signed with ASEAN plus countries. Because of the elimination of tariffs with ASEAN plus countries, there will be a reduction in customs duty to the tune of 19.3 billion US dollars. Because of the reduction in tariff and the consequent reduction in prices, there will be a consumer surplus to the tune of 1.92 billion US$.

Table 9 :Trade, Revenue and Welfare effect of India-BIMSTEC FTA

Source: Calculated based on WITS SMART simulations

The total trade effect of India ASEAN plus FTA is 23.58 billion US $ of which the trade creation effect is 12.58 billion US$ and the trade diversion effect is only 79 US$the total welfare effect is to the tune of 2.22 billion US$. This showed that the India ASEAN plus is a highly trade creation FTA with no trade diversion and substantial welfare improvement.

Conclusion

The simulation exercise showed that India’s import from ASEAN plus countries will substantially increase if the FTA comes into existence. China which enjoys a huge trade surplus with India will further improve its trade performance and increase the trade balance. India’s advantage will be primarily in the services sector and it is better to complete the comprehensive trade agreement which includes trade, services and investment. Also, protection of sensitive product categories with higher Rules of Origin (RoO) support is necessary. India’s experiences with the existing FTAs is not very encouraging. India should ensure its concerns addressed before signing the FTA. Already China is pressurising ASEAN to go ahead with the agreement without India. This kind of Chinese hegemony should be resisted and an institutional framework should be created for the success of RCEP.

References

A Blueprint for Growth ASEAN Economic Community 2015: Progress and Key Achievements http://www.asean.org/storage/images/2015/November/media-summary-ABIS/AEC%202015%20 Progress%20and%20Key%20Achievements_04.11.2015.pdf

ASEAN Integration Report 2015 http://www.asean.org/storage/images/2015/November/media-summary-ABIS/ASEAN%20 Integration%20Report%202015.pdf

ASEAN Community in Figures – Special Edition 2014: A Closer Look at Trade Performance and Dependency, and Investment http://www.asean.org/storage/images/resources/2014/Oct/ACIF%20Special%20Edition%202014_ web.pdf

ASEAN International Merchandise Trade Statistics Yearbook 2014 http://www.asean.org/storage/images/2015/March1/asean_publication/Preview%20IMTS%2012-032015%202.pdf

ASEAN Investment Report 2015 Infrastructure Investment and Connectivityhttp://www.asean.org/storage/images/2015/November/asean-investment-report/ASEAN%20 Investment%20Report%202015.pdf

David Scott, India’s ‘Extended Neighbourhood’ Concept: Power Projection for a Rising Power, India Review 8, No. 2 (2009), accessed June 11, 2017, doi: 10.1080/14736480902901038. 5. For a broad overview of India’s engagement with East and Southeast Asia, see Harsh V Pant, Indian Foreign Policy: An Overview (Manchester: Manchester University Press, 2016), pp. 137-148.

Das, Sanchita Basu The Future of Trade Diplomacy in East Asia, PERSPECTIVE, RESEARCHERS AT ISEAS – YUSOF ISHAK INSTITUTE ANALYSE CURRENT EVENTS, Singapore, 14 February 2017,

Deeparghya Mukherjee, “India-ASEAN economic linkages: Challenges and Way Forward,” Ideas for India, 10 March 2016, accessed June 21, 2017, http://www.ideasforindia.in/article.aspx? article_id=1593.

(Dr. B.P. Sarath Chandran is an Associate Professor at
VVM’s Shree Damodar College of Commerce & Economics, Margao, Goa.)

(This article is carried in the print edition of January-February 2018 issue of India Foundation Journal.)