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Critics claim downsides from the deal are geopolitical in that it dents India's credibility with Asean members who, fearing Chinese domination, were standing by for New Delhi's grand entry to rescue them.
The art of walking away from a deal
9 min read . 07 Nov 2019 Karthik Nachiappan
By not joining the mega RCEP trade deal, India is being rational and sober, not un-ambitious or defensive
Indian negotiators are not defensive by nature, nor do they intend to disrupt negotiations. India's strategy has been driven by institutional capacity and domestic concerns
On Tuesday, India's largest dairy cooperative Amul sent a public thank you note to Prime Minister Narendra Modi. In its latest ad, the evergreen Amul girl was seen leading a happy farmer couple carrying pails of milk. The punch line: 'Firm PM, farm PM.' The occasion: India's decision to stay out of the Regional Comprehensive Economic Partnership or RCEP, a 16-nation mega regional trade agreement signed in Bangkok on Monday. Of course, Amul has a stake in RCEP's success or failure, for it has always opposed the trade deal.
Some critics claim Narendra Modi's jettisoning of RCEP jeopardizes, if not kills, New Delhi's intent to transform India into a $5-trillion economy while signalling India's unwillingness to make necessary reforms to make industries more competitive.
Others claim that Modi's move, coupled with America's absence, effectively cedes regional space to China. Downsides from the deal, they claim, are geopolitical in that it dents India's credibility with Asean (Association of Southeast Asian Nations) members who, fearing Chinese domination, were standing by for India's grand entry to rescue them.
A select few argue that joining RCEP would have realized India's longstanding desire to connect domestic firms to global value chains, particularly in Southeast Asia. This would have, ostensibly, transformed India into a global manufacturing behemoth.
Most of these claims are risible since they do not sufficiently interrogate or internalize the distributional implications of signing the RCEP, particularly to Indian firms and industries who could be materially harmed. Trade agreements are generally compromises where countries exchange market access in areas where they have competitive advantages: in India's case this was clearly services where a trade surplus exists with most countries.
But RCEP did not move the needle here for India; concessions offered by other countries in terms of accepting Indian professionals, specifically from the IT (information technology) and software industry, was negligible. Neither was Delhi moved by liberal interpretations of regulating data within RCEP negotiations, signalling its preference for national control in this area, which was largely opposed by other RCEP countries.
In fact, India was particularly concerned over an RCEP that could potentially entrench the market dominance of foreign technology companies without any recourse to small and medium sized technology companies in the Indian market.
Pail of anxieties
Services aside, India's anxieties largely centered on necessary tariff concessions as a RCEP member; estimates suggest New Delhi would have had to cut duties by 90% over the next 15 years on goods including manufacturing and agriculture, from China and advanced economies like Australia, New Zealand and Japan.
Moreover, there were doubts over whether sufficient exemptions could be secured for India's dairy products within RCEP; without a workable buffer period, a notable feature of WTO agreements, Indian farmers and dairy producers (such as Amul) would have faced cheap dairy imports from Australia and New Zealand.
Given India's economic quandaries, RCEP would have only widened the gaping trade deficit India holds with China and other RCEP countries that now stands at $104 billion, with China making up more than half of that at $53 billion.
In 2018, 35% of India's imports were from RCEP countries while only 20% of India's exports went the other way. Between 2010 and 2018, India's imports from the Asean grew from $5 billion to $22 billion, and from South Korea from $8 billion to $12 billion. In the short to medium term, at least, RCEP imports to India would have risen, placing considerable pressure on Indian firms.
The China factor
The claim regarding India's strategic balance with China and that India's assent to RCEP would have somehow helped constrain China within a regional ambit belies the fact that China is far more embedded, economically and socially, within Asean. This would necessarily make it difficult, if not impossible, to constrict Beijing.
It is not clear how India would allay this situation. In 2019, Asean became China's second-largest trading partner, displacing the United States which held that position from 1997. In 2018, trade between China and Asean countries stood at $588 billion, a legacy of regional value chains.
How India will hold China accountable across a region, where Chinese trade and investment patterns dominate is largely not explained. If anything, through RCEP, India's trade deficit with China, currently around $53 billion, could rise further constricting the bilateral space where it has to work out trade quandaries with Beijing while more Chinese goods enter the Indian market. A multilateral trade pact could possibly constrain India's hand bilaterally vis-a-vis China.
The India-China question also probably featured in RCEP discussions on the ratchet obligations from which India wanted a reprieve. As per ratchet rules, once a country signs a trade agreement with another country, which includes reduction of tariffs on merchandise goods, it concedes the right to raise tariffs again or impose trade-restrictive measures as dictated by national interest.
Under an RCEP with a ratchet provision, India would have had to effectively freeze tariffs, notwithstanding effects on firms and citizens; in other words, no import caps on China or other RCEP partners, should the Indian market get flooded with imports.
Such worries heightened anxieties of certain parts of Indian industry that have been wary of RCEP. Multiple industry groups registered their misgivings over RCEP to government officials. These calls appear to have found resonance.
About India's 'defensiveness'
Sadly, the claims chastising India's rejection of RCEP are and have always been par when describing India's multilateral behaviour. Inexplicably, scholars and critics alike place stiff expectations and benchmarks when India negotiates international rules and then excoriate India for advancing core interests or rejecting an agreement that does not fulfil those interests, as was the case with RCEP.
India has generally been portrayed as an obstructionist negotiating international rules. Scholars point to instances when India has rejected rules that others have agreed to or stymied multilateral negotiations without sufficient cause. This so-called prickly defensiveness has apparently restrained India's multilateral ambitions, denting its credibility as a 'responsible' state working to help address problems like climate change, nuclear proliferation and trade protectionism.
The problem with such myopic views is that they are not representative of all multilateral issues, and they set a benchmark, like consenting to a particular rule or negotiating with a broader mindset, which is used to judge how India behaves in the multilateral arena. Broadly, RCEP allows us to step back and consider how India negotiates international rules and what factors shape why India signs certain rules and rejects others.
My research indicates that Indian negotiators are neither innately defensive nor do they arrive intending to thwart, disrupt or obstruct negotiations. Almost all states enter multilateral negotiations with a brief or a set of interests they seek to clinch without conceding much in return. Defensiveness is de rigueur. Negotiations are characterized by attrition, where compromises and breakthroughs are made on the margins. India's 'defensiveness' has to be understood in this context.
Commentaries on India's multilateral behaviour overstate the degree of defensiveness or measure India's behaviour against a standard that is, in many ways, unachievable. What most analysts misread or neglect to consider is that the international context around global governance has changed. We live in an era of interdependence. And rising interdependence will leave India little choice but to engage on multilateral issues that affect its development and security.
As India further embeds itself within the international economy and international order, it is vital for analysts to map this interaction and interrogate whether and how integration shapes India's multilateral positions.
A rule shaper
Given interdependence, I argue that India's approach towards international rules, a key component of its multilateral behaviour, is sober, rational, and driven by institutional capacity and interest groups which shape the positions taken at negotiations.
When Indian negotiators possess a robust understanding of the problem, like carbon emissions or weak tobacco regulations, and have adequate support from specific interest groups, India will be inclined to shape a particular international agreement and ratify it.
India was a rule shaper on two big international agreements—Framework Convention on Tobacco Control (FCTC) and the Uruguay Round Trade Agreement. On tobacco control, Indian health officials saw multilateral negotiations as an opportunity to reinforce India's new tobacco control law—the Cigarettes and Other Products Act that tightened domestic laws around tobacco production, distribution and use. India's desire to negotiate a robust FCTC would not have materialized had the health ministry and tobacco control groups not collaborated to draft India's first comprehensive tobacco control bill before FCTC negotiations. India's tack at FCTC negotiations mirrored the strong positions taken at home. In 2005, India became the eighth country to sign and ratify the framework convention.
Similarly, India played a useful role working between developing and developed countries to help pass the Uruguay Round Trade Agreement in 1994. Before the round, Indian trade negotiators sensitized themselves to the constraints Indian firms faced while exporting goods abroad, particularly textiles, agriculture and services. Negotiations emerged as an opportunity to secure additional market access and boost India's improving trade position.
Aware of domestic industrial inefficiencies, Indian negotiators strove to extract sufficient protections for domestic firms before the Indian market would have to be opened for competition. In return, the pound of flesh extracted from India was liberalization in services and intellectual property rights, areas where India was not keen to concede.
Having secured gains from reduced tariffs and guaranteed market access with exemptions strewn in for firms to adjust over time, India relented.
That said, negotiating international rules is an onerous endeavour that requires considerable institutional capacity within the government, which India has generally had, contrary to views touting India's foreign policy incapacity.
Adequate capacity exists when it comes to understanding what India's core interests toward an international rule are, positions to craft and defend during negotiations and the decision to either ratify or reject the rule.
Instead of deducing capacity from the size of the foreign service or the seemingly complex nature of issues diplomats confront, it pays to measure and analyse institutional capacity by empirically tracking the intentions and actions of institutions.
Observing how ministries and officials function and adapt helps assess India's institutional capacity vis-à-vis foreign policy. Negotiating rules, like climate change and tobacco control and RCEP, entails dealing with multiple national agendas over what provisions should be in the multilateral agreement.
Rules that emerge out of this fractious process reflect countless trade-offs and bargains which requires considerable diplomatic capacity to navigate; occasionally, negotiations break down leading to India withdrawing or abstaining.
What fundamentally matters in these cases is whether Indian officials grasp the politics around negotiations and how countries prefer to shape the agreement by inserting India's interests and preferences to generate a viable multilateral treaty. Simply put, India's negotiating approach is exigent, rational and sober. Going ahead, we can expect this rationalist bent to sustain as India negotiates new international rules.
Karthik Nachiappan is a research fellow at the Institute of South Asian Studies, National University of Singapore, and author of the book, Does India Negotiate, published by Oxford University Press.