RCEP: Is it in India's interests?

Smitha Francis   New Delhi     Last Updated: August 1, 2017  | 16:44 IST
RCEP: Is it in India's interests?

Regional Comprehensive Economic Partnership (RCEP) is one of the two proposed mega free trade agreements (FTAs) aiming at greater integration in the Asia-Pacific region, the other being the Trans-Pacific Partnership (TPP). The negotiations are being undertaken between the ten member countries of ASEAN and its six FTA partners Australia, China, India, Japan, New Zealand and South Korea. What are they aiming to achieve? What does India hope to gain?

Like its other new-age FTA cousins, RCEP also goes far beyond trade liberalisation. It is seeking to harmonise foreign investment rules, intellectual property right (IPR) laws, and several other laws and standards, beyond what has been agreed by developing countries at the WTO. Such harmonisation is problematic even in the trade policy sphere because it takes away countries' ability to tweak trade policies depending on their changing domestic development needs. Attempts to harmonise rules related to foreign investments, IPR and every other public policy related to the economy extending across agriculture, manufacturing and services sectors, is even more treacherous.

It is true that under the WTO, developing countries including India agreed to reduce and fix industrial tariffs on the majority of industrial goods. But by their special nature under the WTO, FTAs have to undertake WTO-plus liberalisation of tariffs. Because of this, successive Indian governments came to consider FTAs as an important tool for achieving increased entry to foreign markets for Indian exports. India also came to believe that it could increase the productivity of its firms primarily by increasing its import of more competitive foreign inputs and intermediate products. This in fact became a significant incentive for carrying out tariff liberalisation over and above what India had promised under its WTO commitments. Despite this, there is always pressure on India to reduce or eliminate the duties on product lines on which higher tariffs have been retained to meet various national objectives.

In the context of East and Southeast Asian economies,  beginning with the bilateral agreement with Singapore in 2005 through the last one signed with South Korea in 2011, Indian policymakers have been maintaining that the country's 'skilled' labour force stood to gain from improved access to employment opportunities in these economies. This has been expected to come about by increasing the ease of movement of professionals through the liberalisation of what is called Mode 4 in services trade. To this end, India has been willing to trade up its remaining tariff policy manoeuvrability in the manufacturing industry (and even in the agricultural sector). Thus in its FTAs with ASEAN, Japan and South Korea, India committed to reducing or eliminating tariffs in almost all consumer goods, capital goods and intermediate goods. Meanwhile, the government has not been able to establish that India's market access for services in ASEAN has increased.

Successive governments have sold the FTA story also using the argument that India's participation in FTAs especially involving the East and Southeast Asian economies will enable it to become part of global value chains (GVCs) and help Indian firms to improve export capabilities. However, there is mounting evidence globally that while GVCs constitute opportunities for developing countries to become part of the global economy, absorb knowledge and technology, ironically, the level at which developing country entities integrate into any value chain (which determines their scope for moving up the chain) is conditional upon their existing technological capabilities. This necessitates a role for active national industrial policy interventions to build and upgrade domestic capabilities and to guide investment towards activities which have the ability to lead to faster productivity growth.

In fact, across the developed world and in some developing countries, the loss of significance of tariffs as an industrial policy has been countered by an increase in the use of other public policies in the form of non-tariff measures (NTMs) such as sanitary and phytosanitary (SPS) measures, technical barriers to trade (TBT), environmental/resource protection, consumer rights, labour rights, etc. Several countries like China, Brazil and Vietnam have also been using ingenious measures to increase demand for domestically produced goods through other means such as government procurement, technical standards, etc. All these assume significance in the context of climate change mitigation strategies and green technologies too.

But India has been adopting a hands-off approach to industrial development. Having put wholehearted faith in foreign direct investments (FDI) to uplift the competitiveness and technological capabilities of domestic firms, Indian policymakers have been unilaterally liberalising FDI regulatory policies over and above required under the WTO's Trade Related Investment Measures (TRIMs) agreement.

On the other side, countries that have effectively utilised FDI for successful industrial upgrading, including China since the 1980s, have utilised strategic industrial policies to promote export competitiveness of domestic producers at different phases of an industry's lifecycle, regulated FDI into particular industries and activities, and also pushed for direct and indirect modes of technology transfer between foreign invested firms and local firms.

In the absence of such strategic industrial policies to guide and upgrade the domestic manufacturing base, what we have seen is that tariff liberalisation has led to India's FTA partners achieving greater market penetration in India than what India could achieve in their markets. In fact, in the case of non-oil products, India has experienced a higher level of import dependence on her FTA partners as compared to world at large. It is thus unrealistic to hope that this mega FTA will offer increased market access to Indian manufacturing firms as applied tariffs in many other countries are much lower to give any significant price advantage to Indian firms. On the contrary, other RCEP members stand to gain more from tariff liberalisation in the large Indian market.

The current government is cognizant of the fact that further tariff liberalisation in a regional pact involving China would potentially lead to even greater external dependence. It is to the government's credit that in the early stages of RCEP negotiations, it proposed a three-tier approach for making tariff liberalisation offers to the different RCEP members. But after being called "the most obstructionist member of the agreement", India has had to agree to uniform tariff liberalisation to all the RCEP members. It is reported that several of the members currently want India to eliminate duties on about 90 per cent of traded goods.

But clearly, the challenges being faced by India under the RCEP go beyond tariffs. While region-wide tariff liberalisation with ASEAN has already created enormous challenges to India in maintaining and upgrading local production by domestic and foreign producers, investment and IPR chapters in FTAs will compound this problem by restricting the space for industrial and technology policies. It should be remembered that India was a member of the coalition of more than 20 developing countries that successfully resisted the attempt by developed countries to insert investment rules as part of 'Singapore issues' at the WTO's Cancun Ministerial Conference in Mexico in 2003.  But the back-door entry inclusion of investment provisions through FTAs would lead to severe loss of policy autonomy for developing countries.
One of the most problematic aspects relates to the broad asset-based definition of investment employed by them. Another is an expanding set of legally binding policy commitments related to investments. Given that foreign and domestic enterprises cannot be discriminated, broad investment definitions adversely affect developing countries' ability to attract and regulate FDI in order to maximise their benefits to the host economy in a sustainable way. They also restrict countries' ability to regulate non-FDI types of foreign investments (such as portfolio investments, foreign investments in derivatives or in sovereign debt, etc.) with adverse implications for financial/macroeconomic stability.  

Depending on changing industrial structure and impacts of domestic or external factors on domestic industries and the economy, it would be necessary for India to regulate entry and operations of foreign investments based on their employment/environmental impacts, scope for technology transfer, defence capabilities. Such regulatory freedom would also be essential to address any other developmental concerns like regional imbalances in development.

But several of the policy tools still available under the WTO to manage industrialisation and development processes can get blocked at the national and sub-national levels under investment-related and other clauses in RCEP. For instance, existing investment chapters in FTAs such as India-South Korea and India-Japan CEPAs prohibit performance requirements relating to technology transfer and nationality of senior management board of directors. Similarly, the Japan-Philippines Agreement involves WTO-plus performance requirements restricting labour and environmental standards. Moreover, if RCEP were to adopt the investment definition to cover 'admission of investments' as in Thailand's existing FTAs with Australia and New Zealand, it would curtail member countries' right to regulate the very entry of FDI.

Thus even where India has and continues to liberalise its regulations related to foreign investments, it is important to retain India's policy autonomy to flexibly change any policy which it has not bound under the WTO. Legal binding of autonomous national FDI liberalisation under FTAs would mean that any changes to India's FDI policy can make our government liable to face compensation claims from investors for alleged violation of FTA provisions. This arises from the inclusion of investor-state dispute settlement (ISDS) provisions. ISDS clauses allow foreign investors to sue a host government at international arbitral forums (that remain totally outside national jurisdiction), if they interpret any host country measures or laws as leading to a change in their business profitability or prospects. Given that corporations around the world have been using such provisions in existing FTAs and bilateral investment treaties (BITs) to force governments to use taxpayers' money to pay compensation for perfectly legitimate regulations to protect public health, environment and other public interests, ISDS poses serious threat to countries' sovereignty.

The widespread public resistance against FTAs involving investment chapters and ISDS clauses across the EU and the US together with the US withdrawal from the TPP and the collapse of the TTIP (Trans-Atlantic Trade and Investment Partnership) were supposed to have dealt a body blow to new trade deals being pushed along such lines. But currently, the TPP members led by Japan are deciding on how to continue with TPP as a 'gold standard agreement'. On this side of the Pacific, there is continuing pressure on RCEP negotiations to ensure that it is an agreement with 'high standards'.

Like earlier FTAs, the RCEP is being negotiated secretly, with no official communication from the central government to the states and other stakeholders. But reports point out that there is a push to include some of the most controversial clauses of the TPP in the RCEP. RCEP will not only have an investment chapter, but also ISDS. There is also significant pressure from Japan and South Korea on India and ASEAN to include IPR provisions that expand and introduce new monopolies for pharmaceutical corporations. Such provisions will weaken the Indian generic pharmaceutical industry, which has played a critical role in lowering drug prices and ensuring access to affordable medicines for millions of people around the world. Extension of intellectual property rights for commodities ranging from seeds and medicines to computer software will have serious adverse consequences for our food security and public health, as well as our attempts to widen and deepen the access of our people to education, technology, knowledge generation, etc.

There seems to be a convergence in the interests of not only the developed country members of RCEP such as Japan, Australia, New Zealand, South Korea, but also China, which is unsurprising given the expansion of Chinese firms across the world in different industries and sectors. However, it is not clear how China seeks to balance its need to utilise the policy space available under the WTO strategically and the need to reduce entry barriers for its own firms in other countries. Under growing global uncertainties, which country would like to be deprived of the available space to frame regulatory policies to guide its development process?

Rather than proceeding with replicating problematic provisions from other controversial trade deals with the aim of finalising a 'high standards' trade deal, governments of RCEP member countries should strive to meet the people's call for a transparent and democratic approach to trade negotiations. There is the real possibility to alter the 'rules of the game' in favour of a more balanced FTA approach with a 'strategy' that retains and strengthens the existing policy autonomy of developing countries to carry out industrial and other public policies in a manner suited to their development needs. But if the RCEP is to fritter away that historic chance by aiming at political grandstanding, is it in India's interest to play along? The government of the day should protect income generating possibilities of the present and future generations. For an economy in the middle of a demographic challenge and one that has been grappling with industrial slowdown and growing import dependence, it will be a blunder for India to abdicate its remaining policy space and tools for supporting our country's resource development capacities and capabilities.

Smitha Francis is an economist based in New Delhi

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