RCEP: Is the mega FTA leading us into non strategy? Smitha Francis

As the 19th Round of the RCEP (Regional Comprehensive Economic Partnership) negotiations winds up in Hyderabad, India, there are many grounds for being apprehensive about the direction in which it has moved. 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). Beginning in May 2013, the RCEP 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. The initiative was launched to address concerns about the ‘noodle bowl’ effect of overlapping bilateral and regional agreements by ASEAN at the individual and the bloc levels concurrently. For instance, while ASEAN as a regional grouping has FTAs with Australia, New Zealand, China, Japan, South Korea and India, member countries like Singapore, Thailand and Malaysia also have bilateral FTAs with these same FTA partners.

RCEP, like its other new-age FTA cousins, aims not only at harmonising trade regulations, but also seeks to harmonise foreign investment laws, intellectual property right (IPR) laws, and several other public policies, laws and standards across member countries. 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. But the back-door entry into FTAs of issues that had been opposed by developing countries at the WTO to harmonise rules related to investments, IPR, government procurement, and several other public policies related to the economy extending across agriculture, manufacturing and services sectors, has now been understood to be even more treacherous.

There has also been immense awareness globally about how the investor-state dispute settlement (ISDS) clauses in the investment chapters in FTAs (and investment treaties) have led to international arbitration of sovereign states by foreign private corporations for pursuing perfectly legitimate policies to regulate public health, natural resources, etc. The widespread public resistance against such FTAs across the EU and the US together with the US withdrawal from the TPP 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’, and there has been pressure mounting on RCEP negotiations to ensure that it is a “forward-looking agreement with high standards”.

While “inclusiveness” is also often mentioned by analysts as an objective to be met by the RCEP pact, there is hardly any indication that the contradictions between the policy commitments being sought under the trade pact and being “inclusive” are understood! Given that trade policy has a direct or indirect bearing on the economic conditions facing the people of a country, a country’s commitments under trade agreements should be aligned with its other national development policies. This would require that all stakeholders are aware of what is being negotiated in these agreements in each round. That is, at the minimum, being inclusive would mean having transparency. But like earlier trade agreements, the RCEP is also being negotiated secretively, with the public getting to know about the stakes involved through leaked documents. In India, there has been no consultation by the central government with the states and any other stakeholders (except the big industry associations).As a result, there is no accountability to the populations that will be affected by the rules being negotiated.

Accountability would also require that a country which is engaged in overlapping FTAs has done the analysis of the economy-wide impacts of the existing FTAs and placed such analysis before the nation. This is utmost critical in this context given that the logic and objective of the RCEP is to subsume the existing bilateral FTAs and untangle the mess of overlapping clauses and commitments. Given that countries make WTO-plus liberalisation commitments in FTAs and that there are interrelatedness in the commitments made under various FTAs, there are many analytical challenges when we examine the impact of existing FTAs. Further, given that seven of the RCEP members (Australia, Brunei Darussalam, Japan, Malaysia, New Zealand, Singapore and Vietnam) are also members of the TPP, we also need to consider what wider implications could arise from India’s RCEP commitments in relation to TPP clauses that are yet to be finalised. It takes enormous capacity to continuously assess the implications of the policy commitments made under various bilateral, regional and international agreements and tweak their stand before the next FTA is negotiated. If we consider India, the country already has bilateral FTAs with ASEAN as a bloc, as well as bilaterally with Thailand, Singapore and Malaysia. India has also signed a services and investment agreement with ASEAN. Further, there are separate agreements with Japan and South Korea. The task before the Commerce Department officials has thus clearly been daunting. Meanwhile the report of the Parliamentary Standing Committee of Commerce on “India’s Engagement with Free Trade Agreements (FTAs): Challenges and Opportunities”, which was set up in 2013, is still not available in the public domain.

Putting India’s FTA Journey in Context

How did India’s trade policy become so mired? Since the early 2000s, India’s approach towards trade agreements has been underpinned by competitive regionalism and foreign policy dynamics as well as a ‘misplaced perception of marginalisation’ in export markets as more and more Asian countries became members of multiple FTAs. Under the latter perception, successive Indian governments came to consider FTAs as an important tool for achieving increased entry to foreign markets for Indian exports. Trade liberalisation under FTAs has also been believed to improve the export competitiveness of Indian firms.

It should be remembered that traditionally, tariffs were imposed on imports to protect domestically manufactured goods by ensuring an increase in demand for the latter. This was supposed to enable them to scale up their production to levels that will yield economies of scale and improve productivity. The latter was believed to increase the competitiveness of domestic firms, which would in turn, enable them to conquer external markets. But after the coming into being of the WTO in 1995, flexible use of tariffs had to be abandoned as an industrial policy tool for many domestically produced goods as India agreed to reduce and ‘bind’ industrial tariffs on the majority of industrial goods.

Further, following the global shift towards an export-oriented growth paradigm in the nineties, India increasingly 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 to do under its WTO commitments. While more than 31% of the country’s industrial tariff lines were not bound under the WTO at the commencement of the Doha Round negotiations in 2001, India continued autonomous tariff liberalisation through the 2000s too.If we look at the extent of liberalisation in applied tariffs among the RCEP membersbetween 2006 and 2013, India was second only to Vietnam.

But not just tariff policy, India has also given up many other policies that have been successfully used by other late industrialising developing countries. Indian policymakers have put wholehearted faith in an innate benevolence of foreign direct investments (FDI) to uplift the competitiveness and technological capabilities of domestic firms and have gone ahead with unilateral liberalisation of FDI policies over and above required under WTO commitments under Trade Related Investment Measures (TRIMs). On the other side, countries that have effectively utilised FDI for successful industrial restructuring, including China since the 1980s, have employed 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.

WTO-plus Tariff Liberalisation

Even if a WTO member country has brought down its applied tariff levels through unilateral decisions (as India has done), it still has the flexibility to raise its tariffs in any product to the level at which it has bound at the WTO should the need arise. But given that WTO-plus tariff liberalisation is one of the cornerstones of all FTAs, there is always pressure on India to reduce or eliminate the tariffs on product lines remaining outside WTO commitments.

Since the time of 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 the East and Southeast Asian 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. 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. These include products belonging to industries such as organic and inorganic chemicals, metal and metal products, electrical and non-electrical machinery industries, etc. Such trade liberalisation has gone beyond the country’s commitments under the WTO, including under the Information Technology Agreement (ITA-1), which had eliminated tariffs on a vast majority of electronics products.

Pursuant to such WTO-plus tariff liberalisation without strategic industrial policy support, the combined market share of25 FTA partners in India’s imports increased between 2007 and 2014. Over the same period, India’s share in an FTA partner’s imports increased in a stable manner only in three countries, Brazil, Japan and Nepal. In fact, as a result of the greater degree of market penetration in India by FTA partners 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 would seem that Indian policymakers in successive governments underestimated the impact of preferential trade liberalisation in altering incentives for domestic production, and in increasing the import intensity of domestic production. Meanwhile, the government has not been able to establish that India’s market access to trade in services in ASEAN has in fact increased.

When we consider the average applied tariff rate among RCEP members in 2013, which is the benchmark for RCEP tariff reductions, it is seen that India (along with South Korea) had the highest average applied tariff rate at 13.5 per cent. It is unrealistic to hope that this mega FTA will offer increased market access to Indian 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 clearly stand to gain more from tariff liberalisation into the large Indian market.

The current government appears to be 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 India had initially proposed a three-tier approach for making tariff liberalisation offers under the RCEP, based on whether it has an FTA with the country or not, and the level of current import dependence. 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 the challenges being faced by India under this mega-regional FTA (and otherwise) go far beyond tariffs.

Standing on the Precipice of Non Strategy

Apart from the prospect of gain in services sectors, signing up FTAs especially involving the East and Southeast Asian economies has been rationalised using the argument that given the diversity in the levels of economic development, economic structure and capabilities of the countries in the region, India’s participation in FTAs with them would lead to efficient industrial restructuring within the region led by multinational corporations. Thus FTAs are supposed to enable India to become part of global value chains (GVCs). However, experiences from around the world show that while GVCs can offer opportunities for developing countries to become part of the global economy, and to 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 phyto sanitary (SPS) measures, technical barriers to trade (TBT), and measures related to 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, as we saw, has generally preferred to adopt a hands-off approach to industrial development. The result is reflected in India’s export performance in recent years. It clearly shows that an increase in export competitiveness that is mainly attributable to greater access to cheaper imports from abroad following tariff liberalisation has not been sustainable in the absence of strategic industrial policy support.

Clearly, 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, inclusion of investment and IPR chapters in RCEP will compound this problem by restricting the space for industrial and technology policies. One of the most problematic aspects relates to the broad asset-based definition of investment employed by them. 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. Given that foreign and domestic enterprises cannot be discriminated, broad investment definitions adversely affect a host country’s ability to attract and regulate FDI in order to maximise their benefits in a sustainable way. They also restrict countries’ ability to regulate portfolio investments, foreign investments in derivatives, sovereign debt, etc. with adverse implications for financial/macroeconomic stability.

Another is an expanding set of legally binding policy commitments related to investments. 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.

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, ISDS poses serious threat to countries’ sovereignty.

The Stakes are Too High

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 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, etc.

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 blunderfor India to abdicate its remaining policy space and tools for supporting our country’s resource development capacities and capabilities. The ever present danger that provisions in these mega FTAs would easily become the templates for future negotiations at the WTO also needs to be kept in mind.

Rather than proceeding with replicating problematic provisions from other controversial trade deals with the aim of finalising an “ambitious” trade deal, governments of RCEP member countries should meet the people’s call for a transparent and democratic approach to trade negotiations. Against the emerging imperatives of climate change-resilient development strategies, growing challenges associated with global value chain dynamics and technological changes, as well as the need for social cohesion and political viability, all RCEP members, including lead industrialisers Japan and South Korea, as well as Australia and New Zealand, have similar interests as ASEAN, India and China to bring an alternative agenda to the negotiating table that maintain the space for national policies. Those interests should lead to 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, is it in India’s interest to play along? It may just as well be that the desirable ‘regional integration’ and increase in trade beneficial to people at large can still be achieved through mutual recognition agreements and other measures required for increased understanding on non-tariff measures, by cooperating on regional technology projects and standards setting, investing more in connectivity projects, bringing down inefficiency in customs procedures, etc.

Note: A shorter version of this article titled ‘RCEP: Is it in India’s Interests?’ appeared in Business Today dated 27 July 2017 and is available at: