NEW DELHI: The world's largest trading bloc, Regional Comprehensive Economic Partnership (RCEP), which was signed into existence a week back, may skew the way global supply chains work in favour of South East and East Asia forcing India and other emerging economies to scramble to sign up new trade pacts to avoid being left out in the cold.
The mega trade pact, concluded between China, the Asean nations, Australia, New Zealand, Japan and South Korea, delivers a single set of rules covering all countries, making trade simpler and reducing costs for businesses.
The rules RCEP has carved out also allows trade in components produced by any member country to be treated equally by others. Global credit issuance giant Euler Hermes calculates this could boost merchandise exports among RCEP members by nearly $90 billion a year on average, incentivising firms to locate their supply chains within the trading bloc.
"The RCEP trade pact with its tariff reduction plan and rules of origin will make it very attractive in many cases for companies to source much of their global supply chain from within the region, which could place others at a disadvantage," said Dr Arpita Mukherjee, professor at Indian Council for Research on International Economic Relations (ICRIER).
The average tariff of Asean countries on imports from RCEP partners had already dropped from 4.9 per cent in 2005 to 1.8 per cent currently. The low tariff within the trading bloc and treatment of components sourced from each other would, analysts feel, make the region attractive to firms to source products for the world market, besides giving them access to a market which represents 30 per cent of world GDP.
India has been trying to woo firms moving out of China for a variety of reasons including higher costs, the US-China tariff war and desire to be less reliant on one country for supplies. It has slashed corporate taxes, introduced productivity linked incentives and changes investment rules to make itself a more attractive destination.
But, this hasn't been a very successful exercise till date. Most of the Japanese and European firms moving out of China have preferred to shift to Vietnam, Taiwan and even Bangladesh, especially in textiles, food processing and light engineering. Manufacturing as a percentage of India’s GDP had fallen to 13.72 per cent in 2019 from 17.30 per cent in 2006, despite India's attempts to attract investments through 'Make in India' programs.
"The other problem is that the tariff structure which has been put in place (in RCEP) will encourage RCEP member states to seek new terms of trade from partners like India if they review their trade agreements or enter into new ones," said Dr Mukherjee. India has free-trade agreements with Asean, Japan and South Korea and is in the process of renegotiating an existing pact with Asean.
While it will be hard for India to now join RCEP given her hostility with China, other free-trade pacts including with India's largest trade partners – European Union and the US – and possible multilateral pacts such the Trans-Pacific Partnership may come India's way and help it join global value chains on its own terms.
However, India will need to negotiate hard and yet be flexible enough to strike deals, or risk being isolated in a world where economic growth depends on membership of 'trading clubs'.