Indonesia and other members of Regional Comprehensive Economic Partnership committed to sign the agreement in this year - Photo by Trade Ministry Office

JAKARTA (TheInsiderStories) – Indonesia and other members of Regional Comprehensive Economic Partnership (RCEP) committed to sign the agreement in this year. The decision has been made during a virtual ministerial meeting chaired by the Vietnam’ minister of Industry and trade, Tran Tuan Anh, and was attended by 15 Asia-Pacific ministers including Australia, China, Japan, Korea, and New Zealand, except India.

“We acknowledged that the COVID-19 pandemic constitutes an unprecedented challenge for trade, investment and global supply chains that requires a coordinated global response. Against this backdrop, we agreed to enhance our cooperation and coordination to facilitate a strong and resilient economic recovery as well as sustainable, balanced, and inclusive growth following the crisis,” said the joint statement on June 23.

Regarding the statement of Prime Minister Narendra Modi at the RCEP Summit last year, which will pulled India out of the RCEP negotiations, the partnering country has been an important participant in the RCEP negotiations since the launch in 2012. It stated, “We believe that India’ participation in RCEP would contribute to the advancement and prosperity of the region. We therefore wish to emphasize that the RCEP remains open for India.”

Trade minister of Indonesia, Agus Suparmanto added, the completion of this year’ RCEP can provide hope for economic recovery in the regional and global, strengthening supply chains regional, and restore confidence in an open international trade system and based on rules.

The RCEP deal provides a further boost to trade liberalization in the Asia-Pacific region at a time when Asia-Pacific trade has been hit by trade disputes between some of the world’s largest economies, notably the United (States) US – China trade war.

Asia-Pacific economies have suffered considerable negative contagion effects from the trade tension and COVID-19 outbreak, as the wider Asian manufacturing supply chain has been hit by the impact of high tariff barriers on US – China trade flows.

Consequently, the agreement provides a positive initiative that will help to boost trade and investment flows among the 15 nations that have agreed to the RCEP deal, which comprise the 10 nations of ASEAN, plus China, Japan, South Korea, Australia and New Zealand.

However, the decision by India not to join the RCEP deal will reduce the scale of the free trade area significantly, since India is already a US$3 trillion economy that is equal in size to the 10 ASEAN member states combined. India’ decision not to join the RCEP deal reflects considerable domestic concerns amongst political parties as well as industry groups in India about the potential economic shock to Indian industries from dismantling tariff barriers for trade with the other RCEP member nations.

In particular, India had been concerned about the potential impact of largely removing tariff barriers for trade with China, as India feared that many domestic industry sectors would not be able to compete effectively with Chinese manufactures in a wide range of industry sectors.

The country’ manufacturing sector has been facing considerable challenges in 2019, with the Indian auto industry facing a severe crisis due to slumping vehicle sales. Consequently, Indian industry has heightened concerns about the potential negative impact of an RCEP deal on their own domestic market shares.

Unlike ASEAN, India does not have a bilateral free trade agreement in place with China, and the Indian government decided that the overall economic and political costs of dismantling bilateral trade barriers with China would far outweigh the economic benefits, which were assessed to be relatively modest in size relative to the economic costs.

India has had a large and chronic trade deficit with China for many years. India’s bilateral trade deficit with China was $58 billion in 2018, notably due to a large imbalance in trade in manufactures. Consequently, the Indian government feared that removing tariff barriers for Chinese imports would further erode India’ domestic manufacturing market share at a time when the Indian government is trying to accelerate the development of India’s manufacturing sector through the “Make in India 2025” policy, which is championed by Modi.

India also runs a trade deficit with Australia, but the size is relatively moderate compared with India’s trade deficit with China. As Australia is a strategic source of supply for Indian imports of key commodities such as LNG and metallurgical coal, the trade relationship with Australia provides critical raw materials for Indian industry and does not compete significantly with India’s manufacturing industry.

Although India decided that it is not able to join the RCEP agreement in the first wave, there may be the possibility for India to negotiate a later entry date into RCEP to allow a longer transition period for Indian industry to adapt to the new trade rules. Many other RCEP member nations are keen to have India as a member of RCEP, particularly since India, which is now the world’s fifth largest economy, would substantially increase the long-term trade and investment benefits of the RCEP agreement.

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