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The RCEP Conundrum: Japan Awaits India’s Return

India’s return to the FTA would benefit not only the Indian economy, but also all RCEP member countries. 

The RCEP Conundrum: Japan Awaits India’s Return

This image made from a teleconference provided by the Vietnam News Agency (VNA) shows the leaders and trade ministers of 15 Regional Comprehensive Economic Partnership (RCEP) countries pose for a virtual group photo in Hanoi, Vietnam on Sunday, November15, 2020.

Credit: VNA via AP

The Regional Comprehensive Economic Partnership (RCEP) is a multilateral free trade agreement (FTA) between Australia, China, Japan, New Zealand, South Korea, and member states of the Association of Southeast Asian Nations (ASEAN, composed of Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam). The 15 member states account for about 30 percent of the world’s population and nearly 30 percent of global gross domestic product (GDP). Accordingly, RCEP is the world’s largest free trade framework, superseding the European Union (EU), the United States-Mexico-Canada Agreement (USMCA), and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP or TPP-11).

In the RCEP framework, the signatories agreed to eliminate or reduce tariffs on agricultural and industrial products and set new rules on trade, service, and investment. RCEP was signed, following eight-year negotiations, on November 15, 2020, and is supposed to enter into force 60 days after six ASEAN member states and three non-ASEAN member states have ratified the agreement.

In Japan, the ratification of RCEP was approved at the National Diet on April 28, 2021, and the Japanese government officially ratified the treaty on June 25, 2021. The government calculated that Japan’s entry into RCEP would lead to an increase of 2.7 percent in its real GDP and an additional 570,000 jobs, boosting the Japanese economy affected by the COVID-19 pandemic. Notably, RCEP is Japan’s first free trade deal with China, its largest trade partner, and South Korea, its third largest trade partner.

The economic benefits of RCEP for Japan are clear in terms of both exports and imports. In terms of exports, tariffs on Japan’s exports of scallops to China, beef to Indonesia, and alcohol (sake and shochu) to China and South Korea would be gradually reduced and eliminated. Notably, 91.5 percent of tariffs on Japan’s exports of industrial products (car components, such as electric motors and lithium battery materials; steel products; and home appliances, such as microwave ovens and refrigerators) shall be eliminated. In terms of imports, tariffs on imports of frozen vegetables, frozen octopus, frozen green soybeans, and alcohol (Shaoxing rice wine) from China, as well as makgeolli (Korean rice wine) will be gradually eliminated. Most importantly, Japan’s five important products (rice, wheat, meat, dairy, and sugar) were not included in the list of tariff eliminations. This is how Japan successfully protected its domestic agriculture from the harsh international competition.

Meanwhile, India decided to opt out of RCEP in November 2019, in the middle of the negotiations. India is the world’s fifth largest economy, with a GDP of $2.8 trillion, but it has been dwarfed by the Chinese economy, and the total economic output of ASEAN is larger than that of India. New Delhi has not been successful in making profits from other free trade agreements with RCEP countries, except for China. 

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The Japan-India Comprehensive Economic Partnership Agreement (CEPA) entered into force in 2011, yet India has faced trade deficits due to the excessive amount of Japanese exports. In 2018, India’s trade deficit with other RCEP member states amounted to $108.5 billion (China for $57.3 billion and ASEAN for $21.1 billion). As a matter of fact, India has faced trade deficits vis-à-vis 11 of the 15 RCEP countries, and the content of the RCEP deal did not provide protection for the Indian economy. For this reason, Prime Minister Narendra Modi made the final decision not to join RCEP, quoting Mahatma Gandhi: “Recall the face of the poorest and weakest man you have seen, and ask yourself if this step you contemplate is going to be any use to him.”

India’s exit from RCEP was understandable given the trade deficits and domestic opposition, but Japan and the other RCEP member states have strongly desired India to come back to the free trade framework. From a Japanese perspective, New Delhi’s return to RCEP would contribute to strengthening the Australia-India-Japan security network vis-à-vis the rising Chinese military presence in the Indo-Pacific region. Hence, the Japanese government has consistently encouraged India to return to the RCEP framework, stating that “joining RCEP is in India’s interests and would help the entire region prosper. We will continue to work toward its return.” Likewise, Australian Prime Minister Scott Morrison conveyed his message to Modi that the door would remain “wide open” for India to rejoin RCEP. Furthermore, India’s return to the RCEP framework could contribute to the goals of the Indo-Pacific strategy of the United States and the Quadrilateral Security Dialogue (the Quad).

It has been pointed out that there would be demerits for India’s exit from RCEP. It has been argued that by not joining RCEP, India would lose foreign investments and may end up paying more than the country should. India would have been able to expand the export of its competitive IT related technology and pharmaceuticals to RCEP member states, an opportunity now lost. RCEP members countries also lost the Indian market.

Given that the Indian economy is plagued by trade deficits and the COVID-19 pandemic, it is unlikely that New Delhi will rejoin RCEP at this stage or for the time being. However, even analysts in India have suggested that the Indian government should consider a return to RCEP in the future. For instance, Jagannath Panda, a research fellow and center coordinator for East Asia at the Manohar Parrikar Institute for Defense Studies and Analyses, has argued that India’s return to RCEP is “politically and economically desirable” for all countries concerned, stressing that “the pressing conditions created by the coronavirus should encourage India to have a fresh perspective on returning… RCEP is an inclusive model that should not overlook India’s interests, nor should India overlook RCEP’s benefits.”

Similarly, Akarsh Bhutani at the Observer Research Foundation has pointed out that India should have signed RCEP because it could benefit the “Make in India” strategy. Bhutani pointed out that “by not joining the RCEP, India shut themselves out of a trading bloc, which could have served as a huge export market for India to realize the potential of its manufacturing sector.”

From a long-term perspective, it would be politically, economically, and strategically important for India to rejoin the RCEP framework. Of course, it is logical and realistic for the Indian government to minimize its trade deficits and protect its national interests. New Delhi may also need to take time and necessary measures to protect and reinvigorate domestic industries influenced by the COVID-19 pandemic. Still, India’s comeback to the mega FTA would benefit not only the Indian economy, but also all RCEP member countries. 

Japanese Prime Minister Suga Yoshihide had to cancel his official visit to India in May 2021 due to the coronavirus pandemic. However, the Suga government has highly valued the economic and strategic partnership with New Delhi in the Indo-Pacific region. In a video message to the inauguration ceremony of the Varanasi International Cooperation and Convention Centre (VICCC) on July 17, 2021, Suga stated that “India and Japan shared the same fundamental values and both countries maintained cordial relations through the long history of exchanges.” For the sake of the bilateral strategic partnership and the purpose of the free and open Indo-Pacific vision, the Japanese government would continue to wait for India to become fully ready to return to the world’s largest free trade framework, which could facilitate the further economic integration in the Indo-Pacific region.