What will India’s withdrawal from the RCEP mean for Southeast Asia?

Marred by domestic concerns and tension with China, in 2019 India declared that it was withdrawing from the RCEP. Regarded as a crucial counterbalance to Beijing in Southeast Asia, how will this decision impact power dynamics in the region for years to come?

Jennifer Chance
December 21, 2020
What will India’s withdrawal from the RCEP mean for Southeast Asia?
Vietnam's Prime Minister Nguyen Xuan Phuc (L) and Minister of Industry and Trade Tran Tuan Anh (R) cheer during the virtual signing ceremony for the Regional Comprehensive Economic Partnership (RCEP) in Hanoi, Vietnam, on November 15. Photo: EPA-EFE/Luong Thai Linh

November 15 marked the day in which eight years of  “negotiating with blood, sweat and tears”, as Malaysia’s trade minister Mohamed Azmin Ali labelled it, finally paid off. The ten ASEAN members, alongside New Zealand, Australia, China, Japan and South Korea, signed the Regional Comprehensive Economic Partnership (RCEP) deal at a virtual summit in Hanoi, making official the world’s largest free trade agreement to date. 

It wasn’t a complete win, however. Both India and the United States – the world’s largest and fifth largest economies, considered major players and crucial power balancers in the ASEAN region – had left the deal, or were never part of it. India’s withdrawal came late last year, paving a way for China to increase its economic and political influence over Southeast Asia without India acting as a counter-balance to this dominance. 

In an India-ASEAN summit in 2002, Singapore’s former Prime Minister Goh Chok Tong noted that India and China resembled the two wings of an ASEAN jumbo jet – so as India steps away from a deal with such regional importance, the plane becomes unbalanced and may gradually tip over. In other words, China will only continue to grow stronger in the gap formed by India’s exit, and may emerge as the single major power in the region. 

With the removal of trade restrictions, China can solidify its position as the region’s key supplier. This concern is exemplified by Beijing’s growing grip in Laos and Cambodia, with a former Singapore diplomat already stating in late October that decisions made by some Chinese-leaning ASEAN countries will impact the entire alliance. 

The RCEP, formulated in 2012, combines markets that are worth almost $25 trillion, covering 30% of the world’s GDP and population. It plans to deepen economic integration in the region, to lower or eliminate most of the current tariffs on goods and services and to create a common standard of trade regulations across participating countries. 

India’s refusal to sign the RCEP deal revolves around two reasons: growing trade deficits and anxiety over China’s rise. Indian Prime Minister Narendra Modi stated that the RCEP did not “address satisfactorily India’s outstanding issues and concerns”. 

While several experts have stated that backing out of the RCEP will harm Indian economic growth in the long-run, the country has a rationale for their protectionism. The impact of the deal on India’s dairy, agricultural and manufacturing industries is highest on the agenda, and when his country withdrew from the RCEP in November 2019, prime minister Nerandra Modi cited concerns that China, New Zealand and Australia will flood the country with exports and damage the competitiveness of domestic production. 

India’s refusal to sign is to do with its growing concern about China and the way in which China is using its economic clout to try and get things diplomatically and strategically

The outcomes of previous FTAs may be contributing to these fears. The ASEAN-India Free Trade Agreement (AIFTA) – which came into effect in 2010 and increased trade between the partners by 41% in 2011-2012 – has seen India consistently operating at a deficit in the decade since.

“[India] hasn’t gotten what it really wanted out of these [free trade] agreements. The trade has increased but the trade deficit has also increased,” Ian Hall, a professor of International Relations at Griffith University and the research director at Griffith Asia Institute, commented to the Globe

India’s annual trade deficit with ASEAN approaches $24 billion in 2020, without the added vulnerability of opening up its economy under the RCEP deal. Its trade balance with Indonesia alone stood at a deficit of $10.57 billion between 2018 and 2019 – the largest imbalance in ASEAN.

However, the stronger factor impacting India’s decision is the threat of vulnerability with its superpower neighbour. India is concerned that the deal will make the country more economically dependent on China, with whom it has a deficit of around $50 billion and increasingly taut relations over a border dispute that erupted in violence again in June after four decades of relative calm. 

China has a reputation for utilising trade advantages to penalise countries over diplomatic scuffles. For instance, their recent tariffs on Australian exports – part of a trade war that emerged around Canberra’s calls for a World Health Organisation investigation into the origins of Covid-19 – have caused a major blow to the Australian economy without much impacting their own. 

“[India’s refusal to sign] is to do with its growing concern about China and the way in which China is using its economic clout to try and get things diplomatically and strategically,” Hall said.  

A group photo featuring prime minister Narendra Modi prior to India’s withdrawal during the 3rd RCEP Summit in Thailand in November 2019. EPA-EFE/Narong Sangnak

But by sealing off its economy from the trade deal, India is undermining not only its economic influence in Southeast Asia, but also its political clout. 

OECD simulations from February showed that India would be a “major beneficiary” of a multilateral reduction of trade barriers. This is exactly what the RCEP deal could have offered  – more avenues for trade between parties, allowing for a greater exchange of goods and services. 

India’s service sector, such as in e-commerce and financial services, could have benefited from negotiations of greater market access and received even more consumers in Southeast Asia, the world’s fifth largest economy collectively and a burgeoning market of 670 million people

Instead, India will have to negotiate these deals bilaterally, but with it likely they’ll play a secondary role as ASEAN devotes more energy to making the RCEP deal work. Recently, India held a virtual meeting with ASEAN to express the need to review the ASEAN India Trade in Goods Agreement, a pre-existing FTA that came into force in January 2010. The ASEAN ministers, however, released an August statement saying they would prioritise the “conclusions of the RCEP negotiations” over individual FTAs. 

Although India’s RCEP withdrawal prevents India and ASEAN from fully taking advantage of free market access, the existence of previous FTAs will cushion most of the economic consequences for Southeast Asian countries. This means that the heaviest impact of an India-less RCEP will instead be political, with consequences for both New Delhi and ASEAN.  

India’s withdrawal stands against its ‘Act East’ policy, an approach initiated in the early 1990s, built around the country’s desire to increase diplomatic relations with ASEAN and the Asia-Pacific as a whole to counter China’s rise in the region. Tony Makin, an Economics professor at Griffith University in Australia, told the Globe that India’s economic withdrawal could likely spell a political withdrawal too. 

“The fact that India’s less engaged economically means it will be less engaged in other ways as well in the region,” he said. 

The Peterson’s Institute for International Economics projects that the RCEP deal will increase global incomes by $186 billion in 2030, with the major winners being China, Japan and South Korea. While ASEAN will also experience a win, China has the potential to grow even more involved and benefit disproportionately in the region’s economies, thus cementing its political influence.

ASEAN is growing more concerned over their economic dependence on China and had hoped that India’s participation in the deal could counterbalance that dynamic. A January report by the Yusof Ishak Institute in Singapore, for instance, showed that residents in the Philippines, Vietnam, and Thailand had the biggest concerns over China’s regional economic influence. 

If India decides to rejoin the RCEP in the future, the decision could benefit all parties. When done properly, opening up its economy will induce India’s producers to grow more competitive, and also provide access to cheaper commodities for domestic consumers. ASEAN will also benefit from a greater balance in the region. 

There is no telling, however, whether India’s influence will have waned before rejoining, and whether it will still be able to catch up with China at that point.

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