Why India, China can't keep dodging trade deals and let RCEP talks fail

If Beijing needs to compromise to get regional talks across the finish line, so does India

The Regional Comprehensive Economic Partnership, or RCEP, is not a “competitor” to the Trans-Pacific Partnership (or, as it’s now known after adding the adjectives “comprehensive” and “progressive,” the CPTPP). Yes, the CPTPP very obviously excludes the People’s Republic of China while the RCEP does not. But, unlike the former, the RCEP is a more traditional sort of trade deal, in which tariff cuts on tradeable goods — rather than high standards for labor, environmental and intellectual-property protections — are at the center of the discussion.

That’s part of the reason India is leery of signing it. This week, as leaders of the 16 RCEP nations met in Singapore, India managed to postpone its moment of reckoning: Instead of concluding negotiations by the end of the year as hoped, the leaders agreed that the deal would be signed next year. Prime Minister Narendra Modi called for an “early conclusion” to the talks, and others said that significant progress had been made. But the truth is that the gulf between India and the other 15 countries in the RCEP remains deep, and it isn’t clear how or if it can be bridged.

RCEP is is essentially a deal between the 10 members of the Association of Southeast Asian Nations and the other countries — Japan, China, South Korea, India, Australia and New Zealand – with which ASEAN has existing free-trade deals. Indian officials already not-so-quietly regret the current pact with ASEAN. They complain that exports from ASEAN into India have grown far quicker than Indian exports to the bloc, which they attribute to the fact that India is a “services economy.” Thus, they’re willing to hold up RCEP until Indian companies are granted more market access for services than is currently the case.

The truth is that those officials have it backwards. India has largely failed to develop a manufacturing sector because its factories aren’t competitive and aren’t plugged into global supply chains. Over the past few years, tariffs have started rising as well — often in an ad hoc and arbitrary manner — which means that becoming part of spread-out value chains will be even tougher. Modi may want to protect Indian industry. But if he’s going to create the manufacturing jobs he promised in his 2014 prime ministerial campaign, he can’t turn his back on dense knot of production and trade that the RCEP countries represent.

As for Indian services exports, the truth is that market access isn’t as straightforward as all that. Services trade requires harmonized rules and regulations — something that RCEP isn’t prioritizing in the first place. And, in fact, many bits of the agreement that do focus on convergence of rules are also unacceptable to India. It will object, for example, to any clause that forbids laws mandating data localization, having already clamped down on foreign payments networks and internet companies.

Some participants in RCEP might be tempted to dump India and move ahead, signing a reduced version of the agreement just as the other 11 signatories to the CPTPP moved on without Donald Trump’s U.S. In the end, though, such a move wouldn’t be terribly useful. New Zealand, for example, already has trade agreements with every RCEP participant except for India. Given the difficulty of getting Indian negotiators to the table for bilateral trade deals, the RCEP remains the best chance to incorporate India into a genuinely open trading bloc.

In the end, success will come down to give and take, and one country will have to give the most: China. India’s concerns about hidden Chinese subsidies and closed Chinese markets are shared now by much of the world. And it’s not as if Chinese policy makers have no flexibility: After tariffs on U.S. soy exports were imposed as part of the first salvos of the Sino-American trade war, Indian exporters of soymeal found Chinese authorities were far more willing to make things easier for them.

While RCEP may appear to be a multilateral deal, negotiations between China and India lie at its heart. Other countries have now accepted that fact, allowing India to also negotiate separately with China, as well as Australia and New Zealand, under a “bilateral pairing mechanism.”

For Beijing, this is an opportunity to demonstrate not just its continuing commitment to free trade but also its willingness to make trade fairer than it’s been in the past. If the 2019 deadline is to mean anything, then both India and China will have to think very hard about where their national interests really lie. If they do, they’re likely to view compromise much more favorably.