The Association of Southeast Asian Nations (ASEAN) is a political and economic union of 10 states in Southeast Asia, including Vietnam, Thailand, Singapore, Philippines, Myanmar, Malaysia, Laos, Indonesia, Cambodia and Brunei. The RCEP is the world’s largest mega regional trading bloc, representing 30 per cent of global GDP, trade and population. 

In the past, India has actively participated in the RCEP negotiations, before walking out of the agreement in 2019, stating that its “domestic and outstanding issues” remained unaddressed. A group of scholars and policy experts are contending that India should reconsider joining the RCEP agreement.

There are two broad arguments in favour of joining the RCEP: First, it is the world’s fastest-growing trading bloc in terms of market size and growth. Joining the RCEP will help India enhance its exports to the RCEP economies, thereby providing further impetus for its growth and development. Second, the RCEP will create new business opportunities for Indian MSMEs, which will enable their participation in global value chain (GVC) networks. 

Both arguments are compelling, but need closer scrutiny before India decides to join the RCEP. In this context, it is important to closely examine bilateral trade dynamics between India and the RCEP countries to understand how bilateral trade flows have evolved in the past five years.

The table below analyses India’s bilateral trade flows with RCEP countries for 2019 and 2023. In 2019, India’s exports were to RCEP countries US$ 64.4 billion, while its imports were US$ 165 billion, resulting a total trade deficit of US$ 101 billion.

In 2023, India’s exports were US$ 75.6 billion, while its imports were US$ 246 billion, with a total trade deficit of US$ 170.6 billion. The export-import analysis clearly shows that India’s imports from the RCEP countries grew at a much faster rate than its exports. 

A country level export-import trend provides a far more nuanced perspective. Of the 15 RCEP countries, India’s trade deficit with nine member countries of the RCEP has increased significantly.

India’s trade deficit with China has doubled in the past five years. China is one of the largest contributors to India’s total trade deficit with the RCEP economies, with a share of 61.9 per cent.

This raises a pertinent point: Had India joined the RCEP agreement, the trade deficit would likely have worsened, further contributing to its trade deficit with RCEP countries, mainly on account of China.

Therefore, it is important to state that India’s decision to reconsider joining the RCEP agreement should weigh the potential gains and losses in terms of trade at both aggregate and country levels. These are particularly important vis-a-vis China, with which India conducts a significant volume of trade, and has a huge trade deficit. 

Further, a standard argument in favour of the RCEP is that it will facilitate integration of global value chains, by allowing Indian MSMEs to import competitive inputs from the RCEP region.

It is important to note that the integration of Indian MSMEs in GVCs is a working hypothesis and is not supported by any sound empirical analysis. It is understandable that liberalisation of imports enables competitive access to imported inputs, which enhances productivity and competitiveness of domestic and export manufacturing, thereby connecting with GVCs.

Limiting The Scope For Domestic Value Addition

However, it is also important to recognise that the link between import liberalisation and the participation of Indian MSMEs in GVCs, is not linear. Liberalisation of imports certainly enables access to competitive imports, but it hides a crucial fact — it also limits the scope for domestic value addition capabilities, thereby undermining potential opportunities for developing a deep and vibrant domestic manufacturing sector.

This makes the country merely a supplier of assembled products, where it adds little or no value to the goods. The falling share of India’s domestic value addition is a veritable testimony to this. In percentage terms, the domestic value addition in India’s total gross exports declined from 92 per cent in 1995 to 80.2 per cent in 2018. This issue certainly needs to be considered when assessing the potential benefits of joining RCEP-led value chains. 

Finally, India’s reassessment to join the RCEP also needs to be studied in the context of its trade policy under the Self Reliant India initiative. India follows a conservative trade policy with a focus on increasing import tariffs, import restrictions, quality standards and CAROTAR, a.k.a., Customs (Administration of Rules of Origin under Trade Agreements) Rules.  

If India wants to join the RCEP, it has to make significant alterations in its trade policy to make it more coherent with existing trade commitments of the RCEP members. This will be challenging, given the domestic political economy and its quest for self-reliance.

In addition, the evolving geopolitical context in which countries are emphasising on China Plus One strategy to reduce their supply chain vulnerabilities, also needs to be examined. Keeping the complex interplay of various economic and geopolitical factors in mind, it is important for India to adopt a cautious approach to join the RCEP.  

(The writer is an Associate Professor at Jindal School of Liberal Arts and Humanities, O P Jindal University, Sonipat. Views are personal)