INTERNATIONAL RELATIONS CURRENT AFFAIRS 2017 1. REGIONAL COMPREHENSIVE ECONOMIC PARTNERSHIP (RCEP) RCEP is the proposed mega-regional Free Trade Agreement (FTA) between 16 Asia-Pacific countries. It includes India, China, Japan, South Korea, Australia, New Zealand and the 10- member ASEAN bloc. RCEP was set up in November 2012 at the ASEAN Summit in Cambodia. The scope of RCEP includes include trade in goods, competition, economic and technical co-operation, intellectual property and investments, and dispute settling mechanisms. The ASEAN will be in total control of the RCEP set up. The proposed FTA aims to open up trade in goods and services as well as liberalise investment policies. It will cover a market of over 3 billion people in these 16 countries whose total combined GDP is more than $17 trillion. RCEP is viewed as an alternative to the Trans-Pacific Partnership trade agreement, which excludes India and China. RCEP includes 45% of world's population accounting 40% of world trade. IP, INVESTMENT AND RCEP One of the conditions that have been put forth both in the TPP as well as the RCEP is the formation of an Investor State Dispute Settlement mechanism and to include IP as an investment. Treating IP as an investment would allow private companies to raise investment disputes against the host country whenever they feel that the legal regime does not favour them. These disputes could be initiated by MNCs and especially the pharmaceutical industries that have until now had their hands tied in front of the Indian laws and the judiciary. Japan s insistence on the inclusion of this clause comes as no surprise as it is the thirdlargest RCEP investor country. Countries like India and China, which will be the destinations for the investments, should include safeguards against these measures. The IP chapter in RCEP is at risk of including provisions far stricter than those mandated by the World Trade Organisation (WTO) and the Agreement on Trade- Related Aspects of Intellectual Property Rights (TRIPS). The leaked IP chapter shows that both Japan and South Korea are mounting pressure to implement a TRIPS-plus regime in IP. Adhering to TRIPS-plus standards would be detrimental to developing countries that have benefited from generic competition and lower-priced medicines through the use of the flexibilities in NEO IAS 0484-3190310, 9446331522, 9446334122 Page 1
TRIPS such as stricter patentability criteria and the absence of data exclusivity provisions. The few IP reforms discussed in the RCEP include data exclusivity, patent term extension, and much more lenient criteria for patentability. This would mean delay in the entry of generic versions of medicines, extension of patent monopoly for a longer time, and exclusivity for drugs that should not be patented if strict patentability criteria were to be applied. The RCEP negotiations on these fronts spearheaded by Japan appear to be an extension of the arm-twisting that developing countries like India have been repeatedly subject to by the U.S. as reflected in the most recent Special 301 Report released by the U.S. Trade Representative. The strong MNC lobby growing in Japan, especially on the pharmaceutical side, is a reason for its insistence on stricter IP rules. An example of this is the drug patented by Otsuka for the treatment of extensively drug-resistant tuberculosis (TB). The company has been strategically withholding the registration of the patent in India, thereby preventing a generic version of the drug from being manufactured. In the event that a provision of data exclusivity is passed, the millions of TB patients in India would have to buy the high-priced drugs, which would have no cheaper generic alternative. MFN CLAUSE The WTO has a most-favoured-nation (MFN) clause that obliges the concessions offered to the MFN to be offered to others. In essence, if India has an agreement with Japan (through the RCEP), India will be obliged to offer the same concessions to the U.S. as well as the other members of the WTO. The NEO IAS 0484-3190310, 9446331522, 9446334122 Page 2
negotiating pattern reflects the reality of international law making. It is evident that developed countries are using FTAs to expand the existing standards of IP. India must resist Japan s U.S.-style pressure in this regard. Developing countries like India which have taken the leadership in instituting and using balanced intellectual property protection for pharmaceuticals should not only proudly protect their laws in the RCEP negotiations, they should also encourage other countries to adopt and use similar measures that ensure generic competition. The international trading system is not an end in itself and instead of adopting U.S. style lobbying on behalf of multinational companies in the RCEP negotiations, Japan would do well to recall its international commitments on health care and sustainable development and support developing countries in the region in their quest to ensure sustainable access to affordable medicines. INDIA SHOULD JOIN RCEP BECAUSE: Allows India to diversify markets in Southeast Asian countries and garnering benefits of common FTA over the whole region. Enable India to become a member of global production networks by scattering the production chains in different countries. Lenient time limits for attaining labour and environmental standards along with provision of protecting small industries would allow India to secure domestic interests. India is not a party to two important regional economic blocs: The Asia- Pacific Economic Cooperation and the Trans-Pacific Partnership. New Delhi fears the TPP, although years away from reality, could mean losing some textile and drugs exports to countries like Vietnam, which has embraced both the TPP and the RCEP. TPP is set to change the landscape of global trade. For India, it is most likely to affect sectors like leather goods, plastics, chemicals, textiles and clothing. The RCEP would enable India to strengthen its trade ties with Australia, China, Japan and South Korea, and should reduce the potential negative impacts of TPP and TTIP on the Indian economy. The RCEP agreement would complement India s existing free trade agreements with the Association of South East Asian Nations and some of its member countries, as it would deals with Japan and South Korea. It would be the world s largest trading bloc covering a broad spectrum of issues such as trade in goods, services, investment, competition, intellectual property rights, and other areas of economic and technical cooperation. From India s point of view, the RCEP presents a decisive platform which could influence its strategic and economic status in the Asia-Pacific region and bring to fruition its act east policy. NEO IAS 0484-3190310, 9446331522, 9446334122 Page 3
RCEP will facilitate India s integration into sophisticated regional production networks that make Asia the world s factory. The RCEP is expected to harmonize trade-related rules, investment and competition regimes of India with those of other countries of the group. Through domestic policy reforms on these areas, this harmonization of rules and regulations would help Indian companies plug into regional and global value chains and would unlock the true potential of the Indian economy. There would be a boost to inward and outward foreign direct investment, particularly export-oriented FDI. India enjoys a comparative advantage in areas such as information and communication technology, IT-enabled services, professional services, healthcare, and education services. In addition to facilitating foreign direct investment, the RCEP will create opportunities for Indian companies to access new markets. This is because the structure of manufacturing in many of these countries is becoming more and more sophisticated, resulting in a servicification of manufacturing. India still has significant incentives to take part in RCEP if it can gain from the liberalization of services and freedom of movement for professionals. India s has a significant trade surplus in services which would likely benefit from deeper integration. The question for India is whether growth in services would outweigh potential losses in manufacturing. NEO IAS 0484-3190310, 9446331522, 9446334122 Page 4
INDIA SHOULD NOT JOIN RCEP BECAUSE: Study by Commerce Ministry indicates that it can lead to a revenue loss of 1.6% of the GDP Joining the bloc can result in cheaper imports from China as China offers low price and better quality. Competition with Indonesia and Philippines can reduce the benefits of service trade within the bloc. Domestic issues may arise due to such alliance such as harm domestic manufacturing, leather industry etc. Ambiguity in the definition of balanced outcome with respect to downscaling of tariffs. The RCEP concept when mooted by ASEAN was an alternative to the TPP. This might turn detrimental for India given the size of the trade deficit it has with the proposed bloc. Overall trade deficit with RCEP is of $100 billion in 2015. India has a huge trade deficit with China alone. This is despite the fact that India has frequently used anti-dumping duties, safeguard duties and other countervailing measures to protect the domestic industry from unfairly low-priced imports from China. Some of the RCEP members have already refused to agree to India s three-tier approach to tariff reduction over a period of time. Under the ambit of RCEP, countries like China, South Korea and Japan are manufacturing powerhouses, and Australia and New Zealand have strengths in processed foods, wine, and dairy products, while Asean has comparative advantages in plantations, electronics and auto-components. Therefor sectors of India such as plantations, automobiles, textiles, pharmaceuticals, and engineering goods would be impacted negatively. WHAT IS INDIA S EXPERIENCE WITH TRADE AGREEMENTS? Within the RCEP, India has existing FTAs in merchandise goods with ASEAN, South Korea and Japan. With all the three it has witnessed a higher trade deficit after signing the FTA. Post-FTA, bilateral trade volumes did increase, but imports from partner countries have increased at a faster pace than India s exports with partners. India also has a trade deficit with Mercosur (Common Market of the South). Afghanistan, Nepal, and Bhutan remain largely inconsequential given the size of those markets. The only bright spot has been Sri Lanka and Singapore, where India has been successful in achieving a positive trade balance. NEO IAS 0484-3190310, 9446331522, 9446334122 Page 5
WHY SHOULD INDIA BE CONCERNED? A highly ambitious level of tariff elimination without enough flexibility would affect India the most on the goods side. This is because in the RCEP group (except Myanmar, Cambodia and Lao PDR), India has the highest average Most Favoured Nation (MFN) tariff level at 13.5%. MFN tariff, as per the WTO, refers to normal, non-discriminatory tariff charged on imports excluding preferential tariffs under FTAs and other schemes or tariffs charged inside quotas. India has offered to liberalize approximately 80% of tariffs (varying by country depending on whether there are pre-existing mutual FTAs or not). This is far below the 92% tariff liberalization sought by China and ASEAN nations. The difference in desired outcome threatens to slow the talks down significantly and is likely to result in a shallower deal. India is already affected by China s overhang of excess capacity in sectors including metals, chemicals and textiles. Goods imports from China have been far outpacing India s shipments to that country (India s exports are mainly troubled by China s non-tariff barriers). This has led to goods trade deficit with China widening from just $1.1 billion in 2003-04 to a whopping $52.7 billion in 2015-16. The initiative could provide a means for Chinese industries with excess capacity to export equipment that is currently idle. Corruption, internal barriers to trade, and weaker infrastructure have made Indian manufacturing less competitive than China s. These features, along with the fact that India s farms tend to be smaller and less efficient means that India s agriculture industry is also threatened by RCEP. Also, the proposed FTA, owing to the possibility of elimination of duties across most sectors, could lead to a surge in inflow of low-priced goods, mainly from China. This would result in Indian Industry s share in the domestic market contracting, and consequent downsizing/closure of operations, as well as job losses. This could lead to lower incomes and reduced consumer spending. Since India already has separate FTAs with the 10-member ASEAN bloc, Japan and Korea, India Inc. feels that on account of the RCEP, India may not gain much on the goods side with existing FTA partners. India is also negotiating separate FTAs with Australia and New Zealand. China is the only RCEP country with which India neither has an FTA, nor is in talks for one. Therefore, Indian industry sees RCEP as an indirect FTA with China, especially since there could be a hue and cry if India opts for a direct FTA with that country given the sensitivities involved. While consumers would benefit from FTAs, the Indian manufacturing sector which remains relatively uncompetitive vis-à-vis the RCEP countries, would be at a disadvantage. Sanitary & phytosanitary issues and technical barriers to trade measures are the most frequently used against Indian exports. Thus the non-tariff barriers in NEO IAS 0484-3190310, 9446331522, 9446334122 Page 6
RCEP countries should be negotiated transparently before negotiating market access. RCEP has the East Asian economies as partners, who have thrived on export-led growth model, unlike India whose domestic economy is its strength. Therefore India should choose a model that will complement this setup. India also needs to introspect as to what it can get from negotiating the proposed RCEP that it has not already obtained from prevailing trade agreements. India has achieved significant success in services, and hence should seek greater liberalisation of trade in services, including pushing for greater access for its professionals in these markets. India must take steps to strengthen its Medium, Small and Micro Enterprises (MSME) sector, equipping it not only to survive the free flow of trade, but also to become a set of more competitive players. Higher investments in R&D and achieving international standards in terms of delivery are needed. The lack of pre-existing free trade deals between certain countries means RCEP could have drastic effects. India and China, India and Korea, and Japan and Korea, for example, currently have no existing mutual FTAs. Furthermore, the wide variety of economies included in the deal means that while some countries would prefer a shallow manufacturing oriented deal, others are seeking liberalization of services and freedom of movement for professionals. Finally, many of the included countries face growing tensions over disputed borders and territories which threaten to slow or halt the deal if they are not resolved. Geopolitical issues such as territorial disputes in the South China Sea and the Doklam Plateau border dispute between China and India also threaten to impede the talks. In 2012 a trilateral deal between China, Japan, and South Korea was nearly derailed due to Sino-Japanese tensions over the Diaoyu/Senkaku Islands. Escalation of territorial conflicts between China and other RCEP members could easily have the same effect. A coalition of Farmer Unions, Trade Unions and Civil Society groups are particularly concerned with RCEP s negative impact on the livelihoods of Farmers and Workers, and Access to Affordable Medicine for various diseases including HIV/AIDS. They also pointed out that they are even more dangerous than WTO in terms of affecting the lives and livelihoods of common people, and the economic sovereignty of India. Andhra Pradesh is already facing a legal challenge by a foreign investor under a bilateral investment treaty (BIT) with UAE signed in 2013.Under that BIT the investor is allowed to sue the government for loss of intended profits from investment. The UAE investor has filed a claim for USD 44.71 million. Similar investor protector provisions are also proposed in the RCEP. NEO IAS 0484-3190310, 9446331522, 9446334122 Page 7
To become a large integrated market, RCEP must agree to a zero tariff area among members. However, this ambitious solution was never on the agenda. The next best solution could have been RCEP countries agreeing to a single tariff concession list providing uniform tariffs for products across member-countries. However, even this was not agreeable to all. RCEP will not slash tariffs substantially in most cases. Large-scale slashing is theoretically not possible among the countries already connected through FTAs. For example, ASEAN countries and their FTA partners have already opened over 80% trade through existing FTAs. They can, at best, make small incremental offers to each other, under RCEP. Country groups such as India-China, India- Australia and New Zealand or China-Japan do not have any existing FTA relationship with each other and hence there s scope for exchanging deeper tariff slashing. However, many countries in the group are not enthusiastic about this, probably due to a tough economic climate. The level of tariff slashing these countries will finally agree upon is yet to firm up. Consensus on adopting common Rules of Origins (ROO) will make movement of goods easier, predictable across the member-countries. ROO criteria determine nationality of goods. For instance, if squash is made in India from Nagpur oranges, the squash obviously originates in India. But what if the squash is made in India from oranges grown in the US? Which is the country of origin for squash here: India or the US? There is no standard answer. RCEP will have a tough time balancing the conflicting needs of the stakeholders, comprising a mix of manufacturing and trading economies. NEO IAS 0484-3190310, 9446331522, 9446334122 Page 8
Contours of the final outcome are yet to emerge in the area of IPR, services and investments. RCEP will have to reconcile the interests of many conflicting interest groups to ensure that IPR provisions do not compromise on public health issues as it contains 45 per cent of the world population, of which the majority is poor. Another contentious issue before it is investor-state dispute settlement (ISDS) that seeks to enable an investor to sue a foreign government. Detailed provisions of these issues are expected to be debated till the last day of negotiations. Japan now appears to be playing the role that the United States is known for: policing the intellectual property (IP) regimes of its trading partners. WHAT NEEDS TO BE DONE? India s FTA strategy has to be guided by the Make In India initiative that aims to boost domestic manufacturing and job creation within India. In return for greater market access in goods, India, with its large pool of skilled workers and professionals, should try to use the RCEP to gain on the services side, by securing commitments from the other nations to mutually ease norms on movement of such people across borders for short-term work. NEO IAS 0484-3190310, 9446331522, 9446334122 Page 9