India has firmly rejected joining the Regional Comprehensive Economic Partnership (RCEP), the world’s largest trade agreement by GDP. While the deal, signed in 2020, represents about 30% of global GDP, India decided that participation would be detrimental to its own economic interests. This decision has sparked debates, especially in light of recommendations from organizations like the World Bank, which have suggested that India reconsider. But India’s reasons for staying out of the deal go deep, tied to concerns about China’s trade practices, its own economic vulnerabilities, and the potential for unfair competition.

What is RCEP?

The Regional Comprehensive Economic Partnership (RCEP) is a free trade agreement that includes 15 Asia-Pacific countries, including China, Japan, South Korea, Australia, New Zealand, and the 10 member states of the Association of Southeast Asian Nations (ASEAN). The goal of RCEP is to create a single, streamlined trade bloc that eliminates tariffs and trade barriers among these nations, promoting more seamless commerce and investment. When RCEP came into force in January 2022, it became the largest trading bloc in the world by economic size, covering roughly one-third of the global economy.

The sheer scale of RCEP makes it an attractive option for many countries seeking to boost trade. However, for India, the stakes were different. The deal not only required countries to open their markets but also promised more access to Chinese goods—something India has long been wary of.

India’s Concerns with RCEP

India had been part of the initial negotiations for RCEP, which began in 2013. However, after years of talks, India walked away from the deal in 2019. At the time, India cited unresolved “core interest” issues, though it didn’t elaborate on what those were. Later, India’s Commerce Minister Piyush Goyal clarified these concerns, which centered around the potential economic harm RCEP could cause to India’s small businesses and farmers.

According to Goyal, RCEP would have “flooded the market with subsidized goods from China,” which would have hurt local manufacturers and agriculture. “It was not in our farmers’ interest, RCEP did not reflect the aspirations of our small and micro medium industries and sector, and in some form, was nothing but a free trade agreement with China,” he stated.

India was particularly worried about the trade imbalance it already faces with China. In the 2023-2024 fiscal year, India’s trade deficit with China exceeded $85 billion, largely due to the influx of cheap Chinese products like electronics, steel, and solar panels. Joining RCEP would have likely exacerbated this deficit. Under the terms of the agreement, countries are expected to eliminate tariffs on imports, which means Indian businesses would face even stiffer competition from Chinese manufacturers—many of whom benefit from government subsidies and opaque trade practices.

“When you see from the lens sitting outside the country, you don’t realize how difficult it is to compete against a non-transparent economy,” Goyal explained. “Certainly nobody back home would like to have an FTA [Free Trade Agreement] with [a] non-transparent economy, very opaque in its economic practices, where both trading systems, political systems, the economy—the way it is managed—is completely different from what the democratic world wants.”

Goyal also criticized China for using international trade agreements like those under the World Trade Organization (WTO) to its advantage, allowing it to export massive amounts of cheap goods to other markets, often at the expense of local industries. He pointed out that these goods frequently do not meet international quality standards, yet still flood foreign markets due to their low cost.

The World Bank’s Recommendation and Why It’s Flawed

Despite India’s valid concerns, the World Bank has recommended that India reconsider its position on RCEP. In its India Development Update report, the World Bank suggested that India could benefit from joining the pact, arguing that access to broader markets and deeper integration into global trade would boost the country’s long-term economic growth.

However, Indian think tanks, such as the Global Trade Research Initiative (GTRI), have pushed back against this recommendation, claiming that it is based on flawed assumptions. GTRI argues that the World Bank’s advice is rooted in outdated economic models that don’t reflect the realities of today’s trade environment. For example, the report fails to account for the rising trade deficits between RCEP members and the over-reliance on China-centric supply chains.

“India’s decision not to join the RCEP was strategically sound,” GTRI stated, “and the core concerns that led India to opt out of RCEP in 2019 remain valid and have only been reinforced by subsequent developments.” They also noted that India’s non-participation in RCEP was especially insightful during the Covid-19 pandemic, which exposed the dangers of over-reliance on China for essential goods and materials.

India already has free trade agreements (FTAs) with 13 of the 15 RCEP members, excluding only New Zealand and China. This means that joining RCEP would not significantly expand India’s access to new markets. Furthermore, India’s negotiations with New Zealand stalled over concerns in the dairy sector, while trade relations with China remain limited due to long-standing issues related to quality control, pricing, and economic fairness.

China’s Opaque Trade Practices

China’s influence in RCEP is one of the key reasons India has chosen to stay out. As the world’s second-largest economy, China already holds significant sway in global trade, and RCEP would only enhance that power. India’s apprehensions about China stem from what it sees as unfair trade practices that benefit Chinese exporters at the expense of other countries.

In recent years, China has been accused of using subsidies to support its industries, allowing them to produce goods at prices that undercut international competitors. For example, China has dominated industries like steel, solar panels, and electronics by mass-producing these goods and selling them at lower costs globally. These practices have led to market distortions, where local businesses in other countries struggle to compete with the flood of cheap Chinese imports.

Additionally, the lack of transparency in China’s economic and political systems makes it difficult for other countries to compete on a level playing field. India, a democracy with a free-market system, is particularly vulnerable to this imbalance. “The way [China’s economy] is managed is completely different from what the democratic world wants,” Goyal remarked.

India’s Strategy Moving Forward

By rejecting RCEP, India is not closing itself off from global trade but rather protecting its domestic industries from unfair competition. India is also exploring alternative ways to strengthen its economy. One of these is through its ambition to become a major hub for semiconductor manufacturing. Piyush Goyal noted that India aims to become a “Taiwan Plus One” country in the semiconductor industry, offering a viable alternative to companies looking to diversify their supply chains away from China and Taiwan.

India has already started building the infrastructure necessary to attract semiconductor manufacturers, with multiple plants under development. The country has also approved a $10 billion incentive program to encourage foreign companies to set up semiconductor operations in India. Goyal believes that India’s size, democratic system, and rule of law make it a “safe harbor” for global companies seeking stable, long-term investment opportunities.

India’s decision to reject RCEP was not made lightly, and it wasn’t just about trade—it was about protecting its economic future from the risk of becoming overly dependent on China. While organizations like the World Bank may encourage India to reconsider, their recommendations often overlook the complexities of India’s unique economic landscape. For India, the benefits of joining RCEP would likely have been outweighed by the risks of increased competition from China and the potential harm to its domestic industries. By staying out of RCEP, India has chosen a path that prioritizes its long-term growth and economic security, a decision that seems increasingly wise as global trade continues to evolve.

ACZ Editor: India sees how China treats its economic partners and is wisely keeping its distance. Russia, for example, is finding that China has re-priced the Yuan to its own advantage, and much to Russia’s detriment. China has no problem bullying anyone who is foolish enough to create dependency. But China can certainly make sweetheart deals – on the surface and in the short term…