India, currently a member to 13 enforced free trade agreements globally, has opted out of signing onto the Regional Comprehensive Economic Partnership (RCEP), the world’s largest FTA covering roughly a third of the global population and output last week.

However, it does have the opportunity to sign onto it in the near future, being one of the parties in its eight-year-long negotiations. The RCEP agreement provides a strong strategic signal from Asian economies about resisting protectionism and reaping the benefits from free trade and integrated regional supply chains in a post-COVID-19 world.

The real economic value from this agreement for businesses is expected to be generated upon entry into force, which could be in 2021 or beyond. The details in the agreement, covering 20 chapters and a comprehensive agenda that includes trade in goods, services, and investment, appears to suggest modest gains in market access and adds on to the noodle-bowl of existing bilateral and regional FTAs that these members have already signed onto.

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The most significant potential value stems from closer economic integration between East Asian economies (China, Japan, and Korea). From the New Zealand perspective, the gains from RCEP sans India are far lesser than initially envisaged, as it already has working trade agreements with all 15 RCEP members.

In the short-term, from an economic perspective, India’s decision to opt-out is understandable in light of its ongoing economic slowdown, exacerbated by the global COVID-19 pandemic. The pandemic has forced every country to reconfigure its domestic economic priorities while being engaged globally, and India is no exception. Further, India didn’t see itself negotiating from a position of strength within RCEP, and neither saw its core concerns addressed, even before the onset of the same.

However, in the longer-term, India’s Post-COVID-19 recovery strategy cannot ignore engaging in global trade through Indo-Pacific FTAs, and there are several reasons to be noted.

First, India’s currently implemented economic strategy is “Atmanirbhar Bharat,” aimed to think-local, but “act global”, maintaining focus on integrating a more diversified and competitive Indian economy with the global market.

The above reinforces the view that even in the short-term, India remains open to global businesses, which is aptly demonstrated by global tech giant Apple’s recent moves to shift iPhone manufacturing to India. Therefore, in the longer term, developing key export capabilities from moving global manufacturing to India will be a crucial economic objective.

Prime Minister Jacinda Ardern with her Indian counterpart Narendra Modi

In this part of the world, that has already happened with Alstom railway coaches made in India exported for the Sydney metro network. To achieve competitive access to global markets, partnering through FTAs will remain relevant to ensure that India’s products or services do not face trade barriers or diversion, based on existing market access accorded by its trading partners Indo-Pacific economies via FTAs.

Second, RCEP potentially aims to consolidate Asian intraregional trade in the Global Value Chain (GVCs). India risks being left out of its participation, with potential investments and production diverted towards RCEP signatories such as Vietnam and other ASEAN members, including Thailand, which is also planning to sign onto the Comprehensive Progressive Trans-Pacific Partnership (CPTPP).

Third, the US and EU, both top trading partners of India, are likely to embrace trade as a key strategy towards post-COVID-19 economic recovery beyond post-2022. A scenario wherein the US signs onto CPTPP, along with the UK, and US-EU TTIP (Trans-Atlantic Trade and Investment Partnership) is also signed/enforced by then, is not unimaginable.

India has revived its negotiations with both the US and EU bilaterally, post-RCEP signing. The momentum should be maintained, as short-term resistance to free trade could quickly devolve into the longer term, leaving it at risk of trade diversion at a global level (assuming India doesn’t reduce tariff/non-tariff barriers by then, but others so among themselves).

Fourth, RCEP being open to others to join potentially opens the door for other South Asian economies to sign onto it. If that were to happen, it would further exacerbate intra-regional trade diversion, which will not be in favour of India in the longer-term.

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It is evident that with the signing of RCEP (and potential new members onto this agreement or CPTPP), the global trade landscape will shift slowly but surely in the longer term. Indian policymakers cannot ignore this trend and will have to have a two-pronged strategy for the longer term to deal with FTAs.

First, to re-join or contemplate joining any new trade deal from a negotiating position of strength, developing resilience and productivity growth through critical domestic reforms is vital.

There are already steps taken in this direction through reforms in tax and farm laws and the 10 sector Production linked incentive (PLI) scheme that focuses on boosting manufacturing capabilities, thereby exports, globally. India will need to improve upon its domestic competitiveness before getting into FTAs.

Second, it will be prudent to first engage in bilateral FTAs before exploring any wider regional trade deal. Bilateralism has been the strategy of several RCEP-15 members when they embarked on FTAs. It leaves the door open for a potential bilateral trade deal to be negotiated by India with Australia and New Zealand in this part of the world. India already has a trade agreement with 10 member ASEAN and has a close economic partnership with Japan.

Until these are achieved, businesses partnering with India will need to think longer-term in terms of investment opportunities in a trillion-dollar economy that maybe in a short-run slowdown, but poised to rebound on its rapid growth trajectory by 2021.

The author is Senior Lecturer, School of Economics, Faculty of Business, Economics and Law, AUT University, Auckland and Fellow, New Zealand-India Research Institute (NZIRI), Wellington. The views expressed here are personal.