India is wise not to join the largest free-trade agreement in the world – Rabobank

On November 15, the Regional Comprehensive Economic Partnership (RCEP) was signed, an Asian-Pacific free-trade agreement that will probably become effective sometime in mid-2021. The agreement has been signed by 15 countries: all 10 ASEAN countries, Australia, China, Japan, South Korea and New Zealand. Covering roughly 30% of global population and GDP, it is easily the largest FTA in the world. However, economists at Rabobank argue that India’s choice not to sign the RCEP is actually quite rational. 

On Wednesday, the USD/INR pair dropped to the lowest level since mid-October and eyes the 73.00 mark.

Key quotes

“RCEP is a trade bloc of net exporters focused more externally than internally. China is focusing increasingly on its domestic market and is not going to fulfill the buyer of last resort. India is an obvious candidate to take up this role, as RCEP members were responsible for almost 70% of India’s trade deficit over the last five years. India’s weakening external position, however, affects its financial conditions and creditworthiness.”

“Non-tariff barriers (NTBs) to trade have become increasingly important and India is hardly the most protectionist country from this perspective, being outflanked by RCEP members Australia, Japan, and China. RCEP has not made any arrangements on lowering NTBs.”

“If India were to join the RCEP, this could hamper its transition towards industrialization in the face of a surge in imports, which would leave its economy dominated by agriculture and services. Data indeed shows that the deeper the trade relation between India and China grew, the more we have seen a shift towards imports of high-skill and technology-intensive manufactures from China, while India’s exports consist of a stable chunk of commodities.”

“We do not recommend that India continues to follow the route of full-blown protectionism either, but buys itself some time to fix domestic problems before further opening up to trade.”

See – USD/INR Price Forecast 2021: Indian rupee’s four boosters to bolster its recovery