Regional Comprehensive Economic Partnership: The Steel Impact

  • 3 min read

Last year in November, India decided to opt out of the much-touted world’s largest trading bloc - the Regional Comprehensive Economic Partnership (RCEP) in Thailand with the Indian Prime Minister citing the talisman of Gandhi, much to the contentment of Indian industries, farmers’ associations and Swadeshi Jagran Manch.

What is RCEP?

The RCEP is a proposed free trade agreement between the ten member countries of the Association of South East Asia Nations (ASEAN) and its five Free Trade Agreement (FTA) partners. The principal objective of RCEP is to create an integrated free trade market with 16 nations, facilitating the flow of goods and services of each of these countries to be available across this region. The ten-member countries of ASEAN and their FTA partners are Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, Vietnam, China, Australia, Japan, South Korea, and New Zealand. The agreement covers trade in goods and services, investment, intellectual property, dispute settlement, e-commerce, small and medium enterprises, and economic cooperation. It is deemed to be the world’s largest trading bloc comprising one-third of global economic output.

The Genesis

At the 19th ASEAN meeting held in November 2011, the Regional Comprehensive Economic Partnership was introduced. However, the negotiations kick-started only during the 21st ASEAN Summit held in Cambodia in November 2012. All participating countries finalised and signed a deal by November 2019, excluding India.

In a bid to protect its national interests, India decided to opt out of RCEP in November 2019. PM Narendra Modi at the RCEP Summit in Thailand quoted the "Talisman of Gandhi" to put things into perspective and cited outstanding issues. The government’s reasons for opting out of the RCEP include possible flooding of cheap imports from China, increase in competition for Indian dairy farmers from New Zealand and Australia, and the existing trade deficit of $100 billion with RCEP countries

RCEP: A Blow to the Steel Industry

The Indian steel industry had been reeling under low domestic demand and feared joining the pact would further add to its woes and exacerbate the current fragile state of the industry. Complete elimination of tariffs is likely to increase India’s trade deficit and also severely harm some vulnerable sectors. The steel industry believes it will make the domestic markets even more vulnerable to imports. The threat was even more pronounced from China as the Chinese goods would flood Indian markets at predatory prices.

Already, the cost of steel production is higher in India by about $80-100 per tonne owing to challenges such as availability of raw material, royalty (District Mineral Foundation [DMF], National Mineral Exploration Trust [NMET], etc.), high cost of capital, high taxes and logistical issues among others. Another cause of concern for the Indian steel industry was the steady increase in the share of duty-free imports from FTA countries such as Japan, Indonesia, and Korea lately.

As these countries along with China are a major source of steel, tariff elimination would influx the Indian market and threaten the domestic producers in the industry. In August, imports from FTA countries accounted for 77 percent of the overall imports against their share of 58 percent in FY'19.

With the steel industry already bleeding from FTA, the new RCEP will include Australia, New Zealand and China to tap the Indian market duty free. Before opening up the doors for global companies, domestic players have asked the government to provide an export incentive of $40/tonne (per Hindu business line) to them in order to bring both global and domestic producers on an equal footing. As per the steel manufacturers, signing the RCEP agreement would ease imports for foreign investors but at the same time, the local steel producers will suffer from a decline in sales.

Opting Out: A Boon

The decision to opt out of the RCEP agreement gave a significant boost and provided great relief to the steel industry in particular and many other sectors as well. The decision was unanimously hailed by the entire steel fraternity.

At the end of the day, if other countries are allowed to ship their material into India at nil duty, then many of them will send in products that are priced cheaply and we come under the threat of predatory pricing. The RCEP is an expanded version of FTAs and the threat of Chinese dominance is a vital factor in the RCEP. During 2014-16, we saw what steel dumping did to our industry the steel sector was injured by dumping from China and other FTA countries and we still live under the shadow of those events.

The Indian steel industry is particularly vulnerable to this and it strongly supports the decision of opting out of the RCEP.

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