RCEP faces stumbling block amid Chinese frustrations with India

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China has threatened to cut India out of the RCEP agreement. What could this mean for the future?

Despite hopes earlier this year that plans for the Regional Comprehensive Economic Partnership (RCEP) would soon be concluded, the agreement is now facing a major hurdle after China proposed to leave India out.

Let's take a closer look at why this might be and what it might mean for the global economy.

What is the Regional Comprehensive Economic Partnership (RCEP)?

RCEP is a proposed free trade agreement between the ten member states of the Association of Southeast Asian Nations (ASEAN) and the six Asia-Pacific states where ASEAN free trade agreements already exist (Australia, China, India, Japan, South Korea and New Zealand).

It is focused on standardising tariffs across the region, as well as improving market access and including special provisions for developing economies, such as gradual tariff liberalisation.

Negotiations were formally launched in November 2012 and, according to PwC, the Gross Domestic Product of the RCEP members could account to $250 trillion by 2050. The combined economies of China and India would make up more than 75 per cent of this amount.

Meanwhile, the RCEP framework would cover around 30 per cent of the world's total trade. In January 2017, US president Donald Trump withdrew from the Trans-Pacific partnership, further bolstering opinion that RCEP would soon come to fruition.

Furthermore, ASEAN secretary-general Lim Jock Hoi said in April he was confident the deal would be concluded in November 2019 following an ASEAN summit.

RCEP: trouble ahead?

However, China has become increasingly frustrated with India of late, with the latter being at odds with the other would-be member nations over tariff reductions.

The RCEP proposes that over 90 per cent of traded items should have zero tariffs, but India has been hesitant about accepting this for fear of Chinese goods flooding its markets and harming domestic production.

India has also been reluctant to undertake extensive trade liberalisation in agriculture, which it views as one of its most sensitive sectors.

China had perhaps been hoping for a change in the situation after Narendra Modi's ruling party won India's general election in May, but the appointment of a new protectionist-favouring minister of commerce and industry rendered this unlikely.

Now, the situation has culminated in Beijing proposing a new, 13-member partnership that excludes India as well as Australia and New Zealand. 

It may be that China hoped this would encourage the Antipodean nations to put pressure on India to change, as they would presumably not want to be excluded from any future partnership.

But Japan and a number of other Asian countries have already spoken out in opposition of this idea, insisting they want what was originally thought to be all set for agreement.

What next for RCEP?

ASEAN has called a special meeting on June 22nd 2019 in the hopes that finance ministers can reaffirm their goal of reaching a deal by the end of the year, with representatives meeting on the sidelines of the Bangkok summit.

However, it is now likely that China's controversial proposition will form much of the basis of the talks, which is almost certain to hinder that hoped-for deadline.

There have been suggestions that China's pushing for a new arrangement is down to it wanting to regain control amid the challenges of the trade war with the US, which could lead to support from pro-Chinese ASEAN countries such as Laos.

However, with Japan already opposed to the idea, this may not be the best way to go about reorganising stability.

It will be interesting to see if RCEP is indeed going to come into effect soon, or if this conflict could derail it significantly.