Regional Comprehensive Economic Partnership (RCEP) Summit
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Regional Comprehensive Economic Partnership (RCEP) Summit
Why in the News ?
In the recently held Regional Comprehensive Economic Partnership (RCEP) Summit in Thailand, India decided not to finalize the RCEP trade deal.
Regional Comprehensive Economic Partnership (RCEP)
RCEP is proposed between the ten member states of the Association of Southeast Asian Nations (ASEAN) (Brunei, Burma (Myanmar), Cambodia, Indonesia, Laos, Malaysia, the Philippines, Singapore, Thailand, Vietnam) and the six states with which ASEAN has existing FTAs (Australia, China, India, Japan, South Korea, and New Zealand).
RCEP negotiations were formally launched in November 2012 at the ASEAN Summit in Cambodia.
RCEP aims to boost goods trade by eliminating most tariff and non-tariff barriers — a move that is expected to provide the region’s consumers greater choice of quality products at affordable rates. It also seeks to liberalize investment norms and do away with services trade restrictions.
Why has it assumed so much significance in recent times?
When inked, it would become the world’s biggest free-trade pact. This is because the 16 nations account for a total GDP of about $50 trillion and houses close to 3.5 billion people. India (GDP-PPP worth $9.5 trillion and a population of 1.3 billion) and China (GDP-PPP of $23.2 trillion and a population of 1.4 billion) together comprise the RCEP’s biggest component in terms of market size.
Why didn't India sign?
According to the government, RCEP neither reflected its original intent nor addresses India’s key concerns.
- India had been raising the issue of market access as well as protected lists of goods mainly to shield its domestic market as there have been fears that the country may be flooded with cheap Chinese agricultural and industrial products once it signs the deal.
- Joining RCEP would have meant incurring a greater trade deficit with China which has great competence in the manufacturing sector.
- Various sectors like agriculture, dairy, the solar industry, seeds, garments, etc have protested against the deal. Now, the decision will ensure support to India’s farmers, MSME sector, dairy and manufacturing sectors, among others.
- It is an important development for India owing to the above concerns of different sectors that the benefits for India have been very limited from FTAs.
- Also recently, India had decided to commence the review of the India-ASEAN FTA which is pertinent to examine the progress of trade between India and its key FTA partners.
India’s experience with FTA
- A free trade agreement is a pact between two or more nations to reduce barriers to imports and exports among them.
- India has viewed FTAs as an important tool to enhance its trade and investment and signed several trade agreements with various countries or groups.
- In fact, India is one of the top countries in Asia with the maximum number of FTAs either in operation or under negotiation or proposed.
- India’s exports to FTA countries have not outperformed overall export growth or exports to the rest of the world.
- Major FTAs that India has signed and implemented so far include
- South Asia Free Trade Agreement (SAFTA)
- India-ASEAN Comprehensive Economic Cooperation Agreement (CECA)
- India-Korea Comprehensive Economic Partnership Agreement (CEPA)
- India-Japan Comprehensive Economic Partnership Agreement (CEPA)
The rationale for joining FTAs:
- With tariff liberalization commitments under FTA, the additional market access propels a process of scale expansion in domestic manufacturing which helps reaping economies of scale
- It enhances price competitiveness which translates trade diversion ultimately into trade creation. It also leads to greater employment generation.
- Due to inter-sectoral linkages, a further process of greater economic activity in other sectors is unleashed because of backward and forward linkages of the firms.
- It generates opportunities that open up the Global Value Chain (GVC) which brings investments and technology besides the other benefits of domestic manufacturing and services.
- FTA members co-exist with WTO and help achieve the objectives of the liberal trade of the WTO through their building block role.
However, according to the NITI Aayog report, in 2017, it has been pointed out that free trade agreements have not worked well for India.
Problems of India with FTA
Widening of India’s Trade Deficit with FTA Partners:
- The issue of complete tariff elimination remained critical for India as it has already an existing trade deficit of over $106 billion with RCEP negotiators, of which, over $57 billion is alone with China in 2018.
- India has also witnessed a growing trade deficit with ASEAN, Japan, and South Korea after the agreement is signed, particularly due to the surge in metal and capital goods into the country.
- India’s trade deficit with ASEAN from less than US$ 8 billion in 2009-10 to about US$ 22 billion in 2018-19.
- Rules of Origin: It is the criteria that are used to determine the national source of a product which is a serious concern for exporters.
- Improper Standards of import: For example, Concerns had been raised by the food processing sector about the near absence of quality norms for import of processed food products from ASEAN countries resulting in import and consumption of cheap ASEAN processed food products at the cost of the domestic food processing sector.
- No major impact of FTAs on exports:
- If import duty in the partner country is high, there is a likelihood of an increase in exports by 10% when this duty becomes zero (on joining FTA). But the chances of exports increasing are low if the import duty of the partner country is low at 1-3%.
- India’s exports are much more responsive to income changes as compared to price changes and thus a tariff reduction/elimination does not boost exports significantly.
- The difference in the economic efficiency of a country: If a country is not the most efficient economy, some level of an import wall helps in getting external investments. Without an import wall, many firms may shift production to a more efficient FTA partner.