Related Topic in KAS Prelims Syllabus:
International Relations [Paper-I]: India’s Foreign Policy, International Organisations, International Treaties and Forums, their structure and mandate
Foreign Trade [Paper-II]: Trend, Composition, Structure and direction of India’s Foreign Trade
- PM Modi announced the decision of India to pull out of the Regional Comprehensive Economic Partnership (RCEP) agreement, seven years after the country joined negotiations for the 16-nation ASEAN led RCEP or Free Trade Agreement.
- The announcement was made during 3rd RCEP summit held in Bangkok.
- A joint statement issued by RCEP said that 15 RCEP participating countries except India have concluded text-based negotiations for all chapters will begin legal scrubbing to sign the trade deal in 2020.
What is RCEP?
- It is a proposed Free Trade Agreement (FTA) between sixteen countries namely 10 countries of ASEAN (Brunei, Cambodia, Indonesia, Lao, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam) and their six FTA partners namely Australia, China, India, Japan, Korea and New Zealand.
- The purpose of the deal is to create an “integrated market” spanning all 16 countries.
- This means that it would be easier for the products and services of each of these countries to be available across the entire region.
- It is expected to provide market access for India’s goods and services exports and encourage greater investments and technology into India.
Why India pulled out of the agreement?
- India’s withdrawal was mainly by citing negative effects of RCEP on “farmers, MSMEs and dairy sector”.
- Key issues that have prevented India from coming on board include “inadequate” protection against surges in imports.
- This is a major concern for India, as its industry has voiced fears that cheaper products from China would “flood” the market.
- The Indian economy is in the grip of a slowdown now, and the country’s entry into RCEP in such a time would have caused significant pain.
- Greater access to Chinese goods may have impact on the Indian manufacturing sector.
- The present form of the RCEP Agreement does not fully reflect the basic spirit and the agreed guiding principles of RCEP.
- It also does not address satisfactorily India’s outstanding issues and concerns.
- The outstanding issues included major trade deficits with all the countries in RCEP, lack of assurances on market access, and RCEP negotiators’ insistence on keeping 2014 as the base year for tariff reductions.
- India had been seeking an auto-trigger mechanism that would allow it to raise tariffs on products in instances where imports cross a certain threshold.
- India has also not received any credible assurances on its demand for more market access, and its concerns over non-tariff barriers.
Why India will have less benefit from reduced tariff?
- Indian products face high non-tariff barriers (NTBs) like food-related and other standards, as well as technical barriers in Japan, Australia and New Zealand, which hinders India’s exports.
- At the same time, NTBs are lower in India. When tariffs are reduced, Australia, New Zealand, and ASEAN countries will be the major beneficiaries.
- Confederation of Indian Industry in a report criticized that those opposing RCEP had only taken the limited view of curbing imports from China and have not looked at the opportunities for export growth that India could exploit by joining RCEP.
- By not signing the deal, India has missed the opportunity to be part of global supply chains, and closed the door on some trade opportunities in the region.
- The fallout of India’s decision is that it has burnished its image as a protectionist nation with high tariff walls.
- The smart way for India to handle this is to initiate reforms on the export front, bring down costs in the economy and, simultaneously, increase efficiencies.
- India cannot miss out on being a part of global supply chains and this can happen only if tariff barriers are reduced.
- The best way to balance the effect of rising imports is by promoting exports. Tariff walls cannot be permanent.
- India should also explore trade deals with Australia and other key countries in the region even as it works to close the renegotiation of RCEP agreement.