Illustration by Ramandeep Kaur
Illustration by Ramandeep Kaur | ThePrint

Last weekend, 15 countries signed the Regional Comprehensive Economic Partnership (RCEP), the world’s largest free trade agreement.

India had withdrawn from the RCEP in November 2019, concerned about the size of its deficits. The tensions with China in Ladakh have also become a factor, though India has been given the option of joining later.

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Usually, signing a free trade agreement has required India to cut import duties, since most partner countries already have low import duties. Signing FTAs has only meant giving an advantage to those countries compared to others — it has rarely increased India’s exports.

Signing the RCEP would have meant India losing flexibility to raise tariffs. In this case, India felt it would have been giving China an advantage. The increase in India’s trade deficit with China and the dominance of China in many sectors at a global level have made India wary.

RCEP will reduce tariffs on imported goods in the coming 20 years. It is envisaged that this will strengthen Asian supply chains and boost the member countries’ competitiveness in global markets. Its proponents are of the view that RCEP will help member countries emerge from the economic devastation caused by the pandemic through access to regional supply chains.


Also read: Modi rightly didn’t join RCEP a year ago. SE Asian states are unlikely to benefit much


Concerns about India

There have been concerns that if India wants to be part of global supply chains and become globally competitive, it should not become protectionist. Instead, it should be opening up, including by becoming a member of FTAs like the RCEP.

Textbook trade theory teaches us about the benefits of trade liberalisation, particularly of unilateral cutting of tariffs that make an economy competitive in the long run. However, the entry of China with economies of scale in many sectors, enabling it to expand its exports and destroy domestic manufacturing in many countries in the last two decades, has led to a rise in protectionism across the world.

The RCEP was first proposed in November 2011 to create an integrated market between the ASEAN member countries and their FTA partners. While India was a part of the RCEP’s negotiations, it dropped out in November 2019, citing significant outstanding issues that remain unresolved. India’s concern was that participation in RCEP would expose domestic manufacturers to a flood of cheap imports from China. Indian agriculture, dairy and textile sectors which employ millions of workers were projected to be adversely impacted with the signing of the RCEP. India proposed an auto-trigger mechanism to impose tariffs when imports crossed a certain threshold, but the proposal was not agreed to.

There are concerns that pulling out of RCEP is an act of economic self-harm, as India will stand isolated and continue to under-perform in terms of exports and growth. There are concerns that the decision will hamper India’s bilateral trade with RCEP member countries as they would be inclined to bolster trade within the bloc.


Also read: How will RCEP benefit member nations and what does India’s exit from the trade pact mean


What previous trade agreements have shown

A discussion of the benefits and costs of signing free trade agreements must take into account facts about India’s trade balance and how its industries, exports and imports are placed vis-a-vis the trading partners’. In the case of RCEP, India has a trade deficit with most RCEP countries. While India serves as a huge market for its trading partners, its industries do not stand to gain materially from the trade deal.

India has entered into numerous bilateral and regional trading agreements over the years — it currently has preferential access and FTAs with about 54 countries and Comprehensive Economic Cooperation Agreements (CECA)/FTAs with around 18 countries.

In an FTA, tariffs on items of bilateral trade are eliminated between the partner countries while they continue to maintain tariffs on non-member countries. CECA is a more integrated package of agreements consisting of trade in goods and services, investments and economic co-operation and intellectual property.

Whether FTAs are welfare-enhancing or not depends on their trade creation and trade diversion effect. Trade is created when a member of an FTA has a comparative advantage in producing an item, and is now able to sell it to its free trade area partners because trade barriers have been removed. Trade is diverted with the formation of an FTA that replaces lower cost imports from a country outside the trading bloc.

The impact of FTAs on India’s trade balance has been ambiguous. A research paper on ASEAN-India FTA finds a reduction in export flows following the implementation of the FTA. A study by the NITI Aayog on the costs and benefits of FTAs for India has laid down certain facts about India’s exports trajectory. The key findings of the study are that India’s exports to FTAs have not outperformed exports to the rest of the world. FTAs have led to greater imports than exports. And most importantly, India’s exports are much more responsive to income changes as opposed to price changes, and hence a cut in tariffs does not boost India’s exports significantly. High logistics costs and supply side constraints make Indian exports less responsive to price cuts.


Also read: Modi govt keen on trade pact with Australia as RCEP takes backseat


RCEP is China-centric

The RCEP is seen to be China-centric, and is expected to elevate its economic and political influence in the region. India has an unfavourable trade deficit with China. While China’s share in India’s imports is roughly 14 per cent, India’s exports to China are a meagre 5 per cent of its exports to the rest of the world. The unfavourable trade balance is further compounded by the composition of exports and imports. While India’s exports to China mainly consist of primary products like ores, minerals and agro-chemicals, imports from China consist of high-value items like capital and manufactured goods like machinery and engineering goods. An FTA has the potential of giving disproportionate gains to China.

India’s exports to China are different from its exports to the rest of the world — 75 per cent of its export basket comprises manufactured goods, of which engineering goods’ share is 24 per cent.

Trade agreements are envisaged to promote bilateral trade, with both parties benefiting as a result of tariff elimination. With China, India’s trade seems to be skewed and may lead to a surge of imports into India.

Reducing the cost of doing business through infrastructure investment and improving the business environment holds the key for improving India’s export prospects. These reforms would ensure that India stands to gain in terms of greater market share from the various regional trade agreements.

Ila Patnaik is an economist and a professor at National Institute of Public Finance and Policy.

Radhika Pandey is a consultant at NIPFP.

Views are personal.


Also read: Modi reviving NAM won’t be enough in post-Covid world. India must reconsider joining RCEP


 

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19 COMMENTS

  1. A practical approach. In effect, all said and done, the Q is should anyone jump into the deep end without learning to swim….75 years and still a non-swimmer!!!
    We can definitely do it..reform….the opposition needs to play up and save India from being a laggard democracy who can never reform….the people also have to learn to swim…

    • The ruling party is accountable for implementing reforms not the opposition.
      BJP had 6 years and soon 10 years will be completed. Maybe 5 more years after that given their electoral successes. We have to see whether we will still be able to swim 10 years from now!

      • Sir, in a democracy the opposition is as important as the Government in formulating policies. Even with a majority you see how GST, farmers bill, Labour laws, CAA etc.. are struck. Without being partisan, can we deny that the opposition has by rule opposed everything every time the Government brings in.

        No worthwhile discussion takes place in the Parliament. One can forever keep blaming the other for this chaotic democracy. Nothing gets done on time. That is the POINT….people are satisfied with blame games!!! The media feeds on it

  2. I agree in the overarching message that reforms are better needed/suited than joining RCEP. But without joining RCEP, industry and politicians would have no incentive to reform. Will Adani and Ambani fund BJP to reform? Joining RCEP would have forced India to reform. What I see is we moving back to 1980’s monopoly of a few players, non functioning financial system and more and more restrictive policies tending towards atma nirbhar bharat. Which is an oxymoron.

  3. Print, please decide this opinion or opinon below..
    Not signing RCEP could be one of Modi’s biggest blunders, ‘atmanirbhar’ an admission of defeat

  4. Wowooww I’m super surprised and super pleased to see such a rational article (esp from the print!) in a sea of retarded ones!! Makes me even consider donating!!

    Case in point, RCEP would not have been an entirely bad thing as long as China wasn’t a part of it and if we already had balanced or positive trade with other SEA / ASEAN countries. Since that’s not the case, we wouldn’t have benefited at all and RCEP is not what we need now. Our economy would’ve utterly perished. China is also more likely to only import ore and intellectual property (patents etc) from its ‘partner’ nations at cheap prices, thereby emptying its partners’ natural resources while saving its own. Quite a shrewd strategy, like the US sitting on its massive oil reserves.

    In India, there was too much focus in the last few years on the IT industry, leading to most of the economy incl auto, real estate and fmcg to depend heavily on the fortunes of the IT workers. Trump’s restrictions showed the real truth of how our economy was running on fumes for the past two decades, due to not strengthening other sectors (esp. regulation of unorganized manufacturing) and not skilling farmers with modern farming techniques (there used to be an unbelievably high number of low quality farms in TN, but the situation has improved considerably of late).

    I don’t recall reading any published content covering this simple truth. Baffling.

    Even now, I really hope Biden continues Trump’s ban so that our people are forced to look at other sectors for growth, thereby growing those sectors. Only reason those US companies want foreign ‘talent’ is cos of cheaper costs than locals (resulting in higher profits), rather than their claim of ‘wanting diversity’. This depends on the investments the US Democratic Party has made, of course, so if one figures that out, we’ll know what’s going on behind the scenes.

    • The Indian media is on blinkers – politics, caste, religion (PCS). For variety an occasional crime involving a celebrity or one of the PCS. Even the pantheon of “experts” patronized by the media have their own pre conceived notions based on some vested interest from the past, mostly biased on political loyalties. Very obvious – you only need to check it.

      Occasionally you get some balanced piece on important matters.
      Get the drift?

  5. I fully agree with the thought process. India should first be able to cater to its own market first. Most Ships are built abroad. Most aircrafts are imported. Most defence items are imported. Machinery for factories, electronic components, computers, etc all these are imported.
    Once we have enough local capability to produce quality goods at reasonable prices, then we can look for external markets. It requires a mindset change for existing private sector and impetus for new investors to join in.

    • It is a mirage that Reforms from government can stimulate quality exports that the world wants to buy.

      The average Indian is more fascinated with religion, politics, TV and films.

      Outside of those working in industrial units, the average Indian is not fascinated by machines, planes, ships, electronics, medical devices,chemicals, materials, communication technology etc. We don’t have enough hobbyists or inventors. But look at the amount of time Indians spend on politics and religion on social media.

  6. when I read this article – it can be condensed in to a maximum of two paragraphs. Such lengthy composition with the same two or three points repeated throughout. Perhaps it is deliberate.

  7. article makes so much sense, the only way out in the medium and long term is to ramp up our manufacturing both quantitatively and qualitatively

  8. Any clue why exports were climbing at 15% plus rate fir 8 long years in upa it was all because of low import duty to create value chain manmohan singh was a cofounder to rcep

    • Manmohan Singh inherited a fast growing economy. 2003-2008 was the best time to carry out reforms. Had Singh invested more on building physical infrastructure and the skill development for our not so educated masses in that era, India would have been in a better position to compete with the global manufacturers today.

      Programs like ‘Make in India’ and ‘Skill India’ were one decade late. Modi brought them with a good intention something that Manmohan could have done earlier.

        • In 2014 intellectuals thought that Modiji would eliminate black money/corruption and would improve India’s economy.

          After gaining power, he made a lot of foreign trips and even foreign media thought he would be the Messiah for India’s growth. His Make in India and Smart Cities initiatives seemed to show that under his leadership he was going to change the way things are done in India. So also demonetization for curbing black money.

          He must have realised by 2017 that he could not stay in power by these initiatives.

          He retreated back to the typical socialist style welfare schemes which gave him a connect to India’s lower class voters. He thus extended his voter base from his core Hindu upper class voter base.

          Now post 2019 LS elections we see that he does not need to do much to stay in power. 40% of the people in any parliamentary election will vote for him without question. India is getting fascinated with him just like it was in the 70’s with Indira Gandhi.

          When a leader can be in power without much efforts, what is the need for the leader to reform our economy? We are going to stay socialist and isolated for a very long time. Is the Indian voter mature enough to realise this ?

      • It is for the private sector and Indian people to figure out how they want to thrive in an increasingly competitive world. Government job is to remove roadblocks , reasonable infrastructure and enable the people to perform. That simple. Like a manager and employees. No leader has a magic wand however popular he or she may be.

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