Look Before We RCEP

Context: If unresolved issues remained and India’s experience with FTAs was not satisfactory, it made sense not to rush into a monster trade agreement like Regional Comprehensive Economic Partnership (RCEP).

Challenges in joining the Free Trade Agreement:

• Rising trade deficits:
  • ASEAN (Association of Southeast Asian Nations) FTA’s deficit rose from $5 billion to $22 billion.
  • Japan FTA saw the deficit increase from $4 billion to $8 billion.
  • South Korea FTA deficit grew from $8 billion to $12 billion.
• Unsatisfactory exports: According to NITI Aayog, India’s exports to FTA countries have not outperformed overall export growth or exports to the rest of the world.
  • Only 22% of exports are to FTA partners, while nearly 30-35% of all imports are from FTA partners.
  • The corresponding revenue impact of imports costs was about ?65,000 crore for 2019-20.
• Presence of Preferential Duties: significantly hamper the domestic industry.
  • The average margin of preference (the difference between tariff applied across countries and preferential rate applied for partner free-trade countries) in the Asia-Pacific Trade Agreement (APTA) is 33.45%.
  • While the trade deficit with China is in excess of $55 billion; it still has preferential access to many product lines.
• Stagnated manufacturing: at around 16% of GDP (having fallen from 19%). World Economic Forum’s (WEF) Global Competitive Index (GCI) for 2019-20:
• Low competitiveness: In the World Economic Forum’s (WEF) Global Competitive Index (GCI) for 2019-20, India figures 68^th out of 141 countries, 12^th out of the 15 members RCEP.

Arguments Against Joining RCEP:

• No major missing: India has FTAs with 13 of the 15 RCEP countries and negotiations with Australia and New Zealand are on. Also, renegotiation is still on the table.
  • Special economic zones (SEZs) and export-oriented units (EOUs) that permit duty-free imports for exports are in existence.
  • India is a signatory to the World Trade Organisation’s (WTO) Trade Facilitation Agreement (TFA).

Way Forward:

• Indian exports should create the necessary comparative advantage.
• Identifying the industries that need protection: will make eminent policy sense, rather than having a blanket protectionist policy.
  • Put a clear road map in the public domain of tariff protection and the time period should be available.
  • Response should be industry-specific, calibrated with unambiguous sunset clauses.

Conclusion: When India’s concerns are addressed, it can consider joining the RCEP. Not before that.