Note4Students
From UPSC perspective, the following things are important:
Mains level: Regional Groupings; Trade Relations; Significance and issues related to RCEP;
Why in the News?
According to NITI Aayog CEO, India should join the Regional Comprehensive Economic Partnership (RCEP) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).
What are the implications of India joining RCEP and CPTPP?
- Enhanced Trade Opportunities: Joining RCEP and CPTPP could significantly boost India’s trade by providing access to larger markets, particularly in Asia-Pacific regions.
- These agreements encompass a wide range of goods and services, potentially increasing India’s exports, especially from its Micro, Small & Medium Enterprises (MSMEs), which account for 40% of exports.
- Integration into Global Supply Chains: Participation in these trade blocs would facilitate India’s integration into global supply chains, allowing it to benefit from the ‘China plus one’ strategy that many countries are adopting to diversify their supply sources away from China.
- This could enhance India’s manufacturing sector and attract foreign investment.
- Regulatory Alignment: Being part of these agreements would necessitate aligning India’s regulatory frameworks with international standards, which could improve the business environment and attract more foreign direct investment (FDI).
How does India’s current tariff structure affect its competitiveness in global trade?
India’s current tariff structure is characterized by relatively high average tariffs compared to other major economies. For instance:
- Average Tariffs: India has an average applied tariff of approximately 13.8%, which is higher than that of China (9.8%) and the U.S. (3.4%) but lower than some other countries when considering trade-weighted averages.
- High Bound Tariffs: Many of India’s bound tariff rates on agricultural products are among the highest globally, ranging from 100% to 300%, creating significant barriers for foreign exporters.
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What are the risks associated with joining RCEP, particularly concerning competition with China?
- Increased Competition with China: One of the primary risks of joining RCEP is the potential for increased competition with Chinese firms, which may have cost advantages due to economies of scale and established supply chains.
- Pressure on Domestic Industries: Opening up to international competition might pressure local industries, particularly in sectors where they are less competitive compared to their counterparts in member countries.
- This could lead to job losses and require significant adjustments within certain sectors.
- Easy geopolitical Impact on the economy: Increased reliance on trade agreements may expose India to external economic fluctuations, particularly if global demand shifts or if geopolitical tensions impact trade dynamics within these blocs.
Way forward:
- Selective Tariff Reductions and Safeguards for Sensitive Sectors: India should negotiate phased tariff reductions and secure safeguards for vulnerable sectors like agriculture and small manufacturing.
- This approach would protect local industries while allowing gradual integration into RCEP and CPTPP markets.
- Strengthening Domestic Industries and MSMEs: India can boost competitiveness by enhancing MSME support through targeted subsidies, infrastructure improvements, and technology upgrades. Strengthening these sectors will help India leverage new market access and build resilience against foreign competition.
Mains PYQ:
Q Evaluate the economic and strategic dimensions of India’s Look East Policy in the context of the post-Cold War international scenario. (UPSC IAS/2016)
Note4Students
From UPSC perspective, the following things are important:
Prelims level: Trade agreements
Mains level: RCEP and Indo-Pacific Economic Framework and possible implications for India
Central Idea
- India’s recent shift from the Regional Comprehensive Economic Partnership (RCEP) to the Indo-Pacific Economic Framework for Prosperity (IPEF) has raised questions about the motivations behind this decision and the potential implications for the country.
What is Regional Comprehensive Economic Partnership (RCEP)?
- RCEP is a trade agreement involving 15 countries in the Asia-Pacific region, namely the 10 member states of the Association of Southeast Asian Nations (ASEAN) — Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam — as well as China, Japan, South Korea, Australia, and New Zealand.
- RCEP is aimed at creating a regional free trade area, covering a significant portion of the global economy. It is considered one of the largest trade agreements in the world in terms of population, GDP, and trade volume.
- The RCEP negotiations began in 2012 and were concluded in November 2020. The agreement is seen as a significant development in regional trade integration, particularly in light of rising protectionism and uncertainties in the global trading system.
What is Indo-Pacific Economic Framework for Prosperity (IPEF)?
- The IPEF is an economic framework proposed by the United States as an alternative or complement to RCEP.
- The purpose of the IPEF is to promote economic cooperation, trade, and investment among participating countries in the Indo-Pacific region, with the United States taking a leading role.
- The article highlights that the IPEF focuses on non-tariff areas such as intellectual property, services, investment, domestic regulations, digitalization, labor, and environmental standards.
- Unlike traditional trade deals that primarily address tariffs, the IPEF seems to emphasize these broader aspects of economic integration.
Potential reasons for India’s shift from the RCEP to the IPEF
- Strategic Partnership with the United States: India’s top foreign policy priority is to develop a strategic partnership with the United States. The shift to the IPEF may reflect India’s desire to align itself more closely with the United States and its Indo-Pacific strategy.
- Deteriorating Relationship with China: India’s relationship with China has further deteriorated. The decision to join the IPEF could be seen as a way for India to distance itself from China and align with countries that share similar economic and strategic interests.
- Economic Concerns: India may have had concerns about the potential impact of the RCEP on its manufacturing sector. The fear of cheap Chinese goods flooding the Indian market might have influenced India’s decision to explore alternative economic frameworks like the IPEF.
- Non-Tariff Issues and Economic Interests: The IPEF’s focus on non-tariff areas such as intellectual property, services, investment, and digital economy might align more closely with India’s economic interests. By joining the IPEF, India may seek to address these issues and negotiate agreements that are more favorable to its domestic industries and economic priorities.
- Balancing Regional Influence: Joining the IPEF could be part of India’s broader strategy to balance China’s growing influence in the region. By aligning with countries like the United States, Japan, South Korea, Australia, and others in the Indo-Pacific, India may aim to assert its own influence and shape regional economic dynamics.
IPEF’s four Pillars
- Trade: This pillar focuses on facilitating trade and reducing barriers among the participating countries. While India has not joined the trade pillar, there may be pressure for it to do so.
- Supply Chains: This pillar aims to establish integrated and efficient supply chains within the participating countries. It likely involves promoting cooperation and coordination in areas such as logistics, infrastructure, and connectivity to facilitate smooth trade flows.
- Clean Economy: The clean economy pillar focuses on promoting sustainable development, environmental conservation, and green technologies. It likely involves commitments and cooperation to address climate change, reduce emissions, and promote clean energy and sustainable practices.
- Fair Economy: The fair economy pillar aims to establish a fair and level playing field for businesses and promote inclusive economic growth. It likely includes provisions related to competition policy, fair trade practices, and addressing inequalities within and among the participating countries.
Serious implications for India Joining the IPEF
- Economic Dependency: Joining the IPEF could result in increased economic dependency on the United States. If the IPEF aims to establish an integrated economic system centered on the U.S., India may become heavily reliant on U.S.-driven policies, which may not align with India’s specific economic interests and priorities. This could limit India’s ability to pursue independent economic strategies.
- Trade-offs and Market Access: The framework may require India to make trade-offs in various areas, such as agriculture, intellectual property, labor and environment standards, and the digital economy. These trade-offs may involve compromising certain domestic policies or sectors in exchange for market access or participation in the IPEF.
- Impact on Domestic Industries: The IPEF particularly related to non-tariff barriers, intellectual property rights, and labor and environment standards, could impact India’s domestic industries. Depending on the specific terms, India’s manufacturing sector and other industries may face challenges related to competition, compliance, or market access, which could have implications for employment, growth, and economic development.
- Policy Constraints: Joining the IPEF could limit India’s policy-making autonomy in key areas such as agriculture, labor, environment, and digital economy. The IPEF may entail commitments that restrict India’s ability to design and implement policies aligned with its national interests, potentially constraining its ability to protect domestic industries, regulate markets, or enact necessary reforms.
- Implications for Small and Medium Enterprises: The IPEF’s provisions and requirements may disproportionately impact small and medium-sized enterprises (SMEs) in India. Compliance with standards, regulations, or market access requirements could pose challenges for SMEs, potentially hampering their growth and competitiveness.
- Loss of Sovereignty: Depending on the nature of the IPEF, India joining the framework may entail ceding a degree of sovereignty or decision-making authority to the collective interests of participating countries. This loss of sovereignty could limit India’s ability to shape its own economic policies and respond to emerging challenges or priorities.
Way ahead
- Comprehensive Assessment: Conduct a thorough and comprehensive assessment of the potential benefits and risks associated with joining the IPEF. Evaluate the specific terms, provisions, and potential impacts on various sectors of the economy, including agriculture, manufacturing, services, intellectual property, and labor standards.
- Prioritize National Interests: Clearly define and prioritize India’s national interests in terms of economic growth, job creation, industrial development, and sustainable development.
- Engage in Negotiations: Actively engage in negotiations and discussions with the participating countries of the IPEF to ensure that India’s concerns, interests, and objectives are adequately represented and addressed. Seek to negotiate favorable terms and provisions that protect and promote India’s economic priorities.
- Strengthen Domestic Industries: Focus on strengthening domestic industries and sectors to enhance competitiveness and resilience. Invest in research and development, innovation, infrastructure, and skill development to ensure that Indian industries can withstand competition and capitalize on opportunities that arise from participation in the IPEF or other trade frameworks.
- Diversify Trade Partnerships: While considering the IPEF, continue efforts to diversify trade partnerships beyond the United States and the Indo-Pacific region. Explore opportunities to strengthen trade and investment ties with other countries or regions that align with India’s economic interests and offer potential growth prospects.
- Foster Regional Cooperation: Promote regional cooperation within the Indo-Pacific region through alternative frameworks or platforms that better align with India’s priorities and ensure a more inclusive and equitable approach to economic integration.
- Domestic Policy Reforms: Strengthen domestic policy frameworks and institutions to support economic growth, enhance competitiveness, and address challenges related to labor, environment, intellectual property, and other areas covered by the IPEF.
- Public Consultation and Transparency: Ensure transparency and engage in public consultation processes to seek inputs and feedback from stakeholders, including industry associations, civil society organizations, academia, and experts.
Conclusion
- It is essential for India to approach the decision on joining the IPEF with a long-term perspective, taking into account its national interests, economic priorities, and the potential impact on various sectors. A well-informed and strategic approach will enable India to make decisions that maximize benefits and minimize risks for its economy and society.
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Also Read:
Note4Students
From UPSC perspective, the following things are important:
Prelims level: RCEP countries
Mains level: Paper 3- India's decision to not join RCEP
The article analyses government’s decision to stay out of RCEP and factors responsible for it.
What India chose not to join RCEP
- By joining RCEP, India would have further risked a flood of cheap Chinese imports in sectors like electronics.
- India had tried and failed to win substantial concessions in areas like work visas for its information technology-enabled services.
- Two of India’s proposals—an RCEP business travel card and an RCEP service supplier card—failed to find favour with a majority of the bloc’s members.
Arguments in favour of India joining the RCEP
- First argument made is RCEP would have provided an excellent opportunity for Indian firms to get integrated with regional value chains.
- However, merely joining a trade bloc does not automatically result in integration with global value chains.
- The complex nature of global production networks requires a lot of economic and trade policy reforms on the domestic front.
- Second important argument made is that India would lose an opportunity to access RCEP’s common market.
- But this argument too doesn’t hold much water if Indian producers are not competitive.
- Competitiveness is driven by factors both within and beyond the control of domestic industry.
- So it would be an over-simplification to assume that Indian industry does not have the capability or appetite to be competitive.
- Often, global competitiveness inside factory gates gets diluted by costs borne outside those gates.
What past data suggests
- India’s merchandise exports grew at an annual rate of more than 18% between 2000-01 and 2010-11, which was largely a pre-FTA period.
- In this period, India activated only two FTAs—with Sri Lanka and Singapore.
- India joined the FTAs in a big way from 2010 onwards.
- It operationalized big trade agreements with the 10-nation Association of South East Asian Nations (ASEAN), Japan, Korea, and separately with Malaysia.
- However, despite these deals, India could realize annual merchandise export growth of only 2.5% between 2010-11 and 2019-20.
- This disappointing performance shows that FTAs are not conducive for exports.
Conclusion
While RCEP may theoretically offer India new opportunities for exports and integration with pan-Asian production networks, we have a lot of work to do internally before we are in a position to make the most of free-trade deals.
Note4Students
From UPSC perspective, the following things are important:
Prelims level: RCEP
Mains level: Economic implications for India
Even as India opted to stay out after walking out of discussions last year, the new trading bloc has made it clear that the door will remain open for India to return to the negotiating table.
Must read:
China-led RCEP takes off without India
Try answering this also:
Q.Signing the Regional Comprehensive Economic Partnership (RCEP) agreement would have given more substance to India’s Act East policy. Analyse.
Why did India walk out?
- India decided to exit RCEP negotiations over “significant outstanding issues”.
- Its decision was to safeguard the interests of industries like agriculture and dairy and to give an advantage to the country’s services sector.
- The current structure of RCEP still does not address these issues and concerns.
How far is China’s presence a factor?
(1) Escalated tensions
- Escalated tension with China is considered to be a major reason for India’s decision.
- Major issues that were unresolved during RCEP negotiations were related to the exposure that India would have to China.
(2) Surge in imports
- This included India’s fears that there was “inadequate” protection against surges in imports.
- It felt there could also be a possible circumvention of rules of origin— the criteria used to determine the national source of a product.
- In the absence of this, other partner countries could dump their products by routing them through other countries that enjoyed lower tariffs.
(3) Inability for countermeasures
- India was unable to ensure countermeasures like an auto-trigger mechanism to raise tariffs on products when their imports crossed a certain threshold.
- It also wanted RCEP to exclude most-favoured-nation (MFN) obligations from the investment, especially to countries with which it has border disputes.
(4) No assurance of market access to India
- RCEP also lacked clear assurance over market access issues in countries such as China and non-tariff barriers on Indian companies.
- The agreement would have forced India to extend benefits given to other countries for sensitive sectors like defence to all RCEP members.
(5) Trade balances paradox
- India’s stance on the deal also comes as a result of learnings from unfavourable trade balances that it has with several RCEP members, with some of which it even has Free Trade Agreements.
- India has trade deficits with 11 of the 15 RCEP countries, and some experts feel that India has been unable to leverage its existing FTAs with several RCEP members to increase exports.
What can the decision cost India?
- There are concerns that India’s decision would impact its bilateral trade ties with RCEP member nations, as they may be more inclined to focus on bolstering economic ties within the bloc.
- The move could potentially leave India with less scope to tap the large market that RCEP presents —the size of the deal is mammoth, as the countries involved account for over 2 billion of the world’s population.
- Given attempts by countries like Japan to get India back into the deal, there are also worries that India’s decision could impact the Australia-India-Japan network in the Indo-Pacific.
What are India’s options now?
- India, as an original negotiating participant of RCEP, has the option of joining the agreement without having to wait 18 months as stipulated for new members in the terms of the pact.
- RCEP signatory states said they plan to commence negotiations with India once it submits a request of its intention to join and it may participate in meetings as an observer prior to its accession.
- A possible alternative for India is to review its existing bilateral FTAs with some of these RCEP members as well as newer agreements with potential for Indian exports.
- There is also a growing view that it would serve India’s interest to invest strongly in negotiating bilateral agreements with the US and the EU, both currently a work in progress.
Conclusion
- A country can never get into FTAs merely to provide its market to the partner countries.
- When we accommodate our partner countries, our objective is also to increase the presence of our products in the markets of partners, and India hasn’t been able to achieve the latter objective.
Note4Students
From UPSC perspective, the following things are important:
Prelims level: RCEP
Mains level: RCEP and its economy
The Regional Comprehensive Economic Partnership (RCEP), a mega trade bloc comprising 15 countries led by China has come into existence.
Try answering this:
Q.Signing the Regional Comprehensive Economic Partnership (RCEP) agreement would have given more substance to India’s Act East policy. Analyse.
About RCEP
- Regional Comprehensive Economic Partnership (RCEP) is a free trade agreement (FTA) between –
- The 10 members of ASEAN
- Additional members of ASEAN +3 = China, Japan, South Korea
- Members with which ASEAN countries have FTA = Australia, New Zealand
- The group is expected to represent at least 30% of the global GDP and will emerge as the largest free trade agreement in the world.
- It includes more than 3 billion people, has a combined GDP of about $17 trillion, and accounts for about 40 per cent of world trade.
India’s reluctance
- India’s ties with China in recent months have been disturbed by the military tension in eastern Ladakh along the LAC.
- In the meantime, India has also held a maritime exercise with Japan, Australia, and the United States for the “Quad” that was interpreted as an anti-China move.
- However, these moves did not influence Japanese and Australian plans regarding RCEP.
Leverage for China
- Despite the pandemic, the RCEP is certainly leverage for China and shows the idea of decoupling from China is not a substantive issue in a regional sense.
- The agreement means a lot for China, as it will give it access to Japanese and South Korean markets in a big way, as the three countries have not yet agreed on their FTA.
