N<\/span><\/i>ote: <\/span><\/i>A <\/span><\/i>free trade agreement <\/i><\/b>is a pact between two or more nations to reduce barriers<\/span><\/i> to imports and exports among them. Under a <\/span><\/i>free trade <\/i><\/b>policy, goods and services can<\/span><\/i> be bought and sold across international borders with little or no government tariffs,<\/span><\/i> quotas, subsidies, or prohibitions to inhibit their exchange<\/span><\/i>\u00a0<\/span><\/i><\/p>\n The purpose of RCEP was to make it easier for products and services of each of these countries to be<\/span> available across this region.<\/span> Its aim is to lower tariffs, open up trade in services and promote investment<\/span> to help emerging economies catch up with the rest of the world.<\/span>\u00a0<\/span><\/span><\/p>\n Specifically, RCEP is expected to help reduce costs and time for companies by allowing them to export a<\/span> p<\/span>roduct anywhere within the bloc without meeting separate requirements for each country.<\/span>\u00a0<\/span><\/span><\/p>\n The deal includes 2.1 billion people, with RCEP’s members accounting for around 30 percent of global<\/span> GDP.<\/span>\u00a0<\/span><\/p>\n N<\/span>egotiations to chart out this deal had been on since 2013, and India was expected to be a signatory until<\/span> its decision last November.<\/span>\u00a0<\/span><\/p>\n Why does it matter?<\/b>\u00a0<\/b><\/p>\n It mainly matters because it sets new trade rules for the region — and has China’s backing but does not<\/span> include the United States.<\/span><\/p>\n Observers say it solidifies China’s broader geopolitical ambitions in the region, where<\/span> it has faced little competition from the US since President Donald Trump pulled out of<\/span> a trade pact of its own.(That is because China is a much larger economy than the other<\/span>\u00a0<\/span><\/p>\n ones in the deal, which could lead to an imbalance.)(That is because China\u2019s goods<\/span> are the cheapest, and with this deal they could penetrate the markets of these<\/span> countries, thereby leaving the local manufacturers in no position to<\/span> compete)(precisely why India opted out)<\/span>\u00a0<\/span><\/p>\n Why did India walk out?<\/b>\u00a0<\/b><\/p>\n On November 4, 2019, India decided to exit discussions over \u201csignificant outstanding issues\u201d.<\/span> According to a government official, India had been \u201cconsistently\u201d raising \u201cfundamental issues\u201d<\/span> and concerns throughout the negotiations and was prompted to take this stand as they had not<\/span> b<\/span>een resolved by the deadline to commit to signing the deal.<\/span>\u00a0<\/span><\/p>\n Its decision was to safeguard the interests of industries like agriculture and dairy and to give an<\/span> advantage to the country\u2019s services sector(basically protecting local manufacturers)<\/span>\u00a0<\/span><\/span><\/p>\n How far is China\u2019s presence a factor?<\/b>\u00a0<\/b><\/p>\n Escalating tensions with China are a major reason for India\u2019s decision. While China\u2019s<\/span> p<\/span>articipation in the deal had already been proving difficult for India due to various economic<\/span> threats, the clash at Galway Valley has soured relations between the two countries (We had the<\/span> option of rejoining within 18 months). The various measures India has taken to reduce its<\/span> exposure to China would have sat uncomfortably with its commitments under RCEP.<\/span>\u00a0<\/span><\/p>\n Major issues that were unresolved during RCEP negotiations were related to the exposure that<\/span> India would have to China. This included India\u2019s fears that there was \u201cinadequate\u201d protection<\/span> against surges in imports. (cheaper Chinese goods, dominating the Indian market).<\/span><\/p>\n However, India has so far not said that it was walking out of the deal because of China. It has<\/span> only stated that the deal was unfair. The reduction in tariffs, India thinks, will further<\/span> de-industrialize some manufacturing sectors in the country.<\/span>\u00a0<\/span><\/p>\n PROS AND CONS(ARGUMENTS FOR AND AGAINST) INDIA JOINING<\/b> THE RCEP<\/b>\u00a0<\/b><\/p>\n CONS<\/b>:<\/b>\u00a0<\/b><\/p>\n 1) <\/span>By joining RCEP, India would have further risked a flood of cheap Chinese imports in<\/span> sectors like electronics, which India has been trying to resurrect almost from the ashes.<\/span> India had tried and failed to win substantial concessions in areas like work visas for its<\/span> information technology-enabled services.<\/span>\u00a0<\/span><\/p>\n 2) Countries and companies often export products on the principle of marginal costing, and<\/span> hence tend to sell at lower prices in export markets than they do domestically, as only a<\/span> small proportion of their output is exported. Labelling a domestic producer as<\/span> \u2018uncompetitive\u2019 just because an exporter from elsewhere is willing to sell at a lower price<\/span> on a marginal-cost basis, by which all it aims to recover is the add-on expense of<\/span> additional output, amounts to ignoring some fundamental issues.<\/span>\u00a0<\/span><\/p>\n 3) Also, economies of scale in countries like China, where most manufacturers are 8-10<\/span> times in size because of their vast domestic markets and decades of exports, work to the<\/span> disadvantage of Indian manufacturers that are only in their initial stages of achieving<\/span> global scale.<\/span><\/p>\n 4) If one analyses India\u2019s export data of the last two decades, the trend seems to weigh<\/span> against free trade agreements (FTAs). India\u2019s merchandise exports grew at an annual rate<\/span> of more than 18% between 2000-01 and 2010-11, which was largely a pre-FTA period.<\/span> India joined the FTA bandwagon in a big way from 2010 onwards. It operationalized big<\/span> trade agreements with the 10-nation Association of southeast Asian Nations (ASEAN),<\/span> Japan, Korea, and separately with Malaysia. However, despite these deals, India could<\/span> realize annual merchandise export growth of only 2.5% between 2010-11 and 2019-20.<\/span> This disappointing performance shows that FTAs are no magic wand for exports.<\/span>\u00a0<\/span><\/p>\n 5) <\/span>India\u2019s stance on the deal also comes as a result of learnings from unfavorable trade<\/span> b<\/span>alances that it has with several RCEP members, with some of which it even has<\/span> FTAs<\/span>.India has trade deficits with 11 of the 15 RCEP countries<\/span><\/span>, and some experts feel<\/span> that India has been unable to leverage its existing bilateral free trade agreements with<\/span> several RCEP members to increase exports.<\/span>\u00a0<\/span><\/p>\n You don\u2019t get into FTAs merely to provide your market to your partner countries. While<\/span> you accommodate your partner countries, your objective is also to increase the presence<\/span> of your products in the markets of your partners, and India hasn\u2019t been able to achieve the<\/span> latter objective<\/span>\u00a0<\/span><\/p>\n The message, then, is loud and clear: Unless we address the structural issues that impact Indian<\/span> competitiveness, our domestic industry will find it difficult to leverage any FTA to its advantage.<\/span> While RCEP may theoretically offer India new opportunities for exports and integration with<\/span> p<\/span>an-Asian production networks, we have a lot of work to do internally before we are in a<\/span> p<\/span>osition to make the most of free-trade deals.<\/span>\u00a0<\/span><\/p>\n Extra information: WHY IS INDIA\u2019S DAIRY INDUSTRY OPPOSED TO THE RCEP<\/b><\/p>\n Although India is the largest producer of milk globally, dairy is still a backyard business<\/span> for millions of farmers. These farmers treat dairy as a secondary source of income and<\/span> close to 80 million rural households are engaged in milk production in India with a very<\/span> high proportion being landless, small, and marginal farmers.<\/span>\u00a0<\/span><\/p>\n If the dairy sector comes under RCEP, farmers will face a huge problem, as<\/span> cooperatives will buy milk from importers and milk prices will come down drastically,<\/span> impacting their daily life.<\/span>\u00a0<\/span><\/p>\n Indian dairy industry fears that if dairy products are covered under an RCEP deal, India<\/span> would be forced to allow members of the bloc greater access to its market and have to<\/span> phase out high tariffs to cap it 15% under the liberal tariff rate quotas (TRQs), which<\/span> could be a disaster for locals and benefits only nations like New Zealand & Australia.<\/span>\u00a0<\/span><\/p>\n New Zealand, which is a major exporter of dairy products is eyeing India primarily to sell<\/span> milk powder and fat products.<\/span>\u00a0<\/span><\/p>\n In 2018, New Zealand exported 93.4% of milk powder, 94.5% of its butter, and 83.6% of<\/span> its cheese production.<\/span>\u00a0<\/span><\/p>\n During his visit in November this year, New Zealand Minister for trade and export<\/span> growth Damien O\u2019Connor said that Indian dairy needs to use advanced technology and<\/span> his country can help India achieve this.<\/span>\u00a0<\/span><\/p>\n New Zealand minister met Gujarat Cooperative Milk Marketing Federation (GCMMF)<\/span> managing director, R S Sodhi Amul chairman where both the sides explored<\/span> cooperation in artificial insemination, processing, tagging, and other aspects and<\/span> challenges, while New Zealand has advanced technology to address these aspects.<\/span>\u00a0<\/span><\/p>\n Many farmers organizations have cautioned the government about RCEP and have said<\/span> that it would be suicidal if the government includes dairy in the deal.<\/span>\u00a0<\/span><\/p>\n PROS(WHY INDIA SHOULD HAVE JOINED THE RCEP)<\/b><\/p>\n 1) The arguments for opting out have pointed to the limited advantage India has<\/span> derived out of existing free trade agreements (FTAs). India has been running<\/span> trade deficits with ASEAN, South Korea, and Japan with whom it has FTAs. But <\/span>take a closer look, many RCEP member-countries such as Indonesia, the Philippines, and Vietnam also run trade deficits with China; many, including Japan, have territorial disputes with China. Yet, these countries decided to sign the pact.<\/p>\n 2) Contrary to the view of many politicians who consider autarky to be a virtue and<\/span> buying foreign goods as anti-national, viewing trade agreements from the point of<\/span> trade balance alone is not appropriate. Running up more imports than exports<\/span> may not necessarily be undesirable, especially for countries like India, which are<\/span> still in the developing stage. After all, it is the people of the country who benefit<\/span> through free trade as they get access to better quality products at a cheaper<\/span> price. Rising imports of key inputs is also a sign of a growing economy.<\/span>\u00a0<\/span><\/p>\n 3) Remaining out of RCEP can also affect the bilateral trade relationship with RCEP<\/span> members. It can, for instance, affect the Australia-India-Japan network in<\/span> Indo-Pacific.<\/span>\u00a0<\/span><\/p>\n 4) By not joining RCEP, India\u2019s strategy of attracting international supply chains to<\/span> India will get hit, as member-countries are more likely to establish different<\/span> elements of value chains among themselves. Reason: components and parts<\/span> manufactured in one country can be freely traded with other member-nations,<\/span> without attracting any import tariff. If India thinks that first it should protect the<\/span> domestic industry and make it more competitive and join the trade bloc later, it<\/span> may be too late. By that time the supply chains that are getting relocated would<\/span> have established themselves elsewhere.<\/span>\u00a0<\/span><\/p>\n 5) It is essential to understand that in the current scenario, the economic world<\/span> order is changing and countries are forging multilateral arrangements that will<\/span> shape the future of Asian economies in the 21st century. It is important to realize<\/span> that forging FTAs with different regions or countries may bring some pain to<\/span> some sectors for some time, but being part of open trade and getting integrated<\/span><\/p>\n with a trading bloc will definitely be a superior alternative and pave the way for<\/span> India to play an important role in the global economy and politics.<\/span><\/p>\n To structure your\u00a0CAT online preparation<\/a>\u00a0in an efficient way consider joining iQuanta which is a\u00a0top online cat coaching<\/a>\u00a0institute and being a part of the iQuanta CAT 22 Course.![\"\"](\"https:\/\/www.iquanta.in\/blog\/wp-content\/uploads\/2021\/12\/WhatsApp-Image-2021-12-16-at-4.09.20-PM-1.jpeg\")
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