With few exceptions, the free trade agreements had increased India's trade deficit with its partner countries. What are the precautions needed to avoid it in the Regional Comprehensive Economic Partnership (RCEP)?
With few exceptions, the free trade agreements had increased India's trade deficit with its partner countries. What are the precautions needed to avoid it in the Regional Comprehensive Economic Partnership (RCEP)?
Approach:
- Define the Free Trade Agreement.
- Mention about the Indian experience with the free trade agreement.
- Discuss about the features of the Regional Comprehensive Economic Partnership.
- Mention the necessary steps to be taken by India to benefit from RCEP.
- Make an appropriate conclusion.
Free Trade Agreements:
Free Trade Agreements are arrangements between two or more countries that primarily agree to reduce or eliminate customs tariff and non tariff barriers on substantial trade between them. It normally cover trade in goods or trade in services. It can also cover other areas such as intellectual property rights, investment, government procurement and competition policy. These free trade agreements are out of the ambit of the world trade organisation framework. Today more than half of the trade happens through these trade agreements. Some of the important free trade agreements are the Trans-Pacific Partnership (TPP), North American Free Trade Agreement (NAFTA), Regional Comprehensive Economic Partnership (RCEP) among others.
Indian experience with the free trade agreement:
- India’s exports to FTA countries has not outperformed overall export growth or exports to the rest of the world.
- FTAs have led to increased imports and exports, although the former has been greater
- India’s trade deficit with ASEAN, Korea and Japan has widened post- FTAs
- According to Economic Survey 2016- 17, FTAs have had a bigger impact on metals on the importing side and textiles on the exporting side.
- A 10% percent reduction in FTA tariffs for metals increases imports by 1.4 %
- India’s exports are much more responsive to income changes as compared to price changes and thus a tariff reduction/elimination does not boost exports significantly
- Utilisation rate of RTAs by exporters in India is very low (between 5 and 25%)
Regional Comprehensive Economic Partnership:
Regional comprehensive Partnership Agreement is a free trade agreement under negotiation between 10 ASEAN countries and their six FTA partners, namely Australia, China, India, Japan, Korea and New Zealand. The grouping accounts for 25% of global GDP, 30% of global trade, 26% of FDI flows and 45% of the total population. It can be seen as an opportunity for the industrial development in India under the Make in India Initiative.
RCEP countries account for almost 27% of India’s total trade. Exports to RCEP account for about 15% of India’s total exports and imports from RCEP comprise 35% of India’s total imports.
At the same time the trade deficit of India with the group is around 83 Billion USD. In this trade deficit more than 60% is with China.
The member countries view India as a huge market for their exports but reluctant to open up the free services trade. Due to this reason the completion of the negotiation remains inconclusive and continuing
Measures to be taken by India:
According to the Asian Development Bank, the utilisation rate of India’s FTAs varies between 5% and 25%, which is one of the lowest in Asia. Hence India truly at a disadvantage in its free trade agreements. Some of the measures for increasing the benefit under RCEP are
- The rules of origin criteria has to be simplified.
- Adequate information about the free trade agreements has to provided to trading communities.
- The compliance cost should be reduced.
- Reduction of administrative delays.
- Framing of proper safety standards to prevent dumping in India.
- Focus should be given to the goods and services with maximum export potential.
Conclusion:
Free trade agreements ensures economic growth by increasing the movement of goods and services between nations. But the parties to the trade agreements should be careful during negotiations so that they can reap the maximum benefits out of the agreement. Thus it is the right time for India to renegotiate its free trade agreements and make full utilization of the opportunities provided under those trade pacts.
Approach:
- Define the Free Trade Agreement.
- Mention about the Indian experience with the free trade agreement.
- Discuss about the features of the Regional Comprehensive Economic Partnership.
- Mention the necessary steps to be taken by India to benefit from RCEP.
- Make an appropriate conclusion.
Free Trade Agreements:
Free Trade Agreements are arrangements between two or more countries that primarily agree to reduce or eliminate customs tariff and non tariff barriers on substantial trade between them. It normally cover trade in goods or trade in services. It can also cover other areas such as intellectual property rights, investment, government procurement and competition policy. These free trade agreements are out of the ambit of the world trade organisation framework. Today more than half of the trade happens through these trade agreements. Some of the important free trade agreements are the Trans-Pacific Partnership (TPP), North American Free Trade Agreement (NAFTA), Regional Comprehensive Economic Partnership (RCEP) among others.
Indian experience with the free trade agreement:
- India’s exports to FTA countries has not outperformed overall export growth or exports to the rest of the world.
- FTAs have led to increased imports and exports, although the former has been greater
- India’s trade deficit with ASEAN, Korea and Japan has widened post- FTAs
- According to Economic Survey 2016- 17, FTAs have had a bigger impact on metals on the importing side and textiles on the exporting side.
- A 10% percent reduction in FTA tariffs for metals increases imports by 1.4 %
- India’s exports are much more responsive to income changes as compared to price changes and thus a tariff reduction/elimination does not boost exports significantly
- Utilisation rate of RTAs by exporters in India is very low (between 5 and 25%)
Regional Comprehensive Economic Partnership:
Regional comprehensive Partnership Agreement is a free trade agreement under negotiation between 10 ASEAN countries and their six FTA partners, namely Australia, China, India, Japan, Korea and New Zealand. The grouping accounts for 25% of global GDP, 30% of global trade, 26% of FDI flows and 45% of the total population. It can be seen as an opportunity for the industrial development in India under the Make in India Initiative.
RCEP countries account for almost 27% of India’s total trade. Exports to RCEP account for about 15% of India’s total exports and imports from RCEP comprise 35% of India’s total imports.
At the same time the trade deficit of India with the group is around 83 Billion USD. In this trade deficit more than 60% is with China.
The member countries view India as a huge market for their exports but reluctant to open up the free services trade. Due to this reason the completion of the negotiation remains inconclusive and continuing
Measures to be taken by India:
According to the Asian Development Bank, the utilisation rate of India’s FTAs varies between 5% and 25%, which is one of the lowest in Asia. Hence India truly at a disadvantage in its free trade agreements. Some of the measures for increasing the benefit under RCEP are
- The rules of origin criteria has to be simplified.
- Adequate information about the free trade agreements has to provided to trading communities.
- The compliance cost should be reduced.
- Reduction of administrative delays.
- Framing of proper safety standards to prevent dumping in India.
- Focus should be given to the goods and services with maximum export potential.
Conclusion:
Free trade agreements ensures economic growth by increasing the movement of goods and services between nations. But the parties to the trade agreements should be careful during negotiations so that they can reap the maximum benefits out of the agreement. Thus it is the right time for India to renegotiate its free trade agreements and make full utilization of the opportunities provided under those trade pacts.
