Free Trade Agreement:

A free trade agreement is an agreement that is decided between two or more countries in
which they agree on certain terms that affect trade of goods and services, provide protection
for investors and protect intellectual rights of properties.
There are 3 types of free trade agreements:
Unilateral Trade Agreement: Here, trade restrictions are imposed or loosened by a single
country and the other party does not reciprocate. It is very uncommon as it puts someone at a
competitive disadvantage. It is mainly done by developed countries to strategically small
countries to help in the growth of their economy and create new markets for exports.
Bilateral Trade Agreement: Here, both countries agree to decrease restrictions in trade to
expand business opportunities for both the countries. This is usually done by decreasing
tariffs and conferring preferential status. These are mostly done in oil, automobile, and food
sectors.
Multilateral Trade Agreement: These agreements are done between three or more than 3
countries and are the most complex agreements to negotiate as different countries have a
different set of needs and demands. The United States-Mexico-Canada Agreement (USMCA)
between United States, Mexico, and Canada is the largest multilateral agreement in the world.

History and Background of RCEP:

The Regional Comprehensive Economic Policy is a free trade agreement between nations
from the Asia-Pacific region consisting of China, Indonesia, Australia, New Zealand,
Myanmar, Malaysia, Cambodia, Japan, Brunei, Philippines, Laos, Vietnam, Singapore,
Thailand, and South Korea. It was introduced during the 19th ASEAN meet which was held
during Nov 2011. The 16 prospective signatories which included India at that time, accounted
for half of the population and around 39 percent of the world’s GDP which amounted to GDP
of US$ 21.1 trillion and 3.4 billion in population.

The objective of the RCEP is to increase the ease in availability of products and services of
the members by creating an integrated market. It was mainly focused on trade, investment, e-
commerce, settlement of disputes, and economic cooperation.

Ambition of becoming global manufacturing hub

While taking in consideration of a country’s supply chain we need to first look at the
manufacturing sector of the country then only further supply chain can be decided depending
on the country’s condition in exports of the products they manufacture. Talking about India,
Covid-19 has revealed the weakness that was inherent to the Indian economy about its
existing global supply chain and over reliance on China’s manufacturing industry.
Meanwhile, Prime Minister Narendra Modi has announced The Atmanirbhar Bharat Abhiyan
(Self-Reliant India Movement) in May 2020 which aims at merging the global with the local,
generating investment for manufacturing and becoming the new global hotspot of supply
chains in the world after the pandemic. But India still has a long way to go, according to
United Nations Industrial Development Organization (UNIDO), in 2019, India ranked at 42
of 152 countries, with adding manufacturing value (MVA Constant 2015 US$) total $430.25
billion, equaling to 15.5 percent of GDP. Whereas China ranked 2 nd with the MVA constant
of $4105.87 billion or 28.8 percent of its GDP.

India’s journey in glorifying its manufacturing sector had been challenging but full of
opportunities through always pushing its manufacturing output that account for 15-16 percent
of the total GDP since 1980s. But it takes fast approach in the recent years with the initiatives
like Make in India to focus on 25 key sectors that ranges from automobiles to Information
technology and Business Process Management (BPM) and the recent one Atmanirbhar
Bharat, further on May 12, 2020, PM announced a special stimulus package of Rs 20 lakh
crore, 10 percent of India’s GDP to make India strong against tough competition in the
Global supply chain. Further, on 17 May Finance Minister Sitharaman announces detailed
economic measures including increased borrowing limits from state governments and so on.
These measures had an excellent impact in generating FDI and trade in the manufacturing
sector. In fact, the planet Bank’s Doing Business 2020 report ranked India together of the ten
most improved economies in terms of simple doing business score, especially thanks to
reforms in paying taxes, trading across borders, and resolving insolvency.
Other positive developments included improvement in India’s ranking in award of
Construction Permits, from 184 in 2014 to 27 in 2019; and in Getting Electricity, from 137 in
2014 to 22 in 2019. Among 190 economies, India now ranks 13 in Protecting Minority
Investors and 25 in Getting Credit. the development sector has seen the very best growth of
FDI equity during the last two fiscals (FY 2017-18 to FY 2019-20) at 190 per cent, followed
by the telecommunications sector at 67 per cent, the automobiles sector at 35.12 per cent, and
therefore the services sector at 17 per cent. India has also successfully moved towards online
procedures and approval processes for tax filing platforms, property transfer, and showing
greater transparency.

Reasons behind India coming out of RCEP

India decided to opt-out of the RCEP agreement at the ASEAN summit of November 2019
because of the following reasons:
· India’s trade deficit was increasing with the members of ASEAN, Japan, and Korea
even after having separate Free Trade Agreements.
· The trade deficit would be worsened by tariff elimination because of RCEP. As per
RCEP, 92% of Indian goods would be free of tariff for the next 15 years.
· The introduction of sensitive lists meant the members of RCEP would continue to
have high tariffs on items sensitive to them like rice, dairy products, and footwear.
· There was also confusion on the base year for reducing tariffs which was supposed
to be 2013 since the negotiations began at that time. But India had increased custom
duties from 2014 and the advocated reduction in tariffs from 2019.
· India wanted strict rules of origin so as to prevent flooding of Chinese goods from
markets that have lower duty levels which have been done through Duty-Free
Quota-Free window from Bangladesh in the past.
· There was also dispute on implementation of auto-trigger mechanism which will
help in deciding on which products concessions can be curbed if there is a sudden
surge in imports.

Benefits for India by staying out of RCEP

1. Economic Growth
Various economic models after finding correlation between the RCEP and
economic growth don’t show major gains for India. According to ‘Global Trade
 Analysis Report’, India would encounter a growth of 0.97% in GDP, 1.22% in
investments and 0.73% in consumption.
2. Increase in import surge
According to Revealed Comparative Advantage Index between India and the
RCEP countries in sector wise analysis, it can be observed that India doesn’t have
comparative advantage with all the RCEP countries except Laos in capital goods
sector. In case of Raw materials also India has major disadvantage. India has
competitive advantage in Intermediate goods and consumer goods sectors where it
exports the intermediate goods and buys the finished capital goods. This explains
why India’s trade deficit with 13 of 16 countries are increasing in past 2 decades.
By joining RCEP, India would have cut both tariff and non-tariff barriers which
would have increased the imports from other RCEP countries. The free trade
agreement would have improved market access for Indian products but due to lack
of infrastructure and cost competitiveness it would have adversely impacted the
economy.
3. Increasing Trade deficits
India has trade deficits with 11 of 15 RCEP countries. Joining the free trade
agreement would have led to dumping of cheap Chinese finished products. In
financial year 2018-19, India imports 34% of its total imports from RCEP
countries and only exports only 21% of total exports. India has been sceptical
about flooding of dairy products from Australia and New Zealand where these
countries enjoys economies of scale, increased imports of steel from China and
cheap textiles from Vietnam and Bangladesh would have risen the trade deficit to
alarming levels and also cause a major impact on domestic producers.
 India’s trade deficit increased by $5Billion to $22 billion, $4 Billion to $8 Billion
dollars and from $8 Billion to $12 Billion with South Korea even having separate
FTA with these countries.
Benefits for India to stay in RCEP

1. Becoming a global manufacturing hub

By joining RCEP India would have strategic advantage to become a global leader
by leveraging the huge supply chain’s access from RCEP. This would have
brought huge investments in the form of inbound and outbound FDI, employment
opportunities, increased productivity by adopting new technologies both in
organised & unorganised sectors and increased standard of living
2. Gains to the consumers
Consumers would benefit from potentially low cost imports. The industries which
imports raw materials and intermediate goods like the Semi-conductor industry
would benefit from the integrated value chains.
3. Access to the new markets
India to become a current account positive nation must have access to markets.
The GDP of the country doesn’t grow only with the domestic demand. As India’s
economy is slowing down, it can leverage these markets to sell those products and
services like IT, professional, education, healthcare, agriculture related goods,
chemicals, metals & mineral where India has competitive advantage to increase
exports.

Measured taken by Government

1. Government has approved production linked incentives for 10 sectors including

mobile & electronic manufacturing to encourage foreign companies to establish
manufacturing plants in India, Incentives for pharmaceutical companies to produce
medical equipment & dugs in bulk, Automobiles & auto components, Telecom, Cell
batteries, Textile, Food products, Solar Modules, white goods, Speciality Steel.
2. Direct food subsidy to people to which in turn increases their disposable income to
buy goods and services there by inducing multiplier effect in GDP
3. Credit guarantee schemes for MSME businesses, NBFCs, farm sector of worth 3 Lakh
crores.
Conclusion
To realise its ambition of becoming global manufacturing hub and to realise its
Athmanirbhar Bharat scheme, India is undertaking internal reforms to stay
competitive in global markets. Indian government is incentivising and encouraging
businesses to boost investments in new tangible & intangible assets, increase research
and development to improve technology, improving access to pool of skilled labour to
improve productivity and attain competitiveness in global markets by reducing the
exported goods.

Even though India has advantages of cheap labour, land, subsidies on electricity,
water and fuel it was unable to boost the manufacturing due to lack of skilled labour,
investments, required technology to improve the productivity, lack of economies of
scale in capital goods.

India should also focus on current FTA agreements with ASEAN countries to reap the
benefits of free trade and to curtail increasing trade deficit. It has to negotiate fruitful
FTAs with Australia and New Zealand. Until unless it improves it internal capacities
joining in RCEP wouldn’t provide anticipated benefits. But in long term, it should
join these mega free trade markets to participate in global value chains and trade
structure by playing a leadership role to increase markets for its products.

References
https://www.abacademies.org/articles/revealed-comparative-advantage-index-an-
analysis-of-regional-comprehensive-economic-partnership-from-indian-perspective-
9575.html
https://economictimes.indiatimes.com/prime/economy-and-policy/why-indias-decision-
to-pull-out-of-rcep-has-both-pros-and-cons/primearticleshow/72214498.cms?from=mdr
https://thediplomat.com/2015/03/why-rcep-is-vital-for-india/
https://www.business-standard.com/about/what-is-rcep