This is a dialogue between Mr. Curious (C) and Mr. Omniscient (O) regarding RCEP agreement.
C: Today it is big news that India has exited from RCEP agreement. Why India has decided to do so. Is it good for India? What is RCEP? Why do countries entered into this type of agreement?
O: Easy-2… You have asked lots of question at one go. Let’s go one by one. Let’s first understand why countries entered into trade agreement? We will start with two countries example.
C: Sure!!
O: Let’s say there are only two countries in this world. And further assume that only two types of product are produced – Cloth and Food. Which country should produce what?
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C: I think both country should produced both products as per their requirement.
O: Let’s assume that, Country A produce food more efficiently than Country B. And Country B produces cloth more efficiently. Then ???
C: Then Country A should Produced food and Country B should produced Cloth
O: Good!!! But if trade is not open between two countries then from where Country A will get cloth and from where Country B will get food?
C: Okie!!! So we can say that if we have open trade then each country will produced the stuff as per his efficiency and then exchange as per their requirement.
O: Exactly!!! That why, it is encourages to have open trade as much as possible. It will provide the most efficient output at world level.
C: So, if it is so simple, then why don’t countries have the open trade?
O: It is not so simple. I just have given you an idea of things; there are lots hurdles to achieve the free trade. Let me illustrate a simple hurdle. Let’s say China can produce the clothes efficiently than India. What would happen if we have open trade?
C: China will export clothes to India and India people will have cheap cloth.
O: But, what would happen to Indian cloth manufacturer. People employed in Indian textile industries, will become unemployed and it will have spiral effect on our economy which can lead to recession. I will talk about spiral effect some other time.
C: Okie!!! But Indian cloth manufacturer will shift to some other work where India is efficient.
O: It is not so easy to change the business. Let’s if Indian is more efficient in making gold jewellary, how much practical is it for cloth manufacturer to shift into gold industry? He need to have training and investment to do that. IT is not feasible in short term.
C: Okie!!! However, it can be said that in long term free trade is good when each is engaged in industry where it is having comparative advantage.
O: Exactly. Now after understanding the benefit of open trade, Countries started to enter in negotiation to have free trade as much as possible. For achieving the target if free trade in smooth manner, WTO (World Trade Organization) was created. You can find seeds of its creation back towards end of World War-II. In Breton Wood agreement (entered in July 1944) idea of creation of ITO was envisaged. But, finally in 1995, WTO was created.
C: Is it some way like RCEP?
O: It is much bigger then RCEP. WTO is having 164 members. But, most of the countries are starting to have perception that in WTO interest of respective countries are compromised. And WTO is failing in achievement of its goal of free trade. But looking at benefit of free trade many of countries want to have the free trade. Therefore, countries started to enter into bilateral agreement or Regional agreement.
C: Can you give me some example of these types of agreement.
O: Sure!! For instance TAPP , Bimstec. And this RCEP. All these are example of Regional agreement. We will discuss about RCEP in detail. RCEP is abbreviation of Regional Comprehensive Economic Partnership.
O: This partnership is in how many courtiers. What has been decided in this Partnership?
C: Earlier, this partnership was among 16 countries. Now as India is not its part, so only 15 members are left. Biggest member is China. Other members are: ten member states of the Association of Southeast Asian Nations (ASEAN) (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, Vietnam) and Japan, South Korea, Australia and New Zealand
O: Why India is backed out ?
C: In this RCEP, there were negotiations going on reduction of tariff to achieve the target of being more open trade. India was having concern on its impact on Indian especially vulnerable sections of society- small scale industries, shopkeepers and farmers. If tariff is reduced, then cheap product from China will flood into India which can wipe out Indian industries.
O: But India will also get benefit as tariff reduction in other countries will encourage export from India.
C: You are right, But India has advantage in service industry but it s demand for getting swift market access for its professionals is not been met. Also , its demand for advancing baseline for tariff cuts to 2019 is brushed off. At least this govt. sources are telling.
O: Hmmm!!! It can be negotiated, why so much hurry.
C: You are right, further negotiation can be done, but China accelerated the conclusion for deal.
O: Is China desperation to conclude the deal was due to trade war.
C: Yes, it can be said. China is facing slowing growth in demand of its industry output due to trade war with the U.S.
O: Now, is there no hope of India joining in?
C: Still there is a hope. As participating countries are saying that right now only the talks have concluded. RCEP agreement will be finalized next year. Till then window is open for India to Join. But…….
O: But now, if India will join he will be having less say in the deal.
C: Perhaps Yes….