UPSC IAS exam preparation - International Institutions - Lecture 11


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India's trade relations

[हिंदी में पढ़ें ]


There are two types of trades between nations - bilateral trade and multilateral trade. Bilateral trade is the trade between two countries and multilateral trade is trade between more than two countries. In the recent times, foreign direct investment relations between two countries have assumed increased importance as well in defining trade relations between two nations.

The inflow of money in a country from another one goes a long way in determining the relations between those countries in the international scenario. Today, globalization has played an important role in determining the international economic relationship between two or more countries. Prior to this phenomenon there were several countries that had erected trade barriers in the form of oppressive foreign trade legislations and tax policies that were not exactly in favor of attracting foreign direct investment from other countries. In the era of globalization and WTO, major changes have taken place in economic relationships between various countries. The WTO has worked in conjunction with the governments of several countries to lift trade barriers and bring about a better economic environment. This has also led to the creation of several free trade zones all around the world. As a result of the creation of the free trade zones it has been possible to promote free trade on a global basis.

India Top 25 Trade Partners 2018-19

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The implementation of the various reform measures has given immense opportunities to the countries of the world to trade with each other without barriers. However, we now see the emergence of new regional groupings like the TPP & TTIP that can harm India’s growth prospects.  

2.0 India's International Trade Relations

India has important and strong economic relations with many countries in the world. Traditionally India has maintained trade relations with various countries. After the economic reforms of the early nineties, the Indian economy was opened up to further bilateral trade relations with various countries and to Foreign Direct Investment (FDI). Import restrictions on many items were lifted which led to expansion of India's economic relations with other nations.

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2.1 India-US trade relations

Trade with India represents a big prize for the United States because of the size and strength of the Indian economy.

In the last decade, US exports of goods to India increased by around 700 per cent. Exports of services has doubled in the last four years. The US FDI has increased from US$200 million to US$6 billion, and US-India trade is now a balanced trade. This minimises the scope for macroeconomic and currency-related tensions that the United States has experienced with other countries, notably Japan in the 1970s and 80s, and China later.

FDI regulation in India has been dramatically liberalised, and foreign financial investors now have much greater access to Indian equities, corporate and government bonds, and debt and foreign exchange. These changes are the result of a bipartisan domestic consensus that there are no alternatives to openness and globalisation.

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But Indo–US trade faces three challenges.

First, sectoral protectionism in both countries has re-surfaced to favour localisation. This protectionism favours domestic providers of inputs and equipment over foreign providers. It is a result of India's desire to create a manufacturing base for robust employment. Protectionism is not the best policy to achieve this goal, but it is politically difficult to implement better policies in this area. Moreover, India has caught the Chinese bug - it is inducing foreign investors to indigenise and localise.

Second, India has a weak and uncertain regulatory and tax environment that affects the civil nuclear industry, infrastructure, pharmaceuticals and, more broadly, foreign multinationals.

Third, American firms looking to invest in India face an implicit but substantial disadvantage. India has signed (or is about to sign) free trade and economic partnership agreements with its largest trading partners, which are all major competitors to the United States: Europe, Japan, Singapore, ASEAN and possibly ASEAN+6 and Canada. Soon, if not already, this discrimination may be the biggest challenge for US business. Because India's barriers are high and the market is large and growing, this disadvantage to American companies could be substantial.

President Trump’s approach has been centred on reducing the surpluses India enjoys in both goods and services exports. He launched a mini trade war against India, and withdrew the GSP benefits in 2019. (Generalised System of Preferences) 

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2.2 India-EU trade relations

During 2003-2011, the value of trade between the European Union (EU) and India nearly tripled from US$38.2 billion to US$105.9 billion, pushing the EU into the forefront as India's leading trade partner. In fact, EU-India trade amounted to about 9.9 percent of India's total bilateral trade - reinforcing the EU as India's largest trade partner. India, on the other hand, is the EU's 9th largest trading partner. Thanks to ongoing talks seeking a quick conclusion to a free trade agreement (FTA) between the countries, India-EU trade looks to become a defining feature of the international economic landscape.

Ongoing FTA talks: Negotiations on the India-EU Bilateral Trade and Investment Agreement (BTIA) - which plans to eliminate duties on 90 percent of tradable goods - first began in 2007. Unfortunately, however, negotiations have been stalled indefinitely due to a range of problems, and there is currently no estimated timeline for the agreement's completion.

The issues slowing progress include the EU's demand for India to raise its FDI cap in the insurance sector from 26 percent to 49 percent, and the EU's demands for "data exclusivity" in India's drug manufacturing industry.

EU Exports to India: In 2018-2019, EU exports to India totaled US$58,425 million - good for 11.36 percent of India's total imports. That was a 22% rise over 2017-18.

Certain EU member states have managed to increase exports to India, with Poland, Portugal and Ireland all increasing their exports by 36 percent, 22.5 percent and 12 percent year on year, respectively. Belgium's notably high levels of exports to India can be explained by the massive demand in India for gemstones and jewelry, which accounts for 70 percent of bilateral trade between the two countries.

2.3 India-China trade relations

India–China trade relations are complex but both the nations are important trade partners of each other. This is evidenced by several institutional mechanisms for India's economic and commercial engagement with China. India-China Joint Economic Group on Economic Relations and Trade, Science and Technology (JEG) is a ministerial-level dialogue mechanism established in 1988 during the visit of former Prime Minister Rajiv Gandhi to China. A Joint Study Group (JSG) was set up after former Prime Minister Vajpayee's visit to China in June 2003 to examine the potential complementarities between the two countries in expanded trade and economic cooperation. As per its recommendation, a Joint Task Force (JTF) was set up to study the feasibility of an India-China Regional Trading Arrangement. JTF Report was completed in October 2007. There are also Joint Working Groups on Trade, Agriculture and Energy. In Dec 2010, both countries agreed to set up the India-China Strategic and Economic Dialogue (SED). The first SED took place in Beijing on September 26, 2011.

India Top Trade Partner - China - Trade trends - Five years

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India-China Strategic and Economic Dialogue (SED): During Chinese Premier Wen Jiabao's visit to India in December 2010, India and China agreed to set up the Strategic and Economic Dialogue mechanism. The SED is a forum for both sides to discuss strategic macro-economic issues impacting both nations as a result of the changing international economic and financial landscape, to share their individual best practices and in handling challenging domestic economic issues and to identify specific fields for enhancing cooperation, learning and experience sharing. At the SED the Indian side is represented by Mr. Montek Singh Ahluwalia, Deputy Chairman, Planning Commission, while the Chinese side is represented by Mr. Zhang Ping, Chairman, National Development and Reforms Commission (NDRC).

 First SED meeting: The first India-China SED Meeting took place in Beijing from September 26-27, 2011. Issues that were discussed during the 1st SED included introduction to the 12th plan priorities of the two countries, a discussion on each country's monetary and fiscal policies, investment policies of the two countries, policies on energy conservation and environment protection etc. The two sides decided to constitute five Working Groups on policy coordination, infrastructure, energy, environment protection and high-technology. 

Apart from the official meetings the SED also included to a site visit to Tianjin, where the Indian delegation was introduced to water desalination facility. At the end of the official meetings both sides signed the Agreed Minutes of the 1st SED. The Indian delegation also called on the Chinese Premier Wen Jiabao.

Second SED meeting: Second Meeting of SED took place on Nov 26, 2012 in New Delhi, India. During the 2nd meeting, the two sides discussed a wide range of topics including greater cooperation at the global level, strengthening communication on macro-economic policies, deepening and expanding trade and investment and promoting bilateral cooperation in the financial and infrastructure sectors. The proposals and recommendations made by the five Working Groups were considered during the 2nd Dialogue and directions given for their future activities. The two sides agreed that in the current global economic situation it was important to raise the level of economic engagement between India and China. 

The two sides also signed a total of 4 Government-to-Government and 7 business MoUs during the 2nd SED in India. Details of the G-2-G MoUs are as under:
  1. Memorandum of Understanding between the Planning Commission of the Government of the Republic of India and National Development and Reform Commission of the Government of the People's Republic of China on Undertaking Joint Studies.
  2. Memorandum of Understanding between the Bureau of Energy Efficiency, Ministry of Power, Government of the Republic of India and National Development and Reform Commission of the Government of the People's Republic of China on Enhancing Cooperation in the Field of Energy Efficiency.
  3. Memorandum of Understanding between the Ministry of Railways of the Government of the Republic of India and Ministry of Railways of the Government of the People's Republic of China on enhancing technical cooperation in the railway sector.
  4. Memorandum of Understanding between the National Association of Software and Services Companies (NASSCOM), India and the China Software Industry Association (CSIA) on Enhancing Cooperation in the IT/ITES Sector.
Fifth SED meeting: The series continued, and the Fifth India-China Strategic Economic Dialogue (SED) took place between National Institution for Transforming of India (NITI) Aayog and National Development and Reform Commission (NDRC), People’s Republic of China at Beijing, China on April 14th, 2018. The Indian side was led by Dr. Rajiv Kumar, Vice- Chairman, NITI Aayog and the Chinese side was led by Mr. He Lifeng, Chairman of Development and Reform Commission, People’s Republic of China. The Ambassador of India to China Mr. Gautam Bambawale was also present. The five Working groups– in the areas of Infrastructure, High-Tech, Energy, Resource Conservation and Policy Coordination - on 13th April, 2018 reviewed the progress made so far and had discussion on areas for further cooperation and collaboration. 
  1. The Working Group on Policy Coordination discussed in detail the areas of mutual cooperation, including mutual investments. The possible collaboration with some of the provinces in China in the economic field was also discussed. Both sides would be indicating areas where one’s industry has been facing difficulties in promoting their business operations in the other country and expect the other side to have mechanism to speedily resolve those problems.
  2. The Working Group on Infrastructure discussed various areas of cooperation, including setting up of manufacturing units by Chinese companies in India instead of just selling the products. This is feasible considering huge demand in India and growth in India’s eco-system can be used to export the railway products from India.
  3. In the area of information technology and electronic hardware manufacturing, India and China have different competitive advantages which creates many opportunities for cooperation. National Association of Software and Services Companies (NASSCOM) highlighted the opportunities for cooperation between India and China in the domain of High Technology in areas such as smart cities, digital payments, smart manufacturing. Both Sides exchanged ideas in the fields of information technology, high-tech manufacturing industry and telecommunication, shared insights and views on technology innovation, industry situation and future development trend, and held an in-depth discussion on strengthening fields’ cooperation.
2.4 India-Japan trade relations

India and Japan have had cordial relations without major conflicting interest so far. The basis of this cordial relationship trade, economic and technical cooperation. After the WW II, the focus of Japan's economic relations with India switched from the prewar import of cotton to the import of iron ore. Relations developed steadily as Japan's imports of ore and exports of manufactured products increased. In fact, the first Yen loan given by Japan was to India in 1958. 

Traditionally, Japan has been the second largest destination of Indian exports (major exports include gems, marine products, iron ore, and cotton yarn). India is also a major importer of goods from Japan, and its importance has been growing in recent years (major imports include machinery, plant-related products, transport equipment, and electronic machinery).

Agreement on Commerce Between Japan and India (1958) was one of the remarkable treaties signed by the two nations to strengthen their trade relations. Japan-India Trade Talks on overall bilateral trade and investment began in 1978. Since then many such talks have taken place. Besides, private sector forum such as 'Joint Meetings of the Japan-India Business Cooperation Committee', which holds annual joint meetings, promotes private-sector bilateral cooperation in various economic fields as well as mutual understanding.

India is the first country to which Japan extended the first Yen Loan and India has been one of the largest recipients of Japan's ODA. Japan has long been actively providing assistance to India, primarily in the form of Official Development Assistance loans, for upgrading of economic infrastructure, alleviation of poverty through public health and medical care, agricultural and rural development and population and AIDS countermeasures, support for small business and for environmental conservation.

Japanese corporation’s interest in India increased since 1991 when India started pursuing economic liberalisation. In the infrastructure sector too Japan has been helping India since 1958 through its Official Development Assistance (ODA) programme. ODA is provided to infrastructural sectors like telecommunication, power and transport. 

Majority of the Japanese companies surveyed said that they are making profits and are "positively considering further expansion of their operations". However, to many of them, the inhibiting factors are differences in business practices, environment and culture etc but at the same time they are aware of India's huge market potential, especially in IT and IT-related. Japanese investors feel that availability of skilled manpower is a major advantage enjoyed by India in attracting foreign investment into India but at the same time a healthy market growth is also equally important.

Although investments in IT and automobile industries are increasing, thanks to deregulation, further economic reforms and deregulation are required to attract foreign investment into India. Specifically, the retail and real estate industries are still closed to foreign investors, and respective deregulation measures are urgently needed. It is absolutely necessary for India to take steps to strengthen the competitiveness of Indian products and to improve the comprehensive productivity through revision of the Labour Act, improvement of infrastructure and individual private companies, of self-help improvement.

For Indian investors, investing in Japan is pretty alluring. Japan, the business hub of Asia's growing economies is rated as world's second largest market. Apart from highly skilled human resources, Japan offers innovative technologies. So far as infrastructure back-up is concerned, the transportation network is rated as one world's bests. Other advantages to work with Japan include world-class information and communication technology ICT) facility, a highly reliable logistic infrastructure and other investor-friendly facilities. Responding to economic globalization, commercial laws and major elements of country's economic legal framework have been reformed by the Japanese government.

It is significant to note that many a foreign companies doing businesses in Japan have posted higher profit even than Japanese companies themselves. Japan has identified four major areas of foreign investment, namely, ICT, Biotechnology, Medical Care and Environment. Japan wants to diversify its sources of natural gas as it currently relies on imports for 97 percent of its needs with Indonesia, Malaysia and Australia being the major suppliers. The natural gas deal is also aimed at strengthening bilateral ties as Japan's ruling party hopes to use its strong partnership with India for checking China's increasing presence in western Asia. The deal also reflects a tie-up between Japan and India in their bids to become permanent members of the United Nations Security Council.

India Top Trade Partner - China - Trade trends - Five years

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2.4.1 Future of Indo–Japanese trade

India and Japan are strongly committed to an "open and non-discriminatory rule-based multilateral trading system". Indo-Japanese trade relations and economic cooperation is going stronger by the years, though, if compared with neighboring China's trade with Japan, India's share in Japan's total trade does not give any impressive look. So also in the field of foreign direct investment. Japan, which is the fourth largest investor in India itself, is not happy with this rate. India has to do a lot to create an investor-friendly environment through speedier economic reforms and freeing the country from clutches of deregulation at the earliest. In 2018, India-Japan entered into into a $ 75 b Currency Swap arrangement. 
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3.0 Trade Agreements

India's current engagements in RTAs are as follows -
  • Review of ASEAN - India Trade in Goods Agreement The scope of review is under consideration and was discussed in the SEOM held on 11th July, 2015 at Kuala Lumpur. 
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  • India- Sri Lanka Comprehensive Economic Partnership Agreement (CEPA) negotiations India-Sri Lanka Free Trade Agreement (ISLFTA), which was signed in 1998, has become operational in 2000. Sri Lanka is India's largest trading partner country in the SAARC region.  The bilateral trade between India and Sri Lanka has grown four times increasing from US $658 million in 2000 to US $ 2719 million in 2009. The main Indian exports to Sri Lanka are Petroleum (Crude & Products), Transport Equipments, Cotton, Yarn Fabrics, Sugar, Drugs Pharmaceuticals & Fine Chemicals. The main Sri Lankan exports to India are, spices, electrical Machinery except electronic, Transport Equipments, Pulp & Waste, Natural Rubber and Paper Board.
  • India-Thailand Comprehensive Economic Cooperation Agreement (CECA) negotiations  29th round of negations for India-Thailand CECA have been held during 15-17 June, 2015 in Bangkok, Thailand.
  • Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC) Free Trade Agreement (FTA) negotiations. The initiative to establish Bangladesh-India-Sri Lanka-Thailand Economic Cooperation (BIST-EC) was taken by Thailand in 1994 to explore economic cooperation on a sub regional basis involving contiguous countries of South East & South Asia grouped around the Bay of Bengal. Myanmar was admitted in December, 1997 and the initiative was renamed as BIMST-EC. The initiative involves 5 members of SAARC (India, Bangladesh Bhutan, Nepal & Sri Lanka) and 2 members of ASEAN (Thailand, Myanmar). BIMST-EC is visualized as a 'bridging link' between two major regional groupings i.e. ASEAN and SAARC. BIMST-EC is an important element in India's "Look East" strategy and adds a new dimension to India's economic cooperation with South East Asian countries. A free Trade Agreement among the member states of BIMSTEC is being negotiated. 
  • India-Gulf Cooperation Council (GCC) Free Trade Agreement (FTA) negotations A Framework Agreement on Economic Cooperation between Republic of India and Gulf Cooperation Council was signed on 25th August, 2004. The Framework Agreement provided that both the parties shall consider ways and means for extending and liberalizing the trade relations and also for initiating discussions on the feasibility of a Free Trade Agreement between them. Accordingly, negotiations commenced with GCC. Two rounds of negotiations have been held so far in 2006 and 2008. Third round has not taken place as GCC has deferred its negotiations with all countries and economic groups and is currently reviewing its negotiations with all countries and economic groups. Efforts are being made at various bilateral/multilateral forums for early resumption of the negotiations.
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  • India-SACU Preferential Trade Agreement (PTA) negotiations  South African Customs Union (SACU) comprises of South Africa, Lesotho, Swaziland, Botswana and Namibia. So far, 5 rounds of negotiations of India-SACU PTA have been held. The 1st round of technical discussions for India-SACU PTA took place in Pretoria on 5th-6th October, 2007. The 5th round of negotiations was held during 7th - 8th October, 2010. During this round of negotiations, SACU has presented a revised text of the PTA as a working document. Further, both sides have agreed on the following: (i) The text on 'Dispute Settlement Procedures' (ii) To use the text proposed by India on 'Customs Cooperation and Trade Facilitation' and TBT as the working text (iii) To use the text on 'SPS' proposed by SACU as the working text. 
  • Second Review of India-Singapore Comprehensive Economic Cooperation Agreement (CECA)  The 2nd Review of India-Singapore CECA was launched by the Commerce & Industry Minister, India on 11th May, 2010.  The 1st Secretary level meeting of the 2nd Review was held in Singapore on 3rd August, 2010. Thereafter, Working Group meetings on Goods and Services & Investment were held time to time. The Chief Negotiators on both sides met at Delhi on 1-2 November, 2012 after 8 rounds of Inter-sessional meetings between the negotiating teams on both sides. Discussions are being held to sort out certain outstanding issues. 
  • Expansion of India-Chile Preferential Trade Agreement (PTA)  A Framework Agreement to promote economic cooperation between India and Chile was signed on January 20, 2005 which envisaged for a Preferential Trade Agreement (PTA) between the two countries as a first step. The India-Chile PTA was signed on 8th March, 2006 and has become operational on September, 2007. The details of India-Chile PTA are available on this web-page under the heading 'Agreements already concluded'. The 3rd meeting on expansion of India-Chile PTA was held in 30 June- 1 July, 2011 in Chile. During the meeting, both sides agreed on broad principle for expansion of the PTA. They also agreed to exchange new wish lists in order of priority and to hold the next meeting by November, 2011. 
  • MERCOSUR Preferential Trade Agreement (PTA) Negotiations MERCOSUR is a trading bloc in South America region comprising of Argentina, Brazil, Paraguay and Uruguay. It was formed in 1991 with the objective of free movement of goods, services, capital and people and became a customs union in January 1995. MERCOSUR's role model is European Union. It is the third largest integrated market after the European Union (EU), North American Free Trade Agreement (NAFTA). A Framework Agreement was signed between India and MERCOSUR on 17th June 2003 at Asuncion, Paraguay to create conditions and mechanisms for negotiations by granting reciprocal tariff preferences in the first stage and, in the second stage, to negotiate a free trade area between the two parties. The first meeting of Joint Administrative Committee (JAC) on India-MERCOSUR PTA was held in November, 2009 in Uruguay to discuss the various aspects of the implementation and expansion of the Agreement. The 2nd meeting of JAC on India-MERCOSUR PTA was held in June, 2010, in which both sides exchanged their respective wish list of additional items for expansion of the PTA and discussed the further modalities of expansion of the PTA including exchange of their initial offers lists in the matter. 
  • India-Pakistan Trading Arrangement  India and Pakistan have no formal trade agreement. India has granted Most Favoured Nation (MFN) Status to Pakistan, whereas Pakistan maintains a List of Importable Items from India called 'Positive List' which now consists of 1938 items. Both countries have constituted a Joint Study Group (JSG) at the level of Commerce Secretary. Bi-lateral trade and commerce talks were held between Commerce Secretaries of India and Pakistan on 27-28 April 2011, in Islamabad. The two sides, inter-alia, agreed to improve trade infrastructure and expand trade through Attari-Wagah land route. It was agreed to set up a Working Group to address and resolve clearly identified sector-specific barriers to trade. Both sides agreed to undertake new initiatives to enable trade in electricity and Bt. Cotton seeds as also expand trade in petroleum products. Joint Working Groups have been set up for Customs cooperation, trade in electricity and trade in all types of Petroleum Products. A Joint Working Group on 'Economic and Commercial Cooperation & Trade Promotion' to be co-chaired by the Joint Secretaries of the respective Departments of Commerce has been set up for reviewing the implementation of the decisions taken during the meeting of the two Commerce Secretaries and also other trade promotion issues. Pakistan recognized that grant of MFN status to India would help in expanding bilateral trade relations. It has agreed to replace its present 'Positive List' with 'Negative List', by October 2011. But by 2019, all trade relations had been stalled. 
  • India-EU Broad Based Trade and Investment Agreement (BTIA) negotiations  On 28th June 2007, India and the EU began negotiations on a broad-based Bilateral Trade and Investment Agreement (BTIA) in Brussels, Belgium. India and the EU expect to promote bilateral trade by removing barriers to trade in goods and services and investment across all sectors of the economy. Both parties believe that a comprehensive and ambitious agreement that is consistent with WTO rules and principles would open new markets and would expand opportunities for Indian and EU businesses. The negotiations cover Trade in Goods, Trade in Services, Investment, Sanitary and Phytosanitary Measures, Technical Barriers to Trade, Trade Remedies, Rules of Origin, Customs and Trade Facilitation, Competition, Trade Defence, Government Procurement, Dispute Settlement, Intellectual Property Rights & Geographical Indications, Sustainable Development. So far, 15 rounds of negotiations have been held alternately at Brussels and New Delhi. The last meeting was held in the week of 13th May, 2013 in New Delhi. 
  • Brief on India EFTA Broad based Trade and Investment Agreement (BTIA) Negotiations  The European Free Trade Association (EFTA) is an intergovernmental organisation for the promotion and intensification of free trade. EFTA was founded as an alternative for states that did not wish to join the European Community (EC). EFTA was founded by the Stockholm Convention on May 3, 1960 with Austria, Denmark, Great Britain, Norway, Portugal, Sweden and Switzerland as its founding members. The present membership of EFTA is limited to four countries - Switzerland, Norway, Iceland and Liechtenstein. These countries are not part of the European Union (EU). Negotiations: The following are the tracks on which negotiations are currently on: Trade in Goods & Services, Sanitary and Phyto-Sanitary (SPS) measures, Technical Barriers to Trade (TBT), Customs and Tariff Facilitation (TF), Investment, Intellectual Property Rights (IPRs), Competition, Government Procurement (GP), Dispute Settlement (DS), Trade Defence (TD), Rules of Origin (RoO), Sustainable Development (SD) and Legal & Horizontal. Thirteen rounds of India-EFTA BTIA negotiations have been held so far. 
  • Global System of Trade Preferences (GSTP) (as of July, 2014) The Agreement establishing the Global System of Trade Preferences (GSTP) among Developing countries was signed on 13th April, 1988 at Belgrade following conclusion of the First Round of Negotiations. The GSTP came into being after a long process of negotiations during the Ministerial Meeting of the Group of 77, notably at Mexico City in 1976, Arusha in 1979 and Caracas in 1981. As of July, 2014; 8 out of 44 member countries, including India, have signed the protocol. Of these 8 countries, three countries, viz. India, Malaysia and Cuba have ratified it. The Cabinet Committee on Economic Affairs (CCEA) has approved implementation of India's Schedule of Concessions under the Third Round of negotiations. 
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  • Asia Pacific Trade Agreement (APTA)  The Asia Pacific Trade Agreement (earlier known as Bangkok Agreement) is an initiative under the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP) for trade expansion through exchange of tariff concessions among developing country members of the Asia Pacific Region. China acceded to the Agreement in 2000 and the current membership of APTA consists of Bangladesh, China, India, Lao PDR, Republic of Korea and Sri Lanka. The Ministerial Council is the highest decision making body of APTA. The Standing Committee is the negotiating / implementing body which functions under the guidance and direction of the Ministerial Council. UN ESCAP functions as the Secretariat for the Agreement. In accordance with the mandate of the Ministerial Council, the Standing Committee initiated negotiations on the following areas:
  1. Negotiations on tariff concessions on goods; 
  2. Negotiations on a Framework Agreement on Trade Facilitation; 
  3. Negotiations on a Framework Agreement on Trade in Services; 
  4. Negotiations on a Framework Agreement on Investments; and 
  5. Exploring possibilities on expanding the membership of APTA 
  • Negotiations have concluded on the framework agreements on trade facilitation, investments and services. All the three agreements have since been signed and ratified by the Participating States. The Third Session of the Ministerial Council was held in Seoul on 15 December 2009. The Indian delegation was led by Shri Jyotiraditya Madhavrao Scindia, the then Minister of State for Commerce and Industry. Under the Fourth Round of negotiations, Participating States are still negotiating the average margin of preference (MoP) and coverage of tariff lines. 
  • India -New Zealand Free Trade Agreement / Comprehensive Economic Cooperation Agreement. Based on the recommendation of the Joint Study Group (JSG) and subsequent approval of Trade and Economic Relations Committee (TERC), India is negotiating with New Zealand Comprehensive Economic Cooperation Agreement (CECA) covering trade in goods, services, investment and related issues. 9 rounds of Negotiation have been held so far. The 9th Round of negotiation was held during July, 2013 at Wellington (New Zealand) followed by an intersessional discussion on 9-10th December, 2013 in New Delhi. 
  • India-Canada Comprehensive Economic Partnership Agreement (CEPA)  In September 2008, the India-Canada CEO Round Table recommended that India and Canada would benefit enormously from CEPA by elimination of tariffs on a substantial majority of the bilateral trade. CEPA would cover trade in goods, trade in services, rules of origin, sanitary and phytosanitary measures, technical barriers to trade and other areas of economic cooperation. Eight rounds of negotiations have already taken place. The 8th Round was held in Ottawa, Canada from 24th to 26th June, 2013. 
  • India-Australia Comprehensive Economic Cooperation Agreement (CECA)  Five rounds of negotiations for India Australia CECA negotiations have been held so far. The 1st round held in July, 2011 and the last i.e. 5th round was held on 20-21 May, 2013 in Canberra (Australia). 
  • India-Indonesia Comprehensive Economic Cooperation Agreement (CECA) Commencement of negotiations on India-Indonesia CECA was announced on 25th January, 2011 during the visit of Indonesian President to New Delhi. During the CITM's visit to Indonesia on 3-4 October 2011, both sides held India-Indonesia CECA pre-negotiation consultations. 
  • Joint Study on the India- COMESA (Common Market for East and Southern Africa) Joint Study Group Report to examine the feasibility of a Preferential Trade Agreement (PTA)/ Free Trade Agreement (FTA) between India and COMESA  Common Market for East and Southern Africa (COMESA) is Africa's largest economic community comprising of 19 member states namely Burundi, Comoros, DR Congo, Djibouti, Egypt, Eritrea, Ethiopia, Kenya, Libya, Madagascar, Malawi, Mauritius, Rwanda, Seychelles, Swaziland, Sudan, Uganda, Zambia and Zimbabwe. The 1st meeting of the India-COMESA JSG was held in Lusaka on 30-31st July, 2012. It was decided during the 1st meeting of the JSG that the India-COMESA JSG will produce a joint report, containing its recommendations for consideration by the Government of India and the COMESA Secretariat.
  • India-Israel Free Trade Agreement (FTA) Negotiations: India and Israel are negotiating a Free Trade Agreement. First round of negotiation was held in New Delhi on 26th May, 2010. Eight Rounds have been held since. The eighth round of negotiations was held in Israel from 24th to 26th November, 2013. 
  • Brief on Regional Comprehensive Economic Partnership (RCEP) The Regional Comprehensive Economic Partnership (RCEP) is a comprehensive free trade agreement being negotiated between the 10 ASEAN Member States and ASEAN's free trade agreement (FTA) partners viz. Australia, China, India, Japan, Korea and New Zealand. RCEP reflects the emerging trade and economic architecture globally. It should not be seen in isolation but in the context of other comprehensive FTAs that are emerging i.e. the Trans Pacific Partnership (TPP), and the newly launched Trans-Atlantic Trade and Investment Partnership (TTIP) involving the United States and the European Union. In the context of comprehensive regional trading arrangements across the globe, TPP would cover the western flank with TTIP as the central flank and RCEP as the eastern flank. Therefore RCEP is of strategic importance for India both in the context of its look East policy and the comprehensive nature of the engagement. 
Before June 2013, the RCEP process was being conducted under the ASEAN and FTA Partners Senior Economic Officials Meetings (SEOM) which has now been replaced with the RCEP Trade Negotiating Committee (RCEP-TNC) which is the apex negotiating body. The "Guiding Principles and Objectives for Negotiating RCEP", adopted by Economic Ministers in August 2012, lays down some principles like broader and deeper engagement with significant improvements over the existing FTAs while recognizing the individual and diverse circumstances of countries; facilitate countries engagement in global and regional supply chains; taking into account the different levels of development of participating countries etc. It also identifies the areas for negotiations such as goods, services, investment, economic & technical cooperation, intellectual property, competition and dispute settlement with a flexibility to identify other areas. 

While three working groups i.e. Working Group on Trade in Goods (WGTIG), Working Group on Trade in Services (WGTIS) and Working Group on Investment (WGI) were set up under the AFP SEOM Consultation mechanism; three new working groups on competition, intellectual property and economic & technical cooperation (ECOTECH) were established in the 4th RCEP meeting held from 31 March-4 April, 2014 in Nanning, China. 

A new working group on "Legal and Institutional Issues" was set up in the 5th RCEP meeting that was held in Singapore from 21-27 June, 2014. Four sub working groups reporting to the working group on trade in goods have been established on rules of origin (ROO), customs procedures & trade facilitation (CPTF), SPS (sanitary and phytosanitary measures) and STRACAP (standards, technical regulations and conformity assessment procedures). Hence institutionally apart from the TNC, there are 7 working groups and 4 sub working groups The 6th RCEP meeting was held in December, 2014 in India.

Issues covered: Some of the key subjects that have been discussed in the working groups are tariff modalities in goods, listing of services and investment, elements of the RCEP chapters and possible texts thereof, intellectual property, competition, economic and technical cooperation, legal and institutional issues, customs procedures and trade facilitation, rules of origin etc.

4.0 FAQs

Question: What is the relationship between Multilateralism (WTO) and FTAs? 

Answer: Article XXIV of GATT for goods Article 1 of GATT (General Agreement on Tariffs and Trade) which enunciates the most favoured nation (MFN) principle of WTO states that "any advantage, favour, privilege, or immunity granted by any contracting party to any product originating in or destined for any other country shall be accorded immediately and unconditionally to the like product originating in or destined for the territories of all other contracting parties." 

However, derogations from this MFN principle are permitted for forming FTAs under specific conditions as per the following provisions of the WTO Agreements: 
  1. Article XXIV of GATT for goods
  2. Article V of GATS (General Agreement on Trade in Services) for services
The specific conditions under Article XXIV of the GATT permitting FTAs, are: 
  1. FTA members shall not erect higher or more restrictive tariff or non-tariff barriers on trade with non-members than existed prior to the formation of the FTA. 
  2. Elimination of tariffs and other trade restrictions be applied to "substantially all the trade between the constituent territories in products originating in such territories." 
  3. Elimination of duties and other trade restrictions on trade within the FTA to be accomplished "within a reasonable length of time," meaning a period of no longer than 10 years 
Morever, the "Enabling Clause," allows developing countries to form preferential trading arrangements without adhering to the conditions under Article XXIV.

Question: What are Free Trade Agreements (FTAs)? 

Answer: FTAs are arrangements between two or more countries or trading blocs that primarily agree to reduce or eliminate customs tariff and non tariff barriers on substantial trade between them. FTAs normally cover trade in goods (such as agricultural or industrial products) or trade in services (such as banking, construction, trading etc.). FTAs can also cover other areas such as intellectual property rights (IPRs), investment, government procurement and competition policy, etc.

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Question: What is the difference between the terms such as PTA, CECA, RTA, CEPA, Customs Union, Common Market and Economic Union? How are these related to FTAs? 

  1. Preferential Trade Agreement (PTA): In a PTA, two or more partners agree to reduce tariffs on agreed number of tariff lines. The list of products on which the partners agree to reduce duty is called positive list. India MERCOSUR PTA is such an example. However, in general PTAs do not cover substantially all trade. 
  2. Free Trade Agreement (FTA): In FTAs, tariffs on items covering substantial bilateral trade are eliminated between the partner countries; however each maintains individual tariff structure for non-members. India Sri Lanka FTA is an example. The key difference between an FTA and a PTA is that while in a PTA there is a positive list of products on which duty is to be reduced; in an FTA there is a negative list on which duty is not reduced or eliminated. Thus, compared to a PTA, FTAs are generally more ambitious in coverage of tariff lines (products) on which duty is to be reduced. 
  3. Comprehensive Economic Cooperation Agreement (CECA) and Comprehensive Economic Partnership Agreement (CEPA): These terms describe agreements which consist of an integrated package on goods, services and investment along with other areas including IPR, competition etc. The India Korea CEPA is one such example and it covers a broad range of other areas like trade facilitation and customs cooperation, investment, competition, IPR etc. 
  4. Custom Union: In a Customs union, partner countries may decide to trade at zero duty among themselves, however they maintain common tariffs against rest of the world. An example is Southern African Customs Union (SACU) amongst South Africa, Lesotho, Namibia, Botswana and Swaziland. European Union is also an outstanding example. 
  5. Common Market: Integration provided by a Common market is one step deeper than that by a Customs Union. A common market is a Customs Union with provisions to facilitate free movements of labour and capital, harmonize technical standards across members etc. European Common Market is an example. 
  6. Economic Union: Economic Union is a Common Market extended through further harmonization of fiscal/monetary policies and shared executive, judicial & legislative institutions. European Union (EU) is an example.
Question: What is an Early Harvest Scheme/Programme (EHS) and how different is it from an FTA? 

Answer: Early harvest scheme is a precursor to a free trade agreement (FTA) between two trading partners. This is to help the two trading countries to identify certain products for tariff liberalisation pending the conclusion of FTA negotiation. It is primarily a confidence building measure. A good example of an EHS is between India and Thailand signed in October 2003, wherein 83 products were identified to be reduced to zero in a phased manner. The EHS has been used as a mechanism to build greater confidence amongst trading partners to prepare them for even bigger economic engagement.

Question: How is tariff reduction under an FTA different from WTO tariff negotiation? 

Answer: For the purposes of FTAs, the "base rate" is the critical element in all aspects of negotiations/phasing that are carried out. The base rate is the applied MFN duty of any year which is decided mutually. In an FTA tariff reduction is generally undertaken with reference to the base rate i.e. from the applied MFN tariffs. However, the WTO negotiations are always based on "bound duty rates" and not the MFN applied duties.

Question: How is CECA/CEPA different from FTA? 

Answer: A Comprehensive Economic Cooperation Agreement (CECA) or a Comprehensive Economic Partnership Agreement (CEPA) is different from a traditional Free Trade Agreement (FTA) on two counts.
  1. CECA/CEPA are more comprehensive and ambitious that an FTA in terms of coverage of areas and the type of commitments. While a traditional FTA focuses mainly on goods; a CECA/CEPA is more ambitious in terms of a holistic coverage of many areas like services, investment, competition, government procurement, disputes etc. 
  2. CECA/CEPA looks deeper at the regulatory aspects of trade than an FTA. It is on account of this that it encompasses mutual recognition agreements (MRAs) that covers the regulatory regimes of the partners. An MRA recognises different regulatory regimes of partners on the presumption that they achieve the same end objectives.
Question: Why are almost all the countries signing Free Trade Agreements? 

Answer: Countries negotiate Free trade Agreements for a number of reasons. 
  1. By eliminating tariffs and some non-tariff barriers FTA partners get easier market access into one another's markets. 
  2. Exporters prefer FTAs to multilateral trade liberalization because they get preferential treatment over non-FTA member country competitors. For example in the case of ASEAN, ASEAN has an FTA with India but not with Canada. ASEAN's custom duty on leather shoes is 20% but under the FTA with India it reduced duties to zero. Now assuming other costs being equal, an Indian exporter, because of this duty preference, will be more competitive than a Canadian exporter of shoes. Secondly, FTAs may also protect local exporters from losing out to foreign companies that might receive preferential treatment under other FTAs. 
  3. Possibility of increased foreign investment from outside the FTA. Consider 2 countries A and B having an FTA. Country A has high tariff and large domestic market. The firms based in country C may decide to invest in country A to cater to A's domestic market. However, once A and B sign an FTA and B offers better business environment, C may decide to locate its plant in B to supply its products to A. 
  4. Such occurrences are not limited to tariffs alone but it is also true in the case of non-tariff measures. Especially when a Mutual Recognition Agreement (MRA) is reached between countries A and B. Some experts are of the view that slow progress in multilateral negotiations due to complexities arising from large number of countries to reach a consensus on polarising issues, may have provided the impetus for FTAs.
Question: How is India placed globally in terms of its bilateral PTAs/FTAs/ CECAs/CEPAs 

Answer: India has preferential access, economic cooperation and Free Trade Agreements (FTA) with about 54 individual countries. India has signed bilateral trade deals in the form of Comprehensive Economic Partnership Agreement (CEPA)/ Comprehensive Economic Cooperation Agreement (CECA)/FTA/Preferential Trade Agreements (PTAs) with some 18 groups/countries. India is a late, and cautious, starter in concluding comprehensive preferential tariff agreements covering substantially all trade with some of its trading partners.

Question: What are Rules of Origin (ROO)? 

Answer: Rules of origin (ROO) are the criteria needed to determine the of a product for purposes of international trade. Their importance is derived from the fact that duties and restrictions in several cases depend upon the source of imports. 
Rules of origin are used: 
  1. to implement measures and instruments of commercial policy such as antidumping duties and safeguard measures; 
  2. to determine whether imported products shall receive most-favoured-nation (MFN) treatment or preferential treatment; 
  3. for the purpose of trade statistics; 
  4. for the application of labelling and marking requirements; and 
  5. for government procurement.
Question: What are some of the criteria used in the rules of origin? 

Answer: The criteria in the rules of origin sets out specific and detailed conditions on the level of processing that an imported item from a non FTA partner country must undergo in the FTA partner country (or other eligible countries in the region) before being eligible to be called an originating product of a FTA partner country. 
Some of the common criteria used are 
  1. change in tariff classification (this could be at the tariff chapter, tariff heading or tariff sub heading level) 
  2. regional value addition 
  3. substantial manufacturing or processing by excluding some minimal operations
Question: Why are rules of Origin important in the FTA context? 

Answer: The Rules of Origin are important in the context of making an assessment on the application of preferential tariff under an FTA. Hence, without the rules of origin, the preferential tariffs under an FTA cannot be implemented. Moreover, the nonmembers to the FTA are not provided with the benefit of the preferential tariffs, agreed between the FTA partners.

Question: How are Rules of Origin enforced in an FTA? 

Answer: The rules of origin are enforced through a certificate of origin that is issued by authorised agencies of the trading partner. An exporter cannot avail of the customs tariff preferences under the FTA without submitting this certificate of origin from the authorised agency.

Question: What are SPS and TBT measures? Do they figure in FTAs? 

Answer: SPS measures is an acronym for "sanitary and phytosanitary" measures and broadly includes measures for the protection of plant, animal and human health. TBT is an acronym for "technical barriers to trade" and broadly includes standards, technical regulations and conformity assessment procedures as defined in WTO's TBT Agreement. Since SPS and TBT could be barriers to trade, many FTAs deal with them. 

Question: What are other non tariff measures (NTMs) that are dealt in FTAs? 

Answer: Some of the other non tariff measures that figure in FTA chapters are: 
  1. import licencing procedures 
  2. trade documentation 
  3. pre-shipment inspections
Question: What are the four modes of supply under trade in services? 

Answer: The four modes of supply are
Mode 1: Cross border supply - Supply from the territory of a Party into the territory of the other Party). For example an architect can send his architectural plan through electronic means; a teacher can send teaching material to students in any other country; a doctor sitting in Germany can advise his patient in India through electronic means. In all these cases, trade in services takes place and this is equivalent to cross-border movement of goods. 
Mode 2: Consumption abroad - Consumption in the territory of a Party by the service consumer of the other Party). For example a tourist using hotel or restaurant services abroad; a ship or aircraft undergoing repair or maintenance services abroad. 
Mode 3: Commercial presence - By a service supplier of a Party, through commercial presence in the territory of the other Party). In this case, the service supplier establishes a legal presence in the form of a joint venture/ subsidiary/representative/branch office in the host country and starts supplying services. For example a bank opens its branch in another country. 
Mode 4: Presence/movement of natural persons - By a service supplier of a Party, through presence of natural persons of a Party in the territory of the other Party). For example Independent service suppliers or ISS (e.g. doctors, engineers, individual consultants, accountants, etc.) who supply services in another country. However, GATS covers only temporary movement and not citizenship, residence or employment on a permanent basis in the foreign country

Question: What are the different categories of Natural persons and how are they defined? 

Answer: The various categories of natural persons are defined as under: 
  1. Contractual service suppliers (CSS): A service supplier of country "A" without a commercial presence in country "B", sends one of its employees to country "B" to supply a service, pursuant to a service contract it has concluded with a consumer there; 
  2. Intra-corporate transferees (ICT): A service supplier of "A" transfers one of its employees to the commercial presence it has established in "B"; 
  3. Business visitors(BV) and services salespersons: A service supplier of country "A" sends one of its employees to country "B" for the purpose of either setting up a commercial presence or negotiating the sale of a service on its behalf. Business visitors are not directly engaged in the delivery of the service, but are just facilitating future trade, which may take place though a variety of modes of supply. 
  4. Independent Professionals (IP): A service supplier of country "A" goes to country "B" to supply a service in his individual capacity. The supplier would hence not represent or be an employee of any business entity that has the service contract.
  • The composition of India’s exports and import basket has by and large remained unchanged in 2018-19 over 2017-18. 
  • India’s merchandise exports stood at USD 330.07 billion in the year 2018-19.  
  • Petroleum products, precious stones, drug formulations, gold and other precious metals continue to be top export items. 
  • India’s import was USD 514.03 billion during the year 2018-19. 
  • Crude petroleum, pearl, precious, semi-precious stones and gold remained as top import items. 
  • The trade deficit was USD183.96 billion during the period.  
  • India’s main trading partners continue to be the US, China, Hong Kong, the UAE and Saudi Arabia.
  • India’s External Debt was USD 521.1 billion at end-December 2018, 1.6 per cent billion lower than its level at end-March 2018.  
  • The long-term debt declined by 2.4 per cent to USD 417.3 billion at end-December 2018 over end-March 2018, though its share was mostly same at 80.1 per cent of total external debt compared to 80.7 per cent during the same period. 
  • Trade Facilitation - India ratified the WTO Agreement on Trade Facilitation (TFA) in April 2016 and subsequently constituted a National Committee on Trade Facilitation (NCTF) which has played an important role in reducing the high cost of imports and exports so as to integrate our cross-border trade with the global value chain. 
  • These efforts have resulted in substantive improvement of India’s performance in ‘Trading Across Borders’ indicator as well as in ‘Ease of Doing Business’ ranking. 
  • The logistics industry of India has also seen significant development which has led to a jump in India’s global ranking in the World Bank's 2016 Logistics Performance Index. 
  • The US overtook China to once again become India's top goods trading partner in 2018-19, official data shows. Also, India’s trade surplus with the US declined to $16.8 billion from $21.2 billion a year ago.
  • India’s exports are playing in a stronger position with its trade deficit with China dropping to $53 billion in 2018-19, down from $63 billion a year ago. But there is doubt that China is making exports to India, by sending them through Hong Kong!
  • Data showed that India’s dependency on Chinese imports also declined to $70 billion from $76 billion a year ago, with over a fourth increase in exports to $16.7 billion in 2018-19. This comes amid sluggish demand and a slowdown in China, which is the largest producer and consumer of most commodities.
  • The decline in India’s trade surplus with the US comes amid a year-long trade war. US President Donald Trump resorted to protectionism by imposing higher tariffs on imports from its trading partners such as China, Canada, Mexico, Japan, in an attempt to protect its economy and create jobs.
  • In June 2019, the US withdrew duty-free benefits for Indian exports under its Generalised System of Preferences (GSP). Later, India said it had decided to impose retaliatory tariffs on 28 products from the US. 
  • The Indian government had in June 2018 proposed its intention to impose retaliatory duties on over two dozen goods, but repeatedly postponed its implementation. It all began when in March 2018, the US signed an order to impose higher levy on steel and aluminium products coming in from all nations, barring a select few. 
  • Citing products pertaining to agriculture, automobiles and motorcycles, the US has time and again said that India’s import tariffs on certain products are very high. 
  • India is developing an index to rank eight of its major trading partners and countries it is pursuing free trade agreements (FTA) with, to gauge their restrictiveness to cross-border movement of professionals, a crucial area of interest for the country. 
  • The Commerce and Industry Ministry began an exercise to rank the US, Canada, Australia, the Netherlands and India, among others on various criteria such as entry barriers, discriminatory measures, competition barriers and transparency in regulation on the index which is being developed on the lines of OECD Services Trade Restrictiveness Index. 
  • There is a growing view among policymakers that the country has not been able to get a good deal from its trade partners in services sector, particularly in FTAs. This index will also help it highlight the kind of restrictions trade partners imposes on India. 
  • Criteria include regulation of dominant firms to ensure market access, advertising restrictions, minimum capital requirement, foreign equity limits/restrictions, quotas — number of firms permitted to practice and restrictions on type of shares/bonds held by foreigners, among others. 
  • Launched in 2014, one such index, the Services Trade Restrictiveness Index (STRI) computed by the OECD, is available for 45 economies (36 OECD and the rest non-OECD) and 22 sectors. The index seems to show the Indian services sector as one of the most restrictive, particularly in policy areas such as foreign entry even though since 1991, the one area that has seen maximum liberalisation in India is foreign direct investment (FDI). 
  • The index comes at a time when India is pushing for easier movement of professionals across borders in its various FTAs, including the Regional Comprehensive Economic Partnership (RCEP) trade agreement. Mode 4, or movement of natural persons, is one of the four ways through which services can be supplied internationally. It includes movement of natural persons such as independent professionals and is of key interest to India. 
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  • The new government formed in 2019 has a number of pending trade and foreign policy issues at hand, including forging of sustainable export and industrial policies, framing of a trade agreement with the US to avoid further bilateral skirmishes, taking a final position on the mega trade pact being negotiated with China, and future of oil imports from sanctions-hit Iran.
  • US concerned : The US, for instance, will be expecting an early decision on sticky issues such as import duties on telecom and IT equipment, and price caps on medical equipment. 
  • It will want the BJP, which was re-elected, to deliver fast on its key demands such as lowering import duties on smartphones and price caps on medical devices. There will also be pressure to re-work e-commerce rules.
  • Iran oil : The government will also now have to clearly state its policy vis-à-vis oil imports from sanctions-hit Iran. After the US refused to extend the sanctions waiver for India and a few other countries, India stopped oil import from Iran in May 2019.
  • Framing a suitable export policy is also long overdue, especially with continued unstable export performance and negligible growth in April 2019. There is also a need to replace WTO non-compliant export sops with other incentives. The ratification of the new industrial policy to increase foreign direct investment to $100 billion annually, and doing away with regulatory hurdles, are the other issues to be tackled as it had been put off for the new government.
  • A final decision on whether India wants to participate in the RCEP or not is not due, and it will have to remove duties on most items imported from all members, including ASEAN and China.
PT's IAS Academy, PT education, IAS, CSE, UPSC, Prelims, Mains, exam coaching, exam prep, Civil Services test

PT's IAS Academy, PT education, IAS, CSE, UPSC, Prelims, Mains, exam coaching, exam prep, Civil Services test

PT's IAS Academy, PT education, IAS, CSE, UPSC, Prelims, Mains, exam coaching, exam prep, Civil Services test

PT's IAS Academy, PT education, IAS, CSE, UPSC, Prelims, Mains, exam coaching, exam prep, Civil Services test

PT's IAS Academy, PT education, IAS, CSE, UPSC, Prelims, Mains, exam coaching, exam prep, Civil Services test

PT's IAS Academy, PT education, IAS, CSE, UPSC, Prelims, Mains, exam coaching, exam prep, Civil Services test



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PT's IAS Academy: UPSC IAS exam preparation - International Institutions - Lecture 11
UPSC IAS exam preparation - International Institutions - Lecture 11
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