The new trade order

Business Standard, May 02, 2015

By Pradeep S Mehta

The Trans Pacific Partnership is becoming a reality in the Asia-Pacific region would have many implications for India, not only in tariff preferences but also higher standards

One of the two mega regional trade and investment agreements being negotiated by the United States will soon reach the winning post, by, say, the end of the year. The US Congress might soon give “fast-track authority” to the US President to sign on the dotted line of the Trans Pacific Partnership (TPP), a trade and investment agreement covering 12 countries. The other big one is the Transatlantic Trade and Investment Partnership between the US and the European Union, which will take a longer time. That said, the TPP becoming a reality in the Asia-Pacific region would have many implications for India, not only in tariff preferences but also higher standards.

Due to the comprehensive and expansive nature of the TPP, it has the potential to impact India through trade diversion and erosion as well as creating pressure to liberalise markets in goods and services, and raise standards where it may not be prepared. In 2013, India’s exports to the TPP group totalled $83.5 billion while it imported $75.7bn. On the other hand, India only accounts for about one per cent of overall US exports to the world despite its large and growing middle-class consumer base.

Our research has shown that trade diversion for non-member countries (of the TPP) is likely to occur and can be detrimental (, especially on loss of market access. This impact may be particularly severe for products such as grains and other crops, processed food, textiles and clothing and heavy manufacturing. Given that India’s share of these goods exports to TPP countries is more than 50 per cent compared to exports to the rest of the world, its reliance on TPP-country markets is substantial. Additionally, based on economic simulations, India may witness a fall in exports of these products ranging between 0.1 and 0.9 per cent over current trade volumes.

Furthermore, since almost 60 per cent of India’s GDP is tied to the services industry, a large portion being in IT and IT-enabled services, the regulatory harmonisation expected to be enacted in the TPP could greatly harm India’s competitive edge in these sectors. Competitors in Southeast Asia, such as Indonesia, Malaysia, and the Philippines, will have the opportunity to develop stronger IT sectors under such favourable conditions that could divert trade in services from India. Given India’s links to global value chains in services, there are potential implications for loss of market access.

Since many TPP countries already enjoy low tariff rates with their trade partners, significant impact is expected to come from the new and upgraded standards promoted in the trade agreement. The TPP may re-orient rules of trade that advantage their members by paving the way to easing of compliance (e.g. SPS and TBT), streamlined customs administration, and improvements in infrastructure as well as high labour and environmental standards that would likely divert Indian exports that cannot comply with such standards.

One of the best options for India in response to the challenge of TPP is through its own mega trade agreement: the Regional Comprehensive Economic Partnership (RCEP). But, with a membership of 16 Asian nations, the RCEP also includes seven countries, both developed and developing, that are members of the TPP agreement. China is in the RCEP but not in the TPP. Hence there will be some tensions. While expectations for the RCEP are generally low, the potential for TPP members to push for higher standards or tariff cuts akin to what they agree to in the TPP is of some concern, especially if higher standards are proposed in areas critical for India, like intellectual property that could threaten its pharmaceutical sector.

Despite many counties’ desire to harmonise their trade rules through such mega agreements and get out of the current “spaghetti bowl” of regulations, India can use the RCEP, as well its current trade negotiations with the EU, Australia, Canada, and New Zealand, as an opportunity to begin to raise its standards as well as propose mitigating measures that maintain realistic expectations for India’s industry. India can open its market while offering product-specific rules on a case-by-case basis that will leverage support to India’s manufacturing policy, like “Make in India”. It can also begin to reform its intellectual property policy in certain areas, like IPRs on music and film, while still safeguarding its generic medicine industry.

In the likely scenario of the conclusion of the TPP and the challenges that follow, there is enormous opportunity for India to prosper if it can pull up its socks. India can go beyond general economic growth and move towards deeper integration in value chains to produce high-value products, build new and alternative trade engagements, carry out reforms in infrastructure and customs, and enhance domestic standards while maintaining support for India’s industry, workers, and vital development objectives.

The writer is Secretary General of CUTS International. Kyle Robert Cote of CUTS contributed to this article

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