Trans-pacific threat

In Auckland, on February 4, the most voluminous trade deal in history, comprising over 5,000 pages of text, was signed formally by the 12 nations that are party to the Trans-Pacific Partnership (TPP). The TPP agreement covers 30 different chapters addressing issues like non-tariff barriers (NTBs), labour, environment, investment, state-owned enterprises (SOEs) and regulatory coherence which have not been adequately tackled in the WTO. The TPP needs to be ratified by all the 12 countries by February 4, 2018, but even if that fails, it will still come into force if it is ratified by at least six countries representing a minimum of 85 per cent of the combined GDP of the partners. It means that the TPP can get implemented if just the US, Japan and four other countries ratify it.

Jayant Dasgupta

Will TPP affect India? To answer, consider its provisions. First, with import tariffs in developed countries having reduced to 4 per cent or less, tariffs are no longer as important. NTBs have become increasingly important determinants of trade flows. The TPP attempts to reduce or eliminate NTBs and lay down procedures for Mutual Recognition Agreements (MRAs) of standards and Conformity Assessment Bodies (CABs). This will go a long way towards reducing NTBs among partners, enhancing the competitiveness of their producers. Second, barring a few exceptions, almost all products will be importable from other partners at zero duty. TPP non-members would face tariff barriers, thereby affecting their competitiveness. Third, with the establishment of the ASEAN Economic Community in 2015, Cambodia, Laos and Myanmar, all LDCs, will also likely become part of TPP. Thus TPP will have several lower cost producers than India. Fourth, due to the emphasis on regulatory coherence and harmonising "behind the border measures", the transaction cost of doing business among enterprises in partner countries would get reduced substantially. This would lead to greater geographical clustering of industries, even if they are in different countries, signalling closer integration with global value chains. Fifth, given the cost advantages of being part of TPP, there would be trade diversion from non-partners to partner countries. Since trade and investment flows are interlinked, it would mean investment diversion too.

What can India do to overcome these disadvantages? Joining the TPP is not an option in the short run as we still need time to carry out a number of reforms to fulfil the tough commitments required. Closer integration with the Asian region through an ambitious and early outcome in the Regional Cooperation and Economic Partnership (RCEP) agreement negotiations and conclusion of FTAs with the EU, Australia and Canada could mitigate part of the problem. Africa, the fastest growing region, has been left out of TPP, the Trans-Atlantic Trade and Investment Partnership (TTIP) and RCEP. Concluding the SACU FTA and other FTAs with groups of African regional groupings could also be beneficial.

Simultaneously, focus on the following: first, accelerate the development of a few niche areas of manufacturing and services where India has comparative advantage; second, emphasise skill development and improve productivity in these sectors to be globally competitive; third, improve the ease of doing business and reduce transaction costs, both at and behind the border, to attract FDI and technology and integrate more easily with the global value chain; fourth, improve and align our standards with those in the major markets and strongly push for MRAs on standards and CABs with counterparts. The silver lining is that some of our recent initiatives such as Make in India, Skill India and Start-Up India are geared toward bridging these critical gaps in our economy. We need to get these programmes up and running, and fast.

To understand how TPP benefits us, consider its history. TPP negotiations started in 2008 with the US in the driving seat. Australia, Brunei, Chile and Singapore were the initial partners; Canada, Japan, Malaysia, Mexico, New Zealand, Peru and Vietnam joined subsequently. The growing US interest in TPP coincided with its increasing disinterest in the Doha Development Agenda and the WTO process of reaching trade agreements by consensus. It was part of US President Barack Obama's 'Pivot to Asia'.

TPP and TTIP partners represent about 40 per cent and 50 per cent of global GDP and about 25 per cent and 33 per cent of global trade respectively. Since the US is common to both, there is bound to be great harmony between the TPP and TTIP provisions with a likely integration of the two. This would effectively cement the trading rules among nations with 70 per cent GDP.

China, Korea, the Philippines, Indonesia and Thailand are keen to join the TPP. The US did not allow China to join because it feared Beijing would dilute many of the provisions such as SOEs. Now that TPP has been signed, China and others are likely to be allowed in. With these five countries joining a potential TPP-TTIP integrated agreement, the global share of GDP of this bloc would be close to 80 per cent.