HOW TO BE REGIONAL IN THE TWENTY-FIRST CENTURY

http://www.telegraphindia.com/1140923/jsp/opinion/story_18827673.jsp#.VCDAl_mSzb4

India must be part of the trans-Pacific partnership, the largest global supply chain, in order to become a major global power, writes Jayanta Roy

The prime minister is visiting the United States of America later this month at the invitation of its president, Barack Obama, to revive the sagging decade-old US-India strategic partnership. The agenda will be broad and diverse but a key focus will undoubtedly be on economic issues.

The backdrop of the visit includes, inter alia, the tensions between the West and Russia over Ukraine and the resultant strengthening of Sino-Russian strategic ties, the establishment of the BRICS-led New Development Bank, the invitation to India to become a full member of the Shanghai Cooperation Organization and the impasse at the World Trade Organization meeting in Geneva. India’s special strategic and economic partnership with the world’s third largest economy was revealed during the prime minister’s visit to Japan, and its successful engagement with the second most powerful global power was manifested by the Chinese president’s visit to India. Almost all policy initiatives by the new government reflected its recognition that the fulfilment of its socio-economic development goals, as much as India’s national security interests, would be linked with our external engagement. There are also other indicators that India is now convinced about its need to rely on an outward-oriented growth strategy with an emphasis on improving the overall business climate to attract foreign direct investment.

The global trade landscape is marked with the predominance of mega-regionals like the trans-Pacific partnership (TPP) and the regional comprehensive economic partnership in Asia. India is already a member of RCEP. During the forthcoming visit, the prime minister could consider conveying to President Obama that India could upgrade most of its trade policy to meet the evolving gold standards of the TPP. It would do so keeping its national interests in the forefront. No commitment would be required at this stage on joining the TPP. This should send a strong signal that India is serious about removing all major impediments to trade and investment.

India in any case needs to align its trade policies to the drastically changed realities in the last two decades. International trade today is defined by integrated production networks that combine intermediate goods and services from several countries to produce the final goods and services. Global fragmentation of production is essentially a division of labour based on specialized tasks that need to be combined by the means of an efficient supply chain. Thus, the focus now is to connect to global supply chains. To succeed in that, the massive costs of trade transactions have to be drastically reduced through trade facilitation and logistical facilitation reforms and, along with it, the ease of doing business. This would facilitate the linking of small and medium enterprises to global supply chains. This, in turn, would encourage a larger flow of FDI with the aim of making India a hub in the supply-chain process. This will create jobs and make inclusive growth real.

To benefit from the mega-regionals, India also needs to diversify services beyond IT and IT-enabled services. Indian trade policy in services became IT-centric with an over-emphasis in its trade negotiation priorities on Mode 4 (or liberalization of the movement of people), a critical demand of the Indian IT lobby. In doing so, it did not focus on the barriers preventing the take-off of other services such as behind the border regulatory restrictions on accounting, legal, engineering, architecture, or health-related professional services in partner countries. Global trade in off-shored services is becoming increasingly about trade in tasks, that is carrying out specialized functions within the broader accounting or legal service professions. This requires urgent domestic regulatory reforms of the services sector in India, and negotiation of such trade barriers within trade agreements. Agreements like the TPP address such issues. India cannot afford not to engage on these topics with major trade partners. The question remains, as mega-agreements like the TPP take-off, and almost all of India’s major competitors in professional and technical services join these negotiations, can India remain a bystander?

India also needs to adopt a strategic regionalism focus. India’s regionalism efforts so far have been largely un-coordinated; free trade agreements were put into motion with modest success. These agreements follow the old 20th-century model of trade negotiating with a focus on tariffs and to keep the sectors that are most sensitive out of the tariff reduction schedule. Deeper engagement on technical standards and related barriers, trade facilitation, or on the regulatory aspects of services market access — that is, the issues that define effective market access in this production chain related integrated global economy are not a part of such agreements.

Given the current global scenario, it would make sense for India to look to a deeper regionalism that incorporates the 21st-century trade negotiating mandate. This would mean re-working its trade engagement with South and Southeast Asia and replace existing shallow agreements with ones that have a wider mandate, as well as simultaneously consider joining, or at least being ready to join the TPP. The RCEP provides another avenue. The entire focus now should be towards a link to regional supply chains of Asean countries. Essentially, trade negotiations would have to be complemented by a greater focus on domestic reform — that is, business facilitation to create a more competitive and diverse manufacturing base in India, generating more opportunities to find a niche in the regional production network.

India also needs to have some form of trade agreement with its strategic partner, the US. In this regard, the TPP offers the best opportunity. Apart from the US and some RCEP countries, India would also be able to link with the growing markets of Canada, Mexico, Peru and Chile. Most important, this would help to revive the lost momentum of relations with the pre-eminent global power which is our largest trading partner. There is also an important strategic aspect. The two major nodes of the trans-Pacific supply chain that links the East and Southeast Asian economies with the Americas are China and the US. That makes the RCEP and TPP complementary over the long-term. This is one of the reasons why many countries are looking at both agreements.

Membership of TPP, however, would not be automatic. India will have to fulfil the strict requirements of the elimination of tariffs and other barriers to trade and investment, a World Trade Organization plus intellectual property rights regime and trade in services, adherence to competition policy, trade facilitation, state-owned enterprise reforms, investment policy, and government procurement. Labour and environment policies are also in the agenda, although how far these will be enforced is not yet clear. Given the diversity of membership in TPP, the same rules obviously will not apply to all countries. Several Asean countries are already members of the TPP — Singapore, Malaysia, Brunei Darussalam, and Vietnam, and the Philippines and Thailand are considering joining in the next round. China, whether it joins TPP or not, is moving on a fast track to conform to TPP gold standards in trade policy. If India stays aloof from TPP, it is likely to be an outlier even in RCEP, the only mega-regional it is a member of, if it takes off.

India needs to consider the TPP as the largest global supply chain, and must be a part of it to become a major global power. The prime minister’s visit this month offers a unique window of opportunity of conveying to President Obama that India is seriously considering starting work to conform to most of the gold standards of the TPP. President Obama in turn could take the belated initiative to convey to him that he would support India’s membership of the Asia-Pacific Economic Cooperation forum.

The author is a well-known trade economist