Should India Join the TPP?

http://thediplomat.com/2015/10/should-india-join-the-tpp/

In the wake of this week’s historic agreement, what should India do now?

By Rachit Ranjan

October 09, 2015

The international trade regime witnessed a historic moment on Monday, with the United States and 11 other Pacific Rim countries announcing the conclusion of successful negotiations on what has been touted as a mammoth free trade agreement covering more than 40 percent of the global economy.

Over the course of the past couple of years, the Trans-Pacific Partnership (TPP) has been in the news for a variety of reasons that touch on foreign policy maneuvering and provide a teaser of the new age of economic diplomacy that is upon us. In the U.S., opponents of the trade deal have lambasted the Obama administration for conducting the negotiations in secrecy and have consistently advocated against the deal, citing reasons such as a loss of jobs and export revenue. However, the rhetoric that has developed elsewhere is premised on the strategic considerations of the U.S and its traditional allies. Considering the rise of Sino-centrism in Asia and the corresponding diminishment of the sphere of influence enjoyed by U.S. and its traditional allies, the TPP has been perceived as a strategic maneuver, part of Obama’s larger pivot to Asia, and has been pursued seemingly to create a set of market access standards that advance the interests of U.S. industries. It is believed that these standards will invariably favor industries in developed countries, as developing countries are yet to reach that level of sophistication in their international trade dealings.

A recent study conducted by Peterson Institute’s C. Fred Bergsten observed that India’s international competitiveness is in shambles. To support this point of view, Bergsten provides India’s export data in the manufacturing and services sector, which suggest that it has stagnated for more than three years. The merchandise trade deficit is at an all-time high.

The figures certainly suggest weakness. As a forewarning, Bergsten also points out that India’s annual export losses could very well touch $50 billion if China and the rest of the Asia-Pacific Economic Cooperation (APEC) bloc decide to join the TPP in a second stage. As such, Bergsten makes the case for India to join the TPP, and other plurilateral arrangements that are being pursued under and around the aegis of WTO, claiming that integration would lead to massive export gains and raise India’s national income by an estimated 4 percent. Although Bergsten appears very sanguine about the benefits that would accrue through India’s integration with TPP and other agreements, it is unclear what sort of compromises India would have to make to achieve this target, particularly in the case of the TPP.

Harsha V. Singh, the former DDG of WTO, has very cogently assessed the adverse effects of a successful TPP for India. While observing India’s deep integration with global value chains (GVCs), a phenomenon where different stages of production are located in different countries for optimization of the production process, he relies primarily on OECD data, looking at increases in the foreign content of exports in India from 1995 to 2009. India’s domestic value-added content in 1995 was 90 percent, but by 2009 it had fallen to 78 percent, suggesting fragmentation of production and greater integration into global value chains. A successful TPP, he argues, would have three major implications for India. First, a reduction in tariffs among member countries would make such destinations more attractive for inclusion in value chains. Second, the rules of origin under the TPP coupled with the tariff reduction would further favor products from member nations leading to greater inclusion in GVCs. Third, the emergence of technical and other standards, which are more favorable to developed countries, would diminish India’s share in GVCs.

In addition, there is a possibility of the Trans-Atlantic Trade and Investment Partnership (TTIP) merging with the TPP, which would allow greater market access for products of member countries under developed standards, a potential uniform legal and regulatory framework, and preferential tariff commitments. It must be added here that while India can consider joining the TPP to maintain its position in GVCs, certain terms within the agreement, in light of the leaked IP chapter of TPP, are in direct conflict with India’s stated policies. Further, despite this knowledge, if India decides to join the TPP, it would need to forego several key policy goals, and significantly expedite domestic reforms to meet the standards.

A New Trade Order

There is awareness in Indian bureaucratic, political, and policymaking circles that the world is moving towards a new trade order and India must respond. This is reflected in the statements of Commerce Ministry officials, the prime minister, the president. In fact, the need for a counter strategy has also found mention in the Economic Survey 2014-15. However, the response has either been slow or else marked by a classic case of bureaucratic ambivalence. While efforts have been made in both the Economic Survey and new Foreign Trade Policy for 2015-2020 in identifying reforms needed to make India a favorable destination for doing business, these reforms have yet to be fully initiated. For example, the Economic Survey 2013-14 found that India must look to trade diversification, build export infrastructure, and focus on useful free trade agreements (FTAs), which can address the inverted duty structure, rationalize export promotion schemes, and ensure trade facilitation in order to realize her medium term goals.

On all these fronts, India’s progress has been extremely tardy. India is currently negotiating 10 FTAs. All are at different stages of negotiation, but none are close to being finalized. The Economic Survey 2014-15 highlights the issues identified by Harsha V. Singh and explores the option of integration with TPP, while recognizing that integration may be ambitious, as the terms of the deal remain uncertain. However, judging by the leaked IP chapter, it is clear that the terms as they stand currently contradict India’s stated policies.

For India to either become party to the TPP or to sustain the shocks caused by its exclusion, the model of reforms must change from aspirational to one based on aggressive action. It would be extremely difficult and economically burdensome for India to expeditiously initiate and execute the reforms that would be expected if it decided to join the TPP. Further, the political climate limits the chances of wider consensus on the need to accelerate the pace of reforms in the labor, export infrastructure, environment, banking and taxation spaces. Thus, reforms would have to be phased, something that might not be possible if India joined TPP, even though it is believed that the TPP would allow a 20-year transition period for developing economies. Even assuming that a substantial transition period is allowed and India considers joining the TPP, it can be readily argued that the U.S. and its allies will exert considerable pressure on India to forego certain traditional and principled stances, including food security and the stated intent of not entering into TRIPS Plus arrangements (TRIPS refers to the Agreement on Trade-Related Aspects of Intellectual Property Rights), which would not be in its national interest.

On the other hand, through preferential trading arrangements with individual TPP countries, India will be able to exercise greater sovereignty in reaching agreements that allow ample time and space for rolling out these reforms without significantly affecting India’s market access in these and other economies as well as its integration in GVCs. In addition to pursuing bilateral trade arrangements, including one with China, India would also be well advised to explore the possibility of hastening efforts to initiate FTA negotiations with the BRICS bloc and Latin American countries in order to fetch optimal gains and enhance its global competitiveness without compromising integral domestic concerns.

This is not to suggest that India shouldn’t consider taking part in the ongoing negotiations for plurilateral agreements, namely the Environmental Goods Agreement and Trade in Services Agreement, as both are of immense importance to India’s business and developmental concerns. Rather, it is to argue that India may still emerge as a trading power through calculated risks and aggressive economic diplomacy, without providing concessions on core beliefs that are firmly entrenched in its national identity.

The author is a Policy Fellow at the Oval Observer Foundation and specializes in international trade law and policy.