Forbes India 15th Anniversary Special

India and the mega-regional trade deals: What these might mean, and what India should do

What impact these mega-regionals will have on India

Published: Jan 8, 2014 06:05:58 AM IST
Updated: Jan 3, 2014 10:08:51 PM IST

With the successful outcome in Bali on 7 December, trade multilateralism has lived to see another day. Two key players, the US and India, whose last-minute brinkmanship would either make or break the round, finally reached an agreement taking into account India’s domestic concerns on food security. The resulting Bali package,which addresses trade facilitation, agriculture and the issues of least developed countries (LDCs), has restored some degree of faith in the WTO.

However, there remains a wide gap between WTO rules and on-the-ground business realities. It is these “new realities or 21st century issues” such as technology, environment, intellectual property (IP) and finance that are at the core oftwo ambitious “mega-regional” trade deals--the Transpacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP). The TPP, with 12 member countries, is estimated to account for over a quarter of world trade. The TTIP, with 28 countries, makes up almost a third. Together the “mega-regionals” account for 60% of world GDP. If concluded, these deals will very likely change the structure of global trade. And they exclude India.

Groupings like the TPP can either fragment or spur on the move towards greater trade coherence. The key question for India post Bali is what impact these mega-regionals will have on its emerging economy – forecast to be the world’s third largest by 2050 – and its global aspirations. What risks do these deals pose to India--especially the TPP, which is in its backyard? And what should India do about it?

The potential impact of the TPP on India
Isolation as manufacturing sitesand services go elsewhere: Should the TPP be concluded, the extent of potential trade diversion from India is difficult to estimate. However, two areas of India’s current “inclusive development” trajectory, services and manufacturing, could be affected. India’s National Manufacturing Policy promises to create 100 million jobs and contribute 25% to GDP in a decade. But the TPP could result in manufacturing investments and consequently jobs moving to equally well placed TPP members such as Malaysia and Vietnam. India is currently the seventh largest player in global services trade. However, several countries in the TPP configuration have or can potentially develop a stronghold in the services sector, including Malaysia, New Zealand, and Canada.For private operators in both the goods and services sector the TPP disciplines on investment, IP, e-commerce and finance will be a strong incentive enabling potentially seamless operations.

Global Supply Chains(GSCs)move away:Some 80% of global trade is linked to GSCs, making them important sources of investment, technology and job creation, all of which are important for India. GSCs are likely to be enhanced as the TPP rules potentially provide for seamless cross-border operations connecting production/service centers across TPP countries and markets. If this is the case, there is the possibility that the GSCs will gradually shift away from large emerging economies such as India, China, and Brazil. This could potentially isolate India from GSCs in services and manufacturing or it could require India to incorporate TPP terms in order to operate within TPP countries.

Rule taker or rule maker?
If the mega-regionals are concluded, given the US involvement in both, they will create common regulatory sets across the Atlantic and the Pacific. This is likely to result in much higher degrees of regulatory convergence and co-operation amongst member countries. If India is left out, the regulatory sets will be created and later multilateralized, leaving India in the position of being a rule taker rather than a rule maker.

Between the dragon and the eagle:The US,as the main driver of the TPP, has trade, but also political and security interests on its agenda. The TPP is seen as an effort to contain China and strengthen US influence as part of the “pivot to Asia”.If this is the case, then India in effect will find itself involved in a chess game between the Chinese dragon and the US eagle. The US is India’s second largest export market, China is fourth; in imports, the position is reversed with China being India’s largest import source, and the US in fifth position. The Sino-Indian relationship is critical, but from a security perspective the US is key to India’s future.India could find itselfbetween a rock and a hardplace.

India and FTAs:India has in general been cautious in its approach to free-trade agreements(FTAs), concluding mostly regional (SAFTA, BIMSTEC) and south-south deals (Latin America, ASEAN). Interestingly, since 2005India has already concluded FTAs (ASEAN, Singapore, Malaysia, Chile) or is in the process of doing so with several TPP negotiating partners (Australia, Canada, EU, EFTA, New Zealand, Japan and the US). Depending on how stringent the rules of origin for goods and services contained in these agreements are, India would in effect have an entry point into the TPP market. Conversely, TPP members who have not concluded FTAs with India would potentially have access to the Indian market through for instance the India-ASEAN FTA or the India-Singapore FTA. In this case India’s cautious “protection of the market” approach to trade liberalization may no longer be valid. 

Policy options – Back to the WTO
A question constantly posed is why India does not embrace trade liberalization more forcefully, as China has done since its 1978 reforms.One reason is India’s complex and divided political system, which makes it hard to reach compromise on critical issues such as trade policy. And with approximately 32% of the population still below the poverty line, the job-creation versus job-destruction perspective of trade policy is extremely sensitive. This is all the more so as currently two-thirds of India’s population lives in rural areas: food security is understandably a national obsession.

Giventhese domestic constraints,inclusive growth and a calibrated approach to trade policy is a necessity for India, not a choice.Acceding to or joining the currentTPP negotiations may not currently be itsbest option. However, if the mega-regionals were to be concluded, India would be presented with a fait accompli with potentially quite a negative impact.

As opposed to the “mega-regional non platform”, the WTO provides India with an existing and functioning platform to tie up its domestic considerations with its global trade ambitions. The successful passage of the Bali package was an important step in this direction. India maintained a balance, playing a co-operative role on issues such as trade facilitation and the LDC package, while ensuring sufficient flexibility to implement its Food Security Bill.

Thus the risks of trade isolationand of ending up as a rule takerare reason enough for India,in a post-Bali scenario,to play a more proactive role in the multilateral rules-based system.India can, and in our opinion should, play a greater role commensurate with itsaspirations to bea major actor in the global arena.

Jean-Pierre Lehmann is Emeritus Professor of IMD, Founder of The Evian Group@IMD, visiting professor at Hong Kong University and NIIT University in Rajasthan (India). He is a member of the World Economic Forum Global Agenda Council on the future of trade and foreign direct investment.
Deepali Fernandes is a PhD candidate at the University of Zurich. Prior to this she worked as Economics
Affairs Officer at UNCTAD for several years in the areas of migration, trade in services, finance and regional trade agreements. She has also worked with UNEP and practiced law in India and the UK.

[This article has been reproduced with permission from IMD, a leading business school based in Switzerland.]

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