India must rise to the TPP challenge

To stay relevant in global trade, India needs to adopt broader standards in trade policy that go beyond markets and investments

Harsha Vardhana Singh Geneva
We live in a rapidly changing world, with evolution of technologies, production systems, business models, and multiple poles of economic prominence. Building on its domestic policy reform, India has benefited from expanding global trade and investment opportunities. Today’s world is a significantly interconnected and globalized one, with both external and internal conditions affecting our domestic performance and ability to meet key economic and social objectives. The global economic forces that brought major growth stimulus to India have continued to evolve, sometimes in unexpected directions.

Significant developments in the international economic system that can have a major effect on India’s potential for growth include:

  • Emergence of a multi-polar world as a number of developing economies dominate in 
  • every continent.
  • Increasing importance of supply chains and trade in tasks in international trade.
  • New sources of foreign direct investment and increased links through Foreign 
  • Direct Investment.
  • Mega-FTAs (Free Trade Area) being negotiated to create new disciplines for trade and investment regulation.
  • Burgeoning of the middle class and its impact on demand and need for natural resources.
  • Emergence of a more self-confident Africa as the external demand for natural resources increases and growth in the region 
  • gains momentum.
  • Changes in China’s self-perception of the role it needs to play in order to help sustain harmoniously growing global markets that are important for its own domestic objectives.
  • The response of the United States to these developments.
  • Demographics and technology-related changes that reduce communications costs, improve possibility of timely response, produce new combinations of goods and services, and create novel synergies and competition.
  • Dealing with the changes in geo-economics requires policy efforts in several areas such as macroeconomic policy, climate change, health and education, or investment policy. The evolving international trade policy regime ought to be an area of focus. Though limited, these developments are important components of a framework useful for assessing the evolution of geo-economics. An analysis of these matters will also help us prepare for addressing some of the other issues as well. Two of the above-mentioned factors are particularly important to show us the way forward for such preparations, namely the mega-FTA negotiations and the policy changes that are being adopted by China.

Mega-Free Trade Area Negotiations
The large Free Trade Agreement negotiations deal with established issues as well as new ones, which reflect major changes arising due to changes in technology and patterns of trade. As Jayanta Roy, a former Economic Adviser to India’s Commerce Ministry, summarizes in a recent article: “Trade and investment in today’s world takes place in an environment defined by highly integrated global production networks. Trade in intangibles as defined by management of knowledge, data, and support services (IT and ITES) is becoming increasingly more important. The impending automation of many manufacturing and services functions is already starting to re-define the relationship between labour and capital. Such drastic changes require a highly efficient trade and investment environment (low transaction costs), and strategic thinking from the policy-makers who manage this relationship.” An important example of mega-FTA negotiations is the Trans Pacific Partnership (TPP). Without going into details, consider the new issues covered by the TPP negotiations. In addition to greater market access, the list includes intellectual property rights, foreign investment, competition policy, environment, labour, state-owned enterprises, e-commerce, competitiveness and supply chains, government procurement, technical barriers to trade, transparency in healthcare technology and pharmaceuticals, and regulatory coherence. Those who have been following the discussions in the WTO Doha Round will see several new areas that would create problems for
Indian negotiators.

Another important feature of these topics is that they are usually addressed through technical or other standards. If mega-FTAs such as TPP are able to devise the basis for standards within their framework, then they will in effect define such standards for much of international trade, and thus determine a major potential requisite for market access for all, including India. These standards are likely to be reflected also in the Transatlantic Trade and Investment Partnership (T-TIP), the ongoing negotiations between the US and EU.

It is noteworthy that India is not a participant in the TPP, and by definition, it is not part of T-TIP. These higher standards are likely to be agreed upon in about three to five years, not a long time away. If India is not able to meet such higher standards, it would find it difficult to successfully access these markets for a substantial part of its exports. About a quarter of India’s exports go to TPP countries, and if we take EU as well, then the share increases to two-fifths. In the present interconnected world, being excluded from the market with relatively higher standards or conditions of access would limit the opportunities available to the nation to a significant extent. This is why China has already begun to prepare for such changes.

China and the plurilaterals

For the economic progress of China, policymakers consider as crucial the harmonious growth of global markets that provide non-discriminatory access for trade and outward investment of China. Thus, the reform agenda would aim at enabling China to actively participate in the trade and investment regime arising from the mega-FTAs such as TPP.

China’s reforms thus include structural reforms to strengthen the foundations for a market-based economy, accelerate the pace of innovation and create an open innovation system, emphasize green economy, improve environmental standards, improve efficiency of the services sector (with an important emphasis on producer services), reform state enterprise, and implement greater discipline in its foreign investment regime so as to attract ‘quality’ investments into the country and get better treatment for its own outward foreign direct investment.

In addition, China has agreed to negotiate a bilateral investment treaty with the US, using the latter’s template for such treaties. It is also seeking such treaties to broaden the coverage of investment reforms across other important markets. China has agreed with the United States on a non-binding climate plan. It has asked to be admitted as one of the parties negotiating the plurilateral Trade in Service Agreement (TISA). There is also a change, though subtle, in its position on certain issues in the WTO, showing greater ambition in certain areas. Reportedly, China is even considering participating in the Trans-Pacific Partnership (TPP) negotiations; when China’s President, Xi Jinping, met President Obama, he asked to be kept informed about TPP negotiations.

These developments can potentially change the interaction of China with the rest of the world, particularly with developed countries in the context of trade negotiations. China would either like to be part of TPP at a later date, or, if not a part of the mega-FTA, it would still prepare its business to meet the standards and disciplines resulting from these negotiations so as to have easier access to the large market covered by these plurilateral negotiations.

The total share of TPP partners, EU and China is about two-thirds of world trade. Standards are usually applied similarly across total trade, both with trade agreement participants as well as others. If China also applies the same standards as in countries covered by the mega-plurilateral agreements, these higher standards could de facto apply to about two-thirds of world trade. In this situation, if India is out of the framework of disciplines resulting from these agreements, it will effectively be interacting mainly with about one-third of global trade.

The situation would be complicated not just because of higher standards but also on account of new standards in areas that may be very difficult or sensitive for India to address. These would include, for example, the area of social standards. If we do not prepare to be part of the new system, we are likely to face major economic difficulties because without such preparation our exports may find it difficult to have relevant access to a significant part of the global markets. With China also joining the new system of standards, the market difficulties we mentioned above in the context of TPP and T-TIP will be even more severe. And all this could happen in the next three to
five years.

India’s preparations could cover three different focus areas. One is to improve domestic capacity to meet the new standards and evolving disciplines. The second is to assist other economies excluded from TPP agreements (such as African economies) to meet the new standards.

The third is to work with these excluded economies to launch a diplomatic initiative for sensitizing the TPP negotiators of the need for developing an inclusive framework that allows non-members also to have access to their markets, provided the relevant standards are met by them. In each of these three initiatives, India has a prominent role to help reduce potential trade conflicts and promote economic opportunities for all, starting with itself.
The world is changing rapidly with evolving geo-economics, and we need to make the necessary adjustments and preparations. The time to determine and implement our response is now, before our opportunities get adversely affected by changing conditions.

This story is from the print issue of Hardnews: DECEMBER 2013