TPP: implications for India Geethanjali Nataraj is a Senior Fellow at the Observer Research Foundation, and Pravakar Sahoo is Associate Professor at the Institute of Economic Growth (IEG), Delhi The United States along with 11 member countries signed the historic Trans Pacific Partnership (TPP) agreement on 5th October 2015 at Atlanta, USA. TPP not only includes developed and developing countries connecting west with east but covers areas like competition policy, regulatory symmetry, labour standards, environment issues along with trade in services, technical barriers to trade and intellectual property rights. The key outcome of TPP is expected to be high and dynamic-evolvement of standards for trade and investment which are most likely to seriously affect India’s trade and investment. In the above backdrop, the paper explains what are the likely implications of TPP on India and sets out a roadmap for India to prepare itself. Introduction Given the slow and tedious negotiations on crucial issues at the World Trade Organisation (WTO), mega Free Trade Agreements (FTAs) have begun to change and set the rules to create a 21st century template for international trade investment. One such mega FTA just concluded is the TPP which is set re-write the principles of trade and investment and expected to affect India to a considerable extent. For an emerging country like India with high aspirations, staying out of the TPP, regardless of the latter’s fairness and manner of implementation will be a geo-economic self-goal. It’s for time for India to prepare itself to tackle tariff, non-tariff and market access issues that will arise out of TPP and protect India’s trade ambitions, particularly India’s exports which have been contracting for last ten months. The TPP, once implemented in full force, is expected to change the global trade architecture resulting in such high standards in markets covering 1/3rd of world trade and 2/5th of world GDP that India, being a non-TPP trading partner, will find it difficult to access unless its domestic capacity and standards improve. Hence, the implications of the TPP for India and other emerging economies which are not a part of this mega FTA would be a need to develop a strategy to deal with the expected adverse impact. The nature of global trade has changed from mere exchange of goods to complex transnational supply chains and value chains over last couple of decades. A product today is made across geographies, where raw materials and intermediate goods are sourced from across borders. As India is gradually getting integrated to Global Value Chains (GVCs), it has to raise and maintain the standards to remain a part of Global Supply Chains (GSCs). The most difficult for India would be raise its standards to the TPP level to remain a part of GSCs with TPP counties and indirectly with countries with whom TPP members have FTAs. The standards, mostly US standards that are high and developed by the private sector and multi-national firms, relating to production like environment, labour along with product specific standards will result in Indian exports facing more non-tariff barriers. Further, the rules of origin in TPP will favour member countries to be part of GVC than India. The conformity of standards to enter a TPP member country market would be difficult for India to meet. Because supply chains are linked with low-cost labour in developing countries, labour and environmental standards too have come to form part of economic agreements these days. This is in addition to rules governing IP, cross-border investment, etc. are together identified as ‘21st century trade’ in common parlance. These complex elements of modern day trade will be increasingly dealt with by mega-FTAs like the TPP, which has already been signed and the Regional Comprehensive Economic Partnership (RCEP) which is also on the anvil. Moreover, the TPP is different as it covers areas such as competition policy, regulatory symmetry and standards for labour and employment along with other major features such as trade in services, technical barriers to trade and intellectual property rights. As TPP includes other developing countries, it is expected that the trade disciplines and standards will be implemented in these countries other than non-TPP members affecting India’s trade once TPP gets implemented. The potential impact of TPP on India will be on three fronts mainly; (a) trade diversion, (b) drop in FDI and (c) geopolitical exclusion. In the above backdrop, this paper attempts to detail the nature and key elements of the Trans-Pacific Partnership agreement and its implications on India by suggesting a few policy measures that India would need to undertake to deal effectively with the adverse impact of this major mega FTA. Evolution, key elements and scope of the TPP The TPP has its origin to a much smaller group called the Trans-Pacific Strategic Economic Partnership (P4) among four small countries Brunei, Chile, New Zealand and Singapore, which came into force in 2006. It is only in October 2008 that the USA took the initiative in joining the group. Finally, the concluded TPP is a comprehensive US-led FTA covering all the modern day elements of trade includes Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam. What is different with the TPP is that it goes beyond trade and involves near-complete harmonization of regulations and trade disciplines among member countries. Moreover, the TPP covers many behind the border measures aimed at disciplining the state owned enterprises (SOE’s), observing competition rules, ensuring regulatory coherence, facilitating supply chains, setting out labour standards, environment standards and securing more protection for IPRs including patents and copyrights. The TPP is geographically inclusive and extends to ASEAN and NAFTA countries. Other Asian countries such as South Korea and Thailand have indicated their intention to join the group in the foreseeable future and China too is considering joining the TPP, though it remains to be seen how China will meet the standards for doing so. Given other Asian countries preparing grounds to join the group, the TPP is actually staring India in its backyard. Japan’s entry into the TPP is significant as Japan has traditionally been extremely protective of its farm and non-farm sectors, which it will now have to open up. In such a scenario, it would be difficult for India to avoid being marginalized in the trade rule-making process, if it continues to stay out of the TPP. Key elements of the TPP are: Comprehensive market access. The TPP reduces and eliminates tariff and non-tariff barriers across goods and services trade and investment, so as to create new opportunities and benefits for business, workers, and consumers. Regional approach to commitments. The TPP facilitates the development of production and supply chains, seamless trade, enhancing efficiency and facilitating cross-border integration. Goals include creating and supporting jobs, raising living standards, enhancing conservation efforts and opening domestic markets. Addressing new trade challenges. The TPP promotes innovation, productivity, and competitiveness by addressing new issues, including the development of the digital economy, and disciplining state-owned enterprises in the global economy. Inclusive trade. The TPP includes commitments to help small- and medium-sized businesses to understand the agreement, take advantage of its opportunities, and bring their unique challenges to the attention of the TPP governments. It also includes specific commitments on development and trade capacity building to ensure that all parties are able to meet the commitments in the agreement and take full advantages. Platform for regional integration. The TPP is intended as a platform for regional economic integration and designed to include additional economies across the Asia-Pacific region. The scope of the TPP is vast. TPP itself covers about 40% of global GDP and nearly a third of world trade. In their assessment of the economic impact of TPP, Petri and Plummer (2012) find that the enforcement of the TPP could yield annual income gains of $295 billion, including $78 billion in the US alone. It is expected to unleash potential gains of as much as around $1.9 trillion in the Asia Pacific through free trade. One third of US gains are likely to come through investment provisions of the TPP. This is not surprising as capital flows to and from the US will inevitably rise, in view of US-led investment regulation harmonization within the aegis of TPP. The study further finds that Vietnam is expected to gain 14% under the TPP as it would become a hub of low-end manufactured goods like textiles and garments. Likewise, American service export is going to lead the export growth figures in that country. Japan will experience a 2% hike in its GDP and an increase in trade volume to the tune of $340 billion. Todo considers the possibility that these figures are exaggerated, but nonetheless concludes that the TPP will substantially add to Japan’s GDP, and any addition is welcome given Japan’s economy grew at less than 1% in the past two decades. In short, the benefits of the TPP in terms of trade and investment growth – as well as overall economic growth – have been established by the literature on the subject, however limited due to its topical nature. Trade disciplines and standards of TPP TPP seeks to institutionalize certain labour standards. Participating countries have agreed to enforceable labour rights and higher labour standards that will eventually give way to high-standard framework for labour rights and help reduce trade barriers. In the TPP, negotiated environmental standards are of the highest order that include provisions on enforcement of environmental laws, including the multilateral environmental agreements. This has implications for the TPP countries as well as for the non-TPP countries like India as TPP countries are also major trading partners of India. Not all TPP countries have acceded to the different existing multilateral environmental agreements (MEAs), but ratifying the TPP will compel them to eventually accede to them. Besides, the TPP dispute settlement mechanism will appoint a panel to decide if a party has failed to implement its environmental expectations under an MEA. This raises concerns as the MEAs themselves lack such dispute settlement systems today. There is a clear attempt here to link trade and environment which has been thwarted by the developing countries at WTO so far. The strongest concern is the aggressive stance of the US on protection of IPRs, which will allow IP to be monopolized by a few corporations. It bases its view on encouraging innovation. This would however lead to inaccessibility of affordable medicines, particularly for developing countries like India. Not only would it make it difficult for generic drug makers, it will also restrict free flow of information and knowledge. The TRIPS Agreement already seeks to actively protect intellectual property rights, the dominant players in this area being the technologically advanced countries like the US. India is part of the TRIPS Agreement. Further, the TPP seeks to strengthen the Rules of Origin, with specific origin rules on sensitive sectors like farm products and textiles, so that only the TPP countries get the benefit of market access. Overall, it is an all-encompassing comprehensive economic deal that has been signed between the member countries. This is also reflected in the joint statement released by the trade ministers of the 12 member countries. The joint statement says that in addition to “liberalizing trade and investment between us, the agreement addresses the challenges our stakeholders face in the 21st century, while taking into account the diversity of our levels of development.” The joint statement also said that the deal would also promote economic growth, support higher paying jobs, enhance innovation, productivity and competitiveness raise living standards and reduce poverty among the member countries of the TPP. Implications for India All these provisions of TPP, particularly trade disciplines and harmonisation of standards at higher level may spell trouble for India: in essence, the impact on India will be in the form of trade diversion leading to falling exports, industries suffering and rising unemployment. Trade: Though India is relatively less integrated into the global economy compared to its counterpart China, which has five times greater share in world trade, India with a share of 2.1% cannot do with further trade diversion. In fact the slowdown of exports for last ten months has worried Indian policy makers to achieve the targeted growth of 8 percent. One reason why China has the clout that it has today is because it has for decades integrated into the global economy actively leading exports and FDI inflows tables. Today 80 percent of international trade is constituted by global supply chains (UNCTAD, 2013). The TPP is going to further intensify this trend as it will seamlessly link production facilities across borders. If India is to integrate more to these production networks through global value and supply chains, joining the TPP will help. Otherwise India needs to prepare itself to meet the tariff and non-tariff standards of TPP. Anyway, Indian exports are most likely to be hit as the TPP provides special concessions to its partners. For example, Indian textile exports, of which the US itself corners 30%, will come under pressure as competitors in the form of Vietnam and others will be in a position to usurp India’s market share on the back of benefits granted under the TPP. A third of India’s exports are directed towards TPP/TTIP countries. Therefore joining TPP would help India’s exports, particularly Indo-US trade. By choosing to be absent from the TPP, which accounts for almost a third of world trade and 40% of global GDP, India risks off-putting implications for itself. According to a Center on Global Trade and Investment study, India's nominal GDP is likely to be trimmed by more than 1% as a result of TPP. The ensuing negative effects on the economy by way of revenue and job losses are going to be large. The clause of incorporating sustainability standards, which will keep evolving, in areas such as child labour, human rights & working conditions, animal health, testing requirement, quality management, IPRs, etc. will make India’s exports vulnerable to TPP countries. Indian producers need to take a serious note of it to improve their standards as some of the countries aspiring to be member of TPP like China has already started in a big way. China has initiated some big steps in recent years in areas of improving IPR, carbon emission in certain SEZs by 90%, improving working conditions of the labour including hike in wages etc. The TPP will not only affect India’s exports due to trade diversion but also India’s imports. If TPP member countries don’t find it profitable to export to India as a consequence of both low tariff and non-tariff barriers in TPP member countries, India’s essential imports, which are crucial for exports and growth, will get costlier, affecting competitiveness. Apart from the trade diversion, there could re-routing of exports from non-TPP member to TPP member as many TPP members countries are having FTAs with countries that are India’s competitors in many sectors. There are already studies finding that India’s trade, particularly exports of textiles & wearing apparels, agricultural products, processed food, heavy manufacturing would get affected if TPP is implemented. Textiles and clothing, which is one of the top labour-intensive manufacturing exports, will certainly get affected because of trade diversion towards a TPP member country like Vietnam. However, impact analysis of these studies underestimate the magnitude as non-tariff measures, which will facilitate trade among TPP members countries and services trade are not taken into account fully. According to a Center on Global Trade and Investment study, India's nominal GDP is likely to be trimmed by more than 1% as a result of TPP. The ensuing negative effects on the economy by way of revenue and job losses are going to be large. Foreign direct investment: FDI inflows into India started to pick up from mid 2000s and India is today one of the largest recipients of FDI in the developing world, and the largest in South Asia. With the exclusion of India from the TPP the relative attractiveness of India as a destination will go down as TPP member states will have an investment pact amongst themselves which incentivizes foreign investment. TPP also involves regulatory harmonization, meaning that MNCs under the aegis of the TPP do not have to face regulatory hostilities in host countries or grapple with different laws wherever it operates. Even as India’s legislations are not particularly aligned with global standards, companies have earlier faced issues like retrospective tax legislations. In this context, a TPP sans India isn’t good news for the latter. Given its emphasis on manufacturing for employment creation and infrastructure building, India will hardly be in a position to forego potential FDI inflows. As most of the production today happens across borders, multinationals would not prefer India as part of the production process as they would find it difficult to access market in TPP countries. Though India is the most favoured destination for FDI in 2015, its absence in TPP and inability to achieve the trade and investment disciplines to reach the high standards of TPP would keep away foreign investors to make India as their production base or a part of their production process. Trade and investment coverage of TPP along with TTIP it is about half of global share. With supply chains, this coverage will be very much larger. A few experts have said that Indian firms are capable of meeting the standards and even desire to produce modern and knowledge-intensive manufactures; however it might actually require a platform such as TPP for it to fulfil its agenda of effectively meeting the required standards. Geopolitics: The TPP is a well-crafted geo-economic exercise as much as it is a trade and investment pact. It has succeeded in excluding China from the game and stunting its rapid rise by narrowing the very channel that it treaded to rise in stature–commerce. However today’s mega-FTAs are intended to outcompete each other and TPP is a good example. The EU-US TTIP on the other hand has less geopolitical connotations, but will nonetheless serve a blow to China. While studies show that the US would gain marginally with the implementation of the TPP, the US has clearly gained a geopolitical victory here. This is understandable as it might want to stamp its authority on the global economic governance mechanism after it lost some credibility after the 2008 financial crisis and newer groupings like BRICS started to garner much attention. India has to deftly navigate the TPP waters by making sure it does not isolate itself by staying out of the TPP picture for too long. At the same time, actively committing to the TPP will be hard. An incremental process, where India initially joins the discussions and then figures out how well it is placed to enter the TPP as a member, is desirable. India in fact can bring in much needed flexibility in the TPP and also boost its ties with US through TPP. However, as of now there is no clear consensus in the Indian Government on whether enhanced market access through the TPP will be worth the gains as it would involve huge costs to a few select still protected Indian industries. Undoubtedly, India would need to prepare itself for higher standards than it has ever committed to in the past. But the gains to India if it joins the TPP also cannot be overlooked. According to a study carried out by Bergsten, India would gain as much as $500 billion in exports by joining the TPP. But until India prepares itself to join the TPP, India simultaneously could open the India-USA FTA negotiations. An FTA with US could help to a considerable extent to nullify the adverse impact of the TPP and also prepare itself better to join the TPP with the help of US support. The overall impact of the TPP on India could be limited if India signs the FTAs with EU, Australia, Canada and the US. Conclusion and way forward The multi-polar world requires trade policy and domestic policy to go hand-in-hand to prepare India for its larger role as an emerging market economy. India has been a founding member of the GATT, which was replaced by the WTO in 1995. Consistent reforms, particularly trade and industrial reforms, helped India to integrate with the world economy. For example, merchandise trade to GDP has increased from 13.88% in 1991 to 42% in 2013. But while multilateralism survived in Bali last year, the bitter reality of the ambitious mega trade deals like the TPP and the TTIP is creating a snowball effect on global trade, leaving developing countries like India with little or no leverage to bargain, and cannot be ignored. What is also noteworthy is that over past few years India has criticized the WTO in areas pertaining to IPR, trade related investment measures, general agreement on trade and services and non-tariff barriers. Moreover, India requires a consensus based multilateral regime under the WTO framework which will work for its betterment. Unfortunately, because of the presence of 159 WTO members, agreement on a proposal is hard to achieve. The recent tumult over getting the TFA passed is a case in point. It is, therefore, essential to look into the international trade policy regulations and conditions which led to the emergence of mega-regional negotiations such as the TPP, TTIP and RCEP, with the objective of determining the conditions for market access in large parts of international trade and trade policies in the not too distant future. In terms of market access TPP will adversely affect India because of the conditions that will emerge from it. India lacks standards and capacities due to which it will lose its market access for exports to the markets of countries negotiating mega-FTAs. Also, India requires developing an inclusive system of conformity assessment, failing which it will get more difficult for India to access global markets on a wide level. This will require India to negotiate under the RCEP as it is seen by a few of Indian exporting firms as the key to achieving the evolving standards of the TPP. In terms of tariff reductions and service liberalization, the TPP has the potential to go beyond WTO; however there is a possibility that the advantage of the liberalization will accrue to handful of trading partners. Moreover it will not address the issues of anti-dumping/countervailing duties or subsidies at all. Inclusion of standards-one which is generic, related to environment and labour, and the other which is product specific-is going to make trade negotiation all the more complex, and countries that are outside the negotiations, especially India, need to be prepared. Similarly the TTIP will focus on mandatory standards prevailing in the EU and the US which are generally private standards whose content requirement keeps increasing with time and competition measures. This agreement will largely benefit the member countries, while the countries outside will be highly affected. Even at a broader level, because standards incorporated in the mega-FTAs discussed here will potentially become international benchmarks in years to come, India stands to gain little if it stays out of the picture. However, the credibility of WTO can’t be ignored as compared to TPP as its rules are less complex and WTO addresses the issues of anti-dumping and subsidies, which are vital for India. Besides, the WTO with its transparent and merit-based dispute settlement system, has been the most distinguished example of successful multilateral cooperation since its inception – a view India has fiercely advocated. The way forward for India to remain relevant in the global trading system might well be membership of mega FTAs such as the RCEP, TPP and TTIP. However, rushing into FTAs without a level playing field for domestic businesses wouldn’t be of much help to India. A desirable strategy would be to have a good mix of bilateralism and multilateralism by targeting trade pacts which are comprehensive, particularly with members of TPP, TTIP and RCEP. India has a few legitimate concerns that need to be addressed. For instance, India along with other developing countries will find it difficult to give in on environmental standards on account of the stage of economic development that it is in. Likewise, on the IPR front, India will have a hard time conceding to IPR protection regime of the kind that the US wants as it has a huge generic drug manufacturing industry. Other concerns are in the domains of sweeping tariff cuts that are expected under the TPP, something that India cannot afford to participate in as it has legitimate domestic concerns to address. Labour standards of the developed West are also hard to meet. However, these are issues that should be thrashed out and negotiated as staying out of these mega FTAs does not help either in economic terms or foreign policy terms. Even if one finds policy interventions to partly surmount the economic setbacks, the geopolitics of it is hard to miss. Finally-and this is important-it is only major structural changes in the Indian economy, from infrastructural overhauls to legislative fixes, institutional reforms (including curbing corruption) to human resource development that will determine whether India manages to battle it out in a world of complex supply chain-led international trade and investment. Mega-FTAs are mere enablers, which India should partake of according to its needs at a given time.

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It is only major structural changes in the Indian economy... that will determine whether India manages to battle it out in a world of complex supply chain-led international trade and investment

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