The Broad Mind | Navigating the TPP waters

By Abhirup Bhunia

To keep off potential political and commercial isolation, India has to deftly navigate the TPP waters. 

Complex elements of modern day trade like protection of Intellectual Property Rights, seamless cross-border investments, labour and environmental standards for production, etc – together identified as “21st century trade issues” in common parlance – are being comprehensively dealt with by the US-led Trans Pacific Partnership (TPP), a pact which has caused much flutter in trade and foreign ministries worldwide, not least in developing countries.

The TPP is a trade agreement between the US, Canada and major Asia Pacific powers, Australia, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam. It aims to tear tariff and non-tariff barriers down, ease investment flows and promote economic growth.  The US-led TPP once implemented will alter world commerce and bring about a shift in its geo-economics. Obama’s just concluded week-long visit to the Asia Pacific region has sparked off renewed interest in the TPP. While no significant gains have been made in this visit, the lack of a debate on the TPP in India is surprising as the TPP will impact India in more ways than one.

While China is still reportedly out of the TPP ambit, there are many reasons why India should think twice before opting out of the TPP. Regardless of the fairness of the TPP, its merits, and the manner of its operation, it is a huge bloc and it will make geo-economic sense (as well as pure economic sense) to simply join the same. India surely won’t make a point by swimming against the tide. But it stands a chance to do so once it is an active member of the group and its discussions.

Here’s why India can ill afford to join the TPP. While the Bali round has injected fresh ammo into the multilateral system, the WTO is still exposed to the possibility of being replaced by a supranational institution like say the TPP. And while India is part of the RCEP  (another mega FTA involving Asia Pacific powers), it reduces itself to the likelihood of being subjected to rules crafted between the major TPP powers, mainly the US, by staying out of the bloc. If mature democracies like India refuse to play an active role in democratising the international regulatory architecture, the TPP is going to emerge as the de facto regulatory body of global trade. This is because the TPP is by far the most comprehensive economic deal encompassing all the complex trade issues, besides commanding huge numbers. On whether it is excessively corporate friendly and overlooks some of the legitimate developmental concerns, there can be a separate debate and the same is highly called-for. However, by staying out of it, India does not benefit the developmental cause the least bit. All it does is that it isolates itself.

There are specific economic impacts that the TPP will have for India if it stays out of the agreement. Depending on the nature of concessions offered to the TPP members, India could stare at a loss of market share vis-à-vis the IT and services sector, which accounts for well over half of its GDP. India is already facing stiff competition in outsourcing from Philippines, Indonesia and Malaysia. While the latter, with the help of TPP, can develop a stronghold in the global services industry, there are indications that Philippines might be brought under into the TPP fold too. Although this looks somewhat distant now, it might spell mean further trouble for India, as Manila is already providing stiff competition to the Indian services industry.

A TPP sans India would also mean that FDI risks moving away from it to those countries that are part of the TPP. With the TPP also discussing regulatory harmonisation between nations – which envisages that MNCs do not have to deal with divergent set of laws – India risks becoming all the more unattractive as its legislations are not particularly aligned with global standards. While India’s spectacularly large consumer market and a rising middle class makes it an invariable foreign investment choice, firms have earlier faced issues with retrospective tax legislations, and the smoothening out of legislative hurdles in the TPP lands India in a comparatively disadvantageous position. Given its infrastructure building and job creating potentials, India will hardly be in a position to forego potential FDI inflows. India’s flagging manufacturing sector, which it seeks to invigorate through the National Manufacturing and Investment Zones (NMIZs) will also take a blow as the NMIZs seem to rely on FDI inflows to a quite an extent. The textile sector, for one, is likely to be badly hit. As a non-TPP nation, India will be put at a disadvantage as other textile manufacturers who are part of the agreement, notably Vietnam, will get a preferential treatment in the US markets. And with the US alone accounting for 30 percent of India’s readymade garment exports, the sector is in for some trouble. But the extent of trade diversion that will take place owing to India being kept out of the TPP remains to be seen. Although India has FTAs with ASEAN as a whole and many of its constituent members, it stands to lose market share to some of the ASEAN nations with which it competes for a share in the global market.

Then there is the geopolitical aspect. Should India miss an opportunity to make itself heard in a platform as big as the TPP (it commands 40 percent of global GDP and more than a quarter of global trade)? The answer is a resounding no. The geopolitical intentions of the TPP are quite well-known. US Vice President Joe Biden is quoted to have said about the TPP that it intends the high standards of the TPP to ‘enter the blood stream of the global system’. Thus US’ intention to be at the forefront of 21st century trade governance is unambiguous. India, as an emerging power, and a BRICS and G20 member, should voice its opinion in the TPP platform, if it hopes to remain a critical member-state for future global economic governance.

The US has officially shown interest in bringing India within the TPP fold but India does not seem particularly fascinated or capable, for that matter, to enter into an agreement that requires far-reaching reforms. This has got to do with India’s inability to provide concessions on policy/regulatory, environmental and labour fronts, a strict demand of TPP. Also since the TPP is a high level FTA involving tariff cuts across sectors without much room for flexibility, India might find it difficult to accede to tariff cuts in farm and merchandise products in particular. Meeting strict quality standards will be an uphill task for Indian exporters too.

Clearly India has a few issues to resolve in terms of economic dealings. But staying away from it is no solution. To keep off potential political and commercial isolation, India has to deftly navigate the TPP waters. While progress seems to be rather slow with the TPP, US officials have indicated that the TPP is nearing conclusion. Even as consensus building becomes a painful process with so many stakeholders, an Indian nod to the TPP will unfold a new chapter in the ten year long TPP saga.

Abhirup Bhunia holds an MA in International Political Economy from University of Sussex, UK and is currently a research analyst with the Institute of Economic Growth, New Delhi. 

DISCLAIMER: This is an archived post from the Indian National Interest blogroll. Views expressed are those of the blogger's and do not represent The Takshashila Institution’s view.