On 24 June 2015, the United States President Barack Obama was given the authority by the United States Congress to expedite negotiations for a massive trade deal - the Trans-Pacific Partnership (TPP) - with countries on the Pacific-rim. The TPP is a proposed regional, regulatory and investment treaty - a key trade initiative through which the Obama administration seeks to advance the United States' multi-faceted trade and investment interests in the Asia Pacific region. The ambitious 21st century trade agreement treaty, which is also an economic arm of the US Rebalance to Asia-Pacific, is being negotiated with 11 Asia-Pacific countries including Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam. The Obama administration has been pursuing TPP to unlock opportunities for American manufacturers giving an impetus to 'Made in America' exports thereby supporting job creation and increase in wage growth.
The interesting thing to note regarding the TPP is that the proposed trade deal will be a comprehensive deal for all TPP member countries that would range from providing market access for goods and services to ensuring strong and enforceable labour standards and strict adherence to standardized environmental commitments. Through the TPP, the Obama administration wants to ensure the vitality of American economic commitment to its allies and partner countries in the Asia-Pacific.
The conspicuous absence of China from the TPP grouping highlights the US need to write the rules of global trade and position itself at the epicenter of geo-economics. However, the US-led TPP would face increasing competition as China recently concluded a free trade agreement with Australia (ChAFTA) and South Korea and is pushing for a broader Asia-trade pact - Regional Comprehensive Economic Partnership (RCEP). Adding new vigour to TPP negotiations, the US will be hosting a meeting of trade ministers from 12-nations in Maui, Hawaii marking the final stage in the TPP negotiations expected to cover 40 percent of world's economy.
"India's exports are going to be impacted when the TPP is in place as there would be significant trade diversion and diversion in foreign investments from the Indian market."
The TPP is an economic arm of the US Rebalance to Asia Policy. Since India has been an important part of the Asia policy, and is not a signatory to the TPP, there are widespread speculations as to how the TPP will impact India. While several opine that the overall impact is uncertain at this point, there are various channels through which the TPP can affect India. For instance, India's exports are going to be impacted when the TPP is in place as there would be significant diversion in trade and foreign investments from the Indian market. A large portion of India's exports are in services. With the anticipated reduction in barriers to trade in services among TPP members, there is the possibility that some of India's services exports to those countries will be replaced by services trade with the TPP member countries.
The TPP would set a precedent to high global standards and in the event of India's failure to mature and revitalize its manufacturing industry, and induce efficiency in its export sector, it would be increasingly difficult for India to be able to export even if it's a part of RCEP. Even though TPP is open for new members, the standards set by TPP are too high for India to join. India may not be able to meet many of the commitments, for instance the supply chain management or regulatory coherence among others. By not being a part of TPP, India is going to lose the preferential access to the US market which is a big market for Indian exports, however, the extent of the impact from trade diversion would depend on the concessions finally agreed. India is in negotiations with the US on a Bilateral Investment Treaty (BIT), but the success of negotiations on the BIT would depend on the relevant standards of the BIT agreement whether they are at par with the TPP level or below the level. In case, the standards set by BIT are at par with TPP level, then the challenges for the Indian exporters would remain the same and eventually there would be an urgent necessity to improve Indian manufacturing efficiency standards, procedures and processes.
India's bilateral free trade agreements (FTA) with some of the TPP members - Japan, Malaysia, and Singapore - and FTAs, which are underway with Australia, Canada and New Zealand, may dilute the impact of trade diversion caused by TPP to some extent.
With the TPP in place, Indian industries are likely to face trade diversion effects in some of the key sectors such as textiles and clothing industries. The United States accounts for 30-35% of India's ready-made garments exports and the TPP is expected to affect India's textile and clothing sector in two ways: First, TPP member countries will get preferential access in the US market vis-à-vis exporters such as India. This would disadvantage India as US import duties on ready-made garments are high; Secondly, the 'Yarn Forward Rule'-- a key feature of the TPP -- makes it mandatory to source yarn, fabric and other inputs from any or a combination of TPP partner countries to avail duty preference. This would change the dynamics of the existing global supply chain in textile and clothing sector. This is one instance of the adverse impact of TPP on India. Similarly, the loss of market access may also impact other products such as grains and other crops, processed food and heavy manufacturing.
Indian exports will be adversely impacted more due to the non-tariff measures rather than tariff measures as the tariff measures are already low in larger markets such as the US and EU. In addition to labour and environmental regulations, intellectual property rights (IPR) protection is a significant component to the TPP negotiations. The IPR standards are much more demanding than those of WTO. Most of the standards in the TPP negotiations are to converge to US standards or to the standards of developed markets. There is expectation of significant foreign investment diversion from India and since, a large proportion of India's exports are in services, the impact would be significant.
BIT negotiation may shelter India for some of the adverse impacts of the TPP, however, the BIT negotiations would be a long-drawn process. There still exists a vast divergence on issues of IPR and market access which is unlikely to be in favour of India as the TPP reduces India's bargaining power with the US. Lastly, RCEP also has members who are part of TPP. Due to overlap of members, it is expected that the standards for RCEP would also to an extent converge to the even higher standards of TPP. This would require significant efforts by India to reform its domestic policies to comply with the same or be left out of the growth in global trade which would be witnessed due to these multilateral trading arrangements.
Even though the magnitude of impact from trade diversion on India when the TPP is in place can be debated, it is certain that trade and investment diversions hurting the Indian economy is most likely to occur. Some of this impact may be mitigated due to a combination of inclusion in RCEP and other bi-lateral agreements. India should also re-engage the US in advancing BIT negotiations. However, a new 'trade order' is expected with much higher standards congruous to TPP standards and hence, efforts are required on the domestic front for India to acquire preparedness across industries to be able to compete globally.