The Trans Pacific threat to trade

The Pacific Ocean has proved to be troublesome for India’s economy. The El Nino phenomenon, which is caused by warmer than normal waters in the Pacific Ocean, has been a critical ‘X’ factor in the behaviour of the Indian monsoons over the years, including the latest one.

Now, another threat has emerged from the Pacific theatre, so to say, in the form of the Trans Pacific Partnership or TPP, a trade agreement between the US, Japan and ten other nations on the Pacific Rim including Australia, Singapore and Malaysia. When these nations announced on October 5 the successful culmination of talks that had been dragging for over five years, the world woke up to the reality of a formidable trade bloc that will account for 40 per cent of the global economy.

The TPP pushes the envelope on contentious subjects such as intellectual property (IP) rights and the freedom of multinationals to sue governments. Multinational corporations can cramp and even hinder the sovereign right of governments to frame regulations in the interest of citizens when they foresee a threat to their profits. Prices of biosimilars, or drugs that are derived from living biological organisms, may also rise in the TPP member countries as a fallout of the 5- to 8-year protection period that has been granted to companies that have patented the drug. The signing of the TPP is a major challenge to India’s trade interests. It comes at a time when the country is grappling with issues relating to subsidies on food procurement and storage at the WTO. The multilateral trading system under the WTO, which is already under siege with the raft of regional and bilateral trade agreements that have been signed in recent times, faces a challenge like never before with the entry of the TPP. But that’s a subject for another discussion.

For India, the crucial point to note is that among the signatories to the TPP are its important trading partners such as Japan, Australia, Singapore and Canada, in addition to the US. According to a DBS Bank report, the US and Asean together account for almost a quarter of India’s merchandise exports with Latin America accounting for about 4 per cent.

This means that TPP members account for almost 30 per cent of the country’s merchandise exports which could now come under the shadow of the agreement. Nowhere will the effect be felt more than in textiles and leather exports, two important items in India’s export basket. Competition, which is already stiff from Vietnam and Malaysia in these segments, will now acquire a new dimension as exporters from these two countries to the US, Canada, Japan and Australia will enjoy either nil or marginal duty status.

There may also be problems for yarn exports to Vietnam and Malaysia if rules of origin kick in under the TPP preventing garment manufacturers from importing yarn from other countries. It may be a long-term threat but the relaxation in duties for car imports by the US from Japan over the next 25 years can constrain the emergence of India as a manufacturing base for cars. Over the last few years, multinationals such as Ford, Suzuki and Hyundai have been manufacturing in India for export markets.

India did not attempt to join the TPP for obvious reasons: the possible gains from opening up markets for its merchandise exports would have been nullified by the concessions that the country would have had to grant in the realm of intellectual property rights, especially in the important segment of drugs.

Having foregone that option, the only other choice left for India is to stitch up free trade agreements with individual member countries of the TPP. It already has such agreements with Singapore, Malaysia, Japan and the ASEAN — four of whose members are part of the TPP. However, proposed agreements with Australia, Canada and the US are still works in progress.

Given the hard line adopted by both India and the US in the matter of IP rights, protection for drug companies and movement of workers, it is anybody’s guess whether a CEPA with the US will happen anytime soon.

That said, India should speed up its ongoing talks with Australia and Canada and sew up agreements quickly. The process for forging a Regional Comprehensive Economic Partnership (RCEP) between the Asean, China, Japan, Australia, New Zealand, South Korea and India is also currently on. With seven of these countries already a part of the TPP, it will be interesting to watch how talks on the RCEP, nine rounds of which are already over, now progress. The tenth round is scheduled for this month and expectations, at least until the TPP was concluded, were that the RCEP could be stitched together by 2016. It is in India’s interest to push for early and successful conclusion of the RCEP.

In addition to these, India should also restart negotiations with the EU, which have been stalled for the last two years due to disagreement over duties on automobiles, wines and spirits, and data security and immigration. More recently, the EU ban on sale of 700 items of drugs clinically tested in India has prevented the resumption of talks.

Prime Minister Narendra Modi is understood to have raised the issue with Chancellor Angela Merkel recently and hopefully talks will resume soon. The time is opportune now because the EU is vulnerable after the TPP especially because the Trans Atlantic Trade and Investment Partnership is nowhere near conclusion.

Of course, India will have to walk the tightrope while engaging in negotiations, whether it is with the EU, the RCEP or others, and may have to adopt an approach of ‘give some and take some’. Such an approach is integral to trade and India has no choice but to push forward making some concessions along the way if its objective of achieving $900 billion in exports in the next five years and increasing its share of world trade from 2 per cent to 3.5 per cent by 2020 is to become a reality.