Engaging with the World through FTAs

19th Jan 2015 Political-Affairs

India’s long standing position on non-alignment has undergone a dramatic shift in the recent past. India has been increasingly engaging with other countries which constitute its regional neighbours and with countries which share a common growth outlook. India has entered into several regional trade agreements (RTAs) or free trade agreements (FTAs) to enhance economic cooperation and cross-border trade in goods and services across such countries. However, India has been overly cautious in its approach towards implementing FTAs by exhibiting its inclination towards south-south partnerships (ASEAN, Latin America).

The ‘Look East Policy’ as conceived by Narasimha Rao in the 1990s was merely aspirational and it found shape under the guidance of the preceding governments led by Atal Bihari Vajpayee and Manmohan Singh. The current Prime Minister of India, Narendra Modi, has already taken prominent steps towards ensuring that India not only ‘looks’ east but also ‘acts’ east. His active engagement with the West to push the Indian economy forward can be viewed as a positive sign of his willingness to cooperate with other non-regional countries at a deeper level. Even though India is not a part of the Trans-Pacific Partnership (TPP), it has started the process of negotiating FTAs with several TPP members such as Australia and New Zealand. The strengthening of bilateral ties with such TPP countries can produce mutually beneficial results both from an economic and a political standpoint.

  1. The Trans-Pacific Partnership

The Trans-Pacific Partnership (TPP) is a highly ambitious endeavour which involves the intensive engagement of 12 countries, including both developed and emerging economies, in order to create a comprehensive, high standard and balanced agreement. The Partnership is an attempt to encourage employment, stimulate innovation, and impel economic growth and prosperity. The 12 countries include Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, United States, and Vietnam. The TPP seeks to promote the holistic and inclusive development of the participating nations which possess varying levels of economic prowess.

The 12 countries began their negotiation process in 2005, however, owing to sensitive issues concerning agriculture, intellectual property rights, services and investment, the agreement is still in the negotiation stage. If the agreement is born, it has the potential to open up new opportunities for the Asia Pacific region and forge strong economic linkages between such countries by laying down a common rules-based framework. It is believed that the TPP will cover approximately 40 percent of the world’s economic output and affect around 25 percent of the world trade. However, there has been much speculation and debate about the secrecy of the TPP proceedings, the lack of democracy and the major involvement of big corporations, leading to the creation of an environment of widespread uncertainty.

  1. Deconstructing the TPP’s Potential Negative Impact on India

The implementation of the TPP is likely to produce unfavourable ramifications for the Indian economy. The potential negative consequences that might ensue from a successful TPP can be provided thus:

First, the standards incorporated under the TPP are speculated to be higher standards, in comparison to the prevailing ones. Further, there is a possibility that the standards might increase over time owing to the proposed practice of incorporation by reference. This practice essentially involves the incorporation of private standards which are constantly evolving. The implementation of higher standards in diverse areas such as goods, services, intellectual property rights, product related standards, social standards and supply chains could affect how the domestic economies of various countries, such as India, adapt to or avoid the global trend.

WikiLeaks’ release of the secret draft chapter of the TPP on Intellectual Property Rights has generated much controversy with respect to its provisions on patents, inclusive of medical patents, copyright protection, among others. This chapter has elicited a negative reaction from the civil rights and human rights groups specially which claim that the TPP IP regime curtails individual rights, freedom of free expression and other civil liberties.

Second, India might face a situation of loss of investment or trade diversion in sectors such as services and manufacturing, which are two of its jewels in the economic crown. According to theEconomic Survey (Ministry of Finance, Government of India, 2013-2014), the services sector, with a contribution of approximately 57 percent to the GDP, has made rapid strides in the recent past and it has emerged as one of the fastest growing sectors in the Indian economy. Further, the manufacturing sector constitutes about 60 percent of the industry GDP and therefore, it plays an extremely significant role in indicating the acceleration or deceleration of overall industrial growth. The representation below shows the Manufacturing Purchasing Managers Index (PMI) juxtaposed with the Services PMI over the period 2012-2014 in India:

Source: www.tradingeconomics.com/hsbc

Even though the Government of India has announced a National Manufacturing Policy with the goal of creating 100 million jobs and enhancing the share of manufacturing in GDP to 25% within a decade, the successful implementation of the TPP has the potential to affect the Indian manufacturing market adversely. If the TPP negotiations are successful, other developing TPP negotiating countries might be viewed as capable manufacturing hubs, thereby stealing certain manufacturing investment possibilities from non-TPP partners such as India. Similarly, India may lose traction on investment in the services sector which can seriously prejudice the overall industry outlook.

Third, India could face isolation from global supply chains (GSCs) in the services and the manufacturing sectors as an alignment with the globally prevalent TPP standards might be required. The integration of several emerging economies in the GSCs has led to the increased fragmentation of the GSCs with the assembly process stretching across different parts of the globe before the production of the final product. Since GSCs are characterized by fragmentation, the aggregate value in trade of intermediate products can be correlated to their expansion. The figure below depicts the value of trade in intermediate goods vis-à-vis that of other products:

Source: unctad.org

GSCs across the TPP countries are likely to be enhanced as the TPP rules would seek to make cross border dependence on production of goods or services more seamless and promote effective integration of regional supply chains into the global supply chain system and distribution network. In such a scenario, big emerging economies such as India and China (part of RCEP, but not a part of TPP) can witness an undesirable shift in the GSC dynamics, thereby urging India to consider its position as regards the TPP standards.

Last, as the TPP strives to create an atmosphere of enhanced regulatory coherence and cooperation among the negotiating countries, India’s exclusion from the TPP could place India in a rule-abiding situation as opposed to a rule-making one. The regulatory domain stemming from the TPP can undermine the rules-based framework of multilateral institutions such as the WTO where emerging economies such as India find an equal voice.

  1. The Pandora’s Box and the FTA Hope

The TPP can be considered as a Pandora’s Box for India as it has the potential to unleash several negative forces which can have long-term damaging effects on the economy. However, India can still derive considerable benefits from the TPP market by entering into FTAs with some of the TPP partners. The mega-regional deals such as the TPP will inevitably generate a new form of regionalism which will produce sub-optimal outputs for non-participating emerging economies.

However, if India can engage with some of the TPP negotiating partners at a bilateral level while seeking to penetrate the TPP market, it may be beneficial for both India and her trading partners. For example, the trade flows (import and export, USD billions) between India and Mexico [Figure 1] and between India and New Zealand [Figure 2] over the period 2009-2013 has been depicted below:

 

Source: UN Comtrade

 

Source: UN Comtrade

 

From the two figures it is discernible that trade (both import and export) has essentially increased with both Mexico and New Zealand, indicating that there is a possibility of enhanced trade with these two nations. A Memorandum of Understanding (MOU) was signed between India and Mexico on 21 May 2007 at New Delhi by the Minister of Commerce and Industry and the Minister of Economy, Mexico for the establishment of a Bilateral High Level Group (BHLG) on Trade, Investment and Economic Cooperation. According to the Department of Commerce Annual Report 2012-2013, three meetings of the BHLG have been held so far and the Working Groups have been working on further expansion of trade and investment between India and Mexico. So, for example, if India and Mexico decide to enter into an FTA it could produce mutually beneficial results for both.

Similarly, according to a Joint Feasibility Study between the Government of India and the New Zealand Government, which concluded in February 2009, the complementary nature of the Indian and New Zealand economies was highlighted and it was suggested that there is considerable potential for further trade diversification in light of these trade complementarities. The inaugural round of India-New Zealand FTA negotiation was held in April, 2010 in New Delhi and so far eight rounds of negotiations have been held. The successful implementation of the FTA would open a host of trade and investment opportunities for both the countries. Therefore, if India decides to give effect to an FTA with Mexico or New Zealand, by designing the rules of origin for goods or services suitably, it can gain an entry into the TPP market and vice-versa.

Conclusion

Rapidly-evolving economies such as India and China are not parties to the TPP. If the TPP comes into existence, the Indian Tiger might find itself pitted against the US Eagle on one side and the Chinese Dragon on the other, fighting for its share of the global economic pie. By negotiating FTAs with countries such as Mexico or New Zealand, India can strengthen its position in the global market via the Latin American pivot or the Tasmanian pivot, which can produce both economic and politico-strategic benefits.  In this way, India will be able to offset some of the disadvantages that might flow to it from the successful implementation of the TPP.

 

The author is a  junior researcher at Oval Observer Foundation. The views presented in this article do not reflect the views of the Foundation, its partners and affiliates.