The Trans-Pacific Partnership (TPP) that was agreed to on 5 October 2015 covers almost a third of world trade and 40 per cent of global GDP. By not being part of the TPP, India risks losing out.
According to a Center on Global Trade and Investment study, India’s nominal GDP is likely to be trimmed by more than 1 per cent as a result of trade and investment diversion caused by the TPP. The ensuing negative effects on India’s economy by way of revenue and job losses will be large.
India is less integrated into the global economy than China, who is also excluded from the TPP. India has a share of only 2.1 per cent in global trade (five times less than China’s) and cannot do with further trade diversion. One reason for China’s current clout is its active integration into the global economy over recent decades. Today it leads exports and foreign direct investment (FDI) inflows. If India wants to grow to such economic and geopolitical heights, it must become more integrated.
Global supply chains make up 80 per cent of international trade today. The TPP will further intensify this trend, as it will link production facilities across borders. Joining the TPP could help India integrate its small and medium-sized enterprises into these production networks. Indian exports are most likely to be hit as the TPP provides special concessions to some of its key partners to purchase from other TPP member countries. Thirty per cent of Indian textiles exports, for example, are consumed by the United States and will come under pressure as competitors such as Vietnam will be in a position to usurp India’s market share on the back of benefits granted under the TPP.
FDI inflows into India started to pick up from the mid 2000s. Today India is one of the largest recipients of FDI in the developing world and the largest in South Asia. The TPP will incentivise foreign investment among member states, decreasing the relative attractiveness of India as a destination among TPP members. Given its potential to create jobs and help build infrastructure, India is not in a position to forego potential FDI inflows.
The TPP also involves regulatory harmonisation, meaning that multi-national corporations under the aegis of the TPP do not have to face regulatory hostilities in host countries or grapple with different laws. India’s legislations are not particularly aligned with global standards and companies have previously encountered retrospective tax legislations. In this context, a TPP that excludes India isn’t good news for the country.
But, despite its benefits, India cannot easily agree to several measures under the TPP. India, along with other developing countries, will find it difficult to give in on environmental standards due to its lower stage of economic development. Likewise, India will have a hard time conceding to the kind of intellectual property rights protection regime that the United States wants, as it relies on a huge generic drug manufacturing industry. And India cannot afford to participate in sweeping tariff cuts that are expected under the TPP. It will also be hard to meet the labour standards of the developed West.
But India should aim to negotiate on these issues. Staying out of the TPP does not help in either economic terms or foreign policy terms.
Even more significant are the geopolitical implications of the trade deal. 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 and thereby potentially stunting its rapid rise. While studies show that the United States would gain marginally in economic terms with the implementation of the TPP, Washington has clearly gained a geopolitical victory. Its motivations are understandable as it may want to regain its leadership over global economic governance mechanisms after it lost some credibility following the 2008 financial crisis and the emergence of powerful new groupings like the BRICS (Brazil, Russia, India, China and South Africa).
India has to deftly navigate the TPP waters by making sure it does not isolate itself by staying out of the picture for too long. At the same time, actively committing to the TPP will be hard. India should pursue an incremental process, where it initially joins the discussions and then determines how well it is placed to enter as a member. India could bring much needed flexibility to the TPP and use it to boost its own ties with United States.
But there is no clear consensus in the Indian government on whether enhanced market access through the TPP will be worth the gains. The TPP would involve huge costs to a few 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 for India if it joins the TPP cannot be overlooked.
Ultimately, major structural changes in the Indian economy — from infrastructural overhauls and legislative fixes to institutional reforms and human resource development — will determine whether India manages to succeed in a world of complex supply chain-led international trade and investment. Mega-FTAs are only enablers. India should partake in them according to its needs at the time.
This article was republished from Eastasiaforum.org.