Trans Pacific Partnership

In 2005, three countries viz. Chile, New Zealand and Singapore came together and created a free trade agreement called Trans-Pacific Strategic Economic Partnership or TPSEP. Later Brunei joined them and it was now also known as P4.

From 2010 onwards, there have been discussions to make it more wider, more disciplined free trade agreement to be known as TPP or Trans-Pacific Partnership (TPP). On October 5, 2015, an agreement was reached among the twelve Pacific Rim countries in the form of largest trade liberalization pact since WTO. TPP is still in proposed state and would come into force when each of the 12 members ratifies it.

Members

The 12 countries among which TPP has been agreed upon include – United States, Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam. These countries are home to 800 million people and account for 40% of global trade.

Objectives

TPP is essentially a Free Trade Area that among other things, seeks to:

  • lower trade barriers such as tariffs
  • establish a common framework for intellectual property
  • enforce standards for labour law and environmental law, and
  • establish an investor-state dispute settlement mechanism.

The agreement aims to liberalize trade in nearly all goods and services by eliminating tariff and non tariff barriers. This will lead to creation of a unified market like in Europe which will help different countries in different manner. For example, while the Japanese carmakers would get cheaper access to United States for their exports; US vehicle makers would get cheaper access to sell their products in Vietnam and Malaysia. Further, the TPP negotiations have included elaborate but mostly secretive negotiations on intellectual property rights, foreign investments, environment and labor related matters; government and private enterprise, government procurement, technical barriers to Trade (TBT), transparency and regulatory coherence.

Salient Features

There are 30 chapters in the TPP agreement text. The salient Provisions of TPP can be summarized in five defining areas as follows:

Comprehensive market access

This involves reduction or complete elimination of tariff and non-tariff barriers in a huge list of goods, services and investments.

Regional approach to commitments.

The TPP agreement facilities seamless integration of economies of members facilitating development of production and supply chains; opening markets and cross border trade.

Addressing new trade challenges

The agreement promotes innovation, productivity, and competitiveness by addressing new issues such as of digital economy, ecommerce etc. It also includes the role played by state enterprises in the countries.

Inclusive trade

It tries to create an environment where members with all levels of development and businesses of all sizes can benefit from trade.

Platform for regional integration

The agreement seeks to serve as a platform for regional economic integration.

Issues and Analysis

TPP versus APEC

TPP is though a collective of APEC Members, it does not include major APEC economies like China and Indonesia. APEC is a conglomeration of 21 countries and non-country economies. APEC includes most countries with a coastline on the Pacific Ocean. However, the criterion for membership is that the member is a separate economy, rather than a state. As a result, APEC uses the term member economies rather than member countries to refer to its members. The result is that APEC members include Taiwan and Hong Kong also. The belo tables shows APEC members vis-à-vis the TPP members:

APEC MembersTPP Members
AustraliaAustralia
BruneiBrunei
CanadaCanada
ChileChile
JapanJapan
MalaysiaMalaysia
MexicoMexico
New ZealandNew Zealand
PeruPeru
SingaporeSingapore
United StatesUnited States
VietnamVietnam
China
Chinese Taipei
Hong Kong
Indonesia
Papua New Guinea
Philippines
Republic of Korea
Russia
Thailand

US versus China and TPP

The main driving force of TPP is United States and as expected, US has successfully tried to keep China at bay from TPP. The group’s economic significance has increased with the addition of Canada and Mexico and has become even more when Japan and Vietnam have joined it.

The Chinese view regarding TPP was that it would be a US-led alliance for reducing China’s strategic clout in the Asia Pacific region.  Critics put forth the point that in the wake of increasing china’s influence through its soft power diplomacy under “Maritime Silk Road” and ‘One Belt One Road Initiative’ will be countered by the U.S presence in Asia-pacific region.

U.S ambition to engage the countries of the region can be gauged by Obama’s statement wherein he said that ‘ we’ve got to make sure we’re writing the trade rules in the fastest-growing region of the world, the Asia-Pacific, as opposed to having China write those rules for us’. Therefore TPP will pull Vietnam and other signatories economically closer to the United States, thus, reducing Chinese economic preponderance. Given that South Korea is likely to quickly join in any completed TPP agreement, these shifts can have a long-run economic impact on China.

Further the deal is seen as a relief by various countries in Asia. They envision it as a counterweight to China’s efforts to expand its influence not just in trade but in other areas, including its island-building in the disputed South China Sea and its assertiveness in maritime disputes. Some of the potential signatories to the TPP, such as Vietnam, South Korea, Japan, etc, are hoping for such an outcome.

However, undermining China at such phase when TPP is yet to come into operation is not a good idea. China has very strong trade and investment links with several TPP members. Since 2005, China has been taking more steps to improvise its own regional integration efforts. These include:

  • ASEAN+3: China is part of ASEAN+3 (China, Japan, Korea)
  • East Asian Summit (EAS) : this includes ASEAN, China, Japan, Korea, India, Australia, New Zealand, US and Russia.
  • Regional Comprehensive Economic Partnership: RCEP involves the integration of the ASEAN’s FTAs with non-ASEAN Asian economies. It would aim to consolidate the FTAs that ASEAN has with Australia, New Zealand, China, India, Japan and Korea. The consolidation would result in the ASEAN connecting to the rest of the major Asian economies in a ‘hub and spoke’ economic framework with ASEAN as the hub.

In the years to come, there is an expected growth of both TPP and RCEP. The TPP is having a head-start over the RCEP. These negotiations might be influenced by developments in the TPP since there are members common to both such as Australia and New Zealand and ASEAN countries like Brunei, Malaysia, Vietnam and Singapore. The common members would probably include Japan and Korea too in the long term. Further, financial picture is also changing rapidly, with China becoming the major lender in the region. The China led Asian Infrastructure Investment Bank has the support of 47 regional and 20 non-­regional members, including TPP nations, such as Australia, Brunei, Malaysia, New Zealand, Singapore and Vietnam.

Therefore it is certain that challenges lay ahead for china once TPP gets implemented but the exact outcomes will only become clear with time.

Effects Of Agreement On India

The TPP is an economic arm of United States’ 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.

  1. A large proportion 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 within the TPP.
  2. Critics argue that the TPP would set a precedent to high global standards and the standards set by TPP are too high for India to join. This requires India to revitalize its manufacturing industry, and induce efficiency in its export sector, otherwise it would be increasingly difficult for India to be able to compete.

Apart from goods; labor, environmental regulations and 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.

India may not be able to meet many of the commitments given its history of intellectual property rights issues.

Further 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.

While the US and India has started negotiating a bilateral investment treaty (BIT), and these negotiations may shelter India for some of the adverse impacts of the TPP but these negotiations is going to be slow. This is because there is vast divergence between the two countries’ model BITs, especially on issues of IPR and market access commitments. Thus, significant foreign investment diversion, including a deceleration in foreign investment flows to India, is a possible consequence of the TPP. In addition, the TPP reduces India’s bargaining power in its BIT negotiations with the US, as it expands the set of options available to the latter.

However ,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-a-vis exporters such as India. This would disadvantage India as US import duties on ready-made garments are high; Secondly, the ‘Yarn– 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 and could impact yarn and fabric exports from India to countries such as Vietnam etc.  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.

Concluding Remarks

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. Moreover, TPP should be regarded as a challenge because it offers an opportunity to India to raise its standards and trading competitiveness.

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