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14 October 2015, Gateway House

TPP: trade-offs and imperatives

Although it is too soon to comprehensively analyse the Trans-Pacific Partnership agreement of October 5, it is worth assessing what is known. Here are the facts, the controversies, the assessments, and the implications for countries that are not part of the agreement, especially India.

Distinguished Fellow, Geoeconomics Studies Programme

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On 5 October 2015, the United States and 11 other Pacific countries reached an agreement on the ambitiously transformative Trans-Pacific Partnership (TPP), after more than five years of intense negotiations[1]. It is the most far-reaching trade agreement since the Uruguay Round of the 1990s.

The TPP opens a new generation of integration efforts beyond trade in goods, covering services, investment, intellectual property, labour, environmental standards, and non-tariff barriers—areas where India clearly has considerable comparative interest and potential. The TPP could also spur other ongoing trade negotiations in Asia, and globally, thereby boosting multilateral trade initiatives.

In short, it is the first major step toward the creation of a new unified, single market, outside of the European Union, setting standards in nationally sensitive areas such as in labour, intellectual property rights, and environment.

It is too soon to fully analyse the agreement, as details (and approvals by the 12 national legislatures) are awaited[2]. It helps that the U.S. Congress has granted Trade Promotion Authority (TPA) to President Barack Obama, limiting the Congress to an up-or-down vote. However, some high-ranking Republicans and Democrats have already criticised the deal, and there may be delays in possible approval. In this context, the TPA law provides the flexibility for lawmakers to delay the vote until after the U.S. presidential election

Despite the still-emerging details and outcomes, it is worth assessing what is already known, and what the implications are for countries like India and China that are not part of the TPP.

Here are the facts, the controversies, the assessments, and the implications, especially for India.

The facts:

  • The TPP is one of the largest trade deals in history, accounting for nearly 40% of world GDP and one-third of world trade (even with the exclusion of China)[3].
  • The agreement will phase out thousands of tariffs (although for many of the signatories tariffs are already low), including some contentious concessions on agriculture, and it will open more markets for dairy products and sugar.
  • Innovatively, it spans a wide range of new issues and policies, such as in services, investment, competition, state-owned enterprises, procurement, and regulatory coherence, seeking to boost productivity and competitiveness.
  • With non-tariff measures representing most of the remaining barriers to trade among these countries, the TPP is expected to significantly increase trade activity among signatories.
  • The TPP is the first trade agreement to include a chapter specifically on SMEs, aimed at helping them overcome the fixed costs of trade.
  • The TPP also allows countries to impose temporary safeguard measures, such as capital controls, under certain circumstances to manage volatile capital flows.
  • Regarding currency-related provisions, there is a commitment to “strengthen macroeconomic cooperation, including on exchange rate issues, in appropriate fora” but there is no specific stricture against competitive devaluations—although some reports indicate that a parallel agreement may be developed on this issue.

The controversial issues that prolonged the negotiations and where compromises needed to be made include the following[4]:

  • Pharmaceuticals: the protection for drug-makers was limited to five to eight years (against the 12 years favoured by the U.S.).
  • Automobiles: a slow phase-out (over 25-30 years) of U.S. tariffs on Japanese automobiles, with an agreement that 45% of a vehicle’s content comes from TPP members to qualify for the beneficial tariffs.
  • Labour and environmental standards: rigorous specifications, and provisions for the supervision of intellectual property rights.
  • Internet data transfer: agreement not to block cross-border transfers of data over the Internet, and no requirement that servers be located in the country for business reasons.
  • Workers rights: compulsion to follow the International Labour Organisation’s basic principles on workers’ rights, with minimum wage, regulated working hours, trade union activity. Such commitments will be enforceable under the treaty’s dispute-settlement mechanism.

Assessment

There are several estimates of the TPP’s eventual potential growth impact, up to 0.5%-1.0% of GDP for the partner countries by 2025[5]. But it is too early to form a quantitative estimate. However, the eventual benefits are typically greater than the initial, direct estimates, because of the second-order effects that usually arise.

A key feature of the TPP (favoured by the U.S.) is that it focuses on new drivers of growth, such as services and investment, where restrictions have remained relatively high in the Asian countries. In contrast, tariff reductions in the traditional areas form a smaller part of its impact, given tariff reductions that have already taken place in the region.

Because the TPP focuses on new areas and jurisdictions, it is also viewed as a driver of domestic reforms and economic gains, among these:

  • For Japan, it allows the gradual opening of traditionally protected areas of the economy, such as agriculture, and is viewed as the third (structural reform) arrow of Prime Minister Shinzo Abe’s recovery plan.
  • In many ways, emerging markets and the less developed countries in the TPP—such as Vietnam—could benefit relatively more from the deal, although they will need to implement domestic reforms, open up services and investment, and adopt the labour and environment standards proposed by the agreement.
  • The deal will also require countries like Malaysia and Vietnam to take forward reforms of state-owned enterprises that will improve the business climate.
  • As regional flows of trade and investment increase, this will elevate the role of financial centres, such as in Singapore and Kuala Lumpur.

Implications for other countries

What about the exclusion of countries—such as China, India, Korea, and several ASEAN countries—from the TPP? Typically, there are costs in the form of trade and investment diversion, as member countries (such as Vietnam and Malaysia) get cheaper access to the U.S. and other markets covered by the deal. This has competitive implications for complementary exports by others. In China, this could be especially important given that rising wages and other costs are already making manufacturing more expensive. And India’s leadership position and potential in textiles, services, outsourcing, and digital trade could come under pressure, as also potentially reduce the attractiveness of the country for foreign investment in some sectors. There are, then, clear reasons why excluded countries will want to join the deal.

At the same time, the TPP loses by not having China and India in the deal. China is the world’s biggest manufacturer and anchor of supply chains. And, looking ahead, as China rebalances its economy and raises the share of consumption and imports, there will be a global drive to export consumer goods and build new trade relationships with China. Similarly, India’s domestic market and demographics are important off-setting factors to the costs of exclusion.

Hence, to truly succeed, such preferential trade agreements must be open to those willing to meet the standards, and who can eventually be multi-lateralised to avoid fragmenting the global trading system.

Meanwhile, it is likely that steps for other regional trading relationships will be intensified, such as for the Regional Comprehensive Economic Partnership (RCEP), which seeks to bind the 10 ASEAN members with Australia, China, India, Japan, Korea, and New Zealand.

Implications for India

The lesson for India is clear. India must urgently adopt the reforms needed to integrate its domestic economy, making it a more willing and responsive partner in the momentum for a more integrated global economic and financial environment.  This is particularly important given India’s demographics and the need for jobs. The reality is that, while Japan, Korea, and now China, are aging, more than half of India’s population is below the age of 25—and India is likely to account for one-quarter of the increase in the world’s workforce over the next five years[6].

The needed domestic reforms, much enunciated, have a critical homegrown context.  They include uplifting India’s infrastructure, reducing the fiscal deficit, broadening financial markets, and improving states’ governance. The latter is critical because policy heterogeneity across the states—in the labour market and product market regulations—is a key factor in the country’s uneven business environment. The long-awaited step of reducing and rationalizing the various cross-state tax barriers through the General Sales Tax or GST will directly improve India’s competitiveness.

So far, the emerging trade agreements have shown flexibility in giving countries the transition time necessary for political consensus and policy implementation. India has time to design the needed steps consistent with domestic trade-offs and imperatives. It will require boldness from both government and business.

Anoop Singh is Distinguished Fellow, Geoeconomics Studies at Gateway House: Indian Council on Global Relations. 

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References

[1] Office of the United States Trade Representative, Overview of the TPP, TPP, https://ustr.gov/tpp/overview-of-the-TPP

[2] Yan Min, Chia, ‘TPP: What’s in it for Singapore?’, The Strait Times, 14 October, 2015, < http://www.straitstimes.com/business/economy/tpp-whats-in-it-for-singapore>

[3] Petri, Peter A., and Michael G. Plummer, ‘The Trans-Pacific Partnership and Asia-Pacific Integration: Policy Implications’,  Peterson Institute of International Economics, June 2012 <http://www.iie.com/publications/pb/pb12-16.pdf>

[4] Washington Trade Daily, Volume 24, Number 199, October 6, 2015, <http://www.washingtontradedaily.com>

[5] Petri, 2012

[6] Anoop Singh, India—Managing the Challenges of Growth, May 2015, <http://scid.stanford.edu/system/files/AnoopSingh.pdf>

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