For India, joining the TPP FTA can be only for political or strategic reasons, not for economic benefits
The negotiations for the Trans-Pacific Partnership (TPP) free-trade agreement (FTA) have gone into a pause. Only two weeks back, there was feverish activity, at the meeting in Hawaii—it seemed that the ministers of the treaty nations had the end-game before them. But the talks broke down, and no new date for further negotiations has been announced. Going by media reports, differences had been narrowed down substantially and only small steps had to be taken to seal the deal. The suspense on the continuation of talks in future has, therefore, caused some surprise.
While the talks for the TPP FTA have clearly lost momentum, it would be premature to write it off. Given the political weight put behind the proposal by the leaders in the past, it is only a question of time that the talks are revived. Perhaps, this is the right time for us to make an assessment of the mega-regional initiative from India’s perspective. Is it a threat to the country’s economic interest or is it likely to present an opportunity to us when the participants consider inducting new members?
In November 2011, trade ministers of the treaty nations had declared that their aim was to have a comprehensive regional agreement that liberalises trade and investment and addresses new and traditional trade issues and 21st century challenges. In the area of trade in goods, it has been clear from the outset that the agreement will have a number of exceptions and conditions. Political compulsions have made unrestricted duty-free access unlikely for rice, wheat, pork, beef, dairy and sugar in Japan, for dairy, poultry and eggs in Canada, and for dairy and sugar in the US. In fact, issues relating to access for dairy and sugar were mainly responsible for the agreement getting stalled at the Hawaii meet. The proposed regional content (40% or more) in the rules of origin for automobiles has also proved contentious and was another prominent trigger for the breakdown of talks.
The TPP also aims to eliminate barriers to free-flow of services. A basic aim of the participating countries is to allow such flow without any requirement of commercial presence in the importing country. No commitment seems to be proposed in the TPP on mode 4 (the movement of natural persons). Based on the interests of the US, it is expected that there would be greater emphasis on liberalisation in the areas of financial services, telecommunications and express delivery.
On investment, an important element in the TPP FTA will be the right of establishment by foreign investors in both goods and services. The host country’s right to regulate entry of foreign direct investment (FDI) will be limited only to the areas that are put in a finite negative list of exclusions. Non-discriminatory treatment of foreign investment and investor will be a fundamental requirement and will extend to the pre-establishment phase as well. A provision on investor-state dispute settlement (ISDS), sought by the US, has proved controversial, but if agreed upon, it would allow recourse to international arbitration against host governments in disputes.
There are several other aspects in the TPP in which the US is seeking agreement in pursuit of a “21st century trade agreement”. Due to space constraint, we take up only three of the most contentious ones.
On patents, the US is reportedly seeking to extend the scope and term of patentability in a number of ways. Patents would be extended to ‘new forms, uses or methods of an existing product without enhanced efficacy’, a language designed to secure ‘ever-greening’, with the objective of delaying the introduction of generic equivalents. Proposals from the US also include patent-term extensions in the event of ‘unreasonable’ delay in market approval. In addition, there is a proposal for data exclusivity for five years for the patented product, prohibiting use of clinical test data supplied by the original patent holder by generics. For biologics, or medical preparations derived from living organisms, a longer period, of 12 years, is being proposed for data exclusivity. However, the TPP negotiators are thinking favourably of a proposal
to phase in the new
patent standards gradually, applying them to countries only after they have reached a certain stage of development.
In addition to the WTO-plus proposals (on patents) in the TPP, there are two prominent WTO-extra proposals, on labour and environment. The proposal on labour seeks to get TPP members to commit to the adoption and implementation of five internationally recognised workers’ rights.
On environment, the TPP partners would be required to adhere to seven multilateral environment agreements. A crucial aspect of the US proposal is that the provisions on both labour and environment would be enforceable under the dispute settlement procedures of the FTA and violations would attract trade sanctions.
The TPP FTA would undoubtedly have some trade diversion consequences for India. However, such effects are likely to be moderated by a number of factors. Several agricultural and fishery products in our export basket are already duty-free in the US. In such industrial goods as textiles and clothing, in which the US has high tariffs, the preferential advantage of TPP suppliers like Vietnam or Malaysia will be blunted by the restrictive rules of origin, which have been put in place. Furthermore, the US already has subsisting FTA agreements with 6 of the 11 TPP participants, and additional preferential advantage to them will be limited. Finally, India has FTA-type agreements already with Japan, Malaysia, and Singapore and is in the process of negotiating similar agreements with Australia and Canada. These agreements will provide us the means to redress to some extent the trade diversion potential of the TPP FTA agreement.
Will the discriminatory liberalisation of services in the TPP countries affect our export of services? Our export interest is rather narrowly concentrated in IT and IT-enabled services. So far, the FTA agreements entered into by the US with countries such as Canada, Australia and Korea, do not seem to have affected our services exports to the US. Given the well-known deficiencies in the environment for investment in the country, the absence of a guaranteed right to invest in India is not expected to be a significant cause for investment diversion from the country.
If we choose to explore the route of adhering to the TPP FTA, it can be only for political or strategic reasons, and not in the expectation of grand economic benefits. In goods, since tariffs are generally low on MFN-basis in TPP countries, very modest benefit can be expected from zero duties in the FTA. There may be somewhat greater benefit in areas like textiles and clothing and leather products, in which peak tariffs apply in some TPP countries, such as the US. In services, the FTA does not even cover movement of natural persons, which is our main area of interest. What is more significant is that the costs of extension of term and broadening of scope of patents for pharmaceuticals may be too high for healthcare in the country. Further, our international trade interests may be put in jeopardy by the possible imposition of trade barriers on account of labour or environment standards. In investment, after all the blood spilled over the subject in the Doha Round, the idea of a commitment to allow all foreign direct investment automatically except for a negative list of exclusions might appear too far-reaching. Finally, the possibility of investors taking the country to international arbitration may expose us to formidable financial liability.
On the present reckoning, the TPP FTA is neither a threat nor an opportunity for India. As more details filter out, we will need to make a reassessment of the emerging compact from time to time.
The author is professor, ICRIER