India has to conclude its crucial FTAs. Enhanced market access from these FTAs can mitigate some of the export losses on account of the country’s exclusion from TPP
With trade ministers from the US, Japan, Canada, Australia, Malaysia and seven other Asia-Pacific countries having successfully surmounted the final hurdles to the Trans-Pacific Partnership (TPP) negotiations in Atlanta, it signals a significant achievement for the US in the arena of international trade negotiations. Apart from the benefits of free trade among the signatory countries that account for 40% of global GDP and more than 50% of global trade, the implementation of the TPP could also have consequences, in the short term, for the Doha Round negotiations at the WTO.
TPP negotiations were undertaken in considerable secrecy. Despite the talks having been concluded, the final text of the agreement is not yet in public domain. However, texts leaked during the negotiations indicate that the agreement covers liberalisation of trade in goods and services, strong rules for investment protection, strengthened protection of IPR for ensuring continued windfall monopoly profits for US pharmaceutical firms, opening of government procurement markets, restrictions on government support to state-owned enterprises, etc. With the US having driven TPP negotiations aggressively for the past 2-3 years, it is not surprising that the agreement is firmly cast in the mould of US commercial interests.
Not only does the US benefit from what it has secured in TPP negotiations, it is important to recognise that issues on which the US is on the back-foot in the WTO Doha negotiations, including reduction of farm subsidies, were excluded from TPP negotiations. From a strategic perspective, the TPP would entwine the economies of 11 countries more closely with that of the US, an outcome clearly aimed at reducing the growing dependence of these countries on trade with China. Given the twin gains, it is little wonder that US President Barack Obama invested considerable political capital at home, and diplomatic capital abroad, to ensure successful conclusion of these negotiations.
The stage is now set for the ratification of the TPP by the 12 signatory countries prior to the implementation of the largest free trade agreement. It is apprehended that at the ratification stage cold reality may hit some of the signatory countries. To illustrate, in Malaysia, the polity is deeply fractured on the issue of the country’s TPP engagement.
Mahathir Mohamad, the former Prime Minister and strong man of the country, has stridently criticised the current Prime Minister Najib Razak on this issue. Civil society organisations in Malaysia are also up in arms against the TPP.
Malaysia is not an isolated example of the absence of national consensus on the TPP.
In Canada, which goes to polls later this month, Thomas Mulcair, the leader of the New Democratic Party of Canada (NDP), is reported to have stated that he would not feel compelled to honour the provisions of the TPP if his party is voted to power. Dissenting views opposing the TPP are also growing louder in Chile and Peru. Crucially, in the US itself, Hillary Clinton, along with a large number of influential political leaders, has expressed strong reservation on the TPP.
Assuming that the TPP is eventually ratified by signatories despite the lack of domestic consensus, how will its implementation affect non-signatory countries such as India? Should India have made efforts to join TPP negotiations? What should India do to mitigate the adverse impact of being excluded from the TPP?
With TPP signatories enjoying duty-free access into each other markets, price competitiveness of India’s exports could get eroded. Consequently, there is a likelihood of diversion of exports from India in favour of TPP countries. In particular, in the face of competition from Vietnam, India’s exports of textiles and clothing as well as leather products are likely to take a hit. However, this adverse impact would be confined mainly to the US market. In some of the major TPP economies, including Japan, Malaysia, Australia and Canada, India’s exports may not suffer a tariff disadvantage as India already has FTAs with some of these countries or is at an advanced stage of concluding an FTA with others.
While attempts at quantifying the impact of trade diversion on the account of an FTA can become a speculative exercise, nevertheless it is instructive to note that an important think tank in the US has estimated that, by remaining outside the TPP, India would lose exports marginally to the extent of about 0.3% by 2025—which translates to $3-7 billion. While there could be some investment diversion as well, its quantification is not available.
Overall, the extent of trade diversion does not appear to be alarming.
Turning to the question of whether India should have made efforts to join TPP negotiations, it is important to examine the provisions on protection of IPRs and investment. Many of the provisions relating to the protection of IPRs in the TPP are aimed at facilitating evergreening of patents, thereby delaying the entry of generic medicines into the market. With patented drugs continuing to remain monopolies in TPP countries for longer periods, pharmaceutical prices are likely to rise steeply in these markets—a fact widely disseminated by Nobel laureate Joseph Stiglitz. The choice before India was clear—remain outside the TPP and live with a loss of a few billion dollars of exports, or join the TPP and face steep hike in prices of medicines. Given its public policy imperatives and health needs, the country has wisely chosen the first option.
As far as investment provisions in the TPP are concerned, expecting these to result in increased investment appears to be more a matter of faith rather than being based on conclusive evidence. On the other hand, the regulatory chill that gets induced by international investment provisions and the financial compensation that has to be paid by governments in investor-to-state disputes are dangers that could not be ignored by India. Again, a safe choice exercised by the government.
On the question of what should India do to mitigate the adverse impact of being excluded from the TPP, action is required domestically and at the international level too. Within the country, efforts must be made to enhance the competitiveness of India’s exports. On the external front, India needs to get its act together and conclude some of its crucial FTAs, including India-EU Bilateral Trade and Investment Agreement and the ongoing mega FTA negotiations under the auspices of Regional Comprehensive Economic Partnership. Enhanced market access resulting from these agreements could mitigate some of the export losses on account of India’s exclusion from the TPP. Of course, India must safeguard its core interests in these FTA negotiations.
Turning to the question of the likely impact of the TPP on Doha negotiations at the WTO, it is no secret that the US finds it inconvenient to abide by some of the commitments agreed in the course of these negotiations in 2008.
Consequently, it has shown extreme reluctance, if not outright opposition, to conclude the Doha deal. Successful conclusion of the TPP provides it an excuse, at least temporarily, to disengage in these negotiations. However, this should not induce developing countries, including India, to make concessions to get the US back to the negotiating table.
It is also likely that as part of the pay-off for returning to the negotiating table, the US would insist on using TPP provisions as a template for initiating negotiations at the WTO on the so-called 21st century issues. Again, this must be strongly resisted by India and other developing countries, who may not find the outcome of negotiations on the new issues to be mutually beneficial.
The successful completion of the TPP is a feather in the cap of President Obama. However, any attempt to use its provisions as a blueprint for WTO negotiations could have extremely divisive consequences for the multilateral trading system. As far as the countries excluded from the TPP are concerned, the onus is on them to come up with an alternate template for global trade rules.
The author is head, Centre for WTO Studies, Indian Institute of Foreign Trade. Views are personal