Image Courtesy: Wikimedia Commons
Article 04/2021
“The establishment of free Tarde agreements can be a critical and progressive step towards greater economic integration, and continues to become more valuable in an increasingly global world (Kildee nd-1)”.
Increasing Population, depleting natural resources, global warming, and frequent natural calamities have affected the world economies. This in turn has led to greater interdependencies between the nations. “Trade” is one of the effective tools used by the nations to buttress their economies and many existing trade alliances would illustrate the importance and relevance of trade mechanisms.
Trans Pacific Partnership (TPP) is one of the important modern day trade alliances. This article would try to analyze its- genesis, relevance, connect with China, implications for India and some suggested measures to mitigate the impact.
Background
In what could be called an unusual happening, a simple trade agreement between a small group of ‘Pacific Rim’ countries comprising Brunei, Chile, New Zealand and Singapore, signed in the year 2005, subsequently served as a vital impetus for emergence of the TPP. The then US President George W. Bush, in 2008, announced that the United States would begin trade talks with the above group , also bringing along Australia, Vietnam, and Peru to become partners. As TPP related talks continued, the group expanded to include Canada, Japan, Malaysia, and Mexico—twelve countries in all.
On assuming office in 2009, US President Barak Obama continued the talks. As a result, Secretary of State Hillary Clinton, in 2011, framed the TPP as the center piece of the United States’ strategic pivot to the Asia-Pacific region. Interestingly, it took nineteen official rounds of negotiations and many more separate meetings for the participating countries to come to an agreement in October 2015.
The negotiations were tough as they had to overcome many significant political hurdles. This was due to requirement to bring in force difficult reforms, by various member countries, in their economies. To illustrate a few examples:-
Japan’s powerful farming lobby resisted the reduction of tariffs on agricultural goods, while the country agreed to reduce barriers to its auto market.
Canada agreed to allow more foreign access to its heavily protected dairy market.
Brunei, Malaysia, and Vietnam promised to reform their labour laws.
S. negotiators compromised on some of their demands for stricter patent protections for pharmaceuticals.
Finally, post hectic parleys and considerable hewing and hawing between the countries, the TPP was inked in early 2016.
Figure I: Trans-Pacific Partnership Nations
Image Courtesy: CFR
The TPP thus became a massive trade agreement signed by twelve Pacific Rim countries (Fig-I), including the United States, which together comprised 40 percent of the global economy. The TPP was ratified by many partnering countries.
However, the deal was never ratified by the U.S. Congress, as it became a target of both Republican and Democratic candidates during the 2016 presidential campaign.
While many experts in USA opined that the TPP had economic and strategic benefits, it drew severe attacks from across the U.S. political spectrum. In the end, President Trump formally withdrew from the deal on his first day in office, in Jan 2017.
After the U.S. withdrawal, the remaining 11 member countries renegotiated and rebranded the deal in 2018. As a result, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) — also known as TPP 11 — was born. The benefits accrued by the member countries for the TPP, justified the move made by the existing 11 partners (James McBride, Andrew Chatzky, and Anshu Siripurapu. 2020-2)A Former Senator Bob Corker had said at the Milken Institute Asia Summit in December 2020 that “the TPP was a ‘missed opportunity’ for the U.S. to put a lot of pressure on China (Tan, 2021-3)”.
As a matter of record, Biden as VP (during Obama administration) had supported the TPP and would like to renter the same. But the task is going to be easier said than done. To quote Corker (the Republican senator for Tennessee from 2007 to 2019) “It would be a significant step forward if the Biden administration can figure out a way” to rebuild an alliance like the TPP (Tan ibid)
The need for USA to re-join the TPP seems to be becoming more pertinent after China and 14 other Asia-Pacific countries signed the world’s largest trade agreement, the ‘Regional Comprehensive Economic Partnership’ ( RCEP), in Nov 2020, which has given a big economic leverage to China against USA ( Tan,2021a).
Main Contours of the TPP
Before proceeding further, it would be important to briefly understand main contours of the TPP. The TPP text consists of thirty chapters, covering tariffs on goods and services, intellectual property (IP) rights, e-commerce rules, labour and environmental standards, dispute resolution mechanisms, and many other aspects relevant to global trade.
The main aim of this ambitious mega-regional deal has been to create a fully integrated economic area and establish consistent rules for global investment (James McBride, Andrew Chatzky, and Anshu Siripurapu. 2020a). Some prominent provisions included:-
Elimination or reduction of tariffs. The deal lowered tariffs and other trade barriers on a vast range of goods, including many automotive and other manufactured products, textiles and apparel, and agricultural commodities, such as meat, dairy, produce, and grains. Some estimates put the total tariff reduction among TPP members at 98 percent.
Liberalization of services trade. Restrictions on cross-border services were removed, and rules added to ensure that businesses offering services in areas including retail, communications, entertainment, and finance would be protected from discrimination.
Investment rules. Markets were opened up for foreign investment among members, and rules added to protect investors from unfair treatment. The controversial but essential provision which allowed investors to sue host governments using international arbitration panels, known as Investor-State Dispute Settlement (ISDS) provision, was included.
E-commerce guidelines. The TPP was the first regional deal to include comprehensive rules on digital commerce, which would ensure the free flow of information across borders, mandated consumer privacy protections, and banned policies that force investors to move their servers and other related facilities to the host country.
Intellectual property protections. The deal also contained extensive provisions on IP, including patent enforcement, lengthened copyright terms, and protections for technology and trade secrets. This included new protections for prescription drugs, including for a new class of medications known as biologics, pushed by the United States.
Labour and Environmental standards. The TPP went further than previous trade deals in committing members to allow workers to form unions, prohibit child and forced labour, improve workplace conditions, and strengthen environmental protections.
Other important provisions included rules on transparency, restrictions on monopolies and state-owned enterprises, and streamlined regulations meant to make it easier for smaller businesses to trade across borders.
Benefits of the TPP
Many economic analysts have hailed the TPP as a path breaking alliance. Chia Yan Min (Min 2015-4) had analysed the TPP in detailed and had brought out 10 major benefits for the partnering countries. They are:-
Access to the new markets: Member countries will have an access to the new markets. E.g. Mexico – an emerging manufacturing powerhouse which had been heavily dependent on the US markets Mexico will now have access to Asia as a key market. Mr SHIVAJI DAS, a senior vice-president at consulting firm Frost & Sullivan, has also opined that even the Asian region may benefit from Mexico as a free trade partner.
Economic Impact: It has been opined that the member countries will have a good impact on their economies. The Exporters were expected to benefit from removal of the duties on more types of goods than previous trade agreements provided for. For example, a Singapore ice cream manufacturer could find it easier to qualify for lower tariff rates when exporting to other countries under the TPP. This is because milk from New Zealand, sugar from Australia and cocoa from Mexico used in the production of the ice cream will now count as input from TPP countries, and can combine to help qualify the end product for preferential tariffs.
Indirect Benefits: While the direct benefits might have been a few, member countries could be indirect beneficiaries of increased trade between the TPP nations (Mr Das- from Frost & Sullivan Report). For instance, the TPP will phase out the 2.5 per cent US duty on imported cars over 25 years and scrap the levy on many auto parts. This is expected to boost Japan’s automobile exports to other countries.
A Boost for ASEAN: Developing regional economies, such as Malaysia and Vietnam would benefit strongly from the trade deal, and there will be payoffs for Singapore from the growth in activity, said Mr Nicholas Lingard, arbitration partner at law firm Freshfields Bruckhaus Deringer. Vietnam could see a 10 per cent boost to its economy by 2025, while Malaysia could experience a 5.5 per cent expansion in the same period, based on a Peterson Institute for International Economics study. “We expect to see higher deal flow in South-east Asia as a result,” said Mr Lingard.
Opening up New Markets: Some partnering countries do have existing free trade agreements with other countries involved, except Canada and Mexico. However TPP would open new areas for the members. For example -Mr Das (Frost and Sullivan*) noted that Mexico is an emerging manufacturing powerhouse still heavily dependent on the US market. Mexico will be looking at Asia as a key market,” he noted. Under the TPP, Canada and Mexico will eliminate tariffs on almost all of Singapore’s exports. This includes shipments of pharmaceutical products to Mexico, where current tariffs range from 10 to 15 per cent.
Removal of Foreign Equity Restrictions: The TPP lifted curbs on foreign ownership of companies in private healthcare, telecommunications, courier, energy and environmental services in Brunei, Malaysia and Vietnam. While this may benefit many investors keen on those markets, these industries tend to be dominated by domestic incumbents. However, how much headway foreign firms have been able to make in other countries needs to be seen.
Provisions for Cross Border Trade in Services: Trade deals have, traditionally, focused on easing the flow of goods between countries, but the TPP is one of the few with comprehensive provisions for the services trade, said Mr Das. The pact opened up markets in TPP countries for Singapore firms offering services such as consultancy and urban planning, he added. However, some restrictions still remained. Some TPP countries have been allowed to maintain existing protectionist measures in sectors such as transportation services, where firms still have local content requirements.
Easing of Government Procurement Procedures: The TPP enabled companies in the IT, construction and consultancy sectors to bid for government procurement projects in markets such as Malaysia, Mexico and Vietnam, which were previously closed to foreign bidders.
Reducing Non-Tariff Barriers: The TPP reduced “behind-the-border”, or non-tariff, regulatory barriers to ease the flow of trade and investment. This means countries will be required to make Customs laws, regulations and procedures more transparent, and also tackle hidden costs impeding business operations, such as corruption.
Emergence of a ‘21St Century Agreement: The TPP addressed many emerging concerns faced by businesses and consumers, such as intellectual property and the growth of the digital economy. It put in place rules on e-commerce to ensure that government regulations do not impede cross-border data flows, or impose requirements that force businesses to place data servers in individual markets as a condition for serving consumers in that market. The agreement also prohibited the imposition of import duties on electronically transmitted products, hence protecting Singapore businesses and consumers from this potential extra cost. TPP governments have agreed to put in place laws protecting consumers from fraudulent and deceptive commercial activities online. The deal also committed countries to implement common standards across major types of intellectual property, including patents, copyrights and trademarks. This made it easier for many businesses to search, register and protect their trademarks and patents in new markets.
Accessibility for SMEs: With its special provisions for small and medium-sized enterprises (SMEs), the trade deal aimed to make it easier for these companies to participate in regional production and supply chains. The TPP countries were to set up websites with information targeted specifically at SMEs. They were also supposed to develop capacity building programmes for SMEs, to help firms take advantage of the provisions in the deal. SMEs do make up high percentage of companies in member countries and employ sizable workforce.
It is thus seen that the TPP has benefited the member countries on many scores.
Opposition to TPP
Despite many advantages accruable to the member countries, the TPP had an opposition in many countries including almost vehement opposition in USA. The TPP was subjected to attacks from across the U.S. political spectrum, especially during the 2016 presidential campaign, as well as from some groups in other participating countries. President Trump had always criticized the deal, claiming that it would push more manufacturing jobs overseas, increase the U.S. trade deficit, and fail to address currency manipulation by U.S. trade partners. Finally, USA withdrew for the TPP- probably to its loss. An apparent need for rethink on the subject is visible in USA. However, it needs to be seen how President Biden would deal with USA’s TPP re-entry, in the future (James McBride, Andrew Chatzky, and Anshu Siripurapu. 2020b/ Tan, 2021).
UK’s Bid to Join the TPP
Despite criticism the TPP has proven itself as beneficial to the member countries. UK’s move to join the TPP goes to prove the point. As per the Reuter’s report (Reuter 2021-5) UK would, in first week of Feb 2021, formally apply to join the trans-Pacific trading bloc of 11 countries (TPP), with negotiations set to start later this year.
Since leaving the European Union, Britain has made clear its desire to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which removes most tariffs between Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam.
TPP and China
The TPP—now the CPTPP—were mainly conceived with an eye towards expansion. To cite an example, during the original negotiations South Korea was seen as a likely future member. More recently, Thailand and Colombia have expressed interest in joining. Taiwan also has expressed its keenness to join the TPP, but its accession to an agreement, which is being seen as a mechanism for confronting China, has expectedly drawn vociferous opposition from Beijing.
For its part, China has managed to push for a separate trade agreement as a counter to TPP, the ‘Regional Comprehensive Economic Partnership’ (RCEP), which includes fifteen Asia-Pacific countries- but not the United States. It has also launched its ‘Belt and Road Initiative’ (BRI), which seeks to develop trade and energy infrastructure throughout South and Central Asia. The RCEP was signed in November 2020, after eight years of somewhat tough negotiations. It has been observed that the RCEP is not as comprehensive as the TPP- in that it eliminates fewer tariffs, and doesn’t address services trade, intellectual property, or labour and environmental rules to the same extent. Additionally, India (as its concerns were not addressed) withdrew from the pact, reducing its market size. Still, the RCEP creates one of the world’s largest trade blocks, and analysts say it is another sign, along with the CPTPP, that countries in the region are moving on without the United States (James McBride, Andrew Chatzky, and Anshu Siripurapu. 2020c). It’s probably another wake-up call for not only the United States but India as well.
Implications for India
It has been seen that the negotiations on various crucial issues, at the World Trade Organization (WTO,) have been slow and tedious. This procrastination is hampering economies of many countries, making it increasingly difficult for them to keep up with the ebbs and flows of international trade and investment. Accordingly, integration with the mega Free Trade Agreements (mega FTAs) has emerged as an effective alternative for them to consider. Thus many countries have begun to negotiate and set rules towards creating a 21st-century template for global trade. Some example of such mega FTAs are TPP and RCEP (the term mega FTAs will be used in this context hereafter), which have re-written the principles of global trade and investment in the region. India, an emerging country with high aspirations, could encounter significant ripples from these agreements. For an emerging country like India, its decision to stay out of such mega FTAs, regardless of their fairness and manner of implementation, could be a barrier it has set for itself. India may need to prepare itself to tackle the various tariff, non-tariff and market access issues that are likely to arise out of these mega FTAs and protect the country’s trade ambitions, particularly its exports which have been consistently contracting in the last so many years.
Once implemented in full force, these mega FTAs would change the global trade architecture and result in such high standards in markets covering majority of the world trade and more than 3/5th of worlds’ GDP. India, being a non-mega FTAs trading partner, will find it increasingly difficult to access these markets unless its domestic capacity and standards improve. Thus the implications of such mega FTAs for India, and other emerging economies which are not part of these mega FTAs, would act as a compulsion to develop a strategy to deal with the expected adverse impacts while preparing it to join such mega FTAs in the long term.
Re-focusing on the TPP, it is important to note that the TPP varies from existing multilateral trade agreements as it covers areas such as competition policy, regulatory symmetry, and standards for labour and employment. It also tackles other major features such as trade in services, technical barriers to trade, and intellectual property rights. As TPP includes other developing countries, it is expected that the trade disciplines and standards will be implemented in these countries other than non-TPP members, affecting India’s trade once TPP gets implemented (Nataraj, nd-6). The potential impact of TPP on India will be on three fronts:-
(a) Trade diversion
(b) Drop in FDI
(c) Geopolitical exclusion
In another opinion, a report ‘India’s Rise: Toward Trade-Led Growth’, by C Fred Bergsten at the Peterson Institute for International Economics had stated that “if India had joined the TPP it could have expanded its exports by more than $500 billion an year” (PTI 2015-7)
On the whole the impacts on India due to not joining the mega FTAs are evident.
Perceived Advantages and Disadvantages for India from Mega FTAs like TPP (Sen2019-8)
Advantages
It can boost India’s inward and outward foreign direct investment,particularly export-oriented FDI.
It would also facilitate India’s MSMEsto effectively integrate into the regional value and supply chains.
It presents a decisive platform for India which could enhance strategic and economic status in the Asia-Pacific region and can complementits Act East Policy.
It can augment India’s existing free trade agreementswith the Association of South-East Asian Nations (ASEAN).
It can address challenges emanating from implementation concerns vis-à-vis overlapping agreements of ASEAN (Noodle Bowl).
The RCEP would help India streamline the rules and regulations of doing trade, which will reduce trade costs.
India enjoys a comparative advantage in the services sectorsuch as information and communication technology, healthcare, and education services etc. Thus, RCEP will create opportunities for Indian companies to access new markets.
Despite the perceived benefits, the Indian domestic industry has been lobbying against RCEP, due to disadvantages emanating from RCEP.
Disadvantages
Widening Trade Deficit: NITI Aayog held that India’s trade deficit with the ASEAN, Korea and Japan has widened post-FTAs.
Tariff elimination due to RCEP could worsen the trade deficit,at $105.2 billion in 2018-19.
Since import duties are also a source of revenue for India, it could experience a disproportionate loss of customs revenue.
Sensitive List:Most of the RCEP countries have very high tariffs on certain products sensitive to them, such as rice, footwear, dairy products and honey, which they can continue to shield through the sensitive lists.
Services Sector:India has demanded that the ASEAN countries should open up their services sector so that Indian professionals and workers can have easier entry into their market. However, ASEAN countries are very sensitive about protecting this sector and have not offered much liberalisation even within the bloc to each-other.
Impact of Dumping of goods by China: Almost every sector registered its apprehension that once the RCEP agreement was in place, China would harm the domestic marketwith its cheap exports and would also dump its products. China already has a $70 billion (approx.) trade surplus with India.
Agriculture:It threatens farm livelihoods, autonomy over seeds and also endangers the country’s self-sufficient dairy sector.
Proposed Way Forward
India will need second-generation reforms of its domestic economic policies,including those that reform its factor markets, to make its trade more competitive and export-oriented.
These reforms will help India better access other markets and will mitigate some of the repercussions arising from the RCEP.
India needs to ensure that the recent stance of the Indian government, regarding the RCEP, must not dissipate and efforts be made to find an amicable solution.
It is also important that India focuses on resolving the structural issues in the domestic market, before joining Mega FTAs.
Conclusion
With increase in population, depleting natural resources and general strife in most parts of the world, protectionism coupled with hegemonic attitude of some powerful nations’ pressures on economies of various countries has increased manifold. Thus world is moving towards ‘Mega Free Trade Agreements’ like TPP and RCEP, which tend to benefit all partnering countries.
However, every country needs to take its own call about joining or refraining from joining such mega FTAs. India has chosen not to be part of both mega FTAs-TPP and RCEP. This has its own perils including restrictive barriers, decrease in FDI and drop in trade volumes. These signs are already visible in India. It is suggested that India may undertake a holistic review of both TPP and RCEP and present its case to member countries for addressing its concerns. This is important for avoiding global isolation of India – a main aim of China.
Finally a few issues which would need further study are:-
What would be the impact of USA re-joining the TPP TPP/RCEP?
What would be impact on TPP/RECP due to change in USA’s trade policy for China?
(Commodore SL Deshmukh, NM (Retd), has served Indian Navy for 32 years and member, C3S. An alumni of the prestigious Defence Services Staff College Wellington, he has served on-board aircraft carriers and is specialized on fighter aircraft and ASW helicopters. He held many operational and administrative appointments including Principal Director at Naval HQ, Commodore Superintendent at Naval Aircraft Yard, Director, Naval Institute of Aeronautical Technology and Project Director of a major Naval Aviation Project. Post retirement he was with Tata Group for 5 years and is currently working with SUN Group‘s Aerospace & Defence vertical as Senior Vice President. He is also the Life Member of Aeronautical Society of India. The views expressed are personal)
References:
Kildee Quote, Retrieved from: http://www.picturequotes.com/the-establishment-of-free-trade-agreements-can-be-a-critical-and-progressive-step-towards-greater-quote-342703, accessed on 02 Feb 2021
James McBride, Andrew Chatzky, and Anshu Siripurapu.01 Dec 2020, CFR, What Is the Trans-Pacific Partnership (TPP)? Retrieved from: https://www.cfr.org/backgrounder/what-trans-pacific-partnership-tpp, Accessed on 03 Feb 2021
Tan Weizhen, 11 Jan 2021, CNBC, It’s a ‘hard sell’ if Biden administration wants to re-join massive trans-Pacific trade deal, says analyst, Retrieved from: https://www.cnbc.com/2021/01/11/control-risks-on-biden-administration-rejoining-tpp-trade-deal.html, Accessed on 03 and 10 Feb 2021.
Min Chia Yan , 16 Nov 2015, Strait Times, 10 benefits the Trans-Pacific Partnership will bring Singapore, Retrieved from: https://www.straitstimes.com/business/economy/10-benefits-the-trans-pacific-partnership-will-bring-singapore Acessed on 04 Feb 2021
Andy Bruce with Toby Chopra, 31 Jan 2021, Reuters, UK Set to Formally Apply for Trans Pacific Trade Bloc Membership, Retrieved from:
https://www.reuters.com/article/us-britain-trade-cptpp/uk-set-to-formally-apply-for-trans- pacific-trade-bloc-membership-idUSKBN29Z0W1 , Accessed on 04-05 Feb 2021
Nataraj Gitanjali, Undated, ORF India, The Trans Pacific Partnership-Implications for India, Retrieved from:
https://www.orfonline.org/research/the-trans-pacific-partnership-implications-for-india/ Accessed on 05 Feb-10 Feb 2021
Staff Reporter PTI, 05 Oct 2015, PTI/Economic Times, How Trans Pacific Partnership will affect India’s Foreign Trade, Retrieved From: https://economictimes.indiatimes.com/news/economy/foreign-trade/how-trans-pacific-partnership-will-affect-indias-foreign-trade/articleshow/49233547.cms Accessed on 04-05 Feb 2021
Sen Amiti, 05 Oct 2019, The Hindu Business Line, India Should Act Tough and Exit RCEP, Retrieved From: https://www.thehindubusinessline.com/opinion/india-should-act-tough-and-exit-rcep/article28826387.ece accessed on 05 -10 Feb 2021
Additional Reading:
The Office of the U.S. Trade Representative offers a summaryof every chapter of the original TPP.
The Congressional Research Service weighed the research[PDF] on the likely economic effects of the TPP for the United States.
