Reinvent India's trade pattern
US rejoining TPP will put further pressure on China
The US-China trade war has taken a new shape after Trump administration evinced interests for re-joining the TPP (Trans-Pacific Partnership). Seemed to have been flattened by Chinese bellicose and domestic lobby by US farmers, Trump administration is likely to shift pressure on China by joining TPP. Joining TPP will help USA unleash bigger pressure on China, jointly with other member countries of the region, who are incidentally the major trading partners of China.
Originally, TPP was a 12 nations Pacific Rim trade block, comprising USA, Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam. Together the block accounts for 40 per cent of global trade. China is an export-based economy. Trade accounts for 37 per cent of its GDP. China depends substantially on TPP for its exports, which account for 49 per cent of China's global trade.
The Trump's administration warning by imposing high tariffs on steel and aluminum and bringing US $100 billion worth of goods in the high tariff net seemed to have little impact on China's dumping goods in USA. China fumed to retaliate on the same velocity, arguing that its steel export accounted for barely 1.1 percent of USA's total steel import in 2017.
To sully the Chinese obstinacy, Trump asked his administration to reinvent the scope for re-joining TPP, if the terms are renegotiated. Seemingly, he thought that 8 member countries of TPP (out of 12 members), who are largely dependent on imports from China and bear the brunt of large trade deficit with China, will vie for USA's support to dampen the Chinese exports.
The 8 member countries of TPP, accounting for the concentration of China's exports, are USA, Japan, Vietnam, Singapore, Malaysia, Australia, Mexico, and Canada. They accounted for 97 per cent of China's exports to TPP in 2015. China's substantial exports to these countries created big trade deficits of these countries.
Against these backdrops, can USA bring a major jolt to China after rejoining TPP? Can it play a lead role for trade diversion? Presumably, it can dampen China's exports to these countries by supplanting after reaping the benefits of tariff concessions within the trade block.
It was observed that the major component of China's basket of exports to these 8 member countries were electric and mechanical machinery and equipment. Nearly one-fourth of Chinese exports to Japan relate to electrical machineries and equipment. In case of Vietnam, the share was 35 percent in 2015.
This means that to wean away the Chinese predominance in these countries, USA has to supplant Chinese exports of electrical and mechanical machinery by offering competitive pricing after reaping the benefits of low or no tariff in the region.
Besides tariff advantages, TPP provides exemption from non-tariff barriers to its member countries, which are imposed in case of imports from China. USA and Canada imposed TBT (technical barriers to trade) to several home electrical appliances imported from China. USA also imposes TBTs on children products (such as toys) imported from China. Textile products from China are subject to TBT by Canada. Japan imposes technical barriers on imports of furniture and construction machineries from China.
TPP, without USA, would have unleashed more space for China to flex its muscle. Now, with USA rejoining, TPP will impart a big burden on China's exports. This is because USA is the main export destination for some TPP member countries, which are diagonally major importers of Chinese goods. For example, USA is the main export destination for Japan, Vietnam and Singapore, accounting for 20, 19 and 6 percent of their exports respectively. And USA, Japan, Vietnam and Singapore are among the top ten importers of Chinese goods. Together, they accounted for 29.5 percent of Chinese exports in 2016. This means that in the export-import balancing, USA has much power to influence these countries to buy more from USA.
Against this backdrop, it is likely that USA will exert more pressures on these four nations in TPP region to reduce their imports from China and buy American goods.
India is not a member of TPP. Threats of adverse impact loomed large as four TPP members, viz, USA, Singapore, Malaysia and Vietnam, are the major trading partners of India. They account for one-fifth of India's global export. Given this, analysts raised an alarm on trade diversion. They feared that the rise in intra-regional trade in TPP due to tariff preferential and curbing the non-tariff barriers would squeeze India's exports to these countries.
The biggest trade diversion feared for India's exports was textile products. Textile is the single major item of India's export in its total exports to the world. It accounts for 10-11 percent of India's world export. USA alone accounts for 40 percent of India's total export of textiles.
With the duty preferences granted by USA to TPP members, concerns were raised on India's export of textiles to USA. Vietnam would have been the main obstacle to India's export of textile to USA. Vietnam is the second biggest exporter of readymade garments to USA (after China). It accounts for 12 percent of USA imports of garment. The surge in Vietnam competitiveness due to duty preference will deter India's export of garments to USA, trade analysts feared.
But, there is a catch. In TPP, the duty preference for textile trade is governed by yarn forward rule. Under the rule, it is mandatory for the TPP members exporting textiles to procure yarn, fabric and other inputs from any or combination of TPP partner countries. At present, Vietnam procures yarn and fabrics mainly from China. Given the existing structure of logistics and low-cost procurement of yarn and fabrics from China versus TPP rules, it will not be an easy task for the Vietnamese exporters to divert procurement from China to domestic market or to any other TPP member countries. Further, none of the TPP members is globally known for manufacturers of yarn and fabrics.
Nevertheless, in the cross-fire of US-China trade war and USA returning to TPP, India should have a relook at its trade pattern. India is already under US lens for its trade surplus with USA. It has already alleged that India's export subsidies as non-compliant to WTO after achieving the threshold of per capita income of US $ 1000 per annum.
(The views are strictly personal)