Millennium Post

The global bubble

In the face of current world economic crisis, poised by bubble burst in China and the financial crisis in European Union and further to be triggered by Britain exit from EU (highly speculated), regional integrations have become important for developing nations. Inter-regional trade in the trade blocks, which warrant for duty free or concessional duty preferences, has become pertinent for the buoyancy in trade and investment. Under the present environment, no developing country can stand alone for its growth in trade and investment.

RCEP (Regional Cooperation of Economic Partnership) and TPP (Trans-Pacific Partnership) have emerged two biggest free trade blocks in the world, seemingly to get rid of the global crisis. While TPP was concluded last year in October, RCEP is expected to be concluded by the end of 2016. India is a member of RCEP, and not of TPP. RCEP includes ASEAN +6 (China, Japan, S. Korea, Australia, New Zealand and India) and TPP includes 12 nations (USA, Singapore, Vietnam, Japan, Chile, Australia, Malaysia, New Zealand, Peru, Canada, Mexico and Brunei).

From India’s point of view, even though not much direct benefit will make the headway in trade, it might create a new platform to move forward its Act Asia policy. The futurists portend RCEP – which represents vast parts of East and Southeast Asia – a new template for Act Asia policy.

There are two important benefits which emanate from RCEP. First, it will supplement India’s FTA with ASEAN. So far, India-ASEAN FTA in goods could not make much headway in India’s export to ASEAN. 

Later, with the clinching of India-ASEAN FTA in services, ample opportunities were churned out to reinvigorate the trade in services between India and ASEAN. FTA in services will open up India’s opportunities in exporting IT services, professional services such as lawyers, accountancy, medical doctors and banking services in ASEAN countries. According to FICCI-Deloitte study, India has greater competitive advantages in service sector than ASEAN member countries. Sectors such as IT services, telecommunications, e-commerce and engineering services showed greater advantages for India. IT services sector is expected to make a dent in ASEAN market with the relaxation in employment visa rules.  In ASEAN, service sector has been languishing because of its thrust on manufacturing sector to make export based economies.

Another major area of benefit for India from RCEP is the large scope for integration into “regional production networks”. With the low labour cost in the country and duty preferences in trade in importing countries, India can provide base for value chain supply of cheap component and parts and act as supporting country to the assembled units in RCEP countries. Automobile and electronic industries are the areas, where India can gain prominence with the advantage of duty preferences and low labour cost.

However, RCEP is not without glitches. One of them is the pressure on doing away with Section 3(d) of Indian Patent Law. If done away, this will let the poor people deprive of their essential drugs at affordable prices. India must stand firm to ensure that RCEP provisions do not agree to new TRIP regulation which will weed out Section 3(d). It empowers India to reject the patent rights of a new product, which do not embraces much changes in the substances by discovery. India has to vehemently resist this pressure for the sake of its vast poor and middle class people. Rejecting the patent rights of Swiss firm for “Glivec” – a cancer drug – was a case in point

In comparison to RCEP, TPP has more ridings. Had India joined TPP, it would have been more tough to override the glitches. The tough regulations of Intellectual Propriety Rights, which means banishing Section3 (d) and high labor standards, that is, restriction of child labour uses, would have dwarfed India’s scope for increase in trade with TPP member countries.

In some quarters, concerns were raised over the negative impact of TPP on India. They argued that TPP will stonewall India’s opportunities for trade expansion with USA and indulged in trade diversion. Trade competiveness will rise due to duty preferences in the intra-region trade in TPP. Trade with USA is likely to be the greatest threat to India for trade diversion. USA accounts for 14 per cent of India’s world export.

Textile is one of the single major items of India’s world export. It accounts for 10-11 per cent of India’s world export. USA alone accounts for 40 per cent of India’s total export of textiles. With duty preferences given to TPP members in USA market, Vietnam will pose threat to India’s exports of textiles to USA. Vietnam is the second biggest exporter of readymade garments to USA (after China). It accounts for 12 per cent of USA imports of garments. Duty preference to Vietnam will decimate India’s export of garments and textiles to USA, according to some trade analysts.

But, there is a laggard in this threat. In TPP, the duty preference for textile trade is governed by yarn forward rule. This rule will act as a barrier to TPP members and savior to India for its textiles export to USA. Under the rule, it is mandatory for the TPP members exporting textiles to its members, have to procure yarn, fabric and other inputs from any or combination of TPP partner countries to avail duty preferences. At present, Vietnam procures yarn and fabrics mainly from China. Given the existing structure of logistic and low cost procurement of yarn and fabrics from China, it will not be an easy task for the Vietnamese exporters to divert its procurement from China to domestic market or to any other TPP member countries. Paradoxically, none of the TPP members are globally known as manufacturers of yarn and fabrics, which could support Vietnam manufacturers to procure yarn, fabric and other inputs at competitive prices within TPP and enjoy the duty preferences in USA market.

Given the scope brightened by regional production network, RCEP can be engine for FDI buoyancy in India. Currently, two of the top five foreign investors in India are Singapore and Japan. Together they accounted for 39 per cent of total FDI inflow in the country in 2015. In the global survey of foreign investment in 2015 by Ernst and Young, India ranked top for inward foreign investment over the period of three years, pushing behind USA and Western European countries – the prominent members of TPP. The survey revealed that foreign investors witnessed India speeding up pace towards becoming one of the world’s top destination for manufacturing as well as regional hub for operation.

Even though both RCEP and TPP pitch for two greatest economic blocks, in reality they are more of political significance than economy. According to Professor Jagdish Bhagwati, TPP is "a political response to China’s new aggressiveness, built in a spirit of confrontation and containment, not of cooperation”. 

Dealing with accusations
In the past, several RCEP members had accused India of being defensive in its approach. The five members; Australia, China, Japan, New Zealand and South Korea had exhorted India to cut tariff on key products or leave the talks on the FTA. They had said India was taking a half-hearted approach towards the conclusion of major issues.

Should India join TPP?
India, which has stronghold in manufacture and export of generic drugs globally, could lose its trade advantages in generics if it does not join US-led trade pact Trans Pacific Partnership Agreement (TTP). According to patent experts, by India joining TPP, the country can expect to strengthen the dissenting voices in TPP and make TPP provisions more patient friendly.

TPP- Need of the hour?
The Peterson Institute for International Economics (PIIE) in a report released in September said that if China and the rest of the Asia-Pacific Economic Cooperation (APEC) forum join a second stage of the TPP that continues to exclude India, India’s annual export losses will approach $50 billion. However, many analysts claim such projections are exaggerated.

Guarding self interests
While the success of TPP hinges on the global economic authority of the US and how the negotiation process unfolds, the future dynamism of RCEP will depend heavily on how China and the Association of South-East Asian Nations (ASEAN) conduct their negotiation process and accommodate the interests of other regional powers, including India.

Calling for support
While the US-India Joint Strategic Vision for the Asia Pacific and Indian Ocean Region, released in January 2015, in his joint press conference with Obama following their September 28, 2015 meeting in New York, Prime Minister Narendra Modi said he looked “forward to work with the US for India’s membership of Asian Pacific Economic Community.”
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