Mega-trading blocs: Where does India stand?

  • Blog Post Date 07 November, 2014
  • Perspectives
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Sharmila Kantha

Confederation of Indian Industry

Emerging multilateral trading agreements, resulting in mega-trading blocs, seem to be replacing global negotiations through the WTO. In this article, Sharmila Kantha assesses the potential impact of these trading agreements on India, and contends that Indian policymakers and businesses would need to factor them into their future plans.

An interesting transformation is taking place in the global trading environment with the emergence of mega-trading blocs – multilateral trading agreements involving significant proportions of global trade - which can change the way trade is conducted in the world. These huge trading blocs are coming up in parallel with the World Trade Organization (WTO) Doha Development Round, aimed at lowering trade barriers and assisting developing economies to leverage trade for development. However, given the divergent stance of nations depending on their development levels and domestic compulsions, international negotiations on the WTO platform have been protracted.

Emerging mega-trading blocs

The Transatlantic Trade and Investment Partnership (TTIP) brings together two large trading entities of the world, the US and the European Union (EU), to negotiate an agreement on eliminating tariffs and lowering non-tariff barriers to trade and investment. The negotiations commenced in July 2013 and seven rounds of discussions have been held till September 2014. The two sides together constitute about half of the world’s Gross Domestic Product (GDP) and 30% of world trade in goods and services. The US and the EU view this trade treaty as a way to kick-start their vulnerable economies and add about 2 million jobs.

The Trans Pacific Partnership (TPP) negotiations, initiated in 2010, are being conducted among 12 countries on both sides of the Pacific. On one side of the Pacific are Australia, Brunei Darussalam, Japan, Malaysia, New Zealand, Singapore and Vietnam; on the other side are Canada, Chile, Mexico, Peru and the US. A fast-track negotiation process aims at completing the treaty this year. These countries account for around 38% of the world’s GDP and 25% of global trade.

The third potential trading bloc is the Regional Comprehensive Economic Partnership (RCEP) comprising the Association of Southeast Asian Nations (ASEAN) plus Australia, China, India, Japan, Korea and New Zealand - involving 45% of the world population and a third of world GDP, and including two of the three largest economies in the world. Launched in November 2012, it is proposed to be concluded by 2015, but would probably be delayed.

Potential implications for India

Although India is not included in the first two mega-trading blocs above, all of these will significantly impact India. While India has signed multiple free trade and economic partnership agreements, its track record in aligning its supply chains to these treaties has not been outstanding. In fact, in some cases, imports into India have increased faster than its exports. Moreover, the secondary reasons for the trade agreements – incentivising domestic economic reforms and furthering globalisation - have not been achieved as expected. So what should India look at vis-à-vis the mega trade blocs?

First, the rationale for these new trading blocs appears to be two-fold. To begin with, they seem to have been envisaged not as much for trade as for strategic purposes - for example, to strengthen the presence of US in Asia. Secondly, these trade negotiation platforms appear to replace the global trade negotiation platform - WTO, which is widely expected to involve significant delay or not adequately meet aspirations.

However, we are seeing a new format in trading rules under the TPP and TTIP, which also include rules on investment. These are now going beyond tariffs to encompass non-tariff issues such as environmental sustainability, technical standards, public procurement rules, labour standards, intellectual property etc. In some way, these are luxuries that are affordable by larger and more developed trading nations, but place a compliance burden on emerging economies such as India.

One, for India, trade diversion arising from the implementation of these mega-trading blocs may be considerable. It is likely that trade would shift to members of the trading blocs and exclude non-members. The TPP in particular includes several of India’s proximate neighbours such as ASEAN members. The TTIP, on the other hand, may encourage India’s top trading partners – US and EU - to look elsewhere for markets and sources of goods.

Two, there will be an impact of increased trade regulations that India, at this stage of development may not be able to comply with, given the large investments required. An elevated level of environmental and labour standards in the mega-trading blocs could pose a challenge for global trade overall. Consumer preferences in the US and EU – India’s major markets - could shift towards the new regulations.

Three, the investment component in these mega blocs may also divert some funds that may have otherwise come to India.

However, the impact of these developments might not be all adverse for India. India as a member of RCEP has the opportunity to be part of a mega-trading bloc which is more aligned with its development status. The RCEP encompasses trade, investment and economic cooperation and involves the most dynamic and fast-growing Asian economies. If properly handled, this could prove to be a stabilising bloc for global trade and the Asian region. India would need to ensure that the concerns of developing nations are met in the RCEP negotiations.

Secondly, India has a number of Free Trade Agreements (FTA) and economic cooperation agreements in place already and is working on several more. For example, our economic cooperation treaties with Japan, Malaysia and Singapore are showing results and will ensure that these countries would remain high on our trade and investment radar. Similarly, the ASEAN-India FTA is being upgraded to include investments and trade in services. Australia and New Zealand are working with India on FTA, and are also members of RCEP. Hence, the potential negative impact on India may be moderated through these agreements.

Third, India is a huge market for global goods and services and is likely to continue growing faster than most other markets for some time to come. It would be difficult for our trading partners to shift economic and commercial strategies away from India. In fact, given the investment opportunities arising across manufacturing, services and infrastructure, India would need to be included in the business strategies of multinational firms.

What India should do

At the same time, Indian policymakers and businesses would need to factor in the mega-trading blocs into their future plans. For example, Indian companies would need to greatly raise their cost efficiency and productivity parameters through firm-level processes in quality management in order to enhance competitiveness on the global stage.

A facilitative policy regime would be crucial to this endeavour. The new government must accelerate improvement in the climate for doing business with policies such as the Goods and Services Tax (GST), transparent resource allocation (for example, of resources like coal and land), efficient administrative procedures, and faster clearances, among others. The idea should be to infuse competitiveness into the system and minimise transaction costs. Bridging the infrastructure gap would be crucial to this effort.

Another critical policy would be to ensure that sufficient information is provided to Indian industry on emerging trade matters. Opportunities arising from these issues as well as changing standards and regulations need to be properly communicated to manufacturers and exporters so that they can institute response mechanisms well in time.

At the strategic level, the Indian government must examine how to reconfigure the mega-trading blocs to its advantage. One way of doing this is to continue exerting pressure on WTO to complete the Doha Development Round. In July 2014, India played a prominent role in raising the issue of permitted levels of public stockholdings of foodgrains due to which an agreement on trade facilitation (arrived at during the Bali Ministerial Meeting in December 2013) could not make progress. India should make an effort to arrive at a resolution to the current impasse.

Another way could be to work with other countries on moderating some of the norms pertaining to compliance and standards or, alternatively, seeking expertise and aid to meet such norms. The government should also work towards strengthening the export marketing effort in partnership with Indian industry.

Way forward

Isolating India from the mega-trading blocs is not an option since these are realities that we must deal with or lose out in the process. Indian industry would need to understand the potential non-tariff regulations and strategise to meet the requirements as more and more such barriers evolve.

India enjoys friendly relations with all countries and has been able to put forward its perspectives on the global platform to great effect. The mega-trading blocs would therefore be expected to keep in mind the concerns of a large emerging economy like India, and the impact of trade reformatting on developing nations as a whole.

A version of this article appeared in CII Communique, February 2014. Views are personal.

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