ISSN 2330-717X

Will Regional Mega Trade Agreements Come Out Of Cold Storage? – Analysis

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By Jayshree Sengupta

A new Trans Pacific Partnership agreement has been signed in Santiago, Chile, on 8 March. The original TPP agreement, comprising US plus 11 countries (Japan, Chile, Australia, Canada, New Zealand, Mexico, Peru, Singapore, Malaysia, Brunei and Vietnam), was signed  in 2016 but was not ratified because US President Donald Trump withdrew from it.   Now it has been rechristened CPTPP or Comprehensive Progressive Trans Pacific Partnership. It has to be ratified by least 6 member states to be effective. This is important because many members were just made to sign it but they may think it over later and withdraw.

President Trump, after taking up office in January this year, refused to sign the original TPP claiming that it was against the interests of the United States. Because it was largely drafted by US corporations during Obama’s presidency, Trump objected to it and said that it contained some controversial clauses.

Despite President Trump withdrawing, the 11 members of the original mega regional agreement did not want the TPP scrapped and went ahead without the US to draft a new agreement. The new treaty of 11 Pacific Rim countries incorporates changes in some 22 controversial provisions in the 632 pages agreement in order to accommodate Trump’s wishes regarding America’s interests. The grouping is very keen to woo back President Trump so that CPTPP becomes an important mega Regional Trading Agreement of the world, currently covering 13.5 percent of the global GDP.

Trump may or may not relent and in all probability will not sign the agreement. He has started a trade war involving two of the member countries — Canada and Mexico — belonging to the CPTPP.  No one knows when it will end or what the consequences will be.

India and China are not part of this mega agreement but are part of RCEP —Regional Comprehensive Economic Partnership – which is even bigger with ASEAN 10, India, China, Japan, Australia, New Zealand and South Korea, but it is on hold.

Both these two partnerships, in which negotiations are behind closed doors, are a relatively new phenomenon. The main purpose of these mega trade agreements is to facilitate trade and investment within a region with low tariffs and an enabling investment environment. They seek to lay down rules and regulations for regional commerce.

The most significant revisions in CPTPP are in chapters on investors’ ability to litigate and the new agreement limits the ability to litigate relative to the original TPP. The intellectual property rights chapter has also been modified and the length of patent protection for innovative medicines has been shortened and technology and information protection have been narrowed. Copyright periods for written materials have also been shortened but the chapter on state owned enterprises has more or less remained the same. On government procurement, the new agreement permits government contracts to be open to foreign bidders.

On the whole, US may not see the new CPTPP favourably because, according to Peterson Institute in Washington, US has moved from a position of gain of $131 billion under TPP to a loss of $2 billion under CPTPP. Under it, American farmers will face higher duties as compared to Australian and Canadian farmers when selling to Japan and other CPTPP markets. But  there will be $147 billion in global income gains.

Perhaps not so interested in global income gains, Japan’s Prime Minister Shinzo Abe has been keen to push the agreement through in the hope that US will join it. Trump did say at the World Economic Forum in Davos that “would do TPP if we were able to make a substantially better deal.” Japan has worked hard to keep the agreement alive and with help from Australia and others to draw Trump into it to check China’s growing influence in the region.

RCEP on the other hand has the two rising Asian powers — India and China. The negotiations are slated for completion at the end of 2018 but there are many delays in sight. India is not keen on signing it on the existing terms and conditions and is afraid of reducing tariffs to negligible levels. Already it has trade deficits with countries in the RCEP with which it signed Free Trade Agreements in the past —South Korea, ASEAN and Japan. With China the deficit is $51 billion. India has already resorted to duty hikes on 45 imports in order to promote the Make in India campaign and to fob off Chinese imports.

It can be argued that it is in India’s interest to join the RCEP because the region is a  big one and India will benefit by gaining entry into it. The RCEP has a combined GDP of $49.5 trillion and will cover a population of 3.5 billion. By signing the RCEP, India will be able to promote its services exports. It would help if the RCEP countries allowed Indian IT professionals and skilled workers to take up short term work in their countries. The only problem is the vast differences in language and scripts between India and the ASEAN region. Also, India may be able to enter the Global Value Chain more smoothly in many sectors by signing the RCEP. Currently its participation in GVC is confined to one or two manufactures.

The negotiations for the RCEP had begun in 2012 but various differences among members resulted in a stalemate. Those against have pointed out that it will not be to India’s advantage to sign RCEP because it remains weak in many sectors as compared to the other members and may face tough competition in textiles, plantations, automobiles, engineering and pharmaceuticals.

The higher IPR standards in the RCEP could also affect India’s export of generic drugs especially to Africa.  In agriculture, India is not prepared to face competition from some of the RCEP members. Hence there is strong resistance within India from various quarters to signing of the RCEP. India’s SME sector will especially face tough competition from China and it is this sector where future jobs can be created because the top notch manufacturing units in India are going for robotics and automation in a big way. We have to rethink about whether opening up through big tariff reduction especially to China is at all desirable in the present juncture.

In all probability, both the mega trade parternships will remain in cold storage while the world waits and watches President Trump’s latest moves on the trade front.


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Observer Research Foundation

Observer Research Foundation

ORF was established on 5 September 1990 as a private, not for profit, ’think tank’ to influence public policy formulation. The Foundation brought together, for the first time, leading Indian economists and policymakers to present An Agenda for Economic Reforms in India. The idea was to help develop a consensus in favour of economic reforms.

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