India: Acting East after the End of the TPP

Roshan Iyer

As the new US President Donald Trump signed his first set of executive orders on 23 January 2017, the world heard the final nail in (at least this iteration of) the Trans Pacific Partnership’s (TPP) coffin.

The proposed TPP would have linked 40 per cent of the global economy and revolutionised global value chains. This vacuum in the world economy may now purportedly be filled by China. However, this also provides an opportune moment for India to engage with Asia and fill a part of that space through its Act East Policy and engaging with Southeast Asia through the Regional Comprehensive Economic Partnership (RCEP) - a trade deal between the 10 ASEAN nations and the nations that have existing FTAs with the grouping.

Significance of the TPP’s Death

With the rejection of the TPP officially in place, doubts have arisen about the credibility of the US’s Pivot to Asia. Some also feel that this finally heralds the rise of China as the global economic leader. While a conservative US has always been alarmist when it comes to China, the situation might not be as dire as it has been made to be. China still has a long way to go before implementing any of its own initiatives on a trans-continental level.

 

Critics of the TPP targeted its opaque negotiation process and argued that it was created purely for the benefit of large corporations. It also faced criticism for its investor-state dispute settlement mechanism (ISDSM), which would have enabled foreign corporations to sue governments if the former felt that terms of its contracts were being violated by the latter. Meanwhile, the RCEP does not address certain issues like protections for labour and the environment which the TPP had attempted to. The RCEP also lacks an ISDSM, limiting the power that foreign investors hold in a host country (albeit this has not yet been finalised). These make the RCEP more palatable to developing countries.

 

At present, the death of the TPP has breathed new life into the RCEP. This partnership offers India the unique opportunity of engaging directly with China on this multilateral forum to push forward an agenda (that is acceptable to India) for greater regional trade integration.

 

Potential of the RCEP

Originally introduced at a 2011 ASEAN conference as an alternative to the TPP, the RCEP comprises 25 per cent of the global economy. The agreement promises to provide a basis for more open trade and investment in the region while also avoiding the hassle of multiple bilateral arrangements that currently exist between the RCEP countries. Simultaneously, the RCEP is an ASEAN-led agreement, i.e. in principle, both Beijing and New Delhi have an equal platform within the arrangement.

 

Although this grouping holds the potential to be a major trade bloc and possibly even the third pillar in the global economy (like the EU or the North American Free Trade Agreement), India is at loggerheads with the other RCEP nations over certain tariff and liberalisation related matters. Previously, India had proposed a three-tier tariff reduction plan based on its existing Free Trade Agreements, proposing 80 per cent tariff cuts to the 10 ASEAN countries; 65 per cent cuts to South Korea and Japan; and 42.5 per cent cuts to China, Australia and New Zealand. The plan was unilaterally rejected by the RCEP members, a decision that India accepted allowing for negotiations to continue. This worked out well as the RCEP members eventually agreed to include services and investments liberalisation in the negotiation agenda.

 

Previously, services and investments liberalisation found little support as structural disparities between the service and investment sectors of the RCEP countries (especially within the Singapore-led ASEAN grouping) had previously prevented them from negotiating the idea of bringing about a uniform policy in these sectors. However, India used the potential of access to its market as leverage to build a consensus on services and investments liberalisation. This demonstrated India’s considerable sway within the partnership. India requires liberalisation in these sectors to enable its service exports (which are highly competitive and profitable) to the region.

What Next?

At present, the RCEP is still in the negotiating process, with the 16th round scheduled to be held in Indonesia in December 2017. India’s negotiation appears to be heading in the right direction with its focus on services and investment. If the liberalisation of these sectors is implemented in full, India stands to gain the most and must hence work to capitalise those markets in the RCEP countries.

 

However, India must balance the pressure to reduce its own tariffs so that the country’s farmers and low-income manufacturing sector labourers are insulated from the substantial social cost this might have on them. It would be prudent for the Indian government to hold more consultations with the various farmers groups, industry associations, and labour unions to develop an optimal liberalisation plan for the country.

 

On a geopolitical level, the RCEP creates a Southeast Asia-centric economic system that aligns with India’s Act East Policy. The partnership would also work to exclude Trump’s US from the regional Asian economy, reducing the blowback from the US’ withdrawal from the global economy. India must use this window of opportunity to its greatest advantage. Its massive market is extremely attractive to other countries but this is only an asset if India is able to strategically leverage it to its benefit in the global economy.