Prime Minister Narendra Modi recently said that his government had converted the UPA’s Look East policy to a more result-oriented Act East policy. India’s decision to strengthen trade and economic relations with countries towards its east is the result of a compulsion rather than just choice.
Like it or not, India’s exports may in a few years find it difficult to access some of its traditional markets such as the US and the European Union (EU). This is because the US and the EU are in the process of putting in place two mega regional trade agreements that will encourage trading among countries that are signatories of these agreements rather than with those outside them.
Two Trade Agreements That Could Hamper India’s Exports
The two agreements – the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (T-TIP) – together involve countries that account for more than 50% of world trade. The TPP, which is being driven by the US, has as its members the EU and a few countries of the Pacific Rim such as South America’s Chile and Peru and Asia’s Japan, Malaysia, Singapore and Vietnam in Asia. The T-TIP is a trade agreement between the US and the EU.
China, India and South Korea are not part of TPP but of the Regional Comprehensive Economic Partnership of Asia and the Pacific (RCEP), an agreement involving countries in the Asia-Pacific region, which itself is also a very large trading bloc. However, there are indications that South Korea and thereafter China may also join the TPP in the next few years.
India is unlikely to be a part of TPP for a long time, and that’s mostly to protect the domestic industry. Trade agreements necessarily require countries to lower tariffs to allow easier flow of goods and services, and that can lead to an invasion of foreign goods into the domestic market.
It is also expected that TPP will require imports to comply with very high standards which Indian companies may not able to meet in the near term. That will act as a non-tariff barrier and thus shut market access for Indian goods, commerce ministry officials have warned. The standards adopted by RCEP too are expected to be high, but much lower than those required under TPP.
The emergence of TPP and T-TIP can hurt Modi’s plans to make India a manufacturing hub for global markets in many ways, and higher standards is only one of them.
The Case of the Rejected Exports
India’s exports are already facing problems with standards in some countries, not necessarily because of quality of its goods but due to the duplicity of standards applied to Indian exports. Many countries arbitrarily apply higher than commonly applied standards to block access to India’s agriculture and industrial products, exporters complained at a recent conclave organised by the Confederation of Indian Industry and others.
Often, it is private standards – set by importers – that are responsible for the rejection of Indian export consignments. It is feared that these private standards may become more stringent when TPP comes into force. Indian industry and policy makers fear many of these standards many get adopted by RCEP.
Act East, an Imperative Switch
The emergence of these mega regional trade agreements may also lead to diversion of trade and investment away from India. Many multi-national firms of member states may prefer to invest in countries that are part of the agreement to gain the most from free trade agreements and lower tariffs for goods and services moving within the trading bloc. This could lead to fall in demand for goods and services from non-member countries. Investors may prefer Vietnam to India as a manufacturing hub to benefit from the agreement.
In such an emerging situation, it becomes imperative for India to forge a strong trade and economic ties with nations to its east, both advanced as well as the emerging ones. Japan and South Korea have strong manufacturing presence in India and are keen to invest more. China has the potential to be among the big investors in India, particularly as it needs to diversify beyond its borders when its economy is slowing.
The newly developing nations – comprising Cambodia, Myanmar, Laos and Vietnam – offer opportunities for Indian investors to set up overseas base. Vietnam can also serve as a bridge into TPP nations till India is ready to be part of that trade alliance.
(The writer is a Delhi-based senior journalist)
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