By Prof. Amita Batra
India's ability to successfully conclude its FTAs with the EU and Australia, according to schedule, will signal to the world its readiness and capability to play the role envisioned of it in the IPEF
The US is hosting the first in-person ministerial meeting of the Indo-Pacific Economic Framework (IPEF) on September 8-9 in Los Angeles. Earlier discussions with trade ministers, in which India participated as an “observer”, were held at the end of July in Singapore. No joint statement was issued after the July discussions but it is envisioned that the participating countries will declare the formal launch of rule-setting at the end of the September meeting. It may be useful to note some relevant considerations in developing India’s negotiating strategy in the IPEF trade pillar.
It is important to emphasise that while the IPEF has a trade pillar, it is not a trade agreement and, therefore, should not be considered as an alternative to the mega regionals in Asia, namely, the Regional Comprehensive Economic Partnership (RCEP) and the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP). More specifically, the TPP, of which the CPTPP is a subset, both in terms of provisions and membership, was an economic instrument at the heart of the US’s pivot to Asia strategy aimed at containment of China. By instituting WTO++ provisions, especially with respect to state-owned enterprises, intellectual property rights (IPRs) and investor-state dispute settlement, the idea was to establish a rules-based trade order that China would have either found difficult to abide by and/or incur substantial costs in terms of difficult domestic reforms. The CPTPP, in comparison, is a watered-down version of the TPP, especially with respect to provisions relating to investment and labour and environment standards. Most importantly, the IPR provisions have been substantively altered, thus making it easier for China to seek membership of the agreement. China applied for the CPTPP in September 2021. While it has been argued that the actual membership for China may take a long time given some member countries’ (e.g. Japan, Australia and Canada) discomfort with the Chinese membership, it is also a fact that Australia and Japan are both members of the other mega-regional in Asia, the RCEP, which is inclusive of China and was signed in the midst of the pandemic when sentiments against China were running high. Given its centrality in regional supply chains and trade, membership of both the regional agreements, CPTPP and the RCEP, will give China a dominant position in setting the trade rules in the region. The IPEF, which excludes China and is promoted by the US, acquires salience in this context.
For India, which is not a member of either of the mega-regional trade agreements, the IPEF, with nine members from East Asia (seven of which are Asean member economies) and two of its four pillars focused on trade connectivity and supply chains resilience, offers another opportunity to integrate with the dynamic East Asian value chain hub. Post-pandemic and in the wake of the Ukraine crisis, the regional economies are most likely to emerge as the preferred, secure alternative in the large corporations’ “China plus one” relocation strategy. Also, as evident in its post-pandemic comprehensive recovery framework, Asean is looking for supply chain resilience through diversification beyond the region (and beyond the RCEP) through its bilateral free-trade agreements (FTAs). The flexible format of the IPEF could be an opportunity, especially under its trade facilitation component, for India to seek remedial action against the non-tariff barriers that it has long complained about in the context of Asean-India FTA.
The opportunity, however, comes with challenges. The IPEF does not include tariff preferences and hence, the scope for enhanced market access. Non-inclusion of tariffs has been attributed to domestic political constraints in the US. An additional consideration may have been the already low (0-5 per cent) global average most-favoured nation tariffs in the manufacturing sector achieved through both unilateral trade liberalisation policies of the developed and many developing countries and preferential trade agreements. The IPEF may have therefore been deliberately designed to focus on more modern-day provisions like digital trade, regulatory policies, trade facilitation and sustainable social development provisions relating to labour and environmental standards. Led by the US, the IPEF is likely to reflect its revealed position in the US-Mexico Canada Agreement (USMCA), which has forward-looking labour standards, including a mechanism to ensure minimum wages through the innovatively-defined rules of origin that could become a template for the IPEF. The provisions pertaining to digital trade and environmental standards in the USMCA are considered to be even more stringent than those under the CPTPP.
The trade facilitation component in the IPEF may likely draw from the Asia Pacific Economic Cooperation (APEC) rules. Other than India, all members of the IPEF are also members of the APEC. Countries like Vietnam, which is a member of RCEP, CPTPP and APEC, have, in the past, used their membership of FTAs as a means to lock in necessary domestic reforms. A majority of Vietnam’s FTAs are with the APEC member economies. Interestingly, the consensus towards taking forward the high grade, WTO++, CPTPP (post-US withdrawal from the TPP) was achieved at the APEC 2017 summit when Vietnam was the chair. India, therefore, will need to overcome its handicap of non-membership of mega-regional trade agreements, RCEP and CPTPP as well as the regional cooperation forum, the APEC.
The fact that India is in the midst of advanced negotiations with the EU and is aiming at accomplishing the CECA with Australia in the next few months could prove propitious in this context. The EU leads the way, globally, in negotiating and concluding modern-day FTAs with emphasis, in particular, on labour and environment-related commitments. Australia is a founding and leading member of the APEC, which, even with its soft regulations and non-binding/ voluntary mechanisms, has been acknowledged for its contribution to trade and investment facilitation and establishing regulatory ease for cross-border supply chains. India’s ability to conclude successfully, according to the schedule, its FTAs with these countries will not just help to prepare the ground by undertaking necessary domestic policy and tariff reforms but could also, very significantly, be a signalling mechanism to the world, of India’s readiness and capability to play the role envisioned of it in the IPEF.
Thus, India’s stance in the next round of FTA negotiations with the EU, expected to be held next month, should provide evidence of whether it has stepped up its FTA game and its willingness for necessary domestic policy and tariff reforms.
Originally published: Business Standard, September 09, 2022
Posted here with the authorization of the author.
Amita Batra is Professor of Economics, SIS, JNU. The views are personal.