New global trade pacts may cut out India, China

A new global trading system is being erected, almost unnoticed in India. One of its unstated aims is to check China’s rise through economic discrimination. But it could end up discriminating against India too.

Two major new international trade pacts are under negotiation. One is the Trans Pacific Partnership (TPP), creating a free trade area (FTA) of North America and East Asia (including Japan, Australia, New Zealand, Vietnam and some others). For the first time, a once-protectionist Japan plans to join the US in a region of free trade and investment. The unstated but clear Japanese signal is that China must be checked. For this, it is willing to consider dismantling its traditional trade and investment barriers.

The second big FTA under negotiation is the Transatlantic Trade and Investment Partnership (TTIP), covering the US and the European Union. Historically, Europe has felt threatened by US multinationals, technology, and farm produce. The European Common Market came up with a common external tariff, aimed at binding together European members and standing up to competition from the US. But Europe’s recent economic stagnation, plus the rising threat from China, has concentrated minds wonderfully. Europe is now ready to consider a grand bargain with the US, mutually opening up investment, trade and services.

Earlier, the three economic giants — the US, Europe and Japan — saw one another as global rivals. Each sought to conclude FTAs with neighbours and selected developing countries, creating trade blocks within which each had tariff advantages. Now, for the first time, the three big players are seeking FTAs with one another.

What has changed? The rise of China, of course. Now, officials in Washington DC, Brussels and Tokyo will deny heatedly that either the TPP or TTIP is aimed against China. They will claim to be merely carrying forward the logic of globalisation and global integration, a trend that has steadily deepened since World War II. But the strategic anti-China aim is clear.

Besides, the World Trade Organisation (WTO), the original global forum for promoting global integration, has become gridlocked, with little inclination to move forward. The WTO works on the basis of consensus, so any country can veto any deal. India has used its veto in the WTO to block various proposals in the Doha Round of negotiations. So have some African countries. Hence the Doha Round has achieved nothing concrete despite 13 years of talk.

Faced with this, the US and European Union have lost interest in multilateral deals within WTO. They have opted for FTAs with a limited number of partners willing to strike deals containing the clauses vetoed in WTO by India and other countries. In FTAs, the US has been able to get free capital flows, tough patent laws and stiff environmental conditions that it would not be able to get in WTO. So to a lesser extent has the European Union.

Thus the world has shifted from multilateral deals (where all members agree to common conditions) to FTAs (where small groups extend mutual preferences, cutting out outsiders). India too has tried cutting deals with neighbours, but with few clear benefits, and some disadvantages. India has held preliminary talks on FTAs with the European Union and US, but these have run into serious headwinds.

Why? India is a more reluctant globaliser than trade rivals. In WTO, India always opposed free capital flows, free foreign bidding for Indian government contracts, untrammelled investment rights for foreign investors, liberal patent laws and lowered protection for agriculture. It is reluctant to give way on these issues in FTAs with the US or Europe.

But rival developing countries with fewer inhibitions have entered into dozens of FTAs with such conditions. This has given them a trade edge over India, one reason why Indian exports have risen so slowly over the last three years despite massive currency depreciation.

The richest countries are now moving to create giant economic agreements of their own. These, along with existing FTAs, will cover most international trade. This will cut out China. It may also cut out India, seriously disadvantaging it.

To avoid this, India will have to dilute many historical concerns in order to strike serious bargains with the US and European Union. It also needs to make the multilateral WTO system more relevant by helping clinch the Doha Round by diluting its old positions. A lot of political will is required for this.

The TTP and ITTP will take years to be clinched. European and Japanese groups (notably farmers) fearing US competition will oppose these pacts. But the anti-China lobby will probably triumph. So, India must act to avoid potential isolation in global trade and investment.