WORLD MONEY
Donald Trump’s isolationist “Make in America” fire has targeted trade agreements such as the Trans-Pacific Partnership (TPP) and the North American Free Trade Agreement (Nafta). TPP, the proposed agreement between 12 Pacific Rim countries including the US, Japan, Canada, Mexico, Vietnam and New Zealand, together accounting for 40 per cent of world gross domestic product, was junked before it could come into existence. Nafta, essentially a tariff union between the US, Canada and Mexico that has been operational since 1994, will possibly be renegotiated, particularly with Mexico, and there is a real risk that with the US president’s trigger-happy ways and his rather brusque approach to diplomacy, the treaty could be scrapped.
From a global perspective and clearly from India’s point of view, abandoning the TPP is the bigger deal. The biggest losers are clearly the members of the TPP bloc like Vietnam, Singapore and Malaysia. Some of them had low tariff access to the US but would gain through the removal of non-tariff barriers. With TPP out of the way, Asian economies are moving ahead with the Regional Cooperation and Economic Partnership (RCEP) that includes both India and China. Thailand and Korea that were excluded from TPP are part of the RCEP and would stand to gain.
The TPP purported to do more than just slash tariffs; higher standards on a bunch of things such as anti-corruption measures, intellectual property obligations, human rights and child labour conditions, and environmental commitments came within its ambit. India was incidentally not kept out of the TPP — it declined to join because of some of the restrictive conditions that the pact implied. The RCEP might have China has its pivot, but would include all Asean countries and would cover goods, services, investments, competition and intellectual property rights policy among other things. India stands to gain from this but has to reconcile to the prospect of China playing big brother and leveraging the trade agreement to further its political aspirations in the region.
Asian economies that were members of the TPP had been banking on the substantial benefits that would emerge from access to new markets and the development of integrated markets across the Pacific. Even for non-members, benefits would flow from the massive surge in global trade and economic buoyancy that would have ensued from the creation of the new international trading order. Whether RCEP will lead to similar gains as was expected from TPP is questionable. Most Asian countries barring India already have existing free trade agreements with China; they have little to gain.
As for Nafta, it is likely that the US president will realise the difficulty of unravelling the supply chains that have taken root across the North American continent. Automobiles and electronics are two sectors where the US runs a trade deficit with Mexico and many US firms have invested in manufacturing facilities across the border. Forcing businesses to relocate to the US where labour costs are substantially higher will be a difficult task. Instead, renegotiation of the treaty may focus on changes in the rules of origin. These will mandate higher value addition taking place in Mexico so that imports from third countries with only a small value added in Mexico do not find their way into the US.
In any case, renegotiation of Nafta will not be easy and it could take years to pass through Congress. A legislative amendment will require notice to be given to Congress, debates to take place and a review to be prepared by the US International Trade Commission. Given that the US Trade Representative, who is usually the chief negotiator for trade deals, is yet to be appointed, it could take some time before a new deal is formulated. Instead, the Trump administration could look for some quick wins by tweaking the provisions on rules of origin or labour and environmental standards within the same deal. The US may also seek to negotiate bilateral deals with its erstwhile TPP partners.
Meanwhile, the RCEP negotiations are progressing steadily with some optimism that it will be concluded by the end of this year. Like the US, India is in a defensive position when it comes to trade deals. While India will press for greater access in services, it also needs to expand its presence in manufactured products. For that, it will be important to negotiate on the minutiae of rules of origin, dispute settlement, domestic regulations and a host of other factors that create non-tariff barriers.