A recent news report shows EU's keenness to expand economic links with India, seeking a 'political push' by Prime Minister Modi to restart the stalled talks for the Free Trade Agreement (FTA) with the EU. The EU has expressed readiness to adopt flexibility to iron out differences with India on crucial issues.
FTA links with the EU can help address the likely difficulties for Indian trade arising from changes in market conditions as TPP and TTIP are concluded with higher disciplines and standards. Markets covered by these agreements will raise the standards for market access, including through an emphasis on sustainable development and social standards and an enhanced role of private standards for linking up with value chains for products seeking access to western markets.
Consider for instance the statement of President Obama in this year's US President's Economic Council's report: "new trade agreements would help American businesses reach new markets and put stronger environmental and labor standards in place, to ensure that all countries are playing by the same, fair set of rules. The trade deals that my Administration is negotiating in the Atlantic and the Pacific regions would do just that." These negotiations he mentions are the TPP and TTIP.
Further, in a White House blog, President Obama identifies China as a primary reason for this emphasis. He says: "Right now, China wants to write the rules for commerce in Asia. If it succeeds, our competitors would be free to ignore basic environmental and labor standards, giving them an unfair advantage over American workers."
The US is a key part of both TPP and TTIP, and these mega-regional negotiations will thus include its environment and labour emphasis. They will also raise the importance of private standards because the US standards system relies on private standards in a major way.
The importance of these developments can be gauged by China's response. A recent statement by China's commerce minister shows that China has established an information-sharing mechanism with the United States and the EU regarding negotiations about TPP and TTIP. Further, the minister said that China will continue to study and assess their impact on regional and global levels (which he says will be large), and meanwhile accelerate China's own free trade zone strategies. It is noteworthy that free trade zones are areas where China introduces its new reform policies and higher standards, including standards incorporating environment and labour concerns.
In this backdrop, the recent willingness of the EU to show flexibility in its FTA with India becomes very significant. The TPP and TTIP countries cover about half of world trade and the commercial conditions arising there, including through standards, will increasingly determine access to much of global trade. These conditions will be an important consideration also for investors who want to be connected to these markets through global value chains. Thus, we can understand the importance given by China to these developments and efforts to prepare its new policy regime to meet the requisite market conditions linked to TPP and TTIP. With China also moving towards such standards to maintain its strong export links there, we would incrementally have about three-fourths of world trade emphasising sustainable development and social criteria. To compete and sell its products in those markets, India would need both an ability to implement the content of these higher standards, as well as satisfy the conformity assessment requirements to show that the standards are actually being met. Without such preparations, India would tend to lose market access due to trade diversion faced by TPP non-members, and even more so because of the higher standards requirements in the markets concerned.
Therefore, it is important to prepare both the policy regime and the capacity of business to meet the evolving requirements. The gap is large, and step-wise or sequential efforts are more feasible than a large leap. In this process, an FTA with the EU, especially if they are willing to be flexible towards Indian concerns, would provide an intermediate step enabling India to improve its trade and linked investment opportunities.
It is noteworthy that the recent Indian Budget announced a project development company for setting up manufacturing hubs through investment in Cambodia, Myanmar, Laos and Vietnam. The express aim is to develop extensive economic and strategic relations in South-East Asia. An added advantage would be that since some of these economies are members of the TPP, location of manufacturing hubs there will also provide a base for India to access the large markets linked to these economies. Such additional access will arise in a much bigger way with an FTA with the EU, which together with US, is a key member of TTIP. With the TTIP focusing on regulatory coherence, systems would be developed to facilitate consideration of EU standards conforming with US market conditions. Since the US is the largest economy in the TPP, this would imply better access also to the TPP markets. Thus, through an FTA with the EU, India will be able to have a stronger presence in TPP and TTIP markets not only through location, but also by building credibility for its products, as they would meet the conformity requirements for these markets. This will help address some key adverse trade diversion effects for Indian exports likely through the new mega-regionals, and improve India's opportunities for trade, investment and development of value chains.
The writer, former Deputy Director General of WTO, is Senior Fellow, IISD, and Senior Associate, ICTSD