Trade aversion

India must review its IPEF stand

India’s decision to opt out of the trade pillar of the Indo-Pacific Economic Framework (IPEF) is disappointing and will adversely affect longer-term economic prospects. Although India joined the other three pillars of the framework related to supply chains, tax and anti-corruption, and clean energy, the stand on trade will weaken its overall position. The government has argued that in the context of trade, the contours in terms of commitments to be made in areas such as labour, environment, and public procurement are still emerging. It is not clear what member countries will gain and whether some of the conditions would discriminate against developing countries. The government has said that it will continue to engage with the trade track and wait for the final contours to take shape. India would have been better off being part of the process deciding those conditions.

The US-led IPEF was announced in May and has 14 members. Although it’s not a trade agreement between the members and is more of a forum on standards and norms in different areas, it provided an opportunity for India to build partnerships with countries in the region along with the US. This is important because India is not a part of mega-trade agreements. India’s stand on the trade aspect of the framework weakens its standing in a number of ways. For instance, by staying away from the trade aspect, it is highly likely that it will also miss out on the supply chain pillar of the IPEF because the two are interconnected and interdependent. Further, it will signal that India is part of the Quadrilateral Security Dialogue or Quad — a strategic group of the US, Australia, Japan, and India — only with a narrow focus on geopolitical security and is not open to broader economic partnership in the region.

Clearly, if India is not an active member of the forum conceived as an alternative to China’s dominance in the region, it will get more isolated in trade and other economic aspects. More specifically on trade, the thinking in New Delhi seems to be to focus on bilateral agreements. This is a flawed approach. Standards and conditions that India is uncomfortable with in large agreements would also be raised in bilateral trade negotiations with advanced economies. Bypassing such conditions may only result in a shallow deal, which may not go too far. India’s trade policy thus needs to be fundamentally reviewed and associated domestic reforms should be carried out at an accelerated pace.

It is absolutely critical to acknowledge that to do well on the trade front, it is necessary to be part of the global value chain. This can only happen if India is part of large trading groups and willing to adhere to the terms of such agreements. Since India seems unwilling to do so and has raised tariffs in recent years to protect domestic businesses, its participation in the global value chain has declined. India’s stand on IPEF, along with its decision a few years ago to walk out of the Regional Comprehensive Economic Partnership, will also affect its position in bilateral trade talks. It will not be able to approach such negotiations from a position of strength. India thus would do well to review its stand in the context of IPEF as it could also have geopolitical implications.