The failure of the Doha trade talks led to the acceleration of regional trade ties and economic integration as countries chose to aggressively seek alternatives to multilateral trade liberalisation. Several other factors have also led to the development of ever-closer trade and investment relations between regional partners. Manufacturing supply chains have sought to leverage regional specialisations. Firms have sought to take advantage of the economies of scale and market size offered by the larger region in which they operate. Particular natural resource and skill endowments have led to the development of cross-border exchanges of natural and human resources. But in several cases it was strategic considerations that initiated the process of regional integration and paved the way by creating institutions and incentives that led the way to regional economic integration.
The EU, Asean, North American Free Trade Agreement (Nafta), and Mercosur were all part of a larger political commitment to regionalism. Trade policy that facilitated regionalism was the product of such strategic decisions, and regional trade and investment agreements were designed to ensure that the overall competitive strengths of the region were maximised. The depth and quality of institutions and incentives coming out of the design of such trade agreements played an important role in the relative success of such regional integration. More recent new mega-regional initiatives such as the US-led Trans-Pacific Partnership (TPP)1 and the Asean+India, China, Japan, Korea, Australia and New Zealand Regional Comprehensive Economic Partnership (RCEP) show that countries are seeking to create clusters of economic relations across the traditional regional lines. A global economy defined by such clusters of economic relationships along the Pacific and Atlantic rims essentially puts forward a challenge to Indian policy-makers as to where they are as a part of this larger process of economic integration along regional clusters.
The initial steps towards regionalism in India were also dictated by strategic considerations. India chose to reach out to its South Asian neighbourhood to leverage economic diplomacy as a means to improve ties with its neighbours. The South Asian Free Trade Agreement (Safta) and India-Sri Lanka FTA came out of such initiatives of the mid 1990s. South Asian integration, however, was thwarted by the lack of cooperation from Pakistan. Pakistan still restricts free movement of Indian goods and services in spite of recent initiatives at bilateral rapprochement. As a result, South Asia remains one of the least integrated regions in the world.
India's regionalism efforts since then were largely un-coordinated and FTAs were put into motion with some success only with Singapore. India also invested a lot of negotiating energy in FTAs with industrialised economies like Japan and the EU where market access gains will be marginal, given that the tariffs there are already low, and agriculture and a liberalised visa regime are not included in these FTAs. India also wasted efforts in forums such as BRICS that add little value to furthering India's economic objectives.
Given the current global scenario, it would make sense for India to look to a deeper regionalism with the more dynamic economies of Southeast Asia, and simultaneously consider joining the TPP. It already has an FTA with Asean in goods and services, and India is also a member of the wider RCEP. The entire focus now should be towards a link to the regional supply chains of Asean countries. This will require policies to attract FDI that would help create these regional linkages. It would also require the Indian government supporting outward FDI by Indian entrepreneurs seeking to invest in the larger South East Asian region and beyond. Well-targetted industrial policy to help selected sectors like heavy-engineering, chemicals, industrial machinery, textiles, and electronics improve productivity, acquire technology, and develop new product lines would also help in increasing regional linkages. A more competitive and diverse manufacturing base in India would have more opportunities to find a place in the regional production network.
The critical element of this regionalism is connectivity. India has overland routes connecting it to most of South Asia and Southeast Asia. It also shares a coastline along the Bay of Bengal with the wider Southern Asian region. An ambitious long-term vision to ensure economic connectivity between India and the rest of southern Asia is critical to India's trade policy objectives in pursuing regional agreements with Asean economies. Connectivity would not only encompass road, rail, air, and sea linkages but also linkages between Indian and southern Asian energy networks (pipelines and electricity grids). It would also include institutional mechanisms to facilitate the movement of people (thus enabling services trade), customs and other regulatory harmonisation, and the liberalisation of education, health, banking and financial services.
India also needs to have some form of trade agreement with its strategic partner, the US, and also with some other countries in the Pacific region. In this regard, the TPP offers the best opportunity for India. Apart from the US, and some RCEP countries, India would also be able to link up with the growing markets of Canada, Mexico, Peru and Chile. India would benefit greatly by ultimately linking to these mega-regional supply chains. Most importantly, this would help revive the lost momentum of the decade-old US-India strategic partnership.
Membership of the TPP, however, is not automatic. India will have to fulfil the strict requirements of elimination of tariffs and other barriers to trade and investment, a WTO +IPR regime and trade in services, adherence to competition policy, trade facilitation, investment policy, and government procurement. Labour and environment policies are also on the agenda - although how far these will be enforced is not yet clear. Given the diversity of membership in TPP, the same rules obviously will not apply to all countries. Also, India does need to move swiftly on most of these policies on its own to fulfil its objective of becoming a major global player. It is high time that India develops a bold and well-focused 21st century regionalism strategy.
Recommendations
The main reason behind India's ad hoc approach to regionalism has been the total lack of a vision and an overall strategy on the part of the ministry of external affairs (MEA), and the ministry of commerce and industry (MOCI). Given that economic policy, especially trade policy, is now an integral part of foreign policy and diplomacy, it is most surprising to find that no thought was ever seriously given to having a strong economic cell within the MEA headed by a well-qualified economic adviser. There also appears to be no strong collaboration between the MEA and MOCI in formulating multilateral and regional strategies. The trade policy department (TPD) in MOCI mostly focuses on WTO policies, leaving the task of bilateral and regional agreements to individual regional division heads. It is not clear whether regionalism strategy is designed and implemented in MEA or in MOCI. There is an urgent need to have a body such as the Office of the United States Trade Representative (USTR) in India, or a fully revamped TPD which can effectively be in charge of inter-ministerial coordination in unilateral trade policy, multilateral and regional matters. The TPD must have a renowned trade economist as its chief economist, fully armed with state-of-the-art modelling techniques and the best available global trade data. MOCI should scrap its obsolete Annual Foreign Trade Policy and replace it with a periodically updated strategic trade policy paper that India requires to not only overcome its present current-account deficit problem, but to help put India on a truly outward-oriented high and inclusive growth trajectory.
1Members are Australia, Brunei Darussalam, Chile, Malaysia, New Zealand, Peru, Singapore, Vietnam, USA, Japan, Canada, and Mexico. Other countries showing interests are the Philippines, Laos, Colombia, Taiwan, Korea and Costa Rica.
The writer, a trade economist, was economic adviser to the ministry of commerce. This is the last of a three-part series
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper
