TPP and RCEP: Grand trade schemes victimised by US/Indian protectionist policies

In the wake of the withdrawal by India from the Regional Comprehensive Economic Partnership aka RCEP, AURIOL WEIGOLD provides a timely analysis of the implications for multilateral trade agreements such as RCEP and the Trans-Pacific Partnership aka TPP of the growing tendency towards protectionism in both New Delhi and Washington.

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Background

The Trans-Pacific Partnership aka TPP was the central piece of President Barack Obama’s strategic pivot to Asia and was to become a multinational trade agreement between 12 countries, covering 40 per cent of the global economy, and which also served to blunt China’s economic assertiveness by keeping that country out of the agreement. In withdrawing the United States from the TPP, President Trump argued that the agreement would be harmful to American manufacturing and, consequently, would result in reduced employment, lower wages for local workers and increased inequality.

Indian Prime Minister Narendra Modi at the of Regional Comprehensive Economic Partnership RCEP summit in Bangkok, Thailand on 4 Nov 2019. (Photo: AP)
Indian Prime Minister Narendra Modi at the Regional Comprehensive Economic Partnership RCEP summit in Bangkok, Thailand on 4 Nov 2019. (Photo: AP)

The remaining TPP countries responded by developing a new agreement, the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), effective a year ago but commanding a much smaller share of the global market while keeping most of the original TPP provisions in place. In November 2012, however, negotiations were launched at the ASEAN Summit in Cambodia for a Regional Comprehensive Economic Partnership (RCEP), framed as Asia’s commitment to free trade, with sixteen prospective signatories, including India and China, but not the US (member states of both the CPTPP and RCEP can be seen online).

The RCEP was expected to be signed by all participating countries at the ASEAN summit meeting in Thailand on 3-4 November 2019, but India withdrew, arguing that the trade deal did not provide it with adequate protection against surges in imports – essentially targeting China, with which India has a massive trade deficit. New Delhi claimed that unsustainable trade deficits need to be addressed, but also that it has ‘long pushed for other countries to allow greater movement of labour and services’ if it opened up its own market. Modi’s argument for at least temporarily remaining outside RCEP is protective, and thus not dissimilar to Trump’s reasons for walking away from the TPP.

The crux of the US and Indian leaders’ arguments for withdrawing support is domestic economic policy, expressed succinctly by their respective campaign slogans, respectively “Make America Great Again” and “Make in India”.

Comment

Protectionist policies are the imposition of restrictions, such as tariffs on imports, ostensibly to protect that country’s industries, with the countries affected by the higher tariffs almost invariably responding in kind with levies or increased tariffs of their own. Trump has put in place steep tariffs on many goods from Canada, the European Union, Mexico and, most visibly damaging, from China.

India, too, claims unsatisfactory terms in relation to its trade with China. Its stated concern is that China would “flood” its market with cheap imports and that it does not have adequate protection against such “surges”. India has so far unsuccessfully sought an “auto-trigger” mechanism that would allow it to raise tariffs in instances where imports cross a pre-determined threshold. India’s protectionism may be compared to Trump’s US, where a lack of local jobs has also been characterised as, if not a fear of China, at least a result of unequal trading terms and other issues.

India has pushed for other countries to allow greater transfer of labour and services, in return for opening up its own market, in areas where Indian businesses can benefit. It also has issues about its trade deficits associated with its bilateral free trade agreements already in place with states that are part of RCEP.

RCEP has been described as less ambitious that the CPTPP, an aim is to lower tariffs between member countries. India’s desire to be cut some slack is, for the present at least, outside that frame.

The US-India “trade war” may be seen as a case study of an economic imbroglio between countries that are committed to nationalism rather than multilateralism, and thus halts or limits global or Asian trade schemes as those envisaged above.

In its latest report on global trade barriers, the 2019 National Trade Estimate Report, the US Trade Department singled out India as having the highest tariffs ‘of any major world economy’ – 13.8%   – under its Most Favoured Nation (MFN) tariff rate (Report, p.235). The report also states that India’s tariff regime is favourably affected by disparities between the World Trade Organisation’s bound tariff rates on, for example, agricultural products, which can be extraordinarily high (Report, p.236).

The Report also described Indian trade policy as opaque and unpredictable, often leaving US firms overwhelmed by red tape and paperwork. India is one of the world’s main outsourcing destinations, with many of its workers engaged in IT systems such as call centres and software development in India, while supplying highly-skilled workers to the US, primarily in the IT industry, utilising a preferential visa system that the US seeks to restrict. Arguably retaliating under the US Generalized Scheme of Preferences programme, a trade preference scheme for designated developing countries under which more than a thousand products may enter the US duty-free, Trump announced in mid-2019 that he had terminated India’s entitlement after “determining” that New Delhi had not assured the US that it would provide Washington with “equitable and reasonable access” to its markets.

In a concluding assessment, Modi’s Bharatiya Janata Party promised in both his 2014 and 2019 election campaigns to make India the world’s third-largest economy by 2030, encouraging investors to “Make in India”: a promotion to build his country’s manufacturing capacity, taking advantage of a massive workforce and low rates of pay. It is a not dissimilar aim to President Trump’s election slogan of “Make America Great Again”, achieved in part by restricting imports from other countries to protect or increase job opportunities, or by imposing tariffs on imported goods, as noted above.

Also accused of retaliation by the US, India has announced its intention to raise tariffs on a variety of products from the US, and impose tariffs on formerly duty-free items, following the US refusal to exempt India from higher steel and aluminium tariffs. A trade war between the two is underway and, arguably, could be a pattern repeated between countries in the watered-down CPTPP, as well as within RCEP.

Dr Auriol Weigold is Senior Visiting Fellow at the Perth-based Future Directions International. This article first appeared on www.futuredirections.org.au

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