The Trans-Pacific Partnership (TPP), a trade agreement involving 12 countries with the US being a prominent partner, was sealed recently. Pact partners include Australia, Canada, US, Japan, Malaysia, Mexico, Peru, Brunei, Chile, New Zealand, Singapore and Vietnam, which cumulatively constitute 2/5th of global GDP. Under the deal, tariff and non-tariff barriers between TPP countries will be reduced or eliminated on agricultural & manufactured products, intellectual property, services and investments. If approved, it will act as a template for international commerce. The pact's implicit goal is to counterbalance China's growing influence on international commerce. India stayed out of TPP due to contentious issues in agriculture, intellectual property and services. In our view, impact on Indian exports, particularly gems & jewellery, will be minimal due to the sector's eco system, while textile and apparel exports could face potential risk from Vietnam.
Risks to Indian merchandise exports
Think tanks are busy debating TPP's impact on India once it is enacted. Prima facie, we believe there are various channels through which the pact can impact India. For example, India's exports may be hit as there will be significant diversion of trade, as well as foreign investments from Indian markets. In FY15, about a quarter of Indian merchandise exports worth USD75bn went to TPP member countries, of which USD42bn were to the US. Gems & jewellery, textiles and pharmaceuticals contribute ~50% of total Indian exports to the US. While impact on the gems & jewellery sector may be minimal due to the sector's eco system in India, textile and apparel exports could face potential risk from Vietnam.
Proposed regional pact could dilute TPP's impact on India
India is negotiating Regional Comprehensive Economic Partnership (RCEP) that includes 10-member countries from ASEAN, Australia, China, Japan, New Zealand and South Korea. The expected deadline for concluding negotiations is 2015. Also, India's existing bilateral free trade agreements (NASDAQ:FTA) with TPP members like Japan, Malaysia and Singapore, and FTAs (negotiations of which are in progress) with Australia, Canada and New Zealand, may dilute the impact of the trade diversion caused by TPP, to some extent.
TPP enactment: An uphill task
TPP will need to be signed by leaders of all the member countries and approved by their respective legislatures. This could prove to be a formidable task as the deal has generated considerable opposition in the US; it is being opposed even by leading Democratic candidate Ms. Hillary Clinton.
Additional disclosure: The publication was earlier released by the Edelweiss Research, the author is employed by Edelweiss