Global markets for trade and investment are changing in at least six important ways, and India is not yet a significant part of any of them. These are: increasing interlinkages between trade, investment, services, global value chains and technology transfer; a sharper perception of greater global competition among key economies and efforts being made to preserve or enhance global competitive positions; new global trade rules evolving through a combination of mega-regional trade negotiations; inward foreign direct investment (FDI) being used as a major conduit of technology transfer; outward FDI playing an important role for larger economies to create foreign markets; and, the composition of the Fortune 500 changing, with a larger share from emerging economies, primarily China.
India is taking several steps to be an active part of these changes, but as yet these are not significant. Countries are attempting to create conditions for better links with global value chains and to enhance their competitiveness to do so. Of these, the most important efforts are the ongoing mega-regionals and China's bilateral investment treaty (BIT) negotiations with Europe and the US, because they will determine the eventual operational conditions under which most global trade and investment will take place in the future.
Three main mega-regional negotiations are underway: Transatlantic Trade and Investment Partnership (TTIP) between the European Union (EU) and US, Trans-Pacific Partnership (TPP) between the US And 11 other economies, and Regional Comprehensive Economic Partnership (RCEP) between China, Asean, and five other economies. India is part of RCEP.
Since India is part of one of the three mega-regionals, that should be adequate preparation for the likely global trade rules. Thus, India should be able to better link with global value chains and the markets, which will be opening up through the mega-regionals. To some extent, this is correct, but in a very limited way.
An important reason is that the trade policy standards agreed in TTIP and TPP are expected to be higher than those in RCEP. Further, eight (including four Asean nations) of the 16 RCEP countries are also part of TPP initiative, and more Asean members are likely to adopt the higher standards to remain part of the value chains within this economic grouping. China, which knows that it will not be allowed to be a member before the TPP agreement is finalised, has begun preparing for it through its BIT negotiations and its application to be part of another large trade negotiation, the Trade in International Services Agreement. China's BITs with the EU and US cover several important components, such as sustainable development standards and social standards, which are part of the significant disciplines in TTIP and TPP. The ability to meet these standards will determine the possibility of linking up to the value chains in the western markets. TTIP and TPP account for about half of world trade and these two agreements, not RCEP, will likely dominate the standards that will ultimately determine the possibility of linking up with global value chains.
In its BIT with the US, China has reportedly agreed to open some sectors to FDI in return for the US agreeing to relax high technology investment coming to it. In its economic zones, such as the Tianjin economic zone, China will implement world-class environmental standards and intellectual property rights regulation. Of the Fortune Global 500 firms, reportedly 120 have agreed to invest in that zone. Likewise, McKinsey has estimated that by 2025, China will have 120 firms in the Fortune Global 500 top firms, compared to 54 in 2010; the corresponding numbers for South Asia are 11 and eight.
These initiatives reflect the fact that unlike the past when reducing tariffs was enough to open markets abroad, today opening markets requires participation in that market through investment and also an ability to meet the standards prevailing in those markets.
China's outward FDI provides another basis for enhancing its competitiveness. For example, recent reports show that in diamond polishing, China is now taking market share away from India. This is partly on account of FDI in diamond mines in Africa, which leads to direct access to these stones instead of through intermediaries.
Being part of the market systems emerging through TTIP and TPP through enhanced standards and investment would be important strategic initiatives for maintaining India's growth potential. The Indian government has begun a process of reforming and modernising standards policy. Indian business must also recognise the need for doing so, in order to maintain its competitiveness.
India will find it difficult to meet conditions for TPP membership, but it must seriously look at intermediate steps to prepare itself for accessing those markets. These include focusing on its bilateral free trade negotiations with countries participating in TTIP or TPP, and greater policy coherence for outward FDI from India. This may include participating in economic zones abroad, independently or through links with inward FDI. There is currently a lacuna in the area of coherent policy towards outward FDI initiatives. For enhancing India's potential gains from global markets, the current policy initiative on standards needs to be supplemented by these other efforts as well.