India’s international trade challenges
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The World Trade Organization’s (WTO) creation in 1995 was, to a substantial extent, under the auspices of then US president Bill Clinton. He deemed the extension of the General Agreement on Tariffs and Trade—the organization overseeing the multilateral trading system since 1947, also midwifed by the US—into the WTO advantageous for the US. These are vastly different times and Donald Trump is a very different president. His administration has now shown intent to step back from the WTO. It has asked the US trade representative’s office to find ways to circumvent the WTO’s dispute system. Given the implications, it is a good time for New Delhi to take a hard look at its trade policy and planning.
The Trump administration’s lack of enthusiasm for the WTO shouldn’t come as a surprise. Central to Trump’s vision of making America great again is the suspicion that the international order is rigged against it. Its allies are deadbeats that have mooched off a consistently credulous Washington, while international organizations like the WTO are sclerotic bureaucracies that care little for American interests. Given this and Trump’s consistency in advocating trade protectionism—which would doubtless entail run-ins with the WTO—his administration was always more likely than not to be a disrupter in this regard.
But whether in the WTO or out of it, the US will continue to dictate the international trade agenda. This places India in a difficult position on multiple levels. For one, the US is India’s largest single-country trading partner by some distance. Second, as we have recently written in these pages (goo.gl/iYRCLV), the importance of international trade in general to the economy took off after the economic reforms of 1991 and has accelerated over the past decade. Indeed, India has traded more with the rest of the world as a percentage of gross domestic product than China since 2011—and both countries, along with much of the developing world, have benefited immensely from the lowering of trade barriers and the rule-based trade order that the WTO embodies.
New Delhi’s response must, similarly, be on multiple levels. Thus far, it has rightly preferred trade arrangements under the WTO’s auspices to the tangle of bilateral, regional and mega-regional trade pacts. There is no immediate reason for this to change. But it cannot afford to remain apathetic to regional or bilateral arrangements either given that they have proliferated following deadlocks at the WTO. If Washington further undercuts the WTO, as it is shaping up to do—and other countries inevitably follow suit—the balance will skew further.
Ensuring that New Delhi has a seat at the table when it comes to these arrangements will require a political will and diplomatic effort that are currently lacking; witness the India-European Union free trade agreement, hanging fire since 2007. As Hardeep S. Puri has written in a Carnegie India paper, this means leveraging its membership in the Regional Comprehensive Economic Partnership better than it has thus far, as well as pushing to join the Asia-Pacific Economic Cooperation. The latter is considering an Asia-Pacific free trade area—another incentive or threat, depending upon New Delhi’s approach.
New Delhi must also undertake several reforms. The Chelliah committee report of 1992-93 noted the importance of a limited number of tariff rates to simplify administration and reduce distortions. Against its recommendation of six rates to be implemented by 1998, India currently has 15 MFN (most favoured nation) tariffs. As Harsha Vardhana Singh has pointed out in Business Standard, this structure is further complicated by a system of exemptions and concessions that brings India’s average trade-weighted tariffs more or less in line with low tariff economies—but leaves it with significantly higher headline rates, leading to the perception of a high tariff economy.
A forward-looking trade policy must accompany the rationalization of the tariff structure. New Delhi’s foreign trade policy, 2015-20 doesn’t go far enough in this regard. Technical, sanitary and phytosanitary barriers to trade are increasingly important—and they call for a trade policy that helps exporters meet international standards while reducing the cost of compliance. The policy must also reconfigure its trade promotion incentives from handing out financial sops to better helping exporters attain competitiveness.
In Washington last year, Prime Minister Narendra Modi spoke of the benefits of free trade. He is unlikely to find the new administration as receptive to those principles. While Washington might find the cost of circumventing the WTO too prohibitive in the long run, this much seems a safe bet: A Trump administration packed with WTO sceptics is unlikely to be status quoist. The ripple effects mean New Delhi must confront change—both by working within the WTO to resolve the deadlocks, such as on agricultural subsidies and free movement of professionals, that are robbing the body of relevance, and outside it. India has benefited too greatly from trade to do any less.
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