The slowdown in the biggest economies has negative global implications, especially for emerging markets and indebted countries. What can the India-led G20 do to counter it? Global growth is expected to slow to under 3% in 2023, with a major decline for the US and other advanced nations. While the threats stem from persistent inflation, rising interest rates and the Ukraine war, there are other shocks, such as those related to world trade.
The stakes for the G20 are high, with emerging markets likely to bear the brunt of rising protectionism. Let’s look first at the US, which has failed to reverse tariffs imposed by the previous administration and return to open trade policies. Instead of strengthening the World Trade Organization’s (WTO) multilateral role and leading a market-opening push under the Indo-Pacific Economic Framework, the US has extended protectionist measures and risked expanding its trade war beyond China. Through its Inflation Reduction Act (IRA) and Chips and Science Act, the US has ratcheted up subsidies that favour domestic over foreign producers. They subsidize green-tech, local purchases of US-made EVs composed mainly of American parts and domestic private investment in chip-making factories. Both Acts are protectionist and discriminatory, violating the WTO’s prohibition of subsidies with local-content riders. Such measures risk further fragmentation of global trade. Their knock-on effects on investment, innovation and related growth drivers are significant.
The US turn from free-market rules to state-directed industrial policy in specific areas of global interest has opened a Pandora’s box. It has sparked trade wars that will likely result in higher trade barriers. It risks spilling into export categories beyond automobiles and semiconductors; its European allies have warned of similar policies, such as their Green Deal Industrial Plan. It will harm global efficiency and productivity, even as a duplication of efforts and resource-use across countries pushes up costs. It will be costlier to decarbonize. Even ‘friendshoring’ arrangements will fall well short of the WTO’s ‘most favoured nation’ clause, like the ability to determine the origin of digital flows. We must also recognize that US steps to sanction and reduce trade with China have not worked. They have had the opposite effect, with China trade increasing with the US, and China’s trade ties with the rest of Asia, including India, deepening as supply chains are redesigned.
Policymakers in Asia and elsewhere need to act to avoid the adverse effects of greater trade fragmentation and keep trade as a growth engine. As for India, recognition in the country has grown that its economy will need robust trade flows to reach GDP growth levels of 9-10%. India has moved in this direction, with trade agreements being pursued and an increased emphasis on building export infrastructure. As a result, New Delhi has been considering reducing external tariff and non-tariff barriers, phasing out recently introduced food export restrictions and further easing rules for FDI and portfolio investments.
Export success would require an open global trade regime, however, and recent protectionism in advanced countries works against that goal. It’s time for the G20 to act. Rolling back damaging trade restrictions and reducing uncertainty is a major priority for the group. Complementing regional agreements with reforms at the multilateral level, while restoring the WTO’s dispute settlement mechanism to full functionality are urgently needed. Such steps would help address the potential negative impacts of discriminatory policies and deal with underlying sources of tension.
Leading the G20, India could play a greater role in strengthening the multilateral trading system and dealing with trade policy uncertainties that have inhibited investment and global growth. India should work actively with other nations within the G20 to strengthen WTO rules, support a well-functioning dispute settlement system, and conclude new mutually beneficial WTO agreements, building on the recent agreements on fisheries and intellectual property. India should also focus the G20 on developing a common framework for investment across the entire net-zero-target supply chain, from wind and solar renewables to batteries, storage and smart grids. Such a framework could help minimize the trade distortions that would emerge as countries pursue protectionist industrial plans.
These are critical issues for India and other emerging markets which are torn between joining bilateral or regional trade agreements and enforcing tariffs at levels inconsistent with supporting productivity, competition and exports. India, in particular, is deeply affected by a lack of multilateral rules for services, digital trade and environmental protection—areas where the US had once planned to develop trade rules.
Recalling the G20’s historic role in proposing fiscal stimulus packages to deal with the global financial crisis a decade-and-a-half ago, India must now get the G20 to halt rising protectionism in advanced countries and rebuild the WTO’s role in global trade. Given today’s risks to the global economy from a fractured trading system and the need of India and other emerging markets to open up new external markets for trade and investment, doing this is essential.
Anoop Singh is a distinguished fellow at the Centre for Social and Economic Progress, and a former member of the 15th Finance Commission
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