Jul 24, 2014

India - Redefining the idea of world trade

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Where things come from or go to is not as important as how much value is added within your borders

At last week’s meeting of trade ministers from the G20 countries — the grouping of the largest advanced and emerging economies, which together account for 85 per cent of the world’s GDP and more than three-quarters of trade — the talk, expectedly, was around getting some sort of agreement on the ongoing world trade talks so that a new, overarching deal on world trade could be reached.

More immediately, the G20 meeting was also supposed to get its own mini sets of agreements going, so that even if an all-encompassing global deal was some distance away, the members could at least ensure that their own trade could grow faster, in order to ensure that the G20’s self-imposed target of increasing growth (by 2 per cent over the forecast average across member countries over five years) could be met.

Although the shooting down of a Malaysian Airlines aircraft by pro-Russian separatists in Ukraine almost derailed the agenda at last week’s summit of G20 trade ministers in Sydney, India also managed to contribute its mite to the drama a little bit, by threatening to not implement the trade facilitation agreement by the July 31 deadline if its concerns over its food security programme were not met.

Eventually, India was given some assurances and in turn, “committed” itself to the agreements already reached, and all was well — at least on paper.

However, one got the distinct impression that even if the threat had been carried out — and India, say, fails to implement the trade facilitation agreement on deadline — it may not have been the end of world trade as we know it.

Changed nature of trade

The real issue is the future of multilateral trade agreements itself. Although trade has been at the centre of the global growth story over the past 50 years or so, its nature, and components, are remarkably different from the immediate post-colonial trade system after World War II. It’s no longer a case of selling silks and spices in exchange for horses and diamonds, or even importing iron ore and exporting automobiles.

Today’s global economy is driven by transnational corporations, which have built not just worldwide manufacturing, but have developed global value chains. It’s a complex network of raw materials, intermediate and finished products, services and money criss-crossing borders on their way to the final consumer.

So, while your iPhone may be manufactured in China, it is designed in the US, its software may have components engineered in India, the display actually made in Korea and the lithium in its battery imported from Argentina.

The ad campaign may well have been conceptualised in London and finished in a post-production facility in Shanghai or Hyderabad, and sold by an online retailer supported by venture funding from the US. It, in other words, sold in India, but ‘made in the world’.

Protectionism playing up

The trouble is, the multilateral agreements which made all this possible, and opened up markets like India and China to globally manufactured products — but also opened up global markets for India-made manufactures and Indian services — is running out of steam. The post financial crisis period actually saw a rise in protectionism as countries struggled to insulate their economies and sought to protect jobs.

Since the global crisis, the World Trade Organisation says, 1,185 restrictive measures have been imposed — and only some 200-odd removed. The G20 countries themselves imposed over a hundred new restrictive measures in the first six months of this year alone!

As a result, everybody has looked to workarounds. Increasingly, the focus has been on working out bilateral agreements and free trade pacts with specific countries or groupings of countries.

The US, for instance, is working on two major agreements: the Trans Atlantic Trade and Investment Partnership agreement with the EU, and the Trans Pacific Partnership with the Pacific Rim countries, including Australia, the G20 chair for this year.

India has signed, or is in the process of signing, a number of bilateral and free trade agreements (FTAs) with economies of interest to it. There is an Asean FTA in the works, as well as one with Australia, not to speak of the Asean+3 deal being negotiated, with will include Asean, Australia, India and New Zealand, while Australia’s FTA with China may be signed within this year itself.

Australia’s trade minister Andrew Robb pointed out to this writer during an interaction after the G20 meet in Sydney last week that there are as many as 370 such deals already in place around the world and more than a hundred under negotiation.

With nearly 500 agreements girdling the globe, who needs an overarching multilateral?

In fact, tariffs and trade deals, with their focus on protecting the ‘here’ from the ‘made there’, are becoming increasingly irrelevant to actually increasing world trade.

Who’s afraid of tariffs?

Tariffs are no longer the impediment to trade as they have already been reduced — if not for all, then for most key players — through domestic tax reforms and preferential trade pacts.

But, as Peter Draper, former chair of the Global Agenda Trade Council noted in a paper (‘The shifting geography of global value chains: Implications for developing countries and trade policy’, Vox, July 2012): “Current trade rules are based on the notion that firms in one nation sell things to customers in another nation. Hence the rules framework concerns product-trade rather than process-trade. As such they do not account for a range of policies and barriers that do not inhibit selling things per se, but do hinder moving things.”

Policy responses to these changes call for a sea change in perspective. India’s domestic policy response, including taxes and incentives, for instance, has been predominantly skewed towards protecting or enhancing the domestic manufacturing sector, because the manufacturing sector is seen as the job creator.

But, according to UNCTAD, the manufacturing sector’s share of domestic value added in exports actually declined by over 12 per cent between 1995 and 2009, while the share of domestic value addition exports actually grew to over 50 per cent during roughly the same period.

What this means is that trade, exports and tariff deals are only a part of the growth story. The Government needs to recognise how India fits into the complex jigsaw, and how best one can ensure that we get a larger share of this pie.


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