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(GIST OF YOJANA) Evolution of India's Trade Negotiations

[October-2020]

Evolution of India's Trade Negotiations

Introduction:

During the 300 years of Colonial rule, the East India Company completely controlled India’s external trade, allowing export of mainly raw cotton and spices and dumping finished products in the country.
Multilateral Trade under GATT
The General Agreement on Tariffs and Trade (GATT) of 1948 was the first multilateral agreement under UN aimed at boosting economic recovery by reducing barriers to trade.
Even though India was one of the 28 founding members of GATT, it was not a serious stakeholder in multilateral trade negotiations. The newly-born independent countries known as ‘Third World Countries’ had their priorities firmly rooted in development issues such as providing basic necessities to its people—food, clothing and shelter as also building institutions for preserving the hard-earned freedom.

World Trade Organization:

India, along with 76 countries, was a founder member of the World Trade Organization (WTO) in 1995 which subsumed the Uruguay Round GATT negotiations from 1986-1994.
India believes that a fair, equitable, justiciable and predictable rules-based multilateral trading system embodied in WTO is in the best interest of developing and Least Developed Countries (LDCs). The Dispute Settlement Body, a lynch-pin of WTO, makes trade rules enforceable and effective. India sought correction in the highly imbalanced trade negotiations under the Agreement on Agriculture (AoA), reasoning that since developing countries were unfamiliar of the long-term implications of the negotiated formula on agriculture under AoA during the Uruguay Round of negotiations, correction was necessary.
Under AoA, the domestic support policies, subject to reduction commitments, were calculated by the total Aggregate Measurement of Support (AMS) on the base years of 1986-88. Accordingly, input subsidies known as ‘Amber box’ have been calculated for exclusion from reduction commitments at less than 5% of the value of production for developed countries and less than 10% for developing countries. India and other developing countries have argued that developed countries have taken undue advantage of the huge domestic support provided under other boxes namely, ‘Green’ and ‘Blue’ that have been tacitly kept outside the reduction commitments. Efforts to bring balance in AoA negations remains unsuccessful till date.

Reform of WTO:

Presently, talk on reform of the WTO has gathered momentum inthe wake of unilateral measures and counter-measures imposed by mostly USA and China. Developed countries are seeking to graduate few emerging countries like India, China, Brazil, South Africa etc. from the status of 'developing countries' by withdrawing Special and Differential Treatment (S&DT).
The principles of S&DT enshrined in GATT and adopted into the WTO system, was based on the premise that developing countries and LDCs, faced with developmental challenges, require certain buffer to cope with external competition. India strongly opposed this distorted view arguing that development parameters of developing countries are not even remotely close to those of developed countries and putting them in the same basket as developed countries is unfair.
Another challenge in WTO for developing countries is effort by plurilateral groups to push for new issues on the WTO Agenda for rulemaking such as e-commerce, investment facilitation, MSME and gender.
For India and developing countries, Doha Development Round remains unfinished and new issues run the risk of undermining the ‘development’ agenda. India needs to maintain a delicate negotiating balance on reform of WTO without undermining the principle of Special & Differential Treatment and the development-centric agenda of WTO.

Tariff and Non-Tariff Barriers:

Understanding how tariffs and non-tariffs impact trade is crucial for trade negotiations. The rationale for high tariffs is to protect domestic industry from external competition and enhance revenue collection for the State. WTO member countries had bound their tariff rates for each line of product; developed countries bound 99% of their tariff lines to below 5% rates and developing countries bound their rates to 98% but with varying peak rates, within which they can maintain flexible applied rates. Member countries list their commitments in their schedule and offer them on Most Favoured nation (MFN) basis as per GATT Article 1 i.e, “preferences to be offered to all members on an equal basis in a non-discriminatory manner”.

India’s Share in World Trade

India’s share in the world merchandise exports at the time of our independence in 1947 was 2.2%; it dropped to 0.5% in 1983 and marginally raised to 0.7% in 2000. Currently, India’s share in global exports is 1.7%. Experts attribute India’s low share to its decades of insular economic policies but with 1991 economic reforms, leading to integration into the world economy, India's share has picked up.
In contrast, countries such as Japan, Korea, China and even ASEAN enjoy much greater share in global trade as a consequence of their open economic policies with significant thrust on exports.

Global Value Chains:

Global Value Chains or Supply Chains are a reflection of fragmentation of production processes that have assumed a high degree of sophistication and specialisation due to changes in technology, skills, capital and investment policies. It denotes an underlying principle that companies source raw materials and intermediate products at qualitative and competitive prices from wide ranging sources across the world. It marks a shift away from the traditional way of manufacturing where components and finished products are all produced in one country.
As GVCs reduce input costs, it makes finished products competitive in the global markets, a propitious condition for trade to thrive. Open trade and investment policies of a country naturally attract GVCs.

Free Trade Agreements:

Free Trade Agreements (FTAs) create conducive environment for GVCs to operate efficiently. Partner countries take advantage of liberalised investment climate under FTAs to set up production units as part of Supply Chain networks (GVC) to feed into finished products.
A successful FTA creates a win-win situation for both partner countries, not only in terms of providing market access but also enabling deeper engagement through investments, technology and services.

Conclusion:

India’s trade negotiating approach would need to take a broader long-term view of things to come in future. Increasing volume of trade is more important than trade deficit because trade need not be a zero-sum game.
Ultimately, combination of quality and price determines the staying power of a product in the market.
Understanding the evolving linkages between trade, investment, services and technology, GVCs is critical. Investment brings technology which is crucial for making affordable quality products at competitive prices. In the age of servicification of manufacturing, emphasis on providing quality services would have a ripple effect on the overall volume of trade.
Technology will impact trade in big way in near future and staying in niche technologies such as machine learning, 3D printing, robotic engineering, internet-based production; e-commerce, etc. will all impact global trade in a big way. India should consciously develop a wide angle approach to these evolving global trade dynamics.