27 June 2019
Global trade and India’s prosperity
Source: By Narayan Ramachandran: Mint
The international, rules-based, multilateral trading system enshrined through the World Trade Organization (WTO) faces an existential threat. WTO accession played a major role in China’s rise to prosperity. China’s foreign trade rose 10-fold from $475 billion on WTO accession in 2001 to about $4.5 trillion today. India’s total foreign trade in goods and services of approximately $1 trillion in 2018 is roughly the same as China’s in 2003. Can the multilateral trading system play a similar role for India as it did for China, but under very different global circumstances?
First the background; the first wave of globalization spanned 1870-1914. This wave, triggered by the industrial revolution, was facilitated by the movement of goods on steamships and railways with financial intermediation centred in London. Exports as a percentage of global output rose to about 15% from single-digit numbers during this period.
This phase was interrupted by World War I, the Wall-Street crash of 1929 and the economic depression that followed. In 1940-42, legendary economist John Maynard Keynes proposed a new global trade system based on a “reserve currency" called the bancor and a settlement system that would require an International Clearing Union. Neither of these was established since the dollar became the de-facto reserve currency under a pegged exchange rate system that the Bretton Woods Conference accepted after World War II.
The second wave of globalization began around 1950 and was facilitated by the rise of commercial aviation and telecommunication, and sustained towards the end of the 20th century by the rise of the internet. These technologies also facilitated a dramatic increase in global services trade. This second wave greatly benefited from the global institutions set up in the Bretton Woods Conference—the World Bank, the International Monetary Fund and the General Agreement on Tariffs and Trade (GATT), which subsequently became the WTO in 1994 after the Marrakesh Agreement. Exports as a percentage of global output have now risen to about 25% on an average, even as global output has grown materially in the 75 years since World War II.
The first globalization wave resulted in the developed world becoming prosperous and other countries remaining poor. The second wave of globalization has resulted in the developing world making rapid strides and, in the particular case of China, lifting an entire nation out of poverty. The distribution of prosperity both across countries and within countries has become uneven. This imbalance has led to significant domestic pressure on politics, in turn leading to policies such as “America First" and “Made in China 2025". Followed to the extreme, nation-first ideologies conflict directly with a multilateral trading system.
India too has brought a nation-first form of policy in “Make in India", even though it stands to be the biggest beneficiary of global trade for the next couple of decades. A WTO-like system helps countries most when they are lifting from about $2,000 in annual per capita income to about $5,000 with favourable demographics—this is the situation India finds itself in. Trade creates a virtuous cycle of competitive dynamism, employment and economic growth. China embraced this challenge two decades ago and has benefited enormously. Even though India finds itself in an increasingly protectionist world, it should become an enthusiastic supporter of the world trade system and make its voice heard.
Only last week, the new Indian government announced eight cabinet committees, including two new ones on investment and employment/skill development. To give it due importance, I propose that we should add another one for foreign trade made up of ministers from external affairs, commerce, petroleum, agriculture and finance, and led by the external affairs minister. This new cabinet committee should have the mandate to be much more proactive at the WTO. It should start with submitting a position paper on WTO reform (the US, Japan and China have done so already). India’s position should explicitly suggest reforms for rule-making, dispute-settlement and the restoration of the WTO appellate body. India has already taken a positive step saying it will not oppose the end of its special and differential treatment status. Over time, this will force the Indian export industry to be more competitive.
The key is for India to embrace this engagement with WTO fully, as China did in the late 1990s, for its own national interest. Before and after China’s accession to the WTO, it undertook structural and institutional reform to maximize its return. In the same way, India should use the opportunity for betterment. Unlike the prevailing American view, global trade is not a zero-sum game.
For India, it can be a win-win proposition and a modernized WTO is its best chance. There are inferior choices like regional or bilateral free-trade agreements. These should be our least favoured choice only to be engaged if the multilateral system collapses. India probably does not realize it, but in the same way that China was seen as a success in the first 10 years after it joined the WTO, India can provide purpose and direction to the WTO for the next decade or two.