Why free trade belligerents need to be prevailed upon

By: |
September 10, 2019 1:31 AM

Trump’s recent barb at India being the “tariff king” is not misplaced as the World Tariff Profiles 2019 show that India’s average tariffs at 13.8% are much higher than most major trading economies like China (9.8%) and the US (3.4%).

The challenges faced by the global commercial arbiter run in plenty. To start with, the WTO continues to be at the mercy of WashingtonThe challenges faced by the global commercial arbiter run in plenty. To start with, the WTO continues to be at the mercy of Washington

The global trading system is undergoing conflict, chaos. It has remained static in the face of disruptive technologies, automation and shifts in geoeconomics in the last few years. The GATT-based WTO rules are well over 70 years old. Even the newer version of GATT (Uruguay Round, 1986-1994) is decades old, and any attempt to update—through the adoption of a comprehensive Doha Development Agenda (DDA)—has remained inconclusive after 18 years. The challenges faced by the global commercial arbiter run in plenty. To start with, the WTO continues to be at the mercy of Washington.

Despite his earlier disdain for multilateral trade deals and projecting a protectionist stance during the 2016 presidential campaign, Donald Trump appeared to rethink the isolationist approach after the elections. After his initial hawkish stance, Trump erased the fears of the US withdrawing from NAFTA last year. But protectionism is back on the US agenda, with the recent tariff measures against China, India, Canada and the EU. Since July 2018, the US has imposed tariffs on $250 billion worth of Chinese goods including aerospace, auto parts, electronics. China has also retaliated with duties on about $75 billion worth of American products. However, despite a year-long tariff war between the two, China had a record $419 trade goods surplus with the US for the same period (United States Census Bureau).

Beijing’s engagement in the global trading system has been questionable. Much has changed since the WTO came into force in 1995. China, a WTO member, has an extraordinary influence in global economics, and is the common aggressor in trade disputes with all major economies. Beijing’s predatory trade and IP theft practices, heavy-handed direct government intervention in industrial sector, and its abuse of the “special and differential treatment” clause (Art XVIII, GATT 1947) to subsidise specific export industries and dump its oversupply in other countries is universally agreed upon. In general, the stringent WTO rules squeezed the policy space for developing countries to pursue individual industrial policies—pushing them towards “premature deindustrialisation” (Dani Rodrik). But for Beijing to continue its unrepentant mercantilist policies in open defiance of WTO’s free trade rules is evidence that the trade arbiter has failed to enforce its rules.

The American charge against China is fair but doesn’t compensate for the general rhetoric of the multilateral trading system. One may recall Washington has exited major multilateral deals like the TPP (now CPTPP) and Paris Climate deal, while renegotiating NAFTA and threatening to pull out of the WTO. It has unilaterally imposed tariffs on steel and aluminium from other countries including India using the Article XXI of GATT. What constitutes “essential/national security” is rather ambiguous and has the potential of weakening the credibility of WTO’s Dispute Settlement System. The US also supported Russia’s invocation of “essential security” clause in the 2014 blockade on Ukrainian goods headed to Central Asia.

The next challenge facing the WTO is technology disturbing the rules of the game. Digital innovations led by artificial intelligence, blockchain and the internet of things are changing the structure of production and trade. New business models based on these technologies and big data and analytics are breaking up barriers to trade at a time when nations are embracing protectionism. The current set of WTO rules is not well-equipped to deal with modern trade practices.

So, how is India positioned in the global trade mess? One section says that India stands to gain in terms of moving up in the global supply chain if it capitalises on falling investment in China and uses this as an opportunity to give a boost to its merchandise exports. Manufacturing industry in India, which is central to job creation and diversification of economy, has faced the brunt of trade liberalisation post WTO’s inception (having jumped from agriculture to services, without going through a robust industrial stage). India’s share in global merchandise exports is under 2% despite 70% of its exports coming from this sector. Keeping in line with global protectionist trends (America First, Brexit, tariff wars), India has, in the last two years, increased tariffs on several products—mainly from China and the US, and other non-FTA trade partners, to give an impetus to manufacturing. But the retaliatory measures by India in response to Washington’s increase in tariffs on Indian products are likely to bite India back.

Secondly, India is shying away from an indiscriminate signing of FTAs: India is not a part of any mega-FTAs so far and the logjam at RCEP continues. Keeping in view India’s obstructionist view, Beijing even proposed an ASEAN+3 Mega FTA sans India, Australia and New Zealand.

India’s approach towards trade liberalisation is under attack. Trump’s recent barb at India being the “tariff king” is not misplaced as the World Tariff Profiles 2019 show that India’s average tariffs at 13.8% are much higher than most major trading economies like China (9.8%) and the US (3.4%). Considering that its burgeoning trade deficit with China is the primary irritant that’s holding India back from RCEP, if India were to bring down its tariffs to nil in 90% of the traded goods—as Beijing demands—it is likely to lead to even higher trade deficit with China. As such, intermediate products and raw materials (low-value-added category) constitute India’s major exports to China—a matter of concern. With its recent increase in tariff rates on a range of items, it remains unclear if New Delhi has any intent of moving ahead with the Chinese demand under the RCEP, given Beijing’s economic hegemony in the region.

The WTO must be saved: With the ongoing stalemate at the WTO and the near-abandonment of the DDA, RTAs—and recently, mega-FTAs—have taken the lead. RTAs are easier to negotiate than the consensus-based WTO. Some of these mega-FTAs have adopted the “non-issues” and “WTO-plus” provisions (on environment, labour, IPR, competition, investment and government procurement) after they had to be dropped from the DDA due to opposition from developing countries—who, on the other hand, are signing their own mega trade deals to foster greater economic integration, further stealing WTO’s thunder. While the WTO encourages signing of RTAs to further the goal of economic integration, frequent resort to RTAs bypassing the WTO route has become a vicious practice.

The idea of multilateralism is sold greatly by no other institution as the WTO—founded to instil a confidence in law and institutions. Also, Washington stands accused of returning to unilateralism and its 1930s-styled beggar-thy-neighbour policies. Unilateral imposition of sanctions and high tariffs on Chinese products bypassing the WTO DS mechanism sets a bad precedent and countries like India are following suit—belittling the importance of WTO. A strong WTO is essential to check China’s intransigence.

The global financial crisis of 2008 tested the strength of existing international trade governance framework when the WTO acted as a wall against a descent into protectionism during the crisis years. Can it still do it? The answer lies in how firmly member-states come together to reform and save the WTO.

(The author is researcher, international trade and investment law)

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