International trade remains important

News: In 2022, international trade is being impacted by a continuing global pandemic, a European war, widespread economic sanctions, supply chains disruptions and sudden national bans and caps on exports of essential commodities.

Global Trade

The World Trade Organization (WTO) estimates that global goods trade has expanded by about 40 times (in terms of volume) and nearly 300 times (in terms of value) between 1950 and 2020.

The World Bank data shows that the share of world trade (including services) in world GDP soared from 24% in 1960 to 57% in 2010. However, it has plateaued thereafter.

Consequently, unprecedented growth in global GDP has been principally due to the sustained surge in world trade.

India’s trade

India´s trade to GDP ratio has risen from 15% in 1990 to 27% in 2000 and peaked above 50% in 2011. The total (goods and services) exports share of GDP has touched nearly 25%.

Importance of Global Trade

Trade contributed to competitiveness, productivity and technical progress.

India too benefited. India liberalised complex and restrictive trade regime after 1990 and made the exchange rate market responsive.

What were the driving forces behind the growth in world trade?

The general technological progress, rising national savings and investment, and the spread of good education played important roles.

The major causes of expansion in world commerce were the eight “Rounds” of multilateral negotiations for trade liberalizations under the auspices of the General Agreement on Tariffs and Trade, the precursor between 1947 and 1994. These negotiations were driven by industrialised countries. The developing nations were mostly “free riders”.

What are the challenges?
After the formation of WTO, there has not been a single successful Round of multilateral trade liberalisation.

At present, there has been a shift to large and small preferential and free trade agreements (PTAs and FTAs) having limited member country participation.

At present, the Ukraine conflict is damaging global trade and production.

Since 2011, India´s trade share in GDP had declined markedly to 39% by 2019. This has been due to the stagnation of merchandise exports.

What are the factors which have led to India’s lacklustre performance?

First, the rupee´s exchange rate (in terms of the Real Effective Exchange Rate) was overvalued for much of this period.

Second, India failed to participate effectively in the rapid increase in global value chain based trade after 2000.

Third, there has been marked rise in India´s tariffs and other protective measures after 2015. This has been against buoyant expansion of the country´s goods exports, both within and outside global value chains (GVCS).

The world trade dynamism has faltered since 2010, following the global financial crisis and other deglobalizing factors such as Brexit, the Trump protectionism, the global pandemic and the war in Ukraine and associated economic sanctions.

Broad priorities for India´s trade policy

(1) Phase out the tariff increases that have occurred since 2017, because the best trade policy for any nation is to maintain an open and unrestrictive trade policy and as per “symmetry theorem” of 1936, “a tax on imports amounts to a tax on exports”

(2) Instead of tariffs or quota restriction on imports, the government should use external payments pressures, and exchange rate depreciation as the primary instruments.

(3) The monetary and fiscal measures are preferable to export bans and duties to deal with inflation because sometimes the latter pave the way to balance of payments problems.

(4) India’s concluded FTAs with Australia and the UAE are welcomed. There should be discussions with other Gulf Cooperation Council nations, Israel, the UK, the European Union (EU) and the new Indo Pacific Economic Framework.

(5) In order to improve India´s currently low engagement in global and regional value chains, the government should rethink renewed engagement with the Regional Comprehensive Economic Partnership (RCEP) in our Asian neighbourhood. This has huge potential for trade expansion.

Source: The post is based on an article “International trade remains important” published in the Business Standard on 8^th June 2022.