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Why is Modi govt imposing tariff barriers when India has gained so much from free trade?

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Perhaps, it is time India starts acting like a major power and does more than just paying lip service to free trade

Over the years, the World Trade Organization (WTO) has emerged as the single greatest success story of international institutionalism. In its previous avatar as GATT, and now WTO, it has helped uphold free trade for over seven decades now. It helped the western economies develop after war, led to the rise of Asia, and has helped pull millions out of poverty.

But it has been a turbulent few months for global trade. On 1 June, the US imposed tariffs on aluminium and steel imports from the EU, Mexico, and Canada. President Donald Trump has also threatened tariffs on a range of Chinese goods worth $200 billion. In return, the US’ trading partners are planning to impose tit-for-tat retaliation tariffs on goods imported from the US. These events have severely heightened the risk of a global trade war.

In an unprecedented move, the US justified its tariffs using the “national security exception” in WTO rules. Interestingly, as pointed out by my McGill University’s Krzysztof Pelc, while the American tariffs are legal, possibly the retaliation by the EU and others is not.

The American usage of the national security exception is nothing short of bizarre. In the past 70 years of trading history, this is only the sixth occasion when it has been used. This WTO exception is a tool of the last-resort and there has been a long held precedent of staying away from it. But the existence and the usage of the national security clause compel us to inspect the diplomatic roots of WTO and the global trade cooperation.

GATT (General Agreement on Tariffs and Trade) and now WTO are first and foremost purely diplomatic institutions. WTO does not derive its power from some special kind of rights to execute or punish its various members. At best, it is an impartial referee in trade disputes between states. There are three specific diplomatic reasons that underpin WTO’s massive success.

First, trade negotiations since the formation of GATT in 1947 have practiced a very clever tactic – never touch politically sensitive topics. Textiles and agriculture, for example, are some of the most sensitive sectors for the vast majority of countries. Since 1947, all trade negotiations have completely left out textiles and agriculture. We see instances of this over and over again, where successful trade negotiations ignored the politically sensitive areas and aimed to maximise liberalisation everywhere else.

India has also been a beneficiary of this practice. Over the years, India has succeed in getting a lot of exemptions from WTO rules, such as restrictions over food subsidies. It is also a recipient of GSP (Generalised System of Preferences) – according to which India gets preferential access to western markets, but is not expected to provide that reciprocal access to its western trading partners.

GSP is a classic example of WTO’s negotiating strategy. The core rationale of WTO is reciprocity. A large number of developing states were given preferential access to developed world markets through GSP. While they were not expected to open their markets reciprocally, they ended up joining GATT/WTO and became members of the global trading regime.

Second, the cornerstone of WTO’s success has been its dispute resolution mechanism. As aforementioned, while the current US steel and aluminium tariffs are legal, the EU’s retaliation is not. Retaliation is only legal under a specific scenario.

According to WTO rules, when a country finds its partner using unfair trading practices, it can bring the dispute to a WTO panel. Only when the panel rules against the unfair practice and there is no compliance from the side of the aggressor can the country retaliate by equivalent tariffs.

Fascinatingly, this long process is the reason for its success. Majority of disputes brought to WTO are resolved at the consultation stage and do not even make it to a ruling. Most countries fear that an adverse ruling might affect their international credibility. This makes them negotiate a settlement diplomatically before it get to the ruling stage. It is this diplomatic basis that has made WTO enviably successful.

Last, trade agreements recognise the role of politics. Most political leaders face massive competition from domestic interests groups to provide them protection against foreign competition. Trade agreements allow political leaders to tie their hands internationally, and guard themselves against domestic pressures. As argued by Pelc here, trade agreements don’t ignore, but leverage politics.

While WTO’s diplomatic roots are responsible for its success, they have the potential to lead to its unravelling. The global trading system is based on mutual gains and diplomatic goodwill. And in the absence of any enforcing power, there are no repercussions to countries ignoring WTO precedents. It would take no time for this precedent-driven system to unravel if its members decide to do so.

On his recent global outings, PM Narendra Modi has made it a point to pay lip service to the gains from free trade. But contrary to his rhetoric, his government has continued to put more protectionist policies in place. Free trade has helped India immensely over the years. Even some of India’s inability to harness the gains from free trade is due to its own failings, such as the severe lack of labour mobility.

Today India is Asia’s third largest economy, and only second to China in terms of future optimistic trends. It has a lot to gain by ensuring that the global trading regime remains intact in its current form. Perhaps, it is time India starts acting like a major power and does more than just paying lip service to free trade.

Srijan Shukla is a student of comparative politics and international relations at McGill University.

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2 COMMENTS

  1. Agriculture has been ‘completely left out’ ? The WTO inter alia has the AoA, SPS, TBT & TRIPS, which directly (negatively) impact small-farm agriculture in the Global South! The farmers are not any more freer with ‘free trade’.

  2. Part of the credit for high growth during the earlier phase of UPA goes to a surge in exports. For the last four years, these have been stagnant at about $ 300 billion a year; the pain reduced because the oil import bill fell substantially. One reason India is turning protectionist is our economy is becoming less globally competitive. That requires to be redressed, identifying each element – power, for example, where costs are high or roads, where quality is poor – that needs to be worked on. Without more trade and deeper integration with the global economy, including manufacturing chains that weave their way through our neighbours to the east, high economic growth will prove unattainable.

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