International trade is not a zero-sum game

October 22, 2021

Syllabus: General Studies Paper 3

Context:

During the recent G-20 ministerial meeting in Italy, the Commerce Minister made a pitch for deepening India’s trade ties with several countries.

India is negotiating free trade agreements (FTAs) with several countries.
However, rising trade protectionism at home, demonstrated by several examples, could throw a spanner in the works.

Free Trade Agreement

- A free trade agreement is a pact between two or more nations to reduce barriers to imports and exports among them.
- Under a free trade policy, goods and services can be bought and sold across international borders with little or no government tariffs, quotas, subsidies, or prohibitions to inhibit their exchange.
- The concept of free trade is the opposite of trade protectionism or economic isolationism.
- For example:
- The major FTAs that India has signed and implemented so far include South Asia Free Trade Agreement (SAFTA), India-ASEAN Comprehensive Economic Cooperation Agreement (CECA), India-Korea Comprehensive Economic Partnership Agreement (CEPA) and India-Japan CEPA.
  - Comprehensive Economic Partnership Agreement: It is a kind of free trade pact which covers negotiation on the trade in services and investment, and other areas of economic partnership.
  - Comprehensive Economic Cooperation Agreement: CECA involves only “tariff reduction/elimination in a phasedmanner on listed / all items except the negative list and tariff rate quota (TRQ) items”
- Regional Comprehensive Economic Partnership (RCEP) is a proposed free trade agreement (FTA) between the countries of Association of South East Asian Nations (ASEAN) and the six states with which ASEAN has free trade agreements (Australia, China, India, Japan, South Korea and New Zealand).
The RCEP came into force in November 2020 without India. The signatories of the agreement include 10 ASEAN countries – Singapore, Thailand, Vietnam, Cambodia, Indonesia, Malaysia, Brunei, Laos, Myanmar and the Philippines and 5 key partners (China, Japan, South Korea, Australia and New Zealand).

Challenges for international trade in India

Rising tariffs: The simple average of India’s tariffs that stood at 8.9 per cent in 2010-11 has increased by almost 25 per cent to 11.1 per cent in 2020-21.
- The proportion of tariff lines with rates above 15 per cent in 2020-21 stood at 25.4 per cent, up from 13.6 per cent in 2014-15. These increases in tariff rates have reversed the political consensus on tariff liberalisation that India followed since 1991.
- Tariffs are used to restrict imports. Simply put, they increase the price of goods and services purchased from another country, making them less attractive to domestic consumers.

India is the highest initiator of anti-dumping measures aimed at shielding domestic industry from import competition.
- According to the WTO, from 2015 to 2019, India initiated 233 anti-dumping investigations, which is a sharp increase from 82 initiations between 2011 and 2014 (June).
- The anti-dumping initiations by India from 1995 (when the WTO was established) till 2020 stand at 1,071.
- This is higher than the anti-dumping initiations by the US (817), the EU (533), and China (292), despite India’s share in the global merchandise exports being far less than these countries.
- The government imposes anti-dumping duty on foreign imports when it believes that the goods are being “dumped” – through the low pricing – in the domestic market.
- Anti-dumping duty is imposed to protect local businesses and markets from unfair competition by foreign imports.
India recently amended Section 11(2)(f) of the Customs Act of 1962, giving the government the power to ban the import or export of any good (not just gold and silver, as this provision applied earlier) if it is necessary to prevent injury to the economy.
- The power to ban the import or export of gold and silver is consistent with WTO regime, provided the ban is not applied in an arbitrary or discriminatory manner.
- However, expanding the scope to cover any good is inconsistent with India’s WTO obligations.
- WTO allows countries to impose restrictions on imports in case of injury to domestic industry, not to the “economy”.
- However, these trade remedial measures can be imposed only if certain conditions are satisfied and after an investigation. India already has laws to impose these trade remedial measures.
- Additionally, countries can also impose restrictions on trade on account of balance of payment difficulties and national security purposes.
- However, section 11(2)(f) of the Customs Act does not talk of any of these grounds to restrict trade, thus is unnecessary.
India amended the rules of origin requirement under the Customs Act. Rules of origin determine the national source of a product.
- This helps in deciding whether to apply a preferential tariff rate (if the product originates from India’s FTA partner country) or to apply the most favoured nation rate (if the product originates from a non-FTA country).
- But India has imposed onerous burdens on importers to ensure compliance with the rules of origin requirement.
- The intent appears to be to dissuade importers from importing goods from India’s FTA partners.
The call given by the Prime Minister to be “vocal for local” (giving preference to domestically made goods) is creating an ecosystem where imports are looked at with disdain, upsetting competitive opportunities and trading partners.

International trade is not a zero-sum game. India can’t maximise its interests at the expense of others. Its experiment with trade protectionism in the decades before 1991 was disastrous. We should recall Winston Churchill’s warning: “Those who fail to learn from history are condemned to repeat it.”

The Indian Express Link:

https://indianexpress.com/article/opinion/columns/international-trade-is-not-a-zero-sum-game-7584023/

Question- Write about the challenges being faced in strengthening India’s international trade.