Clarity is needed: WTO is in trouble and India must participate in regional trade pacts

This week WTO’s appellate body is set to become dysfunctional as it falls short of a quorum. There’s no remedy in sight as the US has blocked potential replacements. This development is disadvantageous for India and will show up in the form of a more challenging trade environment. Regional trade pacts are now the only game in town. But is India ready for them? The government doesn’t believe so as the decision to pull out of RCEP suggested. Global isolation, however, cannot be an economic strategy.

New Delhi must choose at least two out of the three big trading blocs – RCEP, North America, or the European Union – and conclude free trade agreements with them. It must simultaneously shore up its global competitiveness, lack of which causes it to fear FTAs. Raghuram Rajan, former RBI governor, has pointed out that exports today are import intensive and we cannot make more in India if trade barriers are high. This calls into question India’s trade policy over the last couple of years. The salient feature has been creeping protectionism on the back of enhanced import tariffs. When juxtaposed with other pre-existing impediments such as inflexible markets for factors of production, the signal is that India is not willing to address declining export intensity of growth, causing growth itself to fall.

It is difficult to come across a cogent reason to justify protectionism, a policy that failed India earlier and caused it to be poor for decades. Protectionism is also inconsistent with a policy of lowering corporate taxes on manufacturers to attract inward foreign investment. This policy runs counter to the most important development in trade over the last three decades, that is, production lines of sophisticated merchandise can be spread across countries. This helps an emerging market with the right policies – Vietnam for example – to form a link in the production chain even without having mastered high technology. This beachhead can be used to graduate to higher value products.

If the domestic opposition to trade deals from different stakeholders is to be addressed, government needs a coherent policy that enhances their competitiveness. This will make them reconfigure their vision to one where a trade deal is seen as an opportunity rather than a threat. After six consecutive quarters of a slowdown in economic growth, it is time to replace an ad hoc policy regime with one where clarity on how to enhance competitiveness is evident.

This piece appeared as an editorial opinion in the print edition of The Times of India.

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