31/10/2019 : The Hindu Editorials Notes- Mains Sure Shot
Question – Amidst growing protectionism world wide, analyse arguments for and against free trade.(250 words)
Context – The U.S.-China trade war and global trade.
What is free trade and free trade agreement?
- Free trade refers to international trade that is left to its natural course without tariffs, quotas, or other restrictions.
- While a free trade agreement is a pact between two or more nations to reduce barriers to imports and exports among them.
- NAFTA: United States, Mexico and Canada (being renegotiated)
- SAFTA: South Asian Free Trade Area comprising Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka.
What is fair trade?
- Fair trade basically refers to trade between developed economies and developing economies in which the producers in the developing economies get a fair price for their produce.
- In other words it is a trade between companies in developed countries and producers in developing countries in which fair prices are paid to the producers.
- Fair prices are paid to the producers, and companies are able to provide workers with a stable income that can improve their lives.
- It aims to benefit small-scale farmers and workers through trade – this helps them to maintain their livelihoods and reach their potential.
The present scenario:
- Most of economists around the world favour free trade and advise to bring down barriers to international trade.
- But just the opposite is happening. Protectionist policies are increasing and the protectionists argue that increasing tariffs on foreign goods protects domestic industries from unfair trade practices adopted by foreign governments.
- For example, U.S. President has accused China of ripping off the U.S. by imposing high tariffs on American goods that are imported to China, artificially lowering the value of the yuan against the U.S. dollar in order to encourage Chinese exports, and adopting domestic policies that favour local Chinese companies over American ones. It believes that retaliatory tariffs on China will help level the playing field and ensure “free trade”.
- This has brought global trade “to a near standstill.”
- In the backdrop of the present scenario, economists argue otherwise.
- According to them free trade must be given more importance than fair trade. It is because according to them trade does not have to be fair for countries to benefit from it.
- In other words it means, as Paul Krugman says, that a country can benefit by pursuing (adopting) free trade regardless of what other countries may do. even if other countries do not follow free trade.
- How? – It is because countries that remove trade barriers unilaterally (i.e. on its own not bothering about whether any other country has done it or not), like Hong Kong and Singapore did, benefit their consumers, whose standard of living improves greatly by access to foreign goods.
- In the same context, a country that raises trade barriers works against the interests of its own consumers.
- So unilateral free trade can benefit the consumers in the countries that agree to adopt them.
- The economists argue that if more and more trade barriers are introduced by any country in the hope that it will benefit the producers, what it ends up doing is doing more harm to the consumers.
- It says that competition between producers is usually good because even though it can cause some of them to lose out, it benefits the consumers who can buy cheaper and better goods.
- The protectionists, like those in the U.S. also argue that foreign governments like India and China, misuse their developing country status at WTO to heavily subsidise domestic producers, thus putting American producers at a terrible disadvantage.
- However the proponents of free trade argue that introducing retaliatory tariff stops the American consumers from enjoying the benefits of subsidies offered by foreign governments.
Analysing the argument of trade deficit to impose more tariffs:
- According to economist Milton Friedman, the protectionists argue that trade deficit is a bad thing since it indicates that the value of its imports is greater than the value of its exports. But he argues against this idea that a country loses wealth when it experiences trade deficit.
- According to him it simply shows that people in different countries prefer to buy things different from one another.
- For example, Americans may prefer Chinese goods over Chinese real estate assets while the Chinese may prefer American financial assets over American goods. This will cause the U.S. to experience trade deficit with China as it buys more goods than it sells to China. But at the same time it will enjoy a capital surplus as it receives more capital than it sends to China.
- So for him trade deficit in no way reflects which side wins and which side loses in trade.
- Most economists argue that the idea of fair trade is often used by protectionists to increase more and more barriers in global trade to serve domestic interest groups.
- The world would be a much richer place if “free trade” was given more importance than “fair trade”.
- While formulating foreign relations leaders of countries keep in mind that this country is the greatest importer of our goods so we should not disturb our relations with it.
- The leaders and policy makers must consider these arguments made by economists and take their decisions accordingly.
Question – Analyse the dichotomy faced by India in the context of its S&DT provisions in the WTO.
Context – The U.S. trying to rip India of its developing nation status in the WTO.
- The primary highlight of the article is that we are faced with a dichotomy because according to the official narrative (i.e. according to official statements) India is making rapid development since 2014, but on the other hand when it comes to show our image in the WTO we try hard to prove that we are a poor country and maintain our developing country status.
Why this dichotomy?
- The former is because we want to prove to the domestic people that we are growing but on the other hand the U.S. President is trying hard to strip India of its status of a developing country at the WTO, so that India doesn’t receive the economic advantages that it gets for being a developing economy.
- Under the WTO system countries are put under three categories – developed, developing and least developed countries (LDCs). But the problem arises because it doesn’t classify the criteria that must be there for being declared a developing country.
- In case of LDC status of a country Article IX.2 of the WTO agreement states that LCD status of a country in the WTO is based on such status of the country being recognised by the U.N. But the agreement does not mention any criteria to determine a developing country status.
- The U.S. wants India to be stripped off its developing economy status. The developing economy status increases the trade opportunities for developing countries by ensuring that longer transitional periods for the country and in this period the country can take maximum advantage over the developed nations.
- The U.S. had made a formal submission to the WTO in January 2019, that countries like India are no longer developing countries and so should not enjoy S&DT (Special and Differential Treatment) benefits.
- It has laid down that any country that meets one of the following criteria shall not be eligible for S&DT benefits: first, membership of or seeking membership of OECD, or membership of G-20, second, share in world exports exceeding 0.5% or third, if classified as high income group by World Bank.
- It is a clever step because India is a member of the G-20 and its share in world exports is around 1.7% as of early 2019. So as per this criteria India will not qualify as a developing country.
- India submitted a paper to the WTO in which it shared several numbers to show that it is still a poor country and thus required S&DT provisions. For example, it showed that India’s GDP per capita is very low; India has 346 million people living in multidimensional poverty; domestic subsidy provided to per farmer is a meagre $227; and India has very low research and development capacity.
Is the threat that bad?
- The U.S. seems adamant on stripping India of its S&DT benefits. It has declared that if the WTO doesn’t reform its developing country status, then the U.S. will unilaterally (i.e. on its own) stop giving trade benefits to such countries within three months.
- It had said the same for South Korea and South Korea had to give in to the pressure by giving up its developing country status.
- While any such action by the U.S. will be a violation of international law and go against trade multilateralism, the Indian political leaders should also refrain from doing too much publicity about India’s development. Otherwise our own rhetoric might come to bite us.