Issues in World Trade: The most significant issues in world trade are:
a) Regionalism versus multilateralism;
b) Liberalization and globalisation in foreign trade;
c) Electronic commerce and electronic data interchange;
d) Environmental challenges, etc.
We now discuss these issues in detail. a) Regionalism verses. Multilateralism: In last few decades, there is a growing tendency towards having Regional Trading Arrangements RTAs. Such regional commitments have, however, caused concerns that they may weaken the global trading system by discriminating against imports and investments from non-members. Critics of regional arrangements have asserted that this practice goes against a core principle of the World Trade Organization; that all imports from member states should face the same barriers to trade. Moreover, removing tariffs on imported goods from some countries but not others is certainly counte-productive. If imports from high-cost producers inside the agreements replace goods from low-cost producers outside the agreements, the importing country will obviously lose tariff revenue as well as have imports that cost dearly for its economy.
Diehard supporters of the RTAs, however, affirm that these agreements have make it possible for the countries to liberalize trade and investment barriers much more than multilateral trade negotiations permit. These proponents also claim that regional agreements go beyond mere trade liberalization, by harmonizing regulations, adopting minimum standards for regulations, and recognizing other countries’ standards and practices–factors that go a long way in achieving market success. Empirical evidences support each of the views to some extent. Regional arrangements appear to have generated welfare gains for participants, with small negative spill over onto the rest of the world.
If it becomes evident in future that the RTAs do have adverse effects on the world trading system, they will have to follow the non-discrimination principle of the global trading system. The response of the world should be to pursue even more multilateral trade liberalization to edge out the smallest margin of preference for regional agreements. Countries who believe that they are being badly affected because of the existence of RTAs elsewhere will thus have one more reason to go for multilateral trade liberalization.
Another response would be to modify the WTO agreements on regional trading blocks asking the members to phase out any preferential market access within a given period. Such a provision will ensure that preferential market access becomes only a passing feature of any regional initiative. To make this approach more tempting to the members of a regional group, they could be provided with credit for the reduction in trade barriers, which could be then used in future in multilateral trade negotiations.
The third response means to have a model accession clause for the RTAs. Such a clause would set out conditions, which a non-member must satisfy to join the WTO as its member. When the conditions are satisfied it will automatically activate a negotiation for accession to the regional agreement. In this way, the non-members will not confront any trade barriers when an RTA is floated or when any new members are admitted to the WTO.
b) Globalization and Liberalization: Globalization and liberalization in a broader sense mean integration of different countries with the world. Policy makers in the 21st century now find themselves chasing development goals in a world that is literally transformed economically, politically and socially into a global village. Two main forces of globalization and liberalization are today shaping the development policy in the world.
At the end of last century, it had become evident that any economic decision made anywhere in the world at any time, must take into consideration global factors. The movement of goods, services, ideas and capital across national borders is not something new. However, its growth in recent times is certainly something new and does mark a qualitative break with the past. The world is no more just a collection of separate nations only dimly connected by trade. The global economic order is evolving into a highly integrated and electronically networked world system.
The success of the Uruguay Round of multilateral trade negotiations and the emergence of RTAs have led to extensive momentum to integration of countries further into a global trading system. Policy makers in both developing and industrial countries now have to keep up this forward motion. The efforts of trade are in much focus in recent years, including qualms over inequality, poverty, environment, and the financing of social safety nets. Even though there is almost no empirical evidence to corroborate these concerns, policy-makers have become more and more sensitive to them.
In the past 15 years, mostly due to the environment created by the GATT and WTO, many developing countries have on their own adopted structural changes and economic reforms that include reducing trade barriers. The trend towards these outward-oriented trade policies is not restricted to any one continent or region, and remarkably it even predates the Uruguay Round decisions.
c) Electronic Commerce: Electronic commerce is creating an entirely new scenario for world’s economy in this era of liberalization and globalization. Information-based industries have completely transformed the ways competitive marketing. For the open global economy electronic commerce has come as a boon. The most significant and important characteristics inherent to electronic commerce is its ability to respond to markets without any botheration about national boundaries or time through a medium that is ever-present and instantaneous. However, an enormous investment is needed in electronic commerce technology and the speed with which electronic commerce will benefit a country certainly depends on how fast that country liberalises its market and adopts a predictable trade regime–these two being the necessary and essential conditions for staring e-commerce.
Electronic Data Interchange EDI normally means paperless commutation. Most industrial countries now insist that all necessary documents for international trade must be sent to them through EDI. In some extreme cases, they have even specifically declared that No EDI No Trade. Many less developed and also some developing countries find it still difficult to put into practice electronic data interchange simply because they do not have the necessary infrastructure in information technology to make it possible for them to deal electronically with their clients from developed nations.
In 1998, WTO members earnestly started delving into the problem of how the World Trade Organization should deal with the use of electronic commerce. E-commerce is definitely of a unique nature in entering into contracts of delivering products goods and services across the world. This very uniqueness has raised many issues, which still remain unresolved.
In e-commerce, products are bought and paid for over the Internet. However, they are delivered physically across the world. Such transactions are subject to existing WTO rules on trade in goods. The situation becomes more convoluted for products that are delivered as digitalised information over the Internet. This is just one example. Many such issues are bound to arise as e-commerce becomes widespread.
The supply of Internet access services and delivery of many products over the Internet come within the scope of the General Agreement on Trade in Services GATS. However, there is clearly a need to know the extent to which particular activities come under market-access commitments of the WTO members.
In view of the undefined nature of electronic commerce and its capability to affect most aspects of trade, it was agreed by WTO members to carry out Work Programme on Electronic Commerce in a parallel mode, among the various WTO bodies with different competencies. Different WTO bodies are still engaged in examining trade-related aspects of electronic commerce within the framework of Work Programme on Electronic Commerce.
d) Environment: The issue of trade and environment was not part of negotiations at the Uruguay Round, but many environmental issues were addressed in the outcome of the negotiations. The Preamble to the WTO Agreement makes direct references to the objective of sustainable development and to the need of protecting and preserving the environment. Agreements on Technical Barriers to Trade and on Sanitary and Phytosanitary Measures explicitly spell out use of measures to protect human, animal and plant life and health and the environment by the governments. The Agreement on Agriculture exempts direct payments under environmental programmes. It seeks from WTO members a commitment to reduce domestic support for agricultural production, subject to specific conditions. The Agreement on Subsidies and Countervailing Measures treats as a non-actionable subsidy any government assistance to industry up to 20 per cent of the cost of adapting existing facilities to new environmental legalisation. Both the TRIPs and the Services Agreements contain provisions about protecting the environment.
The WTO Committee on Trade and Environment was responsible for bringing the environmental and sustainable development issues into the forefront of WTO work. Its first Report asserted that the WTO primarily seeks to build a constructive relationship between trade and environmental concerns. Trade and environment are both crucial areas of policy-making and they have to be mutually supportive to ensure a sustainable development, the Report said.
Strategy for Integrating India with World Trade
India adopted an all-inclusive programme of macro-economic stabilization and structural adjustment in June, 1991.The objective was to remove controls on industry, external trade and foreign investments and allow a free atmosphere for growth of trade. However, due to various problems and opposition faced within the country, these reforms could not be immediately implemented to their logical end in different spheres of economic activity. At best it is still a half-hearted effort. The result is India is not yet able to reach desired goals in its external trade and foreign direct investment.
A sustained rapid growth in exports is the most critical need if the country wants to ensure lasting external viability. Vigorous efforts are, therefore, necessary to achieve a hasty expansion of exports, especially when one or other difficult international trading environment is brought about by succeeding economic and financial crisis like those in East Asia or in post-Iraq war Middle East. There is also the apprehension that East Asian countries may reorient their economic activities away from capital-intensive industries and move towards labour-intensive ones. Such a move is bound to intensify competition in markets that are crucial for Indian exports.
It is, therefore, imperative that as early as possible various transaction costs incurred by our exporters are cut to a minimum. Transaction costs originating from enforcement of various rules and regulations for obtaining licenses, customs clearances, refund of duties, infrastructure constraints, etc. are some such unnecessary costs. These affect export performance adversely. Although export transactions are being simplified and rule and regulations are being cut down, the pace is very slow. The changes ought to be made quickly without losing any further time.
Petroleum and allied products have a comparatively large share of India’s total import bill. Global prices of these goods keep on fluctuating, reflecting general world reversionary conditions. There is much uncertainty about the future movements of international prices of petroleum. Under such uncertain trends, there are always significant downside risks to country’s balance of payments. Therefore, efficient use of these products is to be encouraged on war-footing while removing all distorting policies in remaining energy sectors.
Tourism was a major source of buoyant invisible earnings in the past. However, in last few years, growth of tourist arrivals and earnings has not been satisfactory. This is in spite intense efforts by the Centre and State governments to accelerate expansion of tourism in India. Priority needs to be given to banishing irritants like delayed air and rail travels, unclean hotels, lack of quick and cheap international communication. The entire tourist industry needs a complete overhaul if we want to attract foreign tourists and increase our dollar earnings. Airport systems, entry and exit procedures also need to be greatly improved.
There is certainly great potential for higher direct foreign investment from major companies of the world. What is needed is our having a studied positive stance towards FDI. For this, government must give the highest priority to get rid of red tape at every stage of FDI process. The red tape continues to be cited as the main culprit and deterrent for many potential foreign investors. Also, all policy impediments in the infrastructure sectors, which can absorb large FDI, need to be put to an end on a priority basis. To succeed in international arena and to become a foremost market player at global level, India must bring to perfection every type of basis infrastructure to match them to the world standards.
The financial crisis in East Asia and post Iraq-war Middle East has brought into focus the challenges and risks involved in getting involved into free global capital movements. Such crises clearly show that capital account liberalization has to be carefully calibrated to minimize the risks of disruption against increased uncertainty.
Issues in World Trade: The most significant issues in world trade are:
a) Regionalism versus multilateralism;
b) Liberalization and globalisation in foreign trade;
c) Electronic commerce and electronic data interchange;
d) Environmental challenges, etc.
We now discuss these issues in detail.
a) Regionalism verses. Multilateralism: In last few decades, there is a growing tendency towards having Regional Trading Arrangements RTAs. Such regional commitments have, however, caused concerns that they may weaken the global trading system by discriminating against imports and investments from non-members. Critics of regional arrangements have asserted that this practice goes against a core principle of the World Trade Organization; that all imports from member states should face the same barriers to trade. Moreover, removing tariffs on imported goods from some countries but not others is certainly counte-productive. If imports from high-cost producers inside the agreements replace goods from low-cost producers outside the agreements, the importing country will obviously lose tariff revenue as well as have imports that cost dearly for its economy.
Diehard supporters of the RTAs, however, affirm that these agreements have make it possible for the countries to liberalize trade and investment barriers much more than multilateral trade negotiations permit. These proponents also claim that regional agreements go beyond mere trade liberalization, by harmonizing regulations, adopting minimum standards for regulations, and recognizing other countries’ standards and practices–factors that go a long way in achieving market success. Empirical evidences support each of the views to some extent. Regional arrangements appear to have generated welfare gains for participants, with small negative spill over onto the rest of the world.
If it becomes evident in future that the RTAs do have adverse effects on the world trading system, they will have to follow the non-discrimination principle of the global trading system. The response of the world should be to pursue even more multilateral trade liberalization to edge out the smallest margin of preference for regional agreements. Countries who believe that they are being badly affected because of the existence of RTAs elsewhere will thus have one more reason to go for multilateral trade liberalization.
Another response would be to modify the WTO agreements on regional trading blocks asking the members to phase out any preferential market access within a given period. Such a provision will ensure that preferential market access becomes only a passing feature of any regional initiative. To make this approach more tempting to the members of a regional group, they could be provided with credit for the reduction in trade barriers, which could be then used in future in multilateral trade negotiations.
The third response means to have a model accession clause for the RTAs. Such a clause would set out conditions, which a non-member must satisfy to join the WTO as its member. When the conditions are satisfied it will automatically activate a negotiation for accession to the regional agreement. In this way, the non-members will not confront any trade barriers when an RTA is floated or when any new members are admitted to the WTO.
b) Globalization and Liberalization: Globalization and liberalization in a broader sense mean integration of different countries with the world. Policy makers in the 21st century now find themselves chasing development goals in a world that is literally transformed economically, politically and socially into a global village. Two main forces of globalization and liberalization are today shaping the development policy in the world.
At the end of last century, it had become evident that any economic decision made anywhere in the world at any time, must take into consideration global factors. The movement of goods, services, ideas and capital across national borders is not something new. However, its growth in recent times is certainly something new and does mark a qualitative break with the past. The world is no more just a collection of separate nations only dimly connected by trade. The global economic order is evolving into a highly integrated and electronically networked world system.
The success of the Uruguay Round of multilateral trade negotiations and the emergence of RTAs have led to extensive momentum to integration of countries further into a global trading system. Policy makers in both developing and industrial countries now have to keep up this forward motion. The efforts of trade are in much focus in recent years, including qualms over inequality, poverty, environment, and the financing of social safety nets. Even though there is almost no empirical evidence to corroborate these concerns, policy-makers have become more and more sensitive to them.
In the past 15 years, mostly due to the environment created by the GATT and WTO, many developing countries have on their own adopted structural changes and economic reforms that include reducing trade barriers. The trend towards these outward-oriented trade policies is not restricted to any one continent or region, and remarkably it even predates the Uruguay Round decisions.
c) Electronic Commerce: Electronic commerce is creating an entirely new scenario for world’s economy in this era of liberalization and globalization. Information-based industries have completely transformed the ways competitive marketing. For the open global economy electronic commerce has come as a boon. The most significant and important characteristics inherent to electronic commerce is its ability to respond to markets without any botheration about national boundaries or time through a medium that is ever-present and instantaneous. However, an enormous investment is needed in electronic commerce technology and the speed with which electronic commerce will benefit a country certainly depends on how fast that country liberalises its market and adopts a predictable trade regime–these two being the necessary and essential conditions for staring e-commerce.
Electronic Data Interchange EDI normally means paperless commutation. Most industrial countries now insist that all necessary documents for international trade must be sent to them through EDI. In some extreme cases, they have even specifically declared that No EDI No Trade. Many less developed and also some developing countries find it still difficult to put into practice electronic data interchange simply because they do not have the necessary infrastructure in information technology to make it possible for them to deal electronically with their clients from developed nations.
In 1998, WTO members earnestly started delving into the problem of how the World Trade Organization should deal with the use of electronic commerce. E-commerce is definitely of a unique nature in entering into contracts of delivering products goods and services across the world. This very uniqueness has raised many issues, which still remain unresolved.
In e-commerce, products are bought and paid for over the Internet. However, they are delivered physically across the world. Such transactions are subject to existing WTO rules on trade in goods. The situation becomes more convoluted for products that are delivered as digitalised information over the Internet. This is just one example. Many such issues are bound to arise as e-commerce becomes widespread.
The supply of Internet access services and delivery of many products over the Internet come within the scope of the General Agreement on Trade in Services GATS. However, there is clearly a need to know the extent to which particular activities come under market-access commitments of the WTO members.
In view of the undefined nature of electronic commerce and its capability to affect most aspects of trade, it was agreed by WTO members to carry out Work Programme on Electronic Commerce in a parallel mode, among the various WTO bodies with different competencies. Different WTO bodies are still engaged in examining trade-related aspects of electronic commerce within the framework of Work Programme on Electronic Commerce.
d) Environment: The issue of trade and environment was not part of negotiations at the Uruguay Round, but many environmental issues were addressed in the outcome of the negotiations. The Preamble to the WTO Agreement makes direct references to the objective of sustainable development and to the need of protecting and preserving the environment. Agreements on Technical Barriers to Trade and on Sanitary and Phytosanitary Measures explicitly spell out use of measures to protect human, animal and plant life and health and the environment by the governments. The Agreement on Agriculture exempts direct payments under environmental programmes. It seeks from WTO members a commitment to reduce domestic support for agricultural production, subject to specific conditions. The Agreement on Subsidies and Countervailing Measures treats as a non-actionable subsidy any government assistance to industry up to 20 per cent of the cost of adapting existing facilities to new environmental legalisation. Both the TRIPs and the Services Agreements contain provisions about protecting the environment.
The WTO Committee on Trade and Environment was responsible for bringing the environmental and sustainable development issues into the forefront of WTO work. Its first Report asserted that the WTO primarily seeks to build a constructive relationship between trade and environmental concerns. Trade and environment are both crucial areas of policy-making and they have to be mutually supportive to ensure a sustainable development, the Report said.
Strategy for Integrating India with World Trade
India adopted an all-inclusive programme of macro-economic stabilization and structural adjustment in June, 1991.The objective was to remove controls on industry, external trade and foreign investments and allow a free atmosphere for growth of trade. However, due to various problems and opposition faced within the country, these reforms could not be immediately implemented to their logical end in different spheres of economic activity. At best it is still a half-hearted effort. The result is India is not yet able to reach desired goals in its external trade and foreign direct investment.
A sustained rapid growth in exports is the most critical need if the country wants to ensure lasting external viability. Vigorous efforts are, therefore, necessary to achieve a hasty expansion of exports, especially when one or other difficult international trading environment is brought about by succeeding economic and financial crisis like those in East Asia or in post-Iraq war Middle East. There is also the apprehension that East Asian countries may reorient their economic activities away from capital-intensive industries and move towards labour-intensive ones. Such a move is bound to intensify competition in markets that are crucial for Indian exports.
It is, therefore, imperative that as early as possible various transaction costs incurred by our exporters are cut to a minimum. Transaction costs originating from enforcement of various rules and regulations for obtaining licenses, customs clearances, refund of duties, infrastructure constraints, etc. are some such unnecessary costs. These affect export performance adversely. Although export transactions are being simplified and rule and regulations are being cut down, the pace is very slow. The changes ought to be made quickly without losing any further time.
Petroleum and allied products have a comparatively large share of India’s total import bill. Global prices of these goods keep on fluctuating, reflecting general world reversionary conditions. There is much uncertainty about the future movements of international prices of petroleum. Under such uncertain trends, there are always significant downside risks to country’s balance of payments. Therefore, efficient use of these products is to be encouraged on war-footing while removing all distorting policies in remaining energy sectors.
Tourism was a major source of buoyant invisible earnings in the past. However, in last few years, growth of tourist arrivals and earnings has not been satisfactory. This is in spite intense efforts by the Centre and State governments to accelerate expansion of tourism in India. Priority needs to be given to banishing irritants like delayed air and rail travels, unclean hotels, lack of quick and cheap international communication. The entire tourist industry needs a complete overhaul if we want to attract foreign tourists and increase our dollar earnings. Airport systems, entry and exit procedures also need to be greatly improved.
There is certainly great potential for higher direct foreign investment from major companies of the world. What is needed is our having a studied positive stance towards FDI. For this, government must give the highest priority to get rid of red tape at every stage of FDI process. The red tape continues to be cited as the main culprit and deterrent for many potential foreign investors. Also, all policy impediments in the infrastructure sectors, which can absorb large FDI, need to be put to an end on a priority basis. To succeed in international arena and to become a foremost market player at global level, India must bring to perfection every type of basis infrastructure to match them to the world standards.
The financial crisis in East Asia and post Iraq-war Middle East has brought into focus the challenges and risks involved in getting involved into free global capital movements. Such crises clearly show that capital account liberalization has to be carefully calibrated to minimize the risks of disruption against increased uncertainty.