The Future of Multilateral Trade: Implications For India

With countries turning protectionist, the focus of trade negotiations has shifted from multi-lateral to regional and bilateral deals. On its part, India seeks to become more assertive on issues of importance to it: more liberal visa regimes, easier IP norms, financial support for multi-lateral goals like climate change, etc. Nations are also linking economic and geopolitical considerations in ways they never did before. Ambassador Syed Akbaruddin, a former diplomat and currently the Dean of the Kautilya School of Public Policy, provided a considered perspective on the subject at a recent joint session of the India CEO, CFO and CHRO Forums in Hyderabad.

Globalisation: Under the scanner

Globalisation is one of the distinguishing features of our times. Trade flourished after the second world war, growing at ~8% a year for 25 years under GATT. From about 10% in the mid-1940s, trade as a share of global GDP currently stands at 50-60%. Since the inception of the WTO in 1995, the number of Regional Trade Agreements (RTA) has jumped from 55 to 355. By some measures – such as the trade in goods – globalisation peaked in 2008 and has stagnated since then. However, this is perhaps misleading because, since the early 2000s, trade in services has been growing faster (~12% pa) than merchandise trade.

Critics of globalisation argue that it has done little to reduce income inequality. Between 1988 and 2008, the world’s top 1% saw a 70% increase in their assets, compared to a median growth of ~30% and 5% for the world’s poorest. Today, the top 1% own 40% of global wealth while the poorest 50% own less than 5%. These figures are little changed since 1995 and societal inequity remains intact. On the other hand, globalisation is associated with a reduction in absolute poverty. From 1.8 billion in 1981, the number of poor people fell to 600 million in 2018.

Third, the pandemic has rekindled protectionist sentiments, leading to new restrictions on the movement of goods and services. Fourth, as a result of the Russia-Ukraine war, the number of sanctions imposed on Russia has ballooned, from ~2,000 in March 2022 to over 10,000 today. Keeping aside the moral reasons for the imposition of fresh sanctions, this has adversely impacted the global trade. If sanctions were earlier used as channels of interdependence, today, they have been fully weaponised – and this will have repercussions.

Climate-related concerns are also weighing on the outlook for globalisation. Starting in 2026, Europe will adopt a new CBAM (Carbon Border Adjustment Mechanism) in a phased manner, imposing tariffs on the basis of a product’s carbon content relative to that in the EU. The money raised from these tariffs will be used by the EU to make its industries zero-carbon. This will incentivise carbon-friendly practices but shrink imports from polluting countries.

Finally, trade linkages are being reimagined through a mix of on-shoring, re-shoring and friend-shoring. Some of these are not economically efficient but are geopolitically necessarily. Friend-shoring has, for instance, increased trade and FDI between the EU and the US at the expense of China-US flows.

India: Underperforming on trade

India has done well to attract FDI, which grew from ~USD 2 billion in 1995 to USD 44 billion last year. However, its performance on the trade front has been middling. It accounts for 1.8% of global exports (up from 0.6% in 1995, but largely stagnant in recent years) and ranks 18^th (up from 31^st) in value terms. India’s weak performance becomes obvious when comparing it with other emerging economies:

• All of the ASEAN countries run a trade surplus, ranging from 1.3% of the value of exports (Vietnam and Thailand) to 20.4% (Malaysia) but India runs a large deficit (-44.8%).

• Mexico and South Korea have a smaller GDP than India’s, but export more in absolute terms; the other ASEAN countries, which are a fraction of India’s size, have exports worth 58% (Indonesia) and 85% (Vietnam) of India’s exports.

• Specifically in terms of electronics exports, China is 81 times larger than India; Vietnam is 9 times larger.

• Bangladesh and Vietnam now ship out over twice as many clothes as India but 20 years ago, their exports were 90% and 30%, respectively, of India’s.

The cause of this underperformance is clear: India has been and remains a highly protectionist country. Its average tariff on non-agricultural products stood at 14.9% in 2021, compared to 0% in Hong Kong and Singapore, 4.8% in Taiwan, 6.5% in China and 8.4% in Vietnam. Just 1.8% of its tariff lines are eligible for 0% duty. Additionally, India has just 4 FTAs with its 20 top importers, compared to 14 for South Korea and 16 for Vietnam. This makes a huge difference to outcomes: Vietnam’s electronic exports are 9.2 times that of India, but 66% of these exports go to its FTA partners, compared to just 14% for India.

Walking away from RCEP…

Two years ago, India declined the Regional Comprehensive Economic Partnership (RCEP), for a variety of reasons. First, it had  a massive trade deficit with RCEP as a group: currently ~USD 160 billion, including a ~USD 48.7 billion deficit just with China. Second, India’s average tariff rate (17.6%) on RCEP countries and that on non-agricultural imports (14.2%), were well above the expected range. Further, India was asked by the RCEP countries to reduce its tariff rates from 2014 levels whereas India wanted the base year to be 2019; this meant much steeper cuts.

Third, India deemed unsatisfactory the safeguards against imports from China – the country that is expected to be the biggest beneficiary from this agreement. Fourth, India was unable to secure greater market access for its services exports, which are its main differentiator. It also failed to secure clearer mechanisms to address non-tariff measures. In sum, even as RCEP may have been beneficial in some respects, the cons outweighed the pros.

…And The Forward View For India

In the last 100 years, only a handful of Asian countries have achieved 8-10% rates of GDP growth for ~30 years at a stretch. Driving this growth, in every instance, was rapid export growth. Subsequently, however, growth rates and share of world trade either stagnated or grew slowly, which suggests that break-neck growth cannot be sustained indefinitely. India, too, has grown fastest when it has opened itself up to trade but its overall thrust has been protectionist. Going forward, India will need to work at integrating itself with global value chains, which will often be shaped by factors other than efficiency and cost – friend-shoring will be a key consideration. India must additionally seek to sign FTAs with its largest trade partners, including the EU. The ongoing negotiations of the India-UK FTA are on a positive footing and likely to yield substantial gains. A successful conclusion to these talks will be a big step for Indian trade.