Play well to trade better

India which has recently spurned the ratification of the WTO-piloted Trade Facilitation Agreement (TFA) till a permanent solution to its public stock-holding for distribution of foodgrains on subsidised sale to legions of its poor people is found, may perhaps draw comforts from the latest Trade and Development Report (TDR) of the United Nations Conference on Trade and Development (UNCTAD).

In its flagship publication, released worldwide on Wednesday, Unctad said pointblank that it is highly unlikely that international trade alone would be able to kick-start economic growth, given the insufficiency of global demand. While facilitating trade flows by modernising customs procedures will be helpful in making the trading system more efficient over the longer term, Unctad unambiguously argues that it will not address the main constraints on trade today. Global trade has not decelerated or come to a virtual standstill because of higher trade barriers or supply-side difficulties. 

On the contrary, its slow growth is the result of weak global demand. Hence, any lop-sided emphasis on the cost of trade, prompting efforts to spur exports through wage reductions and an ‘internal devaluation’ would be self- defeating and counterproductive, especially if such a strategy is followed by several trading partners simultaneously, warns Unctad.

This is particularly crucial in the post-crisis (2008) milieu, where there is less dynamic demand from advanced countries, developing countries need to adopt a balanced approach that gives a larger role to domestic and regional demand and to South-South trade than in the past. Unctad is of the view that if many trading partners encourage domestic demand simultaneously, they would also be bolstering each other’s exports and the recovery of international trade. Alongside, it urged the developing countries to expand production capacities by adapting to the new demand pattern through appropriate proactive industrial policies.

Even as India has recently signed a free trade agreement (FTA) in services over and above the goods with the Association of South-East Nations (ASEAN) and mulling over a menu of FTAs with other trading partners, Unctad argues that developing countries should carefully weigh the loss of policy space when engaging in bilateral and regional trade and investment agreements. It cautioned that such agreements often come with stricter commitments in areas covered by multilateral agreements or extend to new areas, requiring policymakers to abandon the use of instruments that have proved effective in underpinning industrialisation. 

While conventional wisdom suggests that acceding to such stricter policy and regulatory commitments is needed to attract foreign direct investment (FDI) and to enable firms from developing countries to join global value chains, in the long-run they can trap producers into commodity enclaves or low-value niches of manufacturing. This is so as tight control over intellectual property and expensive branding strategies of the lead firm constrict them from moving up the value chain.

Citing the classic case of China which has been hailed as a dominant exporter of electronics goods to the extent that it now accounts for as much as one-third of total trade in this sector, Unctad report said that there are very few Chinese firms that control the different parts of the electronic chain. More ‘telling still Chinese firms, on one recent estimate, account for just three per cent of total profits in this sector’. Hence Unctad warns the developing nations to carefully weigh both the costs and benefits when considering an industrialisation strategy that places considerable emphasis on participation in global production networks ‘if this pushes them to a race to conclude ever more and increasingly stringent agreements without a full and proper understanding of their development potential’.

For countries like India which is keen to develop its manufacturing muscle, the important role that industrial policy can play in maintaining a robust manufacturing is highlighted by Unctad. Noting that industrial policy matters as even developed countries have acknowledged its role in boosting productivity growth, encouraging innovation and creating decent jobs, the report highlights the approach of the United States (US) to industrial policy which is wrongly construed as a hands-off approach. 

The US approach combines an ‘entrepreneurial State’ with a ‘coordinating State’ to dexterously deploy the policy space not circumscribed by global rules and commitments for sector- specific measures to bolster its manufacturing sector. Unctad has thus drawn attention to reassessment of industrial policy by developing countries to induce greater investment and innovation by domestic firms with a view to honing their international competitiveness.

Some of the measures in this regard already adopted include, sector-specific modulation of applied tariffs, using the difference between bound and applied tariff rates, applying preferential import duties, offering tax incentives, providing long-term investment financing through national development banks or subsidising commercial loans and using government procurement to support local suppliers. 

As various such policy measures continue to be used in countries at different levels of development in a bid to foster a virtuous circle between trade and capital accumulation, India should weigh these options as policy ballast in its new manufacturing policy. As many countries including trade majors do this, India should not keep shy of devising such toolkits for its manufacturing policy, regardless of any reprisal from global trade and investment institutions.

The Geneva-based UN body set up in 1964 was specifically meant to meet the development concerns of the poor countries when the extant multilateral institutions in the post-war era such as the World Bank and the IMF gave conditional loan disbursals. It is small wonder in its TDR 2014, Unctad hit the nail on the head contending that ‘growing global economic imbalances, heightened social and environmental fragilities and persistent financial instability, turning at times to outright crisis, should give pause for thought’ on the pattern of development strategy the world economy should henceforth pursue.

The report is not bluffing when it said that countries should ultimately rely on their own efforts to mobilise productive resources and especially to raise their levels of domestic investment, both public and private, human capital and technological know-how. However, for this, they need to have the widest possible elbow-room to discover which policies work in their particular conditions and not be subject to a constant shrinking of their policy space by the very international institutions originally established to support more balanced and inclusive outcomes. 

This is precisely what the Modi government did when it rattled the global trade majors by refusing to buckle under undue pressure to ratify the trade facilitation pact with its concerns on food security not getting duly addressed and redressed by the global bodies. IPA