GS-3, Indian Economy, Uncategorized

A New Battlefront in the WTO

Context:

U.S. President Donald Trump recently attacked the World Trade Organization (WTO) for allowing countries such as India and China to engage in unfair trade practices that affect American economic interests.

World Trade Organization (WTO):

  • The WTO was envisaged as an international trade body to help foster more trading in goods and services between nations.
  • It tries to achieve the goals by lowering various barriers to trade such as tariffs, subsidies and quotas.
  • Several trade agreements have been ratified over the years under the WTO.

U.S’ Allegations:

  • Trump strongly opposed the “developing country” status enjoyed by India and China at the WTO.
  • He argued that these countries are grown economies that do not deserve any preferential trade treatment over developed countries.

‘Developing Country’ Status:

  • The status allows a member of the WTO to seek temporary exception from the commitments under various multilateral trade agreements ratified by the organization.
  • It was introduced as a mechanism to offer some relief to poor countries while they try to adjust to a new global trade order marked by lower barriers to trade.
  • As many as two-thirds of the 164 members of the WTO have classified themselves as developing countries.
  • India, China, etc. have argued that their economic backwardness should be considered when it comes to the timeline of implementation of WTO agreements.
  • : Over the issue of farm subsidies, rich and poor countries have had major disagreements.

Benefits from the Special Status:

  • Developing countries can seek to delay the implementation of the WTO agreements.
  • They can continue to impose tariffs and quotas on goods and services in order to limit imports (that are lower in price or better in quality) and promote domestic producers.
  • : India gives subsidies in agriculture in the name of food security and protection of farmers.

Challenges:

  • The WTO does not formally classify any of its members as a developing country.
    • Individual countries are allowed to unilaterally classify themselves as developing economies.
    • Even many developed economies such as Singapore and Hong Kong (which have per capita income levels higher than the U.S.) have made use of the provision to classify themselves as growing economies.
    • Countries such as China justify that while their per capita income level has increased over the last few decades, these are still far below that of high income levels in countries such as the U.S.
  • While local producers may be protected by protectionist barriers such as tariffs, consumers in India and China will have limited access to foreign goods.
  • Mr. Trump may have a prima facie case in urging the WTO to address the issue of how countries arbitrarily classify themselves as ‘developing’.

Other Issues in the WTO:

  • Developed countries have tried to force poorer countries to impose stringent labor safety and other regulations.
    • These regulations can make the developing countries uncompetitive by increasing the cost of production.
    • Further, the introduction of labor issues into trade agreements is viewed as beyond the scope of the WTO.
  • Many economists oppose the argument of poorer countries that low per capita income levels justify their decision to raise trade barriers.
    • According to them, free trade benefits all countries irrespective of their income levels.
    • They also argue that protectionist trade barriers obstruct the transition of developing economies to higher income levels.
  • The dispute resolution mechanism of the WTO lacks the powers to enforce the judgments, as the enforcement is left to individual member states.
  • The WTO has now deteriorated into a forum where competing governments fiercely try to protect their narrow interests, even though it was initially envisaged as a global body to promote free trade.

What Lies Ahead?

  • Trump’s criticism may be the opening of a new front in his trade war against China.
    • Earlier, the U.S. President had termed China as a ‘currency manipulator’ for allowing the Yuan to depreciate against the dollar.
    • China and the U.S. have also been placing steep tariffs on imports from each other.
  • Global trade rules are unlikely to experience any huge reform any time soon, since that goes against their economic interests.
  • The inability of the WTO has raised questions about its
    • Global tariff rates over the years have dropped more due to bilateral trade agreements rather than due to multilateral trade agreements brokered at the WTO.
  • The ministerial level talks of the WTO scheduled to be held in Kazakhstan next year will be crucial for the continuation of the relevance of the organization.

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