India must infuse flexibility in policy amid shifting global trade dynamics

As India navigates its way through global, regional and bilateral trade negotiations, it is important to understand that evolving global trade trends are also accompanied by shifting contours of global trade institutions and rules. Foremost among these is the need to recognise that the evident debilitation of the World Trade Organization (WTO) is due to the blunting of its central pillar of dispute resolution by the US, rather than the “spaghetti bowl effects” of preferential trade agreements (PTAs), as propounded by some economists in the 1990s.

 

PTAs acquired greater significance in the early 2000s, with increased depth and coverage of provisions in response to the changing nature of trade, engendered by the cross-border fragmentation of production processes. The provisions and agreements of the WTO, then entangled in the Doha Developments Agenda negotiations, were not sufficiently facilitative of this transformation in global trade. The deep PTAs, while evolving as an alternative to the slow-moving WTO, were very much within the realm of WTO rules, in particular GATT (General Agreement on Tariffs and Trade) Article XXIV.

 

Simultaneously, the Dispute Settlement Mechanism (DSM) at the WTO continued to provide a forum for resolving trade-related complaints and disputes among all member economies, irrespective of their participation in PTAs. The two modes of global trade  — PTAs at the bilateral and regional levels, and the multilateral system — worked successfully, in tandem, during this period.

 

However, the US intransigence in appointing judges to the appellate body of the DSM over the last five years has undone this harmonious working of the rules-based global trade order. By striking at the most significant reform in the multilateral system in the transition from GATT to the WTO, the US has seriously weakened trade multilateralism.

 

At the same time, trade regionalism is being re-defined along discriminatory lines. Intra-North America trade, already facilitated by the US-Mexico-Canada Agreement, is further reinforced by the Inflation Reduction Act (IRA) of the US. The IRA essentially aims at promoting regional trade and value chains in the electric vehicles sector through subsidies and tax credits based on progressively increasing percentage of local content sourced exclusively from US free trade agreement (FTA) partners. The import of any parts and components from “countries of concern” is also prohibited. The IRA is thus discriminatory and in violation of both the WTO most-favoured nation (MFN) principle and FTA rules.

 

Similarly, the Carbon Border Adjustment Mechanism (CBAM), where questions of legality, violation of WTO norms, and implementation difficulties — given the weaker administrative and institutional capabilities of lesser developed economies — remain, fosters inward-looking regionalism within the European Union.

 

In the context, the Regional Comprehensive Economic Partnership and the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) remain as the only mega-regional trade agreements that are open, non-discriminatory and in conformity with WTO rules. The CPTPP is a high-standard, ambitious, and forward-looking trade agreement. With an increasing membership and a long queue of applicants, it has substantial potential for trade expansion.  At the multilateral level, plurilaterals are gaining ground as a viable alternative, under the aegis of the WTO, for cooperation on new-age trade issues.  Plurilaterals involving a sub-set of WTO member economies in agreement on trade rules on an issue of common interest are not new. The first, an agreement to eliminate tariffs on a set of information technology products, was concluded in 1996. An increasing number of countries are now participating in these initiatives on important issues such as e-commerce and investment facilitation. In light of these institutional developments in the global trade context, what should India’s priorities be?

 

First, India needs to accept the likely eventuality of the WTO, and especially the DSM, not being revived in their original form. While former President Donald Trump may have initiated the process of decline in the trade body, President Joe Biden in his four-year presidency and Vice-President Kamala Harris in her presidential campaign have not given any indication of resolving the appellate body crisis. Recent WTO ministerial conferences have also made only perfunctory statements on reforms of the multilateral institution.

 

Second, deep PTAs and regionalism, the predominant modes of trade and global value chains, are evolving in response to global challenges of populism, the need for resilience, climate change, and energy transition. Deeper investment-friendly and environment - and sustainable governance (ESG)-related provisions to facilitate production, increasingly in greener supply chains, are likely to be the principal foci of PTAs in the near future. In addition to theoretical arguments and empirical evidence in support of trade-environment linkages, it is also true that production needs to respond to an increasingly discerning consumer’s demand for environment-friendly goods and sustainable living. So, persisting with its traditional stance of categorising new-age trade issues as “non-trade”, may not be the most productive approach for India to adopt in its trade negotiations.

 

Third, India must apply for membership and initiate preparatory steps towards accession to the CPTPP. Working towards an early conclusion of the FTA with the EU will be a step in this direction. The EU has been in the lead in adopting high standards and WTO-plus provisions, especially in the realm of ESG in its FTAs. For India, insulating domestic producers, especially large industries, from competition should not be the guiding principle in its negotiations with the EU. In sectors of concern, India should negotiate for product/ product-category specific flexibilities, safeguard measures, and extended transition time.

 

Fourth, India’s approach towards negotiating the CBAM should be twofold. While accepting the necessity to make the transition to reduced carbon emissions, the inherent violation of multilateral norms in CBAM (see my “Flaws in a multipurpose CBAM”, Business Standard, June 22, 2023) should be highlighted, as recently emphasised by the finance minister (Business Standard, October 9, 2024).

 

Fifth, India needs to adopt a more positive stance towards participation in plurilaterals. While it is appropriate to prefer consensus as the underlying principle for multilateral negotiations, we must also develop an understanding of the alternative architectures of “variable geometry” for setting global trade rules that are being proposed globally, and formulate a perspective on necessary ground rules and guardrails in such initiatives.

 

So, along with infusing its trade policy with an element of flexibility, India needs to develop a better understanding of the evolving dynamics of global trade institutions and trade rules among its trade negotiators, preferably with active involvement of domain experts from non-government sources.

 

The writer is senior fellow, CSEP, professor, SIS, JNU (on leave) and author of India’s Trade Policy in the 21st Century, Routledge: London, 2022. The views are personal