8

Political Economy of International Trade

INTRODUCTION

The current phase of globalization starting in the aftermath of World War II, strongly bolstered by new communications and transport technologies, has been marked by a prolonged period of strong trade and economic growth.

The discussion of trade theory in Chapter 7 examines the theoretical basis of international trade and the gains to the world economy through its free and fair existence. In actual fact, it is seen that all countries interfere with international trade to varying degrees. Government intervention takes place to achieve different economic, political or social objectives. This chapter examines the different rationales for protection adopted by nations and then looks at the different forms that protection can take. It then looks at the institutional framework governing global trade and the direction of foreign trade in India and examines the different measures taken by the government to promote exports in India.

GOVERNMENT INTERVENTION IN TRADE

There are two rationales for government intervention in trade—an economic rationale and a non-economic rationale.

Economic Rationale

The reasons for adopting an economic rationale are the protection of domestic industries, employment generation and industrialization of the domestic economy, and improving the balance of payments position.

Protection to Infant and Domestic Industry

The infant industry argument proposed in 1792 by Alexander Hamilton is the oldest economic reason for trade intervention. The use of protection in the interest of domestic industries is the most common reason for its use. The proponents of this argument posit that though an industry acquires competitive advantage in the long run, it requires protection in the initial stages of its life. This is a period when the firm secures finance, gains mastery over production techniques, trains its labour force, and begins to reap economies of scale. It is argued that in the absence of these measures, it is impossible for the domestic firm to face competition in low-priced goods. This argument was the basis for protection and an inward-looking Indian industrial policy in the initial stages of the development of its industries, as was the case for several other developing countries. The argument is acceptable under the provisions within the General Agreement on Tariffs and Trade (GATT) as well and has been a defining characteristic of international trade for the last 50 years. It has been seen, however, that protection only helped to foster inefficiency as protected industries rarely made the effort to adopt efficient methods of production due to the security they received in a protected environment.

Employment and Industrialization

This is a corollary of the infant industry argument which emphasizes the employment and industrialization benefits to the domestic economy as a result of setting up domestic manufacturing. This, in turn, leads to regional and national growth. A frequently used argument against free trade is that trade should benefit the interests of the domestic citizens first. In the aftermath of the recent global crisis of 2008, there was a large-scale move in the United States to “buy American goods” in the interest of the domestic economy. A commonly used argument against export that originates in low-cost foreign countries is that it threatens the domestic worker who works at a higher wage rate. The argument fails to take note of the fact that the decision to export is based on total costs, of which the wage rate may often be an insignificant component. Taking into account the higher productivity in developed domestic markets due to the use of more and better capital, superior management, and advanced technology, the total labour cost component of goods is lower even though the total cost is higher.

Balance of Payments Position

Persistent deficits in a country's balance of payments often force countries to resort to trade restrictions. For example, countries such as India find themselves burdened with the import of oil and related products. This often leads countries to promote policies such as tied imports, that is, imports which will help in re-export to help its balance of payments position. Although protection is meant to be temporary, in reality, it extends over a long time period, as a firm or industry rarely ever admits that it is not required.

Non-economic Rationale

The reasons for adopting a non-economic rationale are discussed in this section.

Preservation of National Identity and Culture

It has been argued that free trade is a threat to national identity, culture, and institutions. It is on these grounds that countries impose restrictions on foreign media, which is perceived to be a major source of access to foreign culture. Countries such as Canada and France impose restrictions on foreign media as they consider it a threat to their language and culture. Japan, on the other hand, imposes a high tariff on rice, which is essential to their way of life.

Trade as a Bargaining Tool

Trade protection is often used as a tool to bargain with trading partners as countries often use the reciprocity argument for imposing trade barriers. This could take the form of passive reciprocity, where a country refuses to lower or eliminate its barriers to trade until the other party does the same. On the other hand, active or aggressive reciprocity takes the form of threats where a country may withdraw previous concessions or threaten to take retaliatory steps if the other party does not respond with similar concessions. For instance, the US government threatened China with stringent trade sanctions to try and get the Chinese to improve their intellectual property laws, which were causing US companies such as Microsoft to lose billions of dollars in trade revenue. The use of trade protection as a bargaining tool can be a double-edged sword, which can lead to trade openness and its attendant benefits if it is successful, but could severely restrict trade if the partner country retaliates through similar measures of protectionism.

Protection of Consumer and Human Rights

Trade restrictions are often meant to protect domestic consumers against products that are unsafe and hazardous. The European Union (EU), for instance, has strict guidelines and even imposes barriers against agricultural produce entering its markets. This includes the sale of hormone-treated meats and produce from genetically modified crops. Countries such as the United States have also resorted to measures like not granting the most-favoured-nation (MFN) status to China to protest against its human rights violations.

INSTRUMENTS OF TRADE CONTROL

Government intervention in trade takes the form of tariff and non-tariff barriers. Tariff barriers are direct official constraints on the import of certain goods and services that are non-discretionary in application. Non-tariff barriers are indirect measures that discriminate against foreign goods in the domestic market or otherwise distort and constrain trade and have a discretionary application. Tariff barriers affect prices; non-tariff barriers can affect either price or quantity directly.

Tariff Barriers

A tariff (sometimes called duty) is the most common type of trade control and is a tax that governments levy on a good shipped internationally, above and beyond taxes levied on domestic goods and services. Tariffs are transparent and are typically set on an ad valorem basis, that is, on the basis of the value of the good or service in question. Governments charge a tariff on a good when it crosses an official boundary, whether it is that of a country, for example, Mexico, or a group of countries, like the EU, that have agreed to impose a common tariff on goods entering their bloc.

 

Tariffs collected by the exporting country are called export tariffs; if collected by a country through which the goods have passed, it is called a transit tariff; and if collected by the importing country, it is called an import tariff. The import tariff is by far the most common. A government may also assess a tariff on a per-unit basis, in which case, it is applying a specific duty. A tariff assessed as a percentage of the value of the item is an ad valorem duty. Lastly, a tariff assessed as both a specific duty and an ad valorem duty on the same product, is a compound duty. A specific duty is straightforward for customs officials who collect duties, because they do not need to determine a good's value on which to calculate a percentage tax.

Figure 8.1 illustrates how tariff and non-tariff barriers affect both the price and the quantity sold, although in a different order and with a different impact on producers. Both parts (a) and (b) of Figure 8.1 have downward-sloping demand curves (D) and upward-sloping supply curves (S). In other words, the lower the price, the higher the quantity that consumers demand; the higher the price, the more that suppliers make available for sale. The intersection of the S and D curves illustrates the equilibrium price (P₁) and quantity sold (Q₁), determined by market forces without government interference.

Figure 8.1 (a) shows the impact of the imposition of a tariff on price and quantity in the market. A tariff acts like a tax and raises the price of the commodity in the market from P₁ to P₂. As a consequence, the amount consumers are willing to buy will fall from Q₁ to Q₂. The price rise does not benefit the producers since it goes to the government as taxes rather than profits.

Figure 8.1 (b) shows the impact of a non-tariff barrier on price and quantity. A non-tariff barrier acts as a restriction on supply, giving rise to a new supply curve (S₁). The quantity sold now falls from Q₁ to Q₂. At the lower supply, the price rises from P₁ to P₂, as equilibrium is attained at a new point due to the interaction of the D and S₁ curves.

 

Figure 8.1 Impact of Tariff and Non-tariff Barriers on Price and Quantity

 

The major difference in the two forms of trade control is that sellers raise the price in part (b), which helps compensate them for the decline in quantity sold. In part (a), producers sell less and are unable to raise their price because the tax has already done it.

Import tariffs raise the price of imported goods, thereby giving domestically produced goods a relative price advantage. A tariff may be protective even though there is no domestic production in direct competition. For example, a country that wants its residents to spend less on foreign goods and services may raise the price of some foreign products, even though there are no close domestic substitutes in order to curtail demand for imports.

Tariffs also serve as a source of government revenue. Generally, import tariffs are of little importance to industrial countries; for example, the EU spends about the same to collect duties as the amount it collects. Tariffs, however, are a major source of revenue in many developing countries. This is because government authorities in developing countries have more control over determining the amounts and types of goods crossing their borders and collecting a tax on them than they do over determining and collecting individual and corporate income taxes. Although revenue tariffs are most commonly collected on imports, many countries that export raw materials charge export tariffs. Transit tariffs were once a major source of revenue for countries, but government treaties have nearly abolished them.

There is often a tariff controversy concerning industrial countries’ treatment of manufactured exports from developing countries that seek to add manufactured value to their exports of raw materials (like making tea bags from tea leaves). Raw materials frequently enter industrial countries free of duty; however, if processed, they are assigned an import tariff. Since an ad valorem tariff is based on the total value of the product encompassing the raw materials and the processing combined, developing countries argue that the effective tariff on the manufactured portion turns out to be higher than the published tariff rate. For example, a country may charge no duty on tea leaves but may assess a 10 per cent ad valorem tariff on instant tea. If INR 50 for a package of instant tea bags covers INR 25 in tea leaves and INR 25 in processing costs, the duty is effectively on the manufactured portion, because the tea leaves could have entered duty-free. This anomaly further challenges developing countries to find markets for their manufactured products. At the same time, the governments of industrial countries cannot easily remove barriers to imports of developing countries’ manufactured products largely because these imports affect unskilled or unemployed workers who are least equipped to move to new jobs.

Non-tariff Barriers

There are two kinds of non-tariff barriers, namely, direct price influences and quantity controls.

 

Direct Price Influences

The principal forms of direct price influences are subsidies and aids and loans.

Subsidies   Direct payments made by the government to domestic companies to encourage exports or to protect them from imports are known as subsidies. They can take the form of cash payments, government participation in ownership, low-cost loans to foreign buyers and exporters, and preferential tax treatment. Governments may offer potential exporters many business development services, such as market information, trade expositions, and foreign contacts. From the standpoint of market efficiency, subsidies are more justifiable than tariffs because they seek to overcome, rather than create, market imperfections. There are also benefits to disseminating information widely because governments can spread the costs of collecting information among many users.

Aid and loans   Governments also give aid and loans to other countries. The assistance is known as tied loans if the funds are for a specific use. Tied aid helps win large contracts for infrastructure, such as telecommunications, railways, and electric-power projects. However, there is growing scepticism about the value of tied aid. Tied aid can slow the development of local suppliers in developing countries, and it can shield suppliers in the donor countries from competition.

Countries also use other means to affect prices, including special fees (such as for consular and customs clearance and documentation), requirements that customs deposits be placed in advance of shipment, and minimum price levels at which goods can be sold after they have customs clearance.

Quantity Controls

Governments use other non-tariff regulations and practices to directly affect the quantity of imports and exports. Principal forms of quantity controls include the following:

Quotas   The quota is the most common type of quantitative import or export restriction, which prohibits or limits the quantity of a product that can be imported or exported in a given year. An import quota prohibits or limits the quantity of a product that can be imported in a given year and an export quota prohibits or limits the quantity of a product that can be exported in a given year. Quotas raise prices just as tariffs do but, since they are defined in physical terms, they directly affect the amount of imports by putting an absolute limit on supply, for example, three million DVD players from a particular country in a given year. Therefore, quotas usually increase the consumer price because there is little incentive to use price competition to increase sales. A notable difference between tariffs and quotas is their direct effect on revenues. Tariffs generate revenue for the government. Quotas generate revenues for those companies which are able to obtain a portion of the limited supply of the product by selling it in the domestic market.

A country may establish export quotas to assure domestic consumers of a sufficient supply of goods at a low price, to prevent depletion of natural resources, or to attempt to raise export processes by restricting supply in foreign markets. To restrict supply, some countries band together in various commodity agreements, such as those for coffee and petroleum, which then restrict and regulate exports from the member countries. The typical goal of an export quota is to raise prices for importing countries.

Sometimes, governments allocate quotas among countries based on political or market conditions. This choice can create problems because goods from one country might be trans-shipped or deflected to another country to take advantage of the latter's unused quota. Prior to the ending of the Multi Fibre Arrangement (MFA) in 2004, this method was used to bring in USD 2 billion in illegal clothing imports from China to the United States annually.

Sometimes, goods are subject to tariff rate quotas, according to which, a certain quantity of goods enter the country duty-free or at a low rate. However, there is a very high duty for subsequent imports. For example, since January 2006, the EU allows tariff-free imports of 775,000 tonnes of bananas annually from the Caribbean and African countries, but beyond that limit, all imports are subject to a duty of EUR 176 per tonne. Since the EU imports bananas from Central and South America as well, the tariff effectively subsidizes the banana export from the African and Caribbean nations and penalizes the producers from Central and South America.

Voluntary export restraints   A voluntary export restraint (VER) is a generic term used to describe all bilateral agreements that restrict exports. It is voluntary because a country has a formal right to eliminate or modify it at any time. For example, in the 1980s, the United States convinced the Japanese government to “voluntarily” limit their exports of automobiles to the United States to no more than 1.85 million vehicles per year. Therefore, like a quota, a VER limits the quantity of trade between countries and, therefore, raises the prices of imported goods to consumers. It was estimated by the US Federal Trade Commission (FTC) that US consumers overpaid nearly USD 5 billion for Japanese automobiles between 1981 and 1985 due to the automobile industry VER. Procedurally, VERs have unique advantages. A VER is much easier to switch off than an import quota. In addition, the appearance of a “voluntary” choice by a particular country to constrain its exports to another country does less political damage to the participating countries than an import quota does.

Orderly marketing arrangements   This is a kind of VER consisting of formal agreements between governments to restrict international competition and keep a part of the domestic market for local producers. The MFA, which began in 1973 and regulated about 80 per cent of the world market in textiles and apparel exports, is an example of this. However, under the provisions of the 1994 GATT negotiations, all textile quotas under the MFA expired on 1 January 2005.

Embargoes   An embargo is a specific quota that prohibits all forms of trade. Countries or groups of countries may place embargoes on either imports or exports, on entire categories of products regardless of destination, on specific products to specific countries, or on all products to given countries. Governments often impose embargoes in an attempt to use economic means to achieve political goals.

“Buy local” legislation   Another form of quantitative trade control is the “buy local” legislation. Very often, government purchases, which form a large part of total national expenditures, are from domestic producers only. In the United States, for example, “buy American” legislation requires government procurement agencies to favour domestic goods. Sometimes, governments specify a domestic content restriction, that is, a certain percentage of the product must be of local origin. Sometimes, they favour domestic producers by establishing floor-price mechanisms for competing foreign goods. For example, a government agency may buy a foreign-made product only if the price is at some predetermined margin below that of a domestic competitor. Many countries prescribe a minimum percentage of domestic content that a given product must have for it to be sold legally in their country.

Testing standards   Countries often have various classifications, labelling, and testing standards to protect the health and safety of its citizens. For exporting firms, however, these are a source of complex and discriminatory barriers to free trade. The purpose of these is often to promote the sale of domestic products and complicate the sales of foreign products. An example of these is product labels, which need to indicate their source of manufacture. This adds to the firm's production cost, since it may also need to be translated into different languages for different markets. Further, since raw materials, components, design, and labour increasingly come from various countries, most products today are of mixed origin. For example, provisions in the United States stipulate that any cloth substantially altered (for instance, woven) in another country must identify that country on its label. Consequently, designers like Ferragamo, Gucci, and Versace must declare “made in China” on the label of garments that contain silk from China.

The professed purpose of testing standards is to protect the safety or health of the domestic population. However, some foreign companies argue that testing standards are just another means to protect domestic producers. For example, EU standards keep some US and Canadian products out of the European market completely. This is the case with genetically engineered corn and canola oil even though the worldwide scientific community reports that genetic engineering poses no human health risk and France itself grows and sells a small amount of genetically engineered corn. Kellogg's needs to make four different kinds of corn flakes because different nations have different standards about the vitamins which need to be added to enrich it.¹ Japan similarly prohibits the import of creamy mustard, light mayonnaise, and figs which contain potassium sorbate, a food additive allowed by it in various other products that are of Japanese origin. Canadian regulations similarly treat calcium-enriched orange juice as drugs which have special production and marketing requirements.²

Specific permission requirements   The requirement to obtain permission from government authorities in order to conduct trade transactions is known as a licence. Procedures for this vary between countries and sometimes require the firm to submit samples to the authorities. This procedure can restrict imports or exports directly by denying permission and indirectly because of the cost, time, and uncertainty involved in the process. Foreign-exchange controls similarly limit the availability of foreign exchange for trade and investment. It requires an importer of a given product to apply to a government agency to secure the foreign currency to pay for the product. As with an import license, failure to grant the exchange, not to mention the time and expense of completing forms and awaiting replies, obstructs foreign trade.

Administrative delays   Government policies such as customs rules often discriminate against trade practices. These are intentional administrative delays such as the Chinese requirement of different rates of duty for different products depending on the port of entry and an arbitrary determination of the value of goods.³ Other examples are the requirement of the Australian government that all television commercials be shot in the country itself even for foreign media companies.

Reciprocal requirements or countertrade   The exchange of merchandise for other goods or services is called an offset or countertrade transaction. Governments sometimes require exporters to take actual merchandise in lieu of money or to promise to buy merchandise or services in place of cash payment in the country to which they export. This requirement is common in the aerospace and defence industries, sometimes because the importer does not have enough foreign currency. For example, Russia's commercial airline, Aeroflot, has exchanged Russian crude oil for Airbus aircraft. More frequently, however, reciprocal requirements are made between countries with ample access to foreign currency that want to secure jobs or technology as part of the transaction. For example, McDonnell Douglas Corporation sold helicopters to the British government but had to equip them with Rolls-Royce engines (made in the United Kingdom) as well as transfer much of the technology and production work to the United Kingdom. These sorts of barter transactions are called countertrade or offsets.

Restrictions on services   Many countries depend on revenue from the foreign sale of such services as transportation, insurance, consulting, and banking. Countries restrict trade in services for three reasons:

1. Essentiality: Service industries are considered essential since they have a strategic role in society and because they provide social assistance to their citizens. Countries, therefore, restrict the operation of certain private companies, both foreign and domestic, in sectors such as postal services, education, and health services because they function on a non-profit basis. Services are also restricted in sectors such as media, communications, and banking for foreign companies. In other cases, they set price controls for private competitors or subsidize government-owned service organizations, creating disincentives for foreign private participation. Even when these services are privatized, there is a preference for domestic ownership and control.
2. Licensing standards: Governments limit foreign entry into many service professions to ensure the existence of standards of performance. The licensing standards of different professional services vary between countries for professionals such as accountants, actuaries, architects, electricians, engineers, gemologists, hairstylists, lawyers, physicians, real-estate brokers, and teachers. In the absence of reciprocal recognition in licensing between different countries, it is difficult for an accounting or a legal firm from one country to do business in another country, even if there is a manifest need in the domestic country. This needs the use of local professionals within each foreign country or the use of certification where required. The latter option can be difficult because examinations will be in a foreign language and likely emphasize materials different from those in the home country. Further, there may be lengthy prerequisites for taking an examination, such as internships and course work at a local university.
3. Immigration requirements: In order to work in a foreign land, professionals need to comply with immigration requirements. Very often, government regulations require that an organization, domestic or foreign, first search extensively for qualified personnel locally before it can apply for work permits for personnel it would like to bring in from abroad. Even if no one from domestic sources of labour is available, hiring a foreigner is still difficult.

INTERNATIONAL TRADE REGULATION

International trade regulation is a recent phenomenon which has its roots in the establishment of multilateral trade organizations such as the GATT and the WTO. The basis of multilateral trade is the principles of non-discrimination, reciprocity, market access, and fair competition, which have been embodied in both the GATT and WTO agreements.

The WTO is a multilateral trade organization that came into existence on 1 January 1995, and is the successor to the GATT, which was created in 1947 and continued to operate for almost five decades as a de facto international organization.

General Agreement on Tariffs and Trade (GATT)

The General Agreement on Tariffs and Trade (GATT) came into existence in 1947 as an international organization for the facilitation of trade liberalization. The reconstruction of the world economy after World War II witnessed the inception of the Bretton Woods institutions now known as the World Bank (WB) and the International Monetary Fund (IMF). These have been explained in detail in Chapter 11. There was a simultaneous move for an international organization to liberalize trade, called the International Trade organization (ITO). The ITO Charter, however, could never be ratified and in its place the GATT, which had been proposed as an interim arrangement, became the de facto international organization for the regulation and liberalization of international trade. Since the original signatory nations expected the agreement to become part of the more permanent ITO Charter, the text of the GATT contains very little institutional structure. This lack of detail within the agreement often created increasing difficulties, as the GATT membership and roles governing trade between the world's nations grew. The GATT functioned as an international organization for many years even though it was never formalized as such. The WTO replaced the GATT as an international organization, but the General Agreement still exists as the WTO's umbrella treaty for trade in goods.

 

Objectives and Principles

The GATT was a treaty, not an organization. Its main objective was the facilitation of international trade through the reduction of tariff barriers, quantitative restrictions, and subsidies on trade through a series of agreements. Its main objectives, listed in the preamble are:

• Raising the standard of living
• Ensuring full employment, and a large and steadily growing volume of real income and effective demand
• Developing the full use of the resources of the world
• Expansion of production and international trade

For almost half a century, the GATT's basic legal principles remained much as they were in 1948. There were additions in the form of a section on development in the 1960s and plurilateral agreements (agreements involving fewer members with a specific interest in an issue) with voluntary membership in the 1970s, while efforts to reduce tariffs further continued. Much of this was achieved through a series of multilateral negotiations known as trade rounds. The biggest leaps forward in international trade liberalization have come through these rounds, which were held under the GATT's auspices (see Table 8.1).

The history of the GATT can be divided into three phases. The first phase from 1947 until the Torquay Round, largely concerned which commodities, would be covered by the agreement and freezing existing tariff levels. The second phase, encompassing three rounds, from 1959 to 1979, focused on reducing tariffs. The third phase, consisting only of the Uruguay Round from 1986 to 1994, extended the agreement fully to new areas such as intellectual property, services, capital, and agriculture. Out of this round, the WTO was born.

The early GATT trade rounds only concentrated on reducing tariffs. It was the Kennedy Round in the mid-sixties, which introduced an Anti-dumping Agreement and a section on development. The Tokyo Round during the seventies was the first major attempt to tackle non-tariff trade barriers, and to improve the system. The eighth round, that is, the Uruguay Round of 1986–94, was the last and most extensive round, which led to the establishment of the WTO and a new set of agreements.

 

Table 8.1 Multilateral Negotiations Under GATT

 

Uruguay Round

The last round of multilateral trade negotiation under the GATT, known as the Uruguay Round, started in 1986, but remained largely inconclusive on account of the complexities of the issues involved in it. In December 1990, the then director general Arthur Dunkel presented a draft solution called the Dunkel Draft, which was later replaced by an enlarged agreement. This agreement was finally approved on 15 December 1993.

The Uruguay Round included the following areas for the first time:

• Trade in services leading to the General Agreement on Trade in Services (GATS)
• Trade-related aspects of intellectual property leading to the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs)
• Trade-related investment measures leading to the Agreement on Trade-Related Investment Measures (TRIMs)

Gatt: An Evaluation

Although the GATT was established as a provisional organization with a limited field of action, it had undisputed success in the 47 years of its existence in the promotion and the liberalization of world trade. Continual reductions in tariffs alone helped to increase world trade to high rates of about eight per cent growth during the 1950s and 1960s. The momentum of trade liberalization ensured that trade growth consistently outpaced production growth throughout the GATT era, a measure of the increasing ability of member countries to trade with each other and to reap the benefits of trade. The rush of new members during the Uruguay Round demonstrated that the multilateral trading system was recognized as an anchor for development and an instrument of economic and trade reform.

Problems arose with the passage of time and although the Tokyo Round in the 1970s attempted to tackle some of these, it had limited success.

The GATT's success in reducing tariffs to a very low level, combined with a series of economic recessions in the 1970s and early 1980s, drove governments to look for other forms of protection for domestic sectors, which were threatened by increased foreign competition. High rates of unemployment and the shutting down of factories led governments in Western Europe and North America to seek bilateral market-sharing arrangements with competitors, and to embark on a subsidies race to maintain their hold on agricultural trade. Both these changes undermined the GATT's credibility and effectiveness.

Besides the deteriorating trade-policy environment, by the early 1980s, the GATT was clearly no longer as relevant to the realities of world trade as it had been in the 1940s. There were a number of reasons for this change:

• World trade became far more complex and important than 40 years before with the globalization of the world economy. Trade in services (not covered by the GATT rules) became of major interest to more and more countries, and international investment expanded even more.
• Expansion in merchandise trade matched the expansion of services trade.
• The GATT met with limited success in the realm of agriculture, as loopholes in the multilateral system were heavily exploited, and efforts at liberalizing agricultural trade were largely ineffective.
• In the textiles and clothing sector, an exception to the GATT's normal disciplines was negotiated in the 1960s and early 1970s, leading to the MFA.
• Even the GATT's institutional structure and its dispute settlement system were a cause for concern.

These and other factors convinced GATT members of the need for a renewed effort to reinforce and extend the multilateral system. That effort resulted in the Uruguay Round, the Marrakesh Declaration, and the creation of the WTO.

World Trade Organization

The WTO is a multilateral trade organization aimed at international trade liberalization. It came into existence on 1 January 1995 as the successor to the GATT. At the heart of the system, known as the multilateral trading system, are the WTO's agreements, negotiated and signed by a large majority of the world's trading nations, and ratified in their parliaments. These agreements are the legal ground-rules for international commerce. Essentially, they are contracts guaranteeing member countries important trade rights. They also bind governments to keep their trade policies within agreed limits for everybody's benefit. As of July 2008, the WTO had 153 members.⁴

 

As the keeper of the rules of trade between nations at a near-global level, the WTO is responsible for negotiating and implementing new trade agreements, and is in charge of policing member countries’ adherence to all the WTO agreements. Most of the WTO's current work comes from the 1986–94 negotiations called the Uruguay Round, and earlier negotiations under the GATT. The organization is currently the host to new negotiations, under the Doha Development Agenda (DDA) launched in 2001.

The WTO is governed by a Ministerial Conference, which meets every two years; a General Council, which implements the conference's policy decisions and is responsible for day-to-day administration; and a director-general, who is appointed by the Ministerial Conference. The WTO's headquarters are in Geneva, Switzerland.

Principles of WTO

The WTO is governed by certain basic guiding principles which are further embodied in the form of complex agreements covering a wide range of activities. The basic areas they deal with are agriculture, textiles and clothing, banking, telecommunications, government purchases, industrial standards and product safety, food sanitation regulations, intellectual property, etc. These principles are as follows:

Most-favoured-nation status   Under the WTO agreements, countries cannot normally discriminate between their trading partners. Granting a special favour, advantage, or privilege to one country (such as a lower customs duty rate for one of their products) means that the same favour has to be granted to all other WTO members. This is known as the most-favoured-nation (MFN) status, which is granted by WTO members to each other.

The MFN treatment is a basic pillar of multilateral trade negotiations and is also the first article of the General Agreement on Tariffs and Trade (GATT), which governs trade in goods. MFN is also a priority in the General Agreement on Trade in Services (GATS) and the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). Although in each agreement, the principle is handled slightly differently, together, these three agreements cover all three main areas of trade handled by the WTO.

There are some exceptions which are allowed to the MFN rule. For example, countries can set up a free trade agreement that applies only to goods traded within the group but discriminates against goods from outside. They can also give developing countries special access to their markets or raise barriers against products that are considered to be traded unfairly from specific countries. Limited discrimination is allowed in the area of services too. However, the agreements only permit these exceptions under strict conditions. In general, MFN means that every time a country lowers a trade barrier or opens up a market, it has to do so for the same goods or services from all its trading partners—whether rich or poor, weak or strong.

National treatment   This principle implies that imported and locally produced goods should be treated equally once they are in the domestic market. The same should apply to foreign and domestic services, and to foreign and local trademarks, copyrights and patents. This principle of national treatment (giving others the same treatment as one's own nationals) is also found in all the three main WTO agreements, although once again the principle is handled slightly differently in each of these.

National treatment only applies once a product, service or item of intellectual property has entered the domestic market. Therefore, charging customs duty on an import is not a violation of national treatment even if locally-produced products are not charged an equivalent tax.

There are some exceptions to the WTO principles discussed here:

• The WTO allows members to establish bilateral or regional customs unions, or free trade areas (FTAs). Members in such areas enjoy more preferential treatment than those outside the group.
• The WTO also allows members to lower tariffs to developing countries without lowering them for the developed ones. The United States, for example, offers such treatment to developing countries through the Generalized System of Preferences (GSP). Due to this system, US companies that are more vulnerable to import competition from developing countries, face greater pressure on cost reduction. If a developing country is not a WTO member, it cannot enjoy such preferences.
• The WTO also allows escape clauses, which are special allowances permitted by the WTO to protect infant industries or to safeguard the economic interests of newly admitted developing countries. These countries may modify or withdraw concessions on customs duties if this is required for the establishment of a new industry that will improve standards of living. They may also restrict imports to safeguard their balance of payments equilibrium, or obtain the necessary exchange for the purchase of goods for the implementation of development plans. Their governments are also allowed to provide assistance to these industries if it helps to safeguard their economies.

Functions of WTO

The WTO was set up to achieve the following functions:

• Elimination of discrimination:   The WTO follows the MFN and national treatment principles for the elimination of discrimination among its member nations. This is done to ensure the overall economic development of all member nations based on the principles of free trade.
• Combating protection and trade barriers:   The WTO is committed to the removal of all types of protection against free trade, whether it is in the form of import duties or quotas, for whatever reasons they are implemented. The WTO's trade-policy review body regularly monitors the trade policies of its members in order to enhance the degree of market access to members’ markets.
• Resolution of disputes:   The WTO functions as a forum for the resolution of disputes of its members through the establishment of panels for this specific purpose. The judicial reach of the WTO is, however, restricted to its members, and non-members cannot benefit from this facility.
• Providing a forum for emerging issues:   The WTO is a forum for dealing with emerging issues in the world trading system, such as intellectual property, environmental issues, regional agreements, as well as special sectors such as agriculture, telecommunications, financial services and maritime services. The forum serves to develop new rules through these discussions, such as TRIPS for the governance of issues related to patents, copyrights, trade secrets, and related matters.

Significant Areas of WTO Intervention

Member countries of the WTO have a commitment to rationalize tariffs under the Marrakesh Protocol of 1994. According to this Protocol, developed countries had to cut their average tariff levels on industrial products by 40 per cent in five equal instalments from 1 January 1995. A number of developing and transition economies agreed to reduce tariff levels by two thirds of the percentage agreed upon by the developed countries. Under the Information Technology Agreement of 2007, 40 countries which accounted for more than 92 per cent of trade in information technology products, agreed to eliminate import duties.

WTO members also have a commitment not to increase tariffs above the listed rates known as bound rates, leading to a substantial increase in market security for traders and investors.

WTO AGREEMENTS

The WTO agreements cover trade in goods, services and intellectual property and specify the basic principles of liberalization and the exceptions to the rule. This includes individual countries’ commitments to lower customs tariffs and other trade barriers, and to open markets for services. They also specify a dispute settlement procedure between member countries and prescribe special treatment for developing countries. They require governments to make their trade policies transparent by notifying the WTO about laws in force and measures adopted, through the submission of regular reports to the secretariat on countries’ trade policies.

The WTO agreements fall into a simple structure with six main parts: (1) an umbrella agreement (the Agreement establishing the WTO); (2) GATT for goods; (3) GATS for services; (4) TRIPS for intellectual property; (5) dispute settlement; and (6) reviews of governments’ trade policies.

General Agreement on Tariffs and Trade (GATT)

The agreement for goods under GATT deals with sector-specific issues such as agriculture, health regulations for farm products, textiles and clothing, product standards, and issues such as import licensing, rules of origin, subsidies, counter measures and safeguards.

Agriculture

The first multilateral agreement on agriculture was introduced in the Uruguay Round, with the basic objective of introducing reform in agriculture to make it more market-oriented. Under the terms of this agreement, developed countries agreed to cut tariffs by an average of 36 per cent in equal steps over the period 1995–2000, while developing countries agreed to make tariff cuts of 24 per cent over a 10 year period. However, the least developed countries were exempted from making these tariff cuts.

Tariffs on all agricultural products are now bound and have been substantially reduced. Almost all import restrictions, which were in the form of quotas, have been converted into tariffs. Market access commitments on agriculture have also eliminated previous import bans on certain products.

The agreement also contains provisions for cutting down domestic support in the form of subsidies or price support. The quantified measure of this is known as aggregate measurement of support (AMS). Developed countries agreed to reduce the total AMS by 20 per cent over a period of six years starting in 1995, while developed countries agreed to make a 30 per cent cut over 10 years. The AMS is calculated on a product-by-product basis by using the difference between the average external reference price for a product and its applied administered price multiplied by the quantity of production. To arrive at the AMS, non-product-specific domestic subsidies are added to total subsidies, calculated on a product-by-product basis. Domestic support in the agricultural sector is categorized as green-, amber-, and blue-box subsidies.⁵

Amber-box subsidies   All domestic support measures considered to distort production and trade fall into the amber box. These include measures to support prices, or subsidies directly related to production quantities. These supports are subject to minimal limits of five per cent of agricultural production for developed countries and 10 per cent for developing countries; WTO members that had larger subsidies than these minimum levels at the beginning of the post-Uruguay Round reform period are committed to reducing them. The US marketing loan programme, which provides a floor on crop prices, is an example of an amber subsidy.⁶

Blue-box subsidies   Blue-box subsidies are also known as the “amber box with conditions”—conditions designed to reduce distortion. Any support that would normally be in the amber box is placed in the blue box if the support also requires farmers to limit production. At present, there are no limits on spending on blue box subsidies. In the current negotiations, some countries want to keep the blue box as it is because they see it as a crucial means of moving away from distorting amber-box subsidies without causing too much hardship. Others want to set limits or reduction commitments, some advocating moving these supports into the amber box. Twenty-two per cent of all EU subsidies to its farm sector are classified to fall in this category.

Green-box subsidies   Green-box subsidies are classified as those which do not distort trade, or at most cause minimal distortion. They have to be government-funded (not by charging consumers higher prices), and must not involve price support. These include programmes that are not targeted at particular products, and include direct-income supports for farmers that are not related to (are “decoupled” from) current production levels or prices. They also include environmental protection and regional development programmes. Green-box subsidies are, therefore, allowed without limits, provided they comply with the policy-specific criteria set out in Annexure 2 of the WTO agreements. Examples of green-box subsidies are direct payments to producers, including decoupled income support, and government financial support for income insurance and income safety-net programmes

In the current negotiations, some countries have argued that some of the subsidies listed under this category might not meet the criteria of minimal trade distortion either on account of the large amounts paid, or because of the nature of these subsidies. The July 2004 framework provided a mandate for review and clarification of the green-box criteria. The suggestions aimed to make the eligibility criteria for developed countries more restrictive, and clarify/add additional criteria for covering programmes of developing countries that cause no or minimal trade distortions.

Standards and Safety Measures

The Agreement on Sanitary and Phytosanitary Measures (SPS) lays down basic rules on food, safety, and plant health standards. It allows governments to set their own rules based on science and health, which it deems necessary for the protection of human, animal and plant life or health, as long as they don't discriminate between countries or act as disguised protectionism.

The Agreement on Technical Barriers to Trade (TBT) complements the attempts to make sure that regulations, standards, testing, and certification procedures do not create unnecessary obstacles to trade.

Trade in Textiles

World trade in textiles was governed by the Multi-Fibre Arrangement (MFA)—a framework for bilateral agreements including unilateral actions that established quotas limiting imports into member countries. Since the MFA went against the basic principles of the GATT, it was replaced by WTO's Agreement on Textiles and Clothing (ATC) from 1995. The Agreement was supervised by a Textiles Monitoring Body (TMB), which monitors actions under the Agreement to ensure that they are consistent. The ATC came to an end on 1 January 2005 and opened up immense opportunities and challenges for developing countries.

General Agreement on Trade in Services (GATS)

GATS is the first set of rules established governing international trade in services. It owes its existence to the growing importance of the service sector in the world economy and covers all internationally traded services, such as banking, telecommunications, tourism and other professional services. It covers these services in the following modes:

1. Mode 1 covers services supplied from one country to another, such as international telephone calls. It is known as cross-border supply.
2. Mode 2 covers consumers or firms making use of a service in another country, such as tourism. It is known as consumption abroad.
3. Mode 3 refers to services termed commercial presence, such as a foreign company setting up subsidiaries or branches abroad.
4. Mode 4 is known as presence of natural persons and includes individuals travelling to foreign countries to supply services, such as fashion models or consultants.

Agreement on Trade-related Aspects of Intellectual Property Rights (TRIPS)

TRIPS lays down the minimum standards for the protection of intellectual property rights as well as the procedures and remedies for their enforcement in a multilateral trading system. The TRIPS agreement is an attempt to narrow the gap in the way intellectual property is protected in varying degrees across the world and to bring it under common international rules. It also establishes a mechanism for consultation and surveillance at an international level to ensure compliance with these standards by member countries at the national level. Rapid developments in technology have led to increasing trade in films, music, and computer software with increasing invention, innovation research, and design in all of these. The provisions under TRIPS are based on important existing conventions such as the Protection of Industrial Property and the Berne Convention. Its provisions are applicable to intellectual property rights related to patents, copyrights, trademarks, industrial designs, and layout designs of integrated circuits. According to this agreement, developed countries were given one year to ensure that their law and practices were in conformity with TRIPS regulations, whereas developing and transition economies were given five years. The least developed countries were given 11 years to make the grade, but this was subsequently extended to 2016 for pharmaceutical patents.

Agreement on Trade-related Investment Measures (TRIMS)

TRIMS recognizes that governments often impose conditions on foreign investors to encourage investment according to national priorities. The provisions of TRIMS, therefore, stipulate that no member shall apply any measures in violation of the national treatment principles of the GATT and discriminate against foreigners or foreign products. It also prohibits investment measures that place a restriction on quantities and measures requiring a certain percentage of local procurement (local content requirement), and discourages measures which limit imports or set targets for exports (trade balancing requirements).

WTO: AN EVALUATION

The WTO served as an effective enforcement agency in the first decade of its life, settling more than 325 disputes between 1995 and 2005.⁷ The WTO's efforts to promote free trade in the global economy have been encouraging although it has met with quite a few setbacks and there still remains a large unfinished agenda.

Developing-country Issues

Developing countries allege that they fail to benefit from the trade liberalization and protection of intellectual property under the WTO framework, since they have neither a good supply base necessary for trade expansion nor strong intellectual property rights (IPRs) for financial gains.

Developed countries often take advantage of escape routes and loopholes in the WTO agreements. For instance, the ATC left the choice of products to importing countries. Developed countries chose only those products for liberalization which were not under import restraints without actually liberalizing their textile imports.

Dispute-resolution Mechanism

It has been alleged that the WTO's dispute-settlement mechanism suffers from complete lack of transparency and it is infamously opaque in revealing how settlements were reached. Whether settling disputes or negotiating new trade relations, it is rarely clear which nations are in on the decision-making processes.

In this context, the WTO is seen as a clique of the developed nations forcing agreements that allow them to exploit less developed nations. This clique uses the WTO to open up developing nations as markets to sell, while protecting their own markets against weaker nations’ products. This view has its valid points, as the most economically powerful nations seem to set the WTO agenda, and were the first to pass anti-dumping acts to protect favoured domestic industries, while also opposing similar actions by less powerful nations.

A substantial amount of negotiations take place in small groups where developing nations are not present, but they are expected to ratify these when they are discussed in large groups.

Subsidies in Agriculture

Agricultural subsidies have been a major obstacle in WTO negotiations. The collapse of the Doha Round talks at Cancun in September 2003 have been blamed on the refusal of developed countries to dramatically reform their agricultural domestic-support policies.⁸ For the first time, developing countries organized themselves to form a powerful coalition that was able to resist mediocre reform proposals put forth by the United States and the EU. Cotton subsidies, in particular, became a focal point of talks as the Communaute Financiere Africaine (CFA) countries, who together are the third largest cotton exporters, claimed that US agricultural support causes an oversupply of US cotton, which severely depresses cotton prices and consequently their export earnings. It was estimated that CFA countries lose more than USD 130 million each year due to US cotton support. Estimates suggest that between 1995 and 2009, the United States doled out farm-aid payments to the tune of a quarter of a trillion. The three most heavily subsidized crops in the United States were corn, wheat, and cotton.⁹

The EU's common agricultural policy (CAP), which provides EUR 55 billion as farm subsidies each year, accounts for roughly 40 per cent of the total EU budget and supports farmers across the 27-nation bloc. In 2009, farmers in France received the most farm-aid payments, while sugar-processing companies topped the list of beneficiaries. The sugar-processing firms in Europe were the recipient of large sums of aid payment, as part of EU reforms to help farmers move out of unproductive sectors. The largest single payment under CAP in 2009 went to a French sugar company that collected EUR 178 million in support.

The other sector which receives the highest EU farm subsidies is the dairy sector. Following a steep tumble in the price of milk, tens of thousands of farmers went on strike to demand stronger EU intervention, pouring millions of litres of milk onto their fields in protest. To quell the outcries, European officials used CAP funds to purchase surplus stocks, help pay for private storage, and provide dairy farmers with export subsidies. At the WTO, developing-country exporters expressed their disappointment at the reintroduction of export subsidies for EU dairy products in January 2009. The EU, under the Doha negotiations, had earlier committed to eliminate export subsidies by 2013.

Agriculture continues to be an important source of livelihood for large parts of the developing and the less developed world. Its members have, therefore, been insisting on special and differential treatment in several aspects of WTO dealings, including agriculture, in the Doha Round. It is in this context that countries like India have been insisting that the Doha agricultural outcome must include the removal of distorting subsidies and protection to ensure a level playing field. It also wants appropriate provisions to safeguard food and livelihood security to meet rural-development needs.

Trade in Services

The Uruguay Round brought in the issue of trade in services for the first time, which was further taken up by the WTO, as were issues on foreign direct investment (FDI). The global telecommunications industry and financial services were the first to come within this ambit. As a result, in February 1997, 68 countries accounting for more than 90 per cent of world telecommunications revenue opened up their markets to foreign competition and agreed to abide by a set of common rules. By 1 January 1998, the largest markets, including the United States, Japan, and the EU, were fully liberalized. The pact covered all forms of basic telecommunication services, including voice telephony, data and fax transmissions, and satellite and radio communications.

In December 1997, there was an agreement to liberalize cross-border trade in financial services.¹⁰ The deal, signed by 102 countries, covered more than 95 per cent of the world financial services market, including banking, securities and insurance. It also covered trade and FDI. This led to the opening up of the US and EU financial services markets almost completely, and important concessions by many Asian countries allowing foreign participation in the financial services sector.

Future Challenges for WTO

Some challenges that are continuously being faced by the WTO and will continue in the future are discussed here.

Farm Subsidies

The WTO meeting at Seattle in November 1999 for the reduction of barriers to cross-border trade in agricultural products and trade and investment was an inconclusive, acrimonious session. The deadlock on the agenda arose out of the clash of interests of the United States and the EU over farm subsidies. While the United States advocated the elimination of subsidies on a priority basis, the EU with its politically powerful farm lobby and long history of farm subsidies was unwilling to take this step.

Labour Practices

The United States wanted the WTO to allow governments to impose tariffs on goods imported from countries which did not abide by what the United States considered fair labour practices. This led to violent protests from the developing world, which considered this a legal route to restrict imports from poor, low-cost developing countries.

Anti-Dumping Actions

As per the WTO rules, member nations are allowed to impose anti-dumping duties on foreign goods being sold cheaper in foreign markets than the home market. The provision is hugely exploited on account of its rather vague definition and interpretation. A total of 2537 anti-dumping actions were reported to the WTO between January 1995 and June 2004. These were from the basic metal industries, plastics, machinery, and electrical equipment industries. WTO members reported initiating a total of 69 new investigations in 2010, compared to 97 new investigations reported by 18 members for the period of 2009. A total of 14 members reported applying 59 new anti-dumping measures during the first semester of 2010, with a decrease of five per cent, in comparison to the 62 new measures reported by 16 members during 2009. The members reporting the highest number of new initiations during January–June 2010 were India, with 17 new initiations; followed by the EU, with eight new initiations; Argentina, with seven new initiations; and Brazil and Israel, with five each.

Agriculture

The high level of tariffs in agriculture is another cause for concern at the WTO. The biggest perpetrators of this have been the developed nations in a bid to defend their agricultural sectors from developing nations’ low-cost competition. Tariff rates on agricultural commodities have been much higher than corresponding rates on manufactured products or services. In addition to tariffs, agricultural producers also benefit from substantial subsidies. Both these facts result in significant distortions in the trading system in the form of increased prices and reduced volumes for sale.

Intellectual Property

The TRIPS regulation of the WTO makes it an obligation for members to grant and enforce patents for 20 years and copyrights for 50 years, with grace periods for the poor nations. This is based on the belief that innovation, which is the engine of economic growth, is driven by a protected patent regime. An instance of this is the Indian pharmaceutical industry, which was known for producing generic versions of patented drugs through reverse engineering, earning itself the title of a “copycat”. With the ending of the grace period for the industry in 2005, there has been a flurry of activity, including alliances, as the industry has geared up to cope with the change. Similar issues plague other industries, such as software and music, which need strict enforcement of intellectual property rights.

Doha Development Agenda

The Fourth Ministerial Conference in Doha, Qatar, in November 2001, was the longest negotiating round since World War II. Following the fiasco at the Seattle Ministerial Conference, which ended inconclusively, the Doha Round mandated negotiation on a range of subjects. The entire package is called the Doha Development Agenda (DDA) and included cutting tariffs on industrial goods and services, phasing out subsidies on agricultural produce, reducing barriers on cross border investment, and limiting the use of anti-dumping laws.

There are around 20 subjects listed in the Doha Declaration; most of them involve negotiations. Other work includes actions under implementation, analysis, and monitoring. The meeting had some significant outcomes. The EU and Japan had to make significant concessions on the issue of agricultural subsidies, which have extensive use in their economies to support politically powerful farmers. The United States gave in to global pressure and agreed to negotiate its anti-dumping rules, which it had used to protect its steel industry. European efforts to include environmental issues also had to take a back seat in the face of violent opposition from developing nations, who perceive them as another form of a trade barrier. There was a major concession on the issue of drug patents in the field of public health, to enable the poor nations of Africa, Asia and Latin America, to make or buy generic versions of drugs to fight AIDS and malaria.

The next meeting in Cancun, Mexico, in September 2003 broke down over the issue of agricultural subsidies and tariffs, with the United States, the EU and India being its vociferous opponents. Subsequent ministerial meetings that took place in Hong Kong in 2005 met with a similar fate.

The most recent round of negotiations, 23–29 July 2008, also broke down after failing to reach a compromise on agricultural import rules. Intense negotiations, mostly between the United States, China, and India, held in the end of 2008 in order to agree on negotiation modalities also did not result in any progress. The three most pressing issues include the demand for the developed countries to reduce agricultural subsidies, non-agricultural market access (NAMA) and trade in services.

At a recent meeting of WTO members held on 26 July 2011, it was acknowledged that the package of issues selected from the Doha Round agenda for the December 2011 Ministerial Conference would not be taking shape. WTO Director-General Pascal Lamy accepted that there was a state of “paralysis” in the organization's ability to negotiate as a result of the inability of the WTO to adapt and adjust to emerging global trade priorities, which cannot be solved through bilateral deals.¹¹ Major issues for the least developed countries are duty-free, quota-free (DFQF) access for their exports to richer markets, simpler rules for determining when products come from these countries, a waiver exempting the least developed countries from making commitments in services trade, and extra cuts in subsidies and trade barriers in cotton. Hence, the fate of the Doha Round is continuing to hang in balance, while waiting for the WTO to come out of its state of “paralysis”.

Both the WTO and its predecessor, the GATT, have been considered the “club of rich nations” by the developing world. Considered beneficial to world trade as a whole, the benefits of the WTO are largely dependent on the bargaining power of its members. Consequently, countries of the developing world are of the opinion that that they are victims of unfair trade practices and policies adopted by rich nations. They have long been asking the affluent nations to honour commitments to open more markets or remove unfair treatment. There are also concurrent issues on environmental problems, human rights issues, and national supremacy compounding things even further.

UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT

The United Nations Conference on Trade and Development (UNCTAD) was established in 1964 in response to the growing concerns about the place of developing countries in international trade. UNCTAD is an authoritative knowledge-based institution which promotes the development-friendly integration of developing countries into the world economy. Its work aims to help shape current policy debates and thinking on development, with a particular focus on ensuring that domestic policies and international action are mutually supportive in bringing about sustainable development.

 

The first United Nations Conference on Trade and Development was held in Geneva in 1964. Considering the magnitude of the problems at stake and the need to address them, the conference was institutionalized to meet every four years, with intergovernmental bodies meeting between sessions and a permanent secretariat providing the necessary substantive and logistical support. Simultaneously, the developing countries established the Group of 77 (G77) to voice their concerns. The present strength of the G77 is 131.

Functions of UNCTAD

The organization works to fulfil its mandate by carrying out three key functions:

1. It functions as a forum for intergovernmental deliberations, supported by discussions with experts and exchanges of experience, aimed at consensus building.
2. It undertakes research, policy analysis, and data collection for the debates of government representatives and experts.
3. It provides technical assistance tailored to the specific requirements of developing countries, with special attention to the needs of the least developed countries and of economies in transition. When it is considered appropriate, UNCTAD cooperates with other organizations and donor countries in the delivery of technical assistance.

In performing its functions, the secretariat works together with member governments and interacts with organizations of the United Nations (UN) system and regional commissions, as well as with governmental institutions, non-governmental organizations, the private sector (including trade and industry associations), research institutes and universities worldwide.

UNCTAD over the Years

UNCTAD has gone through three phases till date.

Phase 1: The 1960S and 1970s

In the early decades of UNCTAD's operation (the 1960s and the 1970s), it gained authoritative standing as an intergovernmental forum for North–South dialogue and negotiations on issues of interest to developing countries, including debates on the “new international economic order”, and for its analytical research and policy advice on development issues.

Some of the agreements launched by UNCTAD during this time include:

1. The Generalized System of Preferences, whereby developed economies granted improved market access to exports from developing countries
2. A number of International Commodities Agreements, which aimed at stabilizing the prices of export products crucial for developing countries
3. The Convention on a Code of Conduct for Liner Conferences, which strengthened the ability of developing countries to maintain national merchant fleets
4. The adoption of a Set of Multilaterally Agreed Equitable Principles and Rules for the Control of Restrictive Business Practices; this work later evolved into what is today known as Trade and Competition Policies

Furthermore, the UNCTAD was a key contributor to:

• The definition of the target of 0.7 per cent of gross domestic product (GDP) to be given as official development aid by developed countries to the poorest countries, as adopted by the United Nations General Assembly in 1970
• The identification of the group of least developed countries (LDCs) as early as 1971, which drew attention to the particular needs of these poorest countries. The UNCTAD became the focal point within the UN system for tackling LDC-related economic development issues

Phase 2: The 1980s

In the 1980s, the UNCTAD was faced with a changing economic and political environment. There was a significant transformation in economic thinking. Development strategies became more market-oriented, focusing on trade liberalization and privatization of state enterprises. A number of developing countries were plunged into severe debt crises, generally as a consequence of their inward-looking policies. Despite structural adjustment programmes by the WB and the IMF, most developing countries were unable to recover quickly and often experienced negative growth and high rates of inflation. For this reason, the 1980s become known as the “lost decade”, particularly in Latin America. In the light of these developments, UNCTAD multiplied its efforts:

• UNCTAD aimed at strengthening the analytical content of its intergovernmental debate, particularly regarding macroeconomic management and international financial and monetary issues.
• It tried to broaden the scope of its activities to assist developing countries in their efforts to integrate into the world trading system. In this context, the technical assistance provided by it to developing countries was particularly important in the Uruguay Round of trade negotiations. UNCTAD played a key role in supporting the negotiations for the General Agreement on Trade in Services (GATS).
• UNCTAD's work on trade efficiency (customs facilitation, multimodal transport, etc.) made an important contribution to enabling developing economies to reap greater gains from trade.
• UNCTAD assisted developing countries in the rescheduling of official debt in the Paris Club negotiations.
• UNCTAD played a key role in promoting South–South cooperation. In 1989, the Agreement on the Global System of Trade Preferences (GSTP) among developing countries came into force. It provided for the granting of tariff as well as non-tariff preferences among its members. Till date, the Agreement has been ratified by 44 countries.
• UNCTAD was instrumental in addressing the concerns of the poorest nations by organizing the first UN Conference on Least Developed Countries in 1981. Since then, two other international conferences have been held at 10-year intervals.

Phase 3: From the 1990s Till the Present

This period was marked by the conclusion of the Uruguay Round of trade negotiations under the GATT, which resulted in the establishment of the WTO in 1995, and a strengthening of the legal framework governing international trade. Concurrently, there was a spectacular increase in international financial flows, which led to increasing financial instability and volatility. Foreign direct investment flows became a major component of globalization.

Against this background, UNCTAD's analysis gave early warning concerning the risks and the destructive impact of financial crises on development. Consequently, UNCTAD emphasized the need for a more development-oriented “international financial architecture”. UNCTAD highlighted the need for a differentiated approach to the problems of developing countries. Its tenth conference, held in Bangkok in February 2000, adopted a political declaration—“The Spirit of Bangkok”—as a strategy to address the development agenda in a globalizing world.

In recent years, UNCTAD has:

• Focused its analytical research on the linkages between trade, investment, technology, and enterprise development.
• Put forward a “positive agenda” for developing countries in international trade negotiations, designed to assist developing countries in better understanding the complexity of multilateral trade negotiations and in formulating their positions.
• Expanded work on international investment issues, following the merger into UNCTAD of the New York–based United Nations Centre on Transnational Corporations in 1993.
• Expanded and diversified its technical assistance, which today covers a wide range of areas, including training trade negotiators and addressing trade-related issues; debt management, investment policy reviews and the promotion of entrepreneurship; commodities; competition law and policy; and trade and environment.

FOREIGN TRADE IN INDIA

Foreign trade in India has been a regulated activity aimed at the conservation of scarce foreign exchange for necessary imports and achieving self-reliance in the production of as many goods as possible. India's trade policy can be divided into five distinct phases.

The first phase from 1947 to 1948 saw restrictions on both imports and exports and was a continuation of wartime controls on trade, since there was a restriction on the use of sterling balances by the United Kingdom. The adverse balance of payments position also led to a devaluation of the rupee in 1949.

Liberalization of foreign trade was adopted as a goal of trade policy in the second phase, from 1952–53 to 1956–57. Exports were encouraged by relaxing export controls, reducing export duties, abolishing export quotas, and providing export incentives. Import licences were also granted liberally, and led to a considerable increase in the import volume, but exports did not show much improvement. As a result, the foreign exchange reserves declined sharply and trade policy had to be reversed.

Trade policy was re-oriented to meet the requirements of planned economic development in the third phase, which began in 1956–57. Import policy was very restrictive and import controls were used to further prune the list of imported goods. A vigorous export-promotion drive was launched on the assumption that the balance of payments problem would be solved only through export promotion and diversification. It focused on expansion of traditional items of trade and the simultaneous addition of new ones, and on establishing import-substituting industries as well.

The fourth phase began after the devaluation of the rupee in 1966, which became necessary on account of a deteriorating balance of payments position. Despite implementation of the recommendations of the Mudaliar Commitee, such as increased allocation of raw materials to export-oriented industries, income tax relief on export earnings, export promotion through import entitlement, removal of disincentives, and the establishment of an Export Promotion Advisory Council and a Ministry of International Trade, the balance of payments position continued to decline. The Government of India continued with a policy of import liberalization and export promotion in the period 1975–76 and followed it up with a revised policy in 1985 based on the recommendations of the Abid Husain Committee.

During the fifth phase, the Government adopted an overhauled trade policy in the wake of the programme of economic reform and liberalization adopted in 1991. This was the new trade policy of 1991. It was based on the rationale of reduced control and licences to be replaced by decontrol and opening up. Over a period of time, this has led to a change in the nature and volume of exports and imports, accompanied by major changes in industrialization and foreign investment policy as well.

Organizations for Export Promotion

In order to help in exports, the Government established or sponsored a number of organizations to provide different types of assistance to exporters. At the helm of affairs is the Ministry of Commerce, which looks into various aspects of trade promotion and regulation.

The various autonomous bodies for export promotion and their functions are discussed here:

• The Export Inspection Council is a statutory body, responsible for the enforcement of quality control and compulsory pre-shipment inspection of various exportable commodities.
• The Indian Institute of Foreign Trade is engaged in activities like training of personnel in modern techniques of international trade; organization of research in problems of foreign trade; organization of marketing research, area surveys, commodity surveys and market surveys; and dissemination of information arising from its activities relating to research and market studies.
• The Indian Institute of Packaging undertakes research on raw materials and organizes training programmes for the packaging industry.
• Export Promotion Councils work for both advisory and executive functions under the Ministry of Commerce.
• Commodity Boards have been set up for the promotion, development, and export of commodities, such as spices, coir, and tea.
• The Export Development Authority looks into the promotion of various other commodities not under the earlier Boards. The Marine Products Export Development Authority (MPEDA) is responsible for the development of the marine products industry with special reference to exports. The Agricultural and Processed Food Products Export Development Authority, set up in 1986, serves as the focal point for agricultural exports, particularly the marketing of processed foods in value-added forms.
• The Federation of Indian Export Organizations (FIEO) is an apex body of various export promotion organizations and institutions. It also functions as a primary servicing agency to provide integrated assistance to government-recognized export houses and as a central coordinating agency with respect to export promotion efforts in the field of consultancy services in the country.
• The Indian Council of Arbitration, set up under the Societies Registration Act, promotes arbitration as a means of settling commercial disputes and popularizes arbitration among traders, particularly those engaged in international trade.

Export Incentives

Export incentives are a widely employed strategy of export promotion aimed at increasing the profitability of export. Some of these incentives are discussed here:

• The duty exemption/drawback scheme aims to compensate the exporter for the increase in cost borne by him on account of customs and excise duties. Duty exemption as an export promotion measure had its origin in India during the second five-year plan. Under this scheme, exporters are either exempted from the payment of duty while procuring inputs like raw materials and intermediates or, in cases where the duty is paid on the inputs, the duty is refunded. There are two types of drawback rates—an all-industry rate applicable to a group of products and a band rate applicable to individual products not covered by the industry rate.
• The cash compensatory support (CCS) was a cash subsidy scheme designed to compensate exporters for un-rebated indirect taxes and to provide resources for product/market development. The CCS enabled the exporters to increase the profit or to reduce the price to the extent of the subsidy without incurring a loss. With the devaluation of the rupee in July 1991, the CCS was abolished.
• Another important incentive was the system of import replenishment (REP) licences, which were related to the free-on-board (FOB) value of exports. The REP was, for the most part, a facility that enabled exporters to import inputs where the domestic substitutes were not adequate in terms of price, quality, or delivery rates; it was also an incentive in so far as there was a premium on REP licences, which were transferable. The new trade policy of July 1991 renamed it the Exim scrip scheme. However, it was abolished with the introduction of the partial convertibility of the rupee since April 1992.
• The international price reimbursement scheme (IPRS) was designed to make available specified inputs to exporters at international prices. The scheme, which was initially available to steel, was later extended to aluminium, and there was also a proposal to extend it to other items. The IPRS has been replaced by the engineering products exports (replenishment of iron and steel intermediates) scheme.

Marketing Assistance

A number of steps have been taken to assist exporters in their marketing effort. These include conducting, sponsoring, or otherwise assisting market surveys and research; collection, storage and dissemination of marketing information; organizing and facilitating participation in international trade fairs and exhibitions; credit and insurance facilities; release of foreign exchange for export marketing activities; assistance in export procedures; quality control and preshipment inspection; identifying markets and products with export potential; and helping buyer–seller interaction. Some of the schemes and facilities which assist export marketing are mentioned here.

Market Development Assistance

An important export promotion measure taken by the Government is the institution of market development assistance (MDA). Assistance under the MDA is available for market and commodity researchers; trade delegations and study teams; participation in trade fairs and exhibitions; establishment of offices and branches in foreign countries; and grants-in-aid to Export Promotion Councils (EPCs) and other approved organizations for export promotion on export credit by commercial banks. Approved cooperative banks also enjoy a subsidy out of the MDA. Most of the MDA expenditure in the past was absorbed by the CCS. The CCS helped the exporters to increase the price competitiveness of Indian products in foreign markets.

Market Access Initiative

In 2001, the Government announced the launching of the market access initiative scheme for undertaking marketing promotion efforts abroad on a country-product focus approach basis. This scheme is in line with market promotion and development schemes being implemented by many other countries. The Exim policy, 2002–2007, further broadened the scope of this scheme to include activities considered necessary for focused market promotion efforts.

Foreign Exchange

Foreign exchange is released for undertaking approved market development activities, such as participation in trade fairs and exhibitions, foreign travel for export promotion, advertisement abroad, market research, procurement of samples, and technical information from abroad.

Trade Fairs and Exhibitions

Trade fairs and exhibitions are effective media for promoting products, and facilities are provided for enabling and encouraging participation of Indian exporters/manufacturers in such events. Foreign exchange is released for such purpose, the cost of participation is subsidized, and the Indian Trade Promotion Organization (ITPO) plays an important role in organizing and facilitating participation in trade fairs/exhibitions.

Export Risk Insurance

As international business is fraught with different types of risks, measures have been taken to provide insurance covers against such risks. The Export Credit Guarantee Corporation (ECGC) has policies covering different political and commercial risks associated with export marketing, certain types of risks associated with overseas investments, and risks arising out of exchange rate fluctuations. Further, ECGC extends the export credit risks to cover commercial banks. Marine insurance is provided by the General Insurance Corporation and its subsidiaries.

Production Assistance/Facilities

Exports depend on exportable surplus and the quality and price of goods. The Government has, therefore, taken a number of measures to enlarge and strengthen the production base, to improve the productive efficiency and quality of products and to make products more cost-effective. Measures in these directions include making available raw materials and other inputs of required quality at reasonable prices; facilities to establish and expand productive capacity, including import of capital goods and technology; facilities to modernize production; and provision of infrastructure for the growth of export-oriented industries.

Special Economic Zones (SEZs)

A special economic zone (SEZ) is a geographical region with special economic and other laws aimed at promoting exports and foreign investment. The SEZ category covers a broad range of more specific zone types, including free trade zones (FTZ), export processing zones (EPZ), free zones (FZ), industrial estates (IE), export-oriented units (EOUs), export houses, free ports, and urban enterprise zones.

Export Processing Zones

Export processing zones (EPZs) are industrial estates which form enclaves within the national customs territory of a country and are usually situated near seaports or airports. The entire production of such a zone is normally intended for exports. These zones have well-developed infrastructural facilities, and industrial plots/sheds are normally made available at concessional rates. Units in these zones are allowed foreign equity even up to 100 per cent and are permitted to import capital goods and raw materials for export production without payment of duty. Domestically procured items are also eligible for duty exemption. The main objectives of an EPZ are to earn foreign exchange, generate employment opportunities, facilitate transfer of technology through foreign investment and, thereby, contribute to overall economic development.

India's first EPZ was established at Kandla, Gujarat, in 1965 as a multi-product zone. It has been followed by several others. Later, the Government also introduced schemes for electronic hardware technology park (EHTP) units and software technology park (STP) units.

Free Trade Zones

A free trade zone (FTZ) is different from an EPZ. Goods imported to an FTZ may be re-exported without any processing, in the same form. However, goods exported by units in an EPZ are expected to have undergone some additional manufacturing or other processing before being exported. A free port is a port in which imports and exports are free from trade barriers. An FTZ may be a part of or adjacent to a port; the rest of the port being subject to the national customs regulation.

Export-Oriented Units

A hundred per cent export-oriented unit (EOU), unlike an EPZ, is an industrial unit located anywhere in the country (duty tariff areas), which offers its entire production for export, excluding permitted levels of rejects. EOUs were allowed in industries which had export potential and the capacity to create additional export capacity.

Export Houses

An export house is a registered exporter established to boost exports and provide a channel for the products of the small-scale sector.

India was one of the first Asian countries to recognize the effectiveness of the export processing zone (EPZ) model in promoting exports, with Asia's first EPZ set up in Kandla in 1965. With an aim to overcome the shortcomings experienced on account of the multiplicity of controls and clearances, absence of world-class infrastructure, and an unstable fiscal regime, and with a view to attract larger foreign investments in India, the special economic zones (SEZs) policy was announced in April 2000.

To instil confidence in investors and signal the Government's commitment to a stable SEZ policy regime, the Special Economic Zones Act was passed by the Parliament in May 2005. The SEZ Act, 2005, supported by SEZ Rules, came into effect on 10 February 2006, providing for drastic simplification of procedures and for single-window clearance on matters relating to central as well as state governments.

The main objectives of the SEZ Act are:

• Generation of additional economic activity
• Promotion of exports of goods and services
• Promotion of investment from domestic and foreign sources
• Creation of employment opportunities
• Development of infrastructure facilities

The SEZ Rules provide for different minimum land requirement for different classes of SEZs. Every SEZ is divided into a processing area where alone the SEZ units would come up and a non-processing area where the supporting infrastructure would be created.

Incentives and Facilities Offered to SEZs

The incentives and facilities offered to the units in SEZs for attracting investments into the SEZs include:

• Duty-free import/domestic procurement of goods for development, operation, and maintenance of SEZ units
• 100 per cent income tax exemption on export income for SEZ units, under Section 10AA of the Income Tax Act for the first five years, 50 per cent for the next five years, and 50 per cent of the ploughed-back export profit for the next five years
• Exemption from minimum alternate tax under Section 115JB of the Income Tax Act
• External commercial borrowing by SEZ units up to USD 500 million in a year without any maturity restriction through recognized banking channels
• Exemption from central sales tax and service tax
• Single-window clearance for central and state-level approvals
• Exemption from the State sales tax and other levies as extended by the respective state governments

The major incentives and facilities available to SEZ developers include:

• Exemption from customs/excise duties for development of SEZs for authorized operations approved by the Board of Approval (BOA)
• Income tax exemption on export income for a block of 10 years in 15 years under Section 80-IAB of the Income Tax Act
• Exemption from minimum alternate tax under Section 115JB of the Income Tax Act
• Exemption from dividend distribution tax under Section 115O of the Income Tax Act
• Exemption from central sales tax (CST)
• Exemption from service tax

Benefits of Sezs

SEZs carry multiple benefits, such as employment generation, boosting investment, augmenting exports, and building infrastructure of international standards. SEZs make local recruitments, and provide training for their operations. The gem and jewellery SEZ in Hyderabad, the textile SEZ of the Mahindras in Chennai, the Nokia SEZ in Sriperambedur, the Flextronics SEZ in Chennai, the Apache SEZ in Nellore, the Brandix Apparel SEZ in Vishakhapatnam, the Divi Laboratories SEZ in Andhra Pradesh and the Rajiv Gandhi Technology Park SEZ in Chandigarh are example of SEZs that have created employment in their respective zones.

SEZs also help to attract foreign investment, which augments domestic investment. It is estimated that investment from SEZ developers will touch USD 60 billion by 2012, if all SEZ-approved projects are implemented.

ANALYSIS OF INDIA'S FOREIGN TRADE

An analysis of foreign trade covers three major aspects: (1) volume, (2) composition, and (3) direction. Volume of trade is the monetary value of goods and services being exported and imported. Composition of trade refers to the goods and services being exported and imported, and is indicative of the structure and level of an economy's development. Direction of trade is indicative of the geographical dispersion or concentration of markets for exports and sources of supply of its imports.

Volume of India's Foreign Trade

India's exports have increased from INR 6.06 billion in1950–51 to over INR 8.3 trillion in 2009–10, although the increase has not been uniform over the years.

In the pre-reform period (prior to 1990), export growth was stagnant in the 1950s. It picked up and grew at an average rate of 3.6 per cent per annum in the 1960s. However, India's share in world exports declined from 1.4 per cent during the 1950s to 0.9 per cent during the 1960s.

The seventies witnessed a jump to 18 per cent per annum in the growth rate as a result of various export promotion and subsidization measures. This, however, could not be sustained in the first half of the 1980s and Indian exports showed a sharp decline even as world exports turned negative. In the second half of the 1980s, exports grew at 17.8 per cent per annum, the improvement in export competitiveness being attributed to a major depreciation of the exchange rate and increased export subsidies, along with some initial industrial deregulation and liberalization of capital goods imports.

The post-reform period was characterized by a more supportive industrial policy, a more liberal import policy, and a more realistic exchange rate policy, including the move towards greater currency convertibility. During this period, exports grew at an average annual rate of more than 25 per cent in rupee terms.

The period 1993–97 saw a growth of about 13 per cent per annum despite an appreciation of the exchange rate. The slowdown caused by the Asian crisis led to a decline in exports in 1998, but recovered in 1999–2001 and registered a growth rate of about 10 per cent per annum, and peaked to about 20 per cent per annum between 2002–08.

India's total imports have also increased from INR 6.08 billion in 1950–51 to 13.2 trillion in 2009–10. There has been an increasing trend in imports from the 1950s as a result of government policy till the 1990s. The government's import control policy included policies such as licensing, quotas, and tariff measures. In the post-liberalization period, there has been widespread liberalization of imports with the removal of quantitative restrictions and the lowering of tariffs, leading to an increase in imports. Besides policy liberalization, expansion in the manufacturing sector has led to increasing demand of machinery, raw materials, intermediates, and accessories. This has been accompanied by expansion in transport and infrastructure and the increasing domestic demand for fuel, fertilizers and other commodities.

India's imports grew at rates of 6.5 per cent to 8.5 per cent of GDP in the first 30 years of planning, and 8 per cent to 14 per cent in the next 25 years, and at a remarkable rate of 22 per cent of GDP since 2004–05. Hence, India has had a consistent trade deficit as imports have exceeded exports in all years except 1972–73 and 1976–77.

Composition of India's Foreign Trade

Tea, jute manufactures and cotton goods were India's principal export earners till 1965–66, earning 45 per cent to 50 per cent of the total revenue. Besides these, leather, iron ore, cashew, and manufactured tobacco were also important items of export.

The export basket has done a complete turnaround since 1965–66, reflecting the growth and industrialization of the economy and its commitment to self-reliance. Important additions to the export basket include engineering goods, leather manufactures, cotton apparel, pearls and precious stones, chemicals and allied products, and woollen products. In other words, non-traditional exports constitute 70 per cent of the total export basket. However, high-technology exports constitute only 5 per cent of total manufactures, and 40 per cent of all manufactured exports consist of textiles, garments, gems, and jewellery. This is the result of the natural competitive advantage that India has in the form of its low-cost labour. However, in order to benefit from world trade, Indian exports must diversify and change towards higher value-added products and products with a higher technology content.

Indian imports mainly consist of consumer goods, raw materials and intermediates, and capital goods. There has been a radical change in their composition over the years. Consumer goods made up 26 per cent of imports in 1950–51, but constituted barely 2 per cent of the import bill in 2009–10. Raw materials and intermediates had a share of 53.6 per cent in 1950–51 but increased to 84.3 per cent in 2009–10. Lastly, capital goods made up 20 per cent of the import bill in 1950–51, but had a share of 13.4 per cent in 2009–10.

The changes in the composition of India's foreign trade reflect the structural changes in its economy in the past six decades. It has changed from being an exporter of primary commodities and an importer of manufactured goods to being an exporter of manufactured goods and an importer of intermediates and capital goods. Taking into account the low-export intensity of its manufacturing sector, it has a long way to go before its exports can drive its growth.

Direction of India's Foreign Trade

The United States and the United Kingdom were the traditional export destinations for Indian exports. Their combined share was more than 40 per cent in 1950–51, but was less than 20 per cent in 2009–10. The EU has emerged as an important market for Indian exports, with increasing shares of the markets of Asia and Oceania being responsible for the recent rise in exports. The African market now commands the highest growth in exports from India.

The direction of Indian imports is largely influenced by the nature of its development. As a large part, initial development was tied to aid imports originating in the aid-giving countries. The United States was the principal supplier with a more than 35 per cent share in 1965–66, which has declined to 7 per cent at present. Other important suppliers are the United Kingdom, Belgium, Canada, France, Germany, and Japan. The members of the Organization of the Petroleum Exporting Countries (OPEC) have also emerged as important importers, along with China, which had an 11.3 per cent share in the Indian import bill in 2009–10. It is evident that Indian foreign trade needs to diversify, for both its exports and imports, in order to reap the benefits of growth in world trade.

Embargoes

General Agreement on Tariffs and Trade (GATT)

Licence

Non-tariff barriers

Quotas

Subsidies

Tariff barriers

United Nations Conference on Trade and Development (UNCTAD)

Voluntary export restraints

World Trade Organization (WTO)

1. Distinguish between tariff and non-tariff barriers to trade between nations.
2. What is the basic rationale of trade intervention by the government? Using various examples, explain the effect of different kinds of intervention.
3. Explain the factors which led to the creation of the GATT.
4. “The failure of the GATT led to the creation of the WTO.” Do you agree? Give reasons.
5. Enumerate the principles which are the basis of multilateral trading under the WTO framework.
6. List the major functions of the WTO and how they are achieved.
7. Explain the need for the establishment of the UNCTAD as a multilateral trade negotiation body.

1. Using the information provided on the United States Trade Representative (USTR) Web site (http://www.ustr.gov/about-us/press-office/press-releases/2010/december/united-states-requests-wto-dispute-settlement-con), examine the issue on the subsidies on wind power by China that was debated at the WTO in 2010 and prepare a report on it.
2. The UNCTAD Web site, http://www.unctad.org/Templates/webflyer.asp?docid=13413&intItemID=3765&lang=1&mode=downloads, provides information on beneficiaries under the Generalized System of Preferences (GSP). Using the given information, select any one country and prepare a report on the impact of the scheme on trade in the country.