To prepare for INDIAN ECONOMY for any competitive exam, aspirants have to know about the International Organization. It gives an idea of all the important topics for the IAS Exam and the Economy syllabus (GS-II). Important International Organization terms are important from Economy perspectives in the UPSC exam. IAS aspirants should thoroughly understand their meaning and application, as questions can be asked from this static portion of the IAS Syllabus in both the UPSC Prelims and the UPSC Mains exams.
In this article, you will read about meaning, method, types, importance and other aspects related to the International Organization
An International Organization (an intergovernmental organization) is an organization established by a treaty or other instrument governed by international law and possessing its own international legal by personality, such as the United Nations, the World Health Organization and NATO. International organizations are composed of primarily member states, but may also include other entities, such as other international organizations. Additionally, entities (including states) may hold observer status.
- United Nations Monetary and Financial Conference, commonly known as Bretton Woods conference, was held in Bretton Woods, New Hampshire, USA to regulate the international monetary and financial order after the conclusion of World War II (1939-45)
- Total 44 nations participated, including India.
- The conference resulted in the agreements to setup the International Bank for Reconstruction and Development (IBRD)– popularly known as World Bank and the International Monetary Fund (IMF).
- It proposed 3 international institutions:
Bretton woods conference :
- International Bank for Reconstruction and Development (IBRD), commonly known as World Bank.
- International Monetary Fund (IMF
- International Trade Organisation (ITO) – (Proposed)
ITO could not materialize due to American opposition. Instead, the countries later setup GATT which eventually become WTO.
- While World bank and IMF are considered “Specialized Agencies of UN”, the WTO is considered “Related organization of UN” because it doesn’t fulfil all requirements of UN charter on specialized agencies.
|BRETTON WOODS INSTITUTIONS:1)WORLD BANK, (WASHINGTON,1945)|
- World bank originally focused on reconstructing war-torn European countries. After 1950s focusing on poor countries of Asia and Africa.
- WB works with country governments, the private sector, civil society organizations, regional development banks, think tanks, and other international institutions on issues ranging from climate change, conflict, and food security to education, agriculture, finance, and trade.
- World Bank is a vital source of financial and technical assistance to developing countries around the world. This is not only a bank in the ordinary sense but a unique partnership to reduce poverty and support development.
- IBRD and IDA are collectively known as World Bank, that provides loans to countries for capital programs.
|World Bank Group
|International Bank for Reconstruction and Development (IBRD)
|Commonly known as the world bank. Gives development loans with interest.
Voting power – Depends on the share capital provided by a country. USA highest, followed by various European giants.
|International Development Association (IDA)
|Assists the poorest countries via interest- free long-term loans (“Concessional Loans” or “soft loans”).
Voting power – depends on the share capital provided by a country. USA highest, followed by various European giants.
|International Finance Corporation (IFC)
|Supports enterprise of developing countries. Known for its Masala Bonds.
Voting power – depends on the share capital provided by a country. USA highest, followed by various European giants.
|Multilateral Investment Guarantee Agency (MIGA)
|Offers (foreign) investors insurance against non-commercial risk (such as political instability, regime change etc.). This helps 3rd world nations attract foreign investment.
Voting power – depends on the share capital provided by a country. USA highest, followed by various European giants.
|International Centre for the Settlement of Investment Disputes (ICSID)
|Helps in dispute resolution related to foreign investment / foreign companies in 3rd world countries. India is not a member of this organization.
Voting power – It is a “dispute settlement” body, so the concept of ‘each country’s voting power’ does not apply to it.
Aim Of World Bank
- End extreme poverty – reducing share of global population that lives in extreme poverty to 3 percent by
- Promote shared prosperity – by increasing the incomes of the poorest 40 percent of people in every country.
- Provide sustainable development.
President of World Bank
- Since USA and European powers collectively command large shareholding in World Bank & IMF, so their informal arrangement is – USA’s favorite will be picked as World Bank chief, while European countries’ favorite will be picked as IMF Chief.
- 2019: SBI Managing Director Anshula Kant has been appointed as the Managing Director and Chief Financial Officer of the World bank.
Membership of WB
- Membership in IDA, IFC, and MIGA are conditional on membership in IBRD
- Membership in ICSID is available to IBRD members, and those which area party to the Statute of the International Court of Justice (ICJ)
World Bank is known for Reports?
- World Development Report,
- Ease of doing business Index,
- Remittance & Migration Report,
- Global Economic Prospects report
- International Debt Statistics
- World Development Indicators
Controversy (2019) – Trump demanded World bank should stop loaning to China because China has ‘lots of money’. World Bank clarified, “As countries grow richer, we reduce loaning to them, and the same is being done with China.”
|Q. Which one of the following issues the ‘Global Economic Prospects’ report periodically? CSE-2015
- Caters to the agenda of World Capitalism in the garb of its “Structural Adjustment Programme” (SAP) and continues to be dominated by rich countries.
- SAP is a set of “free market” economic policy reforms imposed on developing countries by the World Bank as a condition for receipt of loans.
- SAP policies have increased the gap between rich and poor
- Changing world order not reflected
- Failure is evident from:
- Peace meal development in poorest countries
- Emergence of Alternatives like AIIB of China
- Neo-imperialism and Neo-Capitalism
Deep reforms of the World Bank are necessary as part of rethinking the current world order, and giving rising powers and developing countries a meaningful voice in this institution
India and WB
- India is a founding member of WB.
- India is not a member of ICSID
- Claims that convention isn’t fair rules for arbitration leaned towards the developed countries.
- By the end of the 1960s, the United States, until then India’s largest source of external resources, sharply cut its bilateral aid program. Since then, the WB emerged as the most important source of official long-term finance.
- IDA provides almost quarter of it.
- But with Chinese entry to WB in 1980, the share to India has declined.
- The lending portfolio changed sharply after the1991macro-economic crisis.
- Structural adjustment lending
- World Bank Group (WBG) has approved a $25-30 billion commitment plan for India for the period 2019-22.
NON-BRETTON WOODS: MULTILATERAL DEVELOPMENT BANKS
A multilateral development bank (MDB) is an institution, created by a group of countries, that provides financing and professional advising for the purpose of development. Apart from World bank, the other notable examples are →
MULTILATERAL DEVELOPMENT BANKS
- BRICS Bank
BRICS Bank and AIIB
New Development Bank (NDB)
|AIIB: Asian Infrastructure Investment Bank|
|Started in 6th BRICS Summit in Fortaleza (2014) members signed treaty||Started in 2015-16|
|Members – Brazil, Russia, India, China South Africa||Members – China, India, UK, Switzerland etc. more than 70 nations as of 2019.|
|Voting power – Each member is given equal 20% voting power.||Voting power – Based on share capital provided. China about 27%, India about 7%. Asian countries control about 75% voting.|
|HQ- Shanghai, China||HQ – Beijing, China|
|COVID-19 loan to India à $1 billion. (2020-Apr)||COVID-19 loan to India à $750 million (2020-June)|
BRICS Contingent Reserve Arrangement (CRA)
- BRICS member have also setup $100 billion BRICS Contingent Reserve Arrangement to help members during BoP crisis – Somewhat similar to IMF.
- BRICS nations also planning to setup their BRICS payment system parallel to SWIFT and BRICS rating agency.
|Q. Find correct statement(s) about AIIB: (CSE-2019)
(a) 1 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3 only
Other Multilateral Development Banks
|OTHER MULTILATERAL DEVELOPMENT BANKS
BIS: Bank for International Settlements
|· 1930: setup in BASEL, Switzerland.
· Made up of 60 countries’ Central Banks.
· Its committee on banking supervision set norms in 1988 (I), 2004 (II), 2011(III) to ensure global financial stability.
|African Development Bank||· 1964: setup in Abidjan in Ivory Coast
· India is a member, also gets loans.
|Asian Development Bank (ADB)||· 1966: setup in Manila, Philippines
· India is a member, also gets loans.
|European Bank for Reconstruction & Development (EBRD)||· 1991: setup at London.
· India became member (shareholder) in 2018. India will not be eligible for loans from EBRD but India can initiate joint loan proposals for Asian, African, European nations for its soft-diplomacy. (usually India does it for winning poor nations friendship. so they vote in favour of India during Kashmir – Arunachal etc resolutions in UN General Assembly)
|Q. Find correct statement(s):(CSE-2016)
BRETTON WOODS INSTITUTIONS:
2) IMF,WASHINGTON (1945)
- IMF was conceived at a UN conference in Bretton Woods in July 1944.
- The International Monetary Fund (IMF) is an organization of 189 member countries, each of which has representation on the IMF’s executive board in proportion to its financial importance, so that the most powerful countries in the global economy have the most voting power.
- International Monetary Fund (IMF) helps in global currency exchange stability, helps against balance of payment crisis.
- Acts as a reservoir of the currencies of all the member countries, from which a borrower nation can borrow the currency of other nations- using the Special Drawing Rights (SDR) mechanism.
- It thus strives to provide a systematic mechanism for foreign exchange transactions in order to foster investment and promote balanced global economic trade.
- IMF important decisions need to be passed with 85% majority. USA has 16.52% voting power so it can effectively block/veto it.
- 2020-May: IMF wanted to issue $500 billion fresh Special Drawing Rights (SDR) to help member countries combat the corona crisis. But USA blocked it. India also supported the USA. India has 2.6% voting rights.
|Q. Recently, which one of the following currencies has been proposed to be added to the basket of IMF’s SDR? (CSE-2016)
It stabilizes the global economy in three ways.
- The IMF’s goal is to prevent these disasters by guiding its members.
- To achieve these goals, the IMF focuses and advises on the macroeconomic policies of a country, which affect its exchange rate and its government’s budget, money and credit management.
- Foster global monetary cooperation
- Secure financial stability
- Facilitate international trade
- Promote high employment and sustainable economic growth
- Reduce poverty around the world
Functions of IMF
- Provides Financial Assistance: to member countries with balance of payments problems, the IMF lends money to replenish international reserves, stabilize currencies and strengthen conditions for economic growth. Countries must embark on structural adjustment policies monitored by the IMF.
- IMF Surveillance: It oversees the international monetary system and monitors the economic and financial policies of its 189 member countries. As part of this process, which takes place both at the global level and in individual countries, the IMF highlights possible risks to stability and advises on needed policy adjustments.
- Capacity Development: provides technical assistance and training to central banks, finance ministries, tax authorities, and other economic institutions. This helps countries raise public revenues, modernize banking systems, develop strong legal frameworks, improve governance, and enhance the reporting of macroeconomic and financial data. It also helps countries to make progress towards the SDGs.
Facilities of IMF to lend money
|Offers financing of a short – term balance of payments, usually between 12 to 18 months.|
|The extended fund facility (EFF)
|It is a medium-term arrangement by which countries can borrow a certain amount of money, typically over a three- to four-year period.|
|Poverty reduction and growth facility (PRGF)
|As the name implies, it aims to reduce poverty in the poorest of member countries while laying the foundations for economic development. Loans are administered with especially low interest rates.|
|The IMF also offers emergency funds to collapsed economies, as it did for Korea during the 1997 financial crisis in Asia. The funds were injected into Korea’s foreign reserves in order to boost the local currency, thereby helping the country avoid a damaging devaluation. Emergency funds can also be loaned to countries that have faced economic crisis as a result of a natural disaster.|
Governance of IMF
- Board of Governors
- one governor and one alternate governor for each member country
- All major functions like appointment of Gov, admission of new country etc
- advised by two ministerial committees
- Ministerial Committees
- International Monetary and Financial Committee (IMFC)
- Development Committee
- Executive Board
- It conducts the daily business of the IMF
24 members elected by BoG
- It conducts the daily business of the IMF
Chief of IMF
- 2019: Christine Lagarde (France) resigned to become chief of European Central Bank (ECB, HQ Frankfurt, Germany). Then,
- Kristalina Georgieva (Bulgarian economist, previously CEO of the World Bank) becomes the second woman IMF Chief after Christine Lagarde. Her five-year term starts on October 1, 2019.
- IMF’ Chief Economist, Gita Gopinath, an Indian-American economist, she became the first woman to be the Chief Economist of IMF (2019-Jan). (Previously Raghuram Rajan has also served in this position.)
Notable reports by IMF
- Global Financial Stability Report
- World Economic Outlook
United Nations (UN) has 195 members, whereas IMF has 189 members.
IMF gives loan to Pakistan (2019)
- 2019-July: IMF approved $6 billion loan to Pakistan. It will be released in tranches (installments) over the next three-years depending on the conditional reforms taken by Pakistan’s Government, which includes:
- Pakistan will have to comply with FATF norms against anti-money laundering and terror financing. So, if Pak gets added in FATF-blacklist, then Pak’s IMF loan release may get stopped.
- Fiscal Deficit and Primary deficit must be controlled to specified% of GDP. Indirectly, Pakistan will be forced to cut down on its Defence Expenditure.
- Pak Government will have to reduce the subsidy on gas & electricity which could results into more hardship for common men.
- Loss making PSUs like Pakistan Steel Mills, Pakistan International Airlines and Pakistan Railways etc. have to:
- become profit making or
- be Privatized or
- be Shutdown.
|Q. ‘Global Financial Stability Report’ is prepared by ________(CSE-2016)
|Q. Which of the following organizations brings out the publication known as ‘World Economic Outlook’? (CSE-2014)
BRETTON WOODS INSTITUTIONS:3) GATT → WTO (GENEVA)
- Initially, Bretton Woods conference proposed set up the International Trade Organisation (ITO) But post USA opposed, the idea could not materialise.
- The World Trade Organization (WTO) came into being in 1995.
- One of the youngest of the international organizations, the WTO is the successor to the General Agreement on Tariffs and Trade (GATT) established in the wake of the Second World War.
- It has 164 Member States
- General Agreement for Tariffs and Trade (GATT) was setup in 1948.
- The General Agreement on Tariffs and Trade was the first worldwide multilateral free trade agreement.
- Uruguay Round of GATT negotiations decided to set up a permanent institution which can encourage international trade not only in goods, but also in services and Intellectual Property Rights (IPR) → Marrakesh treaty (1994) → WTO started functioning from 1st Jan 1995 at Geneva, Switzerland.
- India is a founding member.
General Agreement on Tariffs and Trade (GATT)
- It all began with trade in goods.
- From 1947 to 1994, GATT was the forum for negotiating lower customs duty rates and other trade barriers; the text of the General Agreement spelt out important rules, particularly non-discrimination.
- Since 1995, the updated GATT has become the WTO’s umbrella agreement for trade in goods.
General Agreement on Trade in Services (GATS)
- The General Agreement on Trade in Services (GATS) requires most- favoured-nation Treatment, market access commitments and national treatment.
- GATS was agreed upon at the end of the Uruguay Round negotiations with the participation of all Member nations including developing countries.
- The GATS covers a wide range of service industries such as financial services, transport and shipping, communications, construction, and distribution.
Definition of Services Trade and Modes of Supply
The definition of services trade under the GATS is four-pronged, depending on the territorial presence of the supplier and the consumer at the time of the transaction.
|Cross border trade – from the territory of one Member into the territory of any other Member.
Ex. A user in country A receives services from abroad through its telecommunications or postal infrastructure. Such supplies may include consultancy or market research reports, tele-medical advice, distance training, or architectural drawings.
|Consumption abroad – in the territory of one Member to the service consumer of any other Member.
Ex. Nationals of A have moved abroad as tourists, students, or patients to consume the respective services.
|Commercial presence – by a service supplier of one Member, through commercial presence, in the territory of any other Member.
Ex. The service is provided within A by a locally – established affiliate, subsidiary, or representative office of a foreign-owned and — controlled company (bank, hotel group, construction company, etc.).
|Presence of natural persons – by a service supplier of one Member, through the presence of natural persons of a Member in the territory of any other Member.
Ex. A foreign national provides a service within A as an independent supplier (e.g., consultant, health worker) or employee of a service supplier (e.g. consultancy firm, hospital, construction company).
WORLD TRADE ORGANIZATION
|· Supreme Decision-Making body.
· Usually meets once every two years, deliberates on trade agreements.
· One country = one vote. (unlike IMF & World Bank, where the money power → shareholding → determines the voting power)
· The Ministerial Conference can take decisions on all matters under any of the multilateral trade agreement
· It brings together all members of the WTO, all of which are countries or customs unions.
· Appoints Director General: to look after administrative work. Presently: Roberto Azevêdo (Brazil)
|· Day to day decision making body at Geneva.
· Implements the decision of ministerial conferences
· Has representative from each member country.
· General council has two bodies, with separate chairpersons:
a) Dispute settlement body: à Appellate Body
b) Trade policy review body: à Below general council, there are committees on individual agreements and annexes e.g. Anti-dumping, Subsidies & countervailing measures (SCM) etc.
- Uruguay Round, Marrakesh Treaty 1995 WTO
- General Council
- Dispute Resolution Body
- Trade Policy Review Body
- Ministerial Conference
How WTO can help the world:
- Stimulate economic growth and employment.
- Cut the cost of doing business internationally.
- Encourage good governance
- Help countries in development
- Support the environment issues
- Contribute to peace and stability
Aim of WTO
- Reduce such tariff and non-tariff barriers to encourage international trade through its agreements and dispute settlement body.
Objectives of WTO
- The WTO’s global system lowers trade barriers through negotiation and operates under the principle of non-discrimination
- The result is reduced costs of production(because imports used in production are cheaper), reduced prices of finished goods and services, more choice and ultimately a lower cost of living.
- The WTO’s system deals with these in two ways.
- One is by talking countries negotiate rules that are acceptable to all.
- The other is by settling disputes about whether countries are playing by those agreed rules.
Principles of WTO:
- Most Favoured Nation (MFN)
- Treating other people equally
- National Treatment: Treating locals and foreigners equally
- Free trade: Gradually through negotiation
- Predictability: through binding and transparency. With stability and predictability, investment is encouraged
- Promising fair competition
- Encouraging Development and Economic Reform
- Special and differential treatment
THEORIES OF INTERNATIONAL TRADE
- From the 16th to 18th century, economists believed in mercantilism i.e. The amount of wealth in the world is static.
- A nation’s wealth and power were best served by increasing exports and receiving payments in gold, silver and precious metals.
- Therefore, any import was seen as loss of nation’s wealth in gold payment.
- So, colonial powers tried to flood their colonies with readymade goods but always prevented entry of goods in their home country.
Adam Smith’s Theory of Absolute Cost Advantage (1776)
|Output per one labourer||India||China|
- India has an absolute cost advantage over China in wheat production.
- So, India should focus on producing more wheat, and import rice from China. India should not try to be a ‘rice production specialist’.
- Adam Smith’s theory assumes –
- There are no production costs except labourers
- No transport cost
- There is free trade (no taxes on import exports)
David Ricardo’s Theory of Comparative/Relative Cost Advantage (1817)
|How many workers required to produce →||1-meter textile
|1 bottle of wine
|France||10 workers||12 workers|
|England||9 workers||8 workers|
- Here, we can see England requires less workers than France to produce wine and 8 workers textiles. So, as per Adam Smith’s absolute cost advantage, England should not import anything from France!
- But, if plotted on graphs, it will appear that for England per unit labour cost to produce 1 meter textile is (relatively) cheaper than 1 bottle of wine.
- So, England should shift domestic English wine workers towards textiles. England should export textile to France and import wine from France. England should not try to become a ‘Wine production specialist’.
Heckscher and Ohlin’s Factor – Proportions Theory (1919)
|Capital-abundant country||Capital-abundant country will export the capital – intensive goods. E.g. USA’s Boeing company exporting Jet planes.|
|Labour-Abundant Country||Labour-Abundant Country will export labour-intensive goods. E.g. India exporting cotton (and imports jet planes from USA).|
WTO → FUNCTIONS
Today all countries try to protect domestic industries against foreign imports by creating two types of barriers against the international trade:
Tariff Barriers against international trade
Tariff Barriers: Increasing the taxes, duties, cess, surcharge, on imported goods and services e.g. Trump imposed 25% custom duty on imported steel.
|Two scenarios when foreign goods will appear cheaper to Indians than domestic goods:
· If foreign country is giving subsidies to their exporters and / or
· If Indian government imposes higher amount of taxes, cess or surcharge on the locally manufactured products then Indian Govt tries to protect local (domestic) industry by imposing Countervailing Duty (CVD), Special Countervailing Duty, Additional Customs Duty on imported items on imported items.
· These duties have been removed in India. Now imported items are subjected to [Basic Customs Duty + Social Welfare Surcharge on it] + IGST
|· If China exports goods to India at a price below their normal price in domestic Chinese market or at a price below their cost of production- then it is termed as “Dumping”
· Then, India’s commerce ministry → Directorate General of Trade Remedies : (DGTR) investigates → recommends Finance ministry to impose “Anti-Dumping Duty” on such imported items.
· E.g. $185 on every one tonne of imported Chinese Steel, Then its prices will become equivalent to India Steel, thus Indian steel industry will be protected.
· Not yet abolished in India. They’re imposed subjected to WTO norms.
Non-Tariff Barriers against international trade:
If USA does not increase import taxes but plays other tricks like:
- Subsidies to domestic industries: Giving free electricity to Detroit car manufacturers. or USA govt. giving tax benefits & free car-insurance to American residents for buying American made cars.
- Public Procurement: Making rule that only American companies can fill up tender for supplying stationery, school bags etc. in government schemes.
- Technical Barriers to Trade: e.g. imported mango must have 0% pesticides residue, imported cars must have airbags for each passenger.
- Quota system: e.g. not more than 50 metric tonnes of steel can be imported from a single foreign country.
WTO DISPUTES INVOLVING INDIA VS USA
India’s Solar procurement preference:
- USA argued India’s Jawaharlal Nehru Solar Mission gave public procurement preference & subsidy to India – made solar panels thus creating a non-tariff barrier for American solar panels.
- India lost the case at WTO & forced to withdraw such barriers (2017).
- However, USA still alleges that India is playing mischief in solar schemes by giving preference to local manufacturers over American-made products (2018)
Ban on American Poultry
- In 2007, India had imposed the ban on American poultry under the Indian Livestock Importation Act, 1898 stating avian influenza / bird flu danger in India.
- USA claimed there was no scientific basis – India merely banning us to protect local poultry’ business interest.
- WTO ruled in favour of USA (2016). But India has only allowed partial import of poultry from selected states of USA so, USA has demanded $450 million compensation from Indian Govt. at WTO (2018).
India’s export incentive schemes
- 2018: USA complained to the WTO’s Dispute Settlement Body (DSB) that India is running various export incentive schemes such as:
- Merchandise Export from India Scheme (MEIS)
- Export Oriented Units (EOU)
- Export Promotion Capital Goods (EPCG).
- Electronics Hardware Technology Parks (EHTP)
- Special Economic Zone (SEZ)
- Under such schemes India gives tax reliefs / subsidies to its exporters. So, it is creating tariffs and non-tariff barriers against American companies, & thus India is violating the WTO Agreement on Subsidies and Countervailing Measures (SCM).
- India’s position is “We will phase out these schemes after 8 years from 2017 (e. around 2025). Since we are a developing country, we should be given such relaxed deadline under SCM agreement.”
- 2019-Oct: WTO’s Dispute Settlement Body (DSB) ordered in favour of USA and ordered India to stop such schemes within the next 90-180 days.
- 2019-Nov: India goes to WTO Appellate Body to undo DSB’s order.
- WTO Appellate Body members are appointed by the WTO members by consensus, (i.e. no member-nation should formally object to candidate’s name). USA is presently opposing appointment of new members in Appellate Body. So, body is under-staffed/ dysfunctional.
- 2020-Mar: Indian Commerce Minister says, “we will not implement WTO’s dispute panel orders, because the appellate body is not functioning so our appeal is pending.”
WTO and NOTABLE AGREEMENTS
Reduce the tariff barriers
|1. General Agreement on Tariffs and Trade (GATT) for goods|
|2. General Agreement on Trade in Services (GATS)|
Reduce the non-tariff barriers
|For non-food: Agreement on Technical Barriers to Trade (TBT) e.g. talcum powder should not have more than x% of asbestos.|
|For food: Agreement on Sanitary and Phytosanitary Measures (SPS) e.g. ‘x’ food item must not have more than y% pesticides residue|
Reduce non-tariff barriers → Subsidies
|For non-food à Subsidies and Countervailing Measures (SCM)|
|For food à Agreement on Agriculture (AoA) – which aims to regulate the subsidies on agriculture through its ‘box’ mechanism.
1. Subsidies that are classified in Green & Blue box category – are allowed (e.g. Research, Cattle-Vaccination).
2. Amber box category subsidies will be subjected to quantitative limits (e.g. Fertilizer, Electricity, Diesel, MSP.)
Misc. measures to encourage global trade
|1. Trade-Related Aspects of Intellectual Property Rights (TRIPS)|
|2. Trade-Related Investment Measures on Foreigners. (TRIMs)|
|3. Plurilateral agreements: They are not signed by all the members of WTO e.g. Agreements on aircrafts, dairy product, bovine meat, Information Technology Agreement (ITA)|
WTO’s Notable Report: World Trade Report (Annual). World trade growth has slowed down from 2017 (4.6%) to 2018 (3%), mainly due to protectionism.
|Q. In the context of which of the following do you sometimes find the terms ‘amber box, blue box and green box’ in the news? (CSE-2016)
|Q. The terms ‘Agreement on Agriculture’, ‘SPS Agreement and ‘Peace Clause’ are in the context of affairs of the________ (CSE-2015)
TRIPS & TRIMS
- The WTO’s intellectual property agreement amounts to rules for trade and investment in ideas and creativity.
- The rules state how copyrights, patents, trademarks, geographical names used to identify products, industrial designs, integrated circuit layout-designs and undisclosed information such as trade secrets — “intellectual property” — should be protected when trade is involved.
- The basic principles related to the Intellectual Property agreements are mentioned in “The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS)”.
|· The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) is an international legal agreement between all the member nations of the World Trade Organization (WTO).
· It sets down minimum standards for the regulation by national governments of many forms of intellectual property (IP) as applied to nationals of other WTO member nations.
· TRIPS was negotiated at the end of the Uruguay Round of the General Agreement on Tariffs and Trade (GATT) in 1994 and is administered by the WTO.
|· Trade Related Investment Measures (TRIMS)
· Under TRIMs, the WTO names the list of investment measures that discriminates foreign investment and hence violates the basic WTO principle of National Treatment.
· These measures include – local content requirement, domestic employment, technology transfer requirement etc
· The objective of TRIMs is to ensure fair treatment of investment in all member countries.
· As per the TRIMs Agreement, members are required to notify the WTO Council for Trade in Goods of their existing TRIMs that are inconsistent with the agreement.
- Compulsory Licensing (CL) allows governments to license third parties(that is, parties other than the patent holders) to produce and market a patented product or process without the consent of patent owners.
- Any timeafter three years from date of sealing of a patent, application for compulsory license can be made, provided:
- Reasonable requirements of public have not been satisfied;
- Patented invention is not available to public at a reasonably affordable price;
- Patented inventions are not carried out in India.
- Compulsory Licencing is regulated under the Indian Patent Act, 1970.
- The TRIPS does not specifically list the reasonsthat might be used to justify compulsory licensing.
However, the Doha Declaration on TRIPS and Public Health confirms that countries are free to determine the grounds for granting compulsory licences, and to determine what constitutes a national emergency.
Recently, the CPI (Marxist) party has suggested that the government shall issue Compulsory Licensing for the manufacturing of a Generic version of Remdesivir which is being used to treat Covid-19 patients.
Generic medicines and vaccinations are copies of originally researched drugs, but at much lower prices.
“Evergreening” of patents
- “Evergreening,” is referred to the practice whereby pharmaceutical firms extend the patent life of a drug by obtaining additional 20-year patents for minor reformulations or other iterations of the drug, without necessarily increasing the therapeutic efficacy.
- However it has become a practice in the pharmaceutical industry where on one hand innumerable patients struggling to afford the high priced patented drugs, while on the other hand innovators struggling to give immortal value to their creation.”
- A parallel import is a non-counterfeit products imported from another country without the permission of the intellectual property owner.
- Parallel imports are often referred to as gray products and are implicated in issues of international trade and intellectual property.
- Parallel importing is based on concept of exhaustion of intellectual property rights. According to this concept, when the product is first launched on the market in a particular jurisdiction, parallel importation is authorized to all residents in the state in question. Some countries allow it but others do not.
- Parallel importing of pharmaceuticals reduces price of pharmaceuticals by introducing competition.
- TRIPS agreement in Article 6 states that this practice cannot be challenged under the WTO dispute settlement system and so is effectively a matter of national discretion.
- The practice of parallel importing is often advocated in the case of software, music, printed texts and electronic products.
WTO NEGOTIATIONS / SUMMITS / PACKAGES
Most Favoured Nation (MFN)-
- If a country grants someone a special favor (such as a lower customs duty rate for one of their products) then it must do the same for all other WTO members. This principle is known as most-favoured-nation (MFN) treatment.
- Suppose India levies 15% custom duty on imported laptop from any country. But, later India-Japan trade agreement is signed wherein Japanese laptop are subjected to only 5% custom duty in India. Then implies Japan has become the Most Favoured Nation for India (as far as the laptop trade is concerned).
- WTO agreements require that whatever treatment is being given to the MFN, must also be extended to all other member countries. A member should not discriminate between its trading partners. (So even imported Pakistani laptop should be subjected to 5% custom duty only, if India is charging that % on Japanese). But in practice, MFN is not implemented in letter and spirit by the members.
- 1996: India granted MFN status to Pakistan but Pakistan didn’t reciprocate (mainly) due to their local textile industrialists’ lobby who feared competition from Indian textile imports.
- 2019-Feb: India withdrew MFN status for Pakistan, following Pulwama attack on CRPF personnel. India also hiked the customs duty by 200% on goods originating from Pakistan.
- Since Pakistan is not giving India MFN treatment. So, there is no ‘legal-compulsion’ on India to give them MFN status. even if Pakistan complained to WTO’s dispute redressal panel, it’ll lose the case.
Least Developed Countries (LDC)
- LDC are identified by the UN Economic and Social Council: (ECOSOC).
- For example – Somalia, Ethiopia, Congo, Central African Republic, Bhutan, Bangladesh etc.
- Least Developed Countries’ economic growth can improve if they are able to export more. So, WTO agreements permit other countries to give duty free quota free access to exports from LDC. and that is not considered as a violation of any other agreement.
- For instance, if India levied 0% custom duty on Somalian laptop, India will not be required to give same treatment to Japanese laptop under “MFN norm”, Because Japan is not an LDC.
|First world countries||Also known as Advanced Economies (AE), Developed Countries, such as USA Canada, France and Germany etc.|
|Second world countries||USSR and its neighbouring European countries which were under the influence of Communist Socialist ideologies. However, the term has become defunct with the collapse of USSR.|
|Third world countries||Developing countries, Emerging market economies (EME) – India China, Mexico, Brazil etc.|
Domestic Subsidies are categorized into 3 boxes:
|Subsidies which are no or least market distorting includes measures decoupled from output such as income-support payments (decoupled income support), safety – net programs, payments under environmental programs, and agricultural research and development subsidies.|
|Only ‘Production limiting Subsidies’ under this are allowed. They cover payments based on acreage, yield, or number of livestock in a base year.|
|Those subsidies which are trade distorting and need to be curbed. The Amber Box contains category of domestic support that is scheduled for reduction based on a formula called the “Aggregate Measure of Support” (AMS). The AMS is the amount of money spent by governments on agricultural production, except for those contained in the Blue Box, Green Box and ‘de minimis’.|
“De minimis” provision:
Under this provision developed countries are allowed to maintain trade distorting subsidies or ‘Amber box’ subsidies to level of 5% of total value of agricultural output. For developing countries this figure was 10%. So far India’s subsidies are below this limit, but it is growing consistently and are likely to cross 10% level allowed by de Minimis provision.
Some of the burning and contentious issues between 1st world vs. 3rd world at WTO:
Doha Development Round (Qatar) – 2001
In WTO’s “Doha development agenda” (2001) negotiations, the 3rd world countries wanted following:
- 1st world should liberalize their trade regulation further so that 3rd world’s goods and services can enter more easily in the first world’s domestic markets.
- 3rd world should be allowed to keep various barriers to slow down the entry of 1st worlds agriculture, manufactured goods and service exports in their domestic market.
- 1st world should give financial and technical assistance to 3rd world.
USA and European countries would not agreed to this. So, Doha round of negotiation continues without conclusion. And in future summits the USA/EU would want WTO officials to begin negotiations on the new matters lucrative to their MNCs (like ICT, E-Commerce) whereas 3rd world nations will continue to insist that Doha round negotiations must be concluded first.
- National treatment implies treating foreigners and locals equallyImported and locally-produced goods should be treated equally — at least after the foreign goods have entered the 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 (Article 3 of GATT, Article 17 of GATS and Article 3 of TRIPS), 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 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.
“Special And Differential Treatment Provisions”
- The WTO agreements contain special provisions which give developing countries special rights and allow other members to treat them more favourably. These are “special and differential treatment provisions” (abbreviated as S&D or SDT).
- The special provisions include:
- Longer time periods for implementing agreements and commitments.
- Measures to increase trading opportunities for these countries.
- Provisions requiring all WTO members to safeguard the trade interests of developing countries.
- Support to help developing countries build the infrastructure to undertake WTO work, handle disputes, and implement technical standard.
- Provisions related to least-developed country (LDC) members
In the Doha Declaration, ministers agreed that all special and differential treatment provisions should be reviewed, in order to strengthen them and make them more precise, effective and operational.
Food subsidies & peace clause:
- Under WTO’s Agreement on Agriculture (AoA), 1st world and 3rd world countries are required to limit their food-subsidies to 5% and 10% respectively to the value of their agriculture production in
Agreement on Agriculture
- Decoupled from production and prices
- For research, implementation of structural prog, disaster relief
- Trade distortionary but limits production.
- Encouraging production for limited time period
- Trade Distortionary like MSP
- But in 1986, India’s agricultural production was far lower than USA so even in absolute quantitative terms USA’s 5% will be much bigger than India’s 10%. 1st world countries are able to give larger amount of food subsidies to their farmers and facilitate their export to 3rd world countries at much cheap price, and ruining local farmers.
- Further, India has a large population of poor farmers who require Govt support in the form of subsidies & procurement at Minimum support prices (MSP). India also has a large number of malnourished poor families who need subsidized food grains under National Food Security Act (NFSA) 2013.
- 2013 – At WTO’s ministerial conference at Bali (Indonesia), India refused to sign any new agreements until this food subsidy issue was resolved.
WTO Peace Clause à It gave temporary immunity to India and other developing countries, “You may continue to give as much subsidy for your food programs. If USA/any other country challenges your food subsidies at WTO’s dispute settlement platforms, we will not entertain their petition.”
Bali Package & Trade Facilitation Agreement / TFA (2013)
Bali Package is the trade agreement or outcome resulting from the WTO ministerial conference 2013 at Bali, Indonesia. Its two significant components are :
Trade Facilitation Agreement
|· It requires the member countries to reduce their bureaucratic delays, red tapes, inspector raj in import-export of goods.
· They’ve setup online portals where traders can seek permissions, pay fees, custom duties, self-declaration forms (like e-way bill) etc.
· India & others ratified in 2016
· TFA became effective from 2017. India set up a National Committee on Trade Facilitation (NCTF) under Cabinet Secretary (IAS).
|Peace Clause on subsidies||Discussed in previous section.|
|Q. Find correct among the following statements: (CSE-2017)
Nairobi Package & SSM (2015)
Nairobi Package resulted from the WTO ministerial conference 2015 at Nairobi (Kenya):
- We will extend the Peace Clause for another “Specific” years.
- Members must stop the subsidy on Agriculture Exports: 1st world countries must comply immediately while 3rd world countries given a relaxed deadline.
- If there is a surge of cheap agro exports from 1st world to 3rd world, then 3rd world countries will have the right to temporarily increase tariff / taxes on them, to protect their local farmers, popularly known as “Special Safeguard Mechanism (SSM).”
- 1996 – Information Technology Agreement (ITA) plurilateral agreement (i.e. not signed by all member nations). Agreement aims to abolish import export taxes on about 200 IT products. We will try to get more members sign this, so global IT-trade can increase.
- Technical reforms to help the exports from Least Developed Countries (LDC).
Buenos Aires Summit (2017)
The 11th WTO Ministerial conference 2017 at Buenos Aires, Argentina failed to deliver any notable and substantial package because :
- Food subsidy related reforms remained inconclusive because neither India – China nor USA-EU were willing to compromise. So, in reality ‘Peace clause’ is extended for infinite period– which is not a good thing because large amount of food subsidies given on (chemical) fertilizers harm the environment.
- USA-EU were more keen for a new agreement on e-commerce but India-China opposed that such agreements will benefit 1st world countries more (because they’ve Amazon, Walmart, Facebook etc) than 3rd world. India insisted that first finish negotiations of the original Doha agenda subjects, before proposing such new topics like e-commerce.
- Members also failed to conclude negotiations related to Special Safeguard Mechanism (SSM), investment facilitation, MSME etc..
As a result, this conference ended without a joint declaration by the members.
Why has India opposed Buenos Aires Declaration?
- India held that it strongly supports gender equality and is very much in favour of promoting gender issues but it cannot concur with view that gender is trade-related issue.
- WTO is purely trade-related body and not a forum to discuss gender, so gender-related discussions should take place at appropriate fora.
- It also held that developed countries have high standard in gender- related policies as compared to developing or least developed countries (LDC).
- Hence the proposition to link gender and trade agreed then developed nations will curb exports from developing world using ‘gender’ issues as non-trade barrier.
G-33 (Group of 33)
- The Group of 33 developing countries, including India and China, has proposed to include procurement of food products from farmers at minimum support price (MSP) and their distribution at subsidised rates to the poor in the global rules of agriculture.
- Subsidies on account of these programmes should not be included in the category of trade-distorting subsidies that disrupt markets and prices of food items, the grouping has said in its proposal on a permanent solution on public stockholding for food security.
- G33 includes 47 developing and least developed countries. It has called for an amendment in the Agreement on Agriculture (AoA) of the World Trade Organisation (WTO) because current rules suggest a fixed subsidy of 10% for food procurement from farmers to feed the poor.
- The existing rule also uses an old methodology for subsidy calculation that does not account for inflation and is based on a price index of 1986-88.
- Public stockholding for food security is critical for developing countries where agriculture is dependent on rains, agricultural markets are imperfect and they provide subsidised food grains to their poor.
Sanitary and Phytosanitary Measures (SPS)
- Agreement on the Application of Sanitary and Phytosanitary Measures (SPS)
- The SPS agreement was negotiated during the Uruguay Round.
- Under the SPS agreement, the WTO sets constraints on member-states’ policies relating to food safety (bacterial contaminants, pesticides, inspection and labelling) as well as animal and plant health (phyto-sanitation) with respect to imported pests and diseases.
- these measures may sometimes go beyond what is needed to protect such objectives and be used to shield domestic producers from foreign competition
- Indian Alphonso by EU
Geographical Indications (GI):
- Geographical indications are place names (in some countries also words associated with a place) used to identify products that come from these places and have specific characteristics (for example, “Champagne”, “Tequila” or “Roquefort”).
- A geographical indication or GI is a sign used on products that have a specific geographical origin and possess qualities or a reputation that are due to that origin.
- Under the TRIPS Agreement, all geographical indications have to be protected at least to avoid misleading the public and to prevent unfair competition (Article 22).
- This is the only intellectual property issue that is definitely part of the Doha negotiations.
- Geographical Indications are part of the intellectual property rights that comes under the Paris Convention for the Protection of Industrial Property.
In India, Geographical Indications registration is administered by the Geographical Indications of Goods (Registration and Protection) Act of 1999.
- Need of free trade is required more by developing countries like India than developed countries. So Developing countries must work collaboratively to strengthen WTO
- There is a need to collaborate effectively and learn from the past experiences when India and China led the developing countries in environmental forums, garnering funds in the form of GCF.
- There is need for the structural reforms in the WTO functioning as multilateral trading system
- Despite WTO being a democratic organization, there is a need to make it more effective in protecting the interests of small nations against stronger countries. The process of retaliation is ineffective and too impractical for smaller players.
- WTO needs to strengthen the dispute settlement mechanism as there are issues in appointment of judges in new appellate body
- Lastly, WTO needs to enhance discussion mechanism by introducing wider consultations. It has been a long standing complaint by the smaller participants that the consultations or decision making is limited to the green room of DG of WTO.
TRADE AGREEMENTS TYPES:
- Partial Scope Agreement (PSA): Trade between two countries for a small list of goods @reduced tariffs.
- Preferential Trade Agreement (PTA) / Free Trade Agreement (FTA): Member à lower tariff; non-members: regular tariff.
- All FTAs are not same. Tariff and list of allowed goods/services could vary depending on country to country.
- Depending on number of participants it can be bilateral or multilateral or regional or global (e.g. WTO).
- If countries go further beyond just lower tariffs e.g. relaxed norms for entry of foreign investment and foreign workers, then it becomes Comprehensive Economic partnership Agreement (CEPA) or Comprehensive Economic Cooperation Agreement (CECA)
|Customs Union (CU):||FTA in which members apply a common external tariff (CET) for non- members. E.g. East African Community (EAC). Caribbean Community|
|Common Market (CM):||Customs union where factors of production (capital, labour) can move freely amongst members e.g. MERCOSUR- S. America.|
|Economic Union (EU):||Common market where member countries keep common currency & tariff. Allow entry of goods, services, capital and labour among themselves with minimum restrictions. They decide their fiscal policies and diplomatic policies through a common parliament ‘European Parliament’, and their monetary policies through a common central bank – ‘European Central Bank’.|
FREE TRADE AGREEMENTS (FTAs)→ TPP, TPP11, TATIP, RCEP
Trans-Pacific Partnership (TPP)
- USA proposed free trade agreement among 12 countries: US, Japan, Malaysia, Vietnam, Singapore, Brunei, Australia, New Zealand, Canada, Mexico, Chile and Peru.
- Aimed to have lower tariffs for participant countries, easier norms for labour, environment and investment.
- 2016: President Trump withdrew from the negotiation claiming, “TPP will take away jobs from USA because companies will setup factories in Mexico where labour is cheaper, and then such cheap products will be dumped in USA, yet we will not be able to impose heavy taxes on them.” So TPP has become defunct.
TPP-11 or CPTPP
- While USA-led TPP could not materialize, but some of the nations in Pacific region separately worked out a ‘Comprehensive and Progressive Agreement for Trans- Pacific Partnership’ (CPTPP or commonly called TPP-11) in 2018-Dec.
Transatlantic Trade and Investment Pact (TTIP):
- Proposed free trade agreement between USA & EU with objectives similar to TPP– reduce tariff, easier entry of foreign investment etc.
- Negotiations are ongoing but it is not yet signed mainly due to opposition from the European Union side. E.g.
- In USA’s Farm, Dairy and Meat industry the standards related to pesticide residue, pathogens, antibiotics, growth hormones, genetically modified (GM) crops etc. are slightly lower than EU. So, EU’s animal rights & environmental groups worried it will lead to unrestricted flow of those “harmful” products from USA to Europe.
- EU has strict norms on private companies to cut their emissions and compulsorily invest in renewable energy. In USA such norms are relaxed. EU’s environmental groups don’t want such ‘polluting US companies’ to profit via exporting to EU.
- USA wants EU nations to cut down the subsidies and preferences given to EU’s state owned enterprises (SOE) / PSUs. The EU civil rights / labour rights group fear it will lead to privatization of health, education, and insurance companies which will cause unemployment of PSU-workers, and when pvt. MNCs are providing such essential services it will become unaffordable for many poor citizens.
- USA had been lobbying for TPP and TTIP because USA is disillusioned with the WTO– wherein India, China and other emerging economies have equal voting rights and have become more assertive, so USA and its MNCs are not gaining much benefit out of WTO led agreements. But, If TPP/TTIP materialized, it’d harm Asian economies exports towards US/EU so to compensate that loss, Asian economies came up with their own idea RCEP.
REGIONAL COMPREHENSIVE ECONOMIC PARTNERSHIP (RCEP)
- RCEP is a proposed free-trade agreement between the 10 ASEAN countries (Indonesia, Malaysia, Philippines, Singapore, Thailand, Brunei, Vietnam, Laos, Myanmar, Cambodia) and their six Free-Trade Agreements partners Australia, China, India, Japan, New Zealand and S. Korea.
- Collectively, these countries command 25% of global GDP, 30% of global trade.
- RCEP requires them to reduce the tariff and non-tariff barriers against each other, encourage investments, economic and technical cooperation, protect Intellectual Property Rights (IPR) etc.
- This will boost trade, economic growth and employment in each of these countries,
RCEP: Reasons for India not joining RCEP (2019)
- India already has over $100 billion trade deficit with RCEP countries. Out of this, China alone accounts for $54 billion trade deficit. So India had following apprehensions about this agreement.
- China: RCEP will result in increased flow of (Cheap) Chinese manufactured & electronic goods → Indian MSME, automobile, steel industries harmed → So, India wanted separate levels of customs duty against Chinese imports.
- Dairy: India is among the largest producers of milk but our speciality is mostly in the liquid products whereas New Zealand is renowned for its solid products (milk powder, butter, cheese etc.) These solid dairy products have a longer shelf-life & easier to transport over long-distance. So if trade-barriers removed, India will be flooded with cheap dairy products which leads to suffering of Indian farmers & dairy entrepreneurs.
- Agriculture: Southern India’s plantation farmers afraid of cheaper tea, coffee, rubber, cardamom and pepper from Malaysia, Indonesia & other RCEP nations.
- India wanted an Automatic Trigger Safeguard Mechanism (ATSM) to protect itself from surge in imports. (e.g. raise customs duty by “x%” on imported products from “y” country if “z” situation occurs).
- Ratchet Obligation: It means a nation cannot go back/undo its commitments under the RCEP agreement. India wants certain exemptions
- Base Year for tax cuts: India wants base year for tax-cuts fixed at 2019 instead of 2014. Because since 2014, India has raised customs duties on over 3,500 products.
- Data localisation: India wants all RCEP countries to have the rights to protect data & prohibit cross-border data flow in the national interest. For this reason, India even refused to sign G20 Osaka declaration on cross-border data flow.
- 2019-Nov: RCEP summit at Bangkok, Thailand. Here, Indian demands were not agreeable to the majority of other members. So, India announced not to join the RCEP Agreement.
RCEP: Counterview: India made a mistake by not joining
- Competition brings excellence – Unless the Indian industrialists are subjected to the competition from Asian giants, they will not invest further in the R&D, product upgradation, customer service & customer satisfaction.
- If India doesn’t join RCEP, our products will not be able to compete in those nations because of the higher taxes on Indian exports viz a viz other RCEP exports.
- Indian manufacturers could import intermediate goods from RCEP countries at cheaper price to process them further and re-export towards Middle East, Africa and European. Thus, RCEP could have provided the perfect opportunity for India to become integrated with the global value chain.
- World Bank’s “A Glass Half Full – The Promise of Regional Trade in South Asia” report (2019) estimates India’s potential trade in goods with South Asia at more than 60 billion, but at present the actual trade is less than $20 billion– due to tariff barriers and connectivity issues. Hence, RCEP is necessary for boosting India’s exports.
- RCEP was still ‘less strict’ in comparison of India’s ongoing FTA negotiations with the USA or EU. It was a low-hanging fruit, we should have signed it.
- India will have to eventually shed-off its ‘big but poor’ mentality. International agreements always require some sort of bargaining / give and take.
- While it is true that India could have gained in certain export-sectors by signing RCEP Agreement, but its present format did not fully address India’s issues and concerns regarding the protection of the domestic industry. So we’ve opted not to sign it.
- The remaining member-nations have planned to sign the RCEP agreement in 2020 and they are trying to convince India to get onboard.
- India has not permanently shut the doors for negotiation. In future we may sign it, if our concerns are addressed.
Economic Survey 2015-16: Observations about India’s Trade Agreements
|· India has signed 40+ trade agreements with various countries, our global trade has improved but more on import side than export side.
· RCEP, TTIP, TPP are mega regional agreements that will undermine the WTO processes. India must prepare for this changing world. India should shed its “big but poor” dilemma– i.e. We’ve to grow up from the mentality that “Our India is poor nation we must protect farmers & MSME so we have moral right to impose tariff and non-tariff barriers on US/EU goods/services & yet US/EU must allow our goods/services into their countries without any barriers”
· It’s for this reason, India-European Broad-Based Trade and Investment Agreement (BTIA) is not reaching conclusion. International trade is a give-and-take relationship we’ve to reduce our trade barriers only then we can expect them to reduce their trade barriers.
ES20: Observations about India’s Trade Agreements
|· Critiques allege that most of India’s FTAs have not worked in “India’s favour.” e.g. India’s FTA with S. Korea, Japan and Sri Lanka = % increase in imports >> are higher than % increase of exports.
· The ES20 concluded that overall India has gained in terms of increase in exports by signing FTAs.
Budget-2020: FTA ‘rules of origin’
|· 1998: India – Sri Lanka FTA. So ink manufactured in Sri Lanka = 0% Indian customs duty when imported in India.
· But sometimes Chinese company manufacture ink bottles in China, transports to its Sri Lankan company → Sri Lanka’s company pastes a label “this bottle manufactured in Sri-Lanka” → sell them in India at 0% customs duty.
· So, FTA agreements contain ‘rules of origin’. Which requires that minimum x% manufacturing/processing/value addition must be done in originating country (SriLanka in our example) before it’s eligible for 0% customs duty.
· Originating country (SriLanka) cannot dump goods from some third country (China) in the Indian market by just putting a label on it.
Rules of origin
- Determining where a product comes from is no longer easy when raw materials and parts criss-cross the globe to be used as inputs in scattered manufacturing plants.
- Rules of origin are therefore needed to attribute one country of origin to each product.
- They are the criteria used to define where a product was made and are important for implementing other trade policy measures, including trade preferences (preferential rules of origin), quotas, anti-dumping measures and countervailing duties (non-preferential rules of origin).
|Q. Consider the following countries:(CSE-2018)
Which of the above are among the ‘free-trade partners’ of ASEAN?
NAFTA & SAFTA
|· North American Free Trade Agreement; (1994) involves Canada, USA and Mexico.
· However, Trump felt NAFTA harms the American interests.
· 2018: He made a deal with Mexico and Canada to replace NAFTA with a new agreement called United States-Mexico-Canada-Agreement (USMCA).
|· South Asian Free Trade Area: (SAFTA) is a trade agreement of SAARC nation’s – Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka.
· 2016: India refused to attend SAARC Annual summit at Pakistan, after Uri- Attack.
· In 2019 India raised duties on Pakistani goods so SAFTA’s is losing its shine.
|· 2019: African Union (AU) members have signed the African Continental Free Trade Agreement (AfCFTA).
· It’s world’s largest FTA covering 54 nations.
INDIA’S TRADE AGREEMENTS
|Economic Survey 2019-20|
|Free Trade Agreements (FTAs) of India
|· India – Sri Lanka FTA
· Agreement on SAFTA
· India Nepal Treaty of Trade
· India – ASEAN- CECA – Trade in Goods, Services and Investment Agreement
· India – Japan CEPA
|Preferential Trade Agreements (PTAs)
|· Asia Pacific Trade Agreement (APTA)
· Global System of Trade Preferences (GSTP)
· India – Afghanistan
· SAARC Preferential Trading Agreement (SAPTA)
· India – MERCOSUR
|On-going trade negotiations||· India – EU BTIA
· India – Sri Lanka Economic and Technical Cooperation Agreements (ETCA)
· India – Thailand CECA
· India – New Zealand FTA/CECA
· India – Gulf Cooperation Council (GCC) Framework Agreement
· India – Iran PTA
Key initiatives for trade facilitation
- Self e-sealing through RFID tag by trusted exporters,
- Introduction of ‘E-Sanchit’ for lodging supporting documents online,
- Tracking of imported cargo clearance time through Indian Customs Ease of Doing Business Dashboard (ICEDASH),
- Launch of Atithi mobile App for international passengers.
- National level Time Release Study (TRS) across multiple locations covering seaports, Inland Container Depots (ICDs), air cargo complex etc. to achieve cargo release time targets.
BURNING ISSUES IN INTERNATIONAL TRADE
Protectionism, Trade war:
- Protectionism connotes the use of tariff and non-tariff barriers to protect the local industry against foreign competition.
- Trade war happens when two / more nations attack each other’s exports through tariff and non-tariff barriers.
- 2017: USA had $375 billion trade deficit with China. Cheap import from China causes domestic American manufacturers suffer. US companies outsourcing to China which results into unemployment of American workers.
- 2018: Trump announced 25% tariff on imported steel, semiconductors, chemicals, plastics, motorbikes and electric scooters etc. from China. So, China retaliated by hiking tariff on imported American soybean & other food products, chemicals, medical equipment & vehicles.
- Both also filled complaints against each other at WTO.
- EU also making similar protectionist moves against China and India.
Protectionism: Medicine and Defence
|Anti-malarial drug, could be used in the COVID-19 treatment. Earlier India had imposed a ban on its export to ensure supply for the Indian patients. But 2020-june: India lifted the ban for 1)export earning
2)soft-diplomacy: winning support of its friendly nations
|Defense ministry has put 101 defense items in negative import list i.e. they will be purchased from local manufacturers. They’ll not be imported e.g. Multi barrel rocket launchers, assault rifles, radars.
Benefit – Local industry will get contracts worth ₹4 lakh cr. → Make in India, Atma-Nirbhar, reducing CAD
Protectionism → Indian Govt procurement
- Atma-Nirbhar: PM asked the nation to be ” vocal for local “ (to promote local goods) with an aim to make India self-sufficient in every way.
- So, in Government procurement tenders up to ₹200 crore, foreign (global) companies will not be allowed to apply.
- This will help Indian Micro, Small & Medium Enterprises (MSME) and large Indian companies to revive business through increased purchase from the Government.
USA’s Special 301 report
- Annual report that lists the countries who are harming the Intellectual Property Rights – copyrights, patents and trademarks of American companies.
- These countries are classified into categories such as “Priority Foreign Country” (Most dangerous)> “Priority Watch List” > “Watch List” etc.
- Depending on the classification, USA will complaint to WTO and / or spend money on those countries to reduce the piracy (e.g. training and capacity building of Russian police officers & China’s cybercrime courts etc.).
- 2018: India, Russia, China etc. are in priority watchlist. Mainly because of their hackers, movie piracy, counterfeit products; India because of its drug patent norms & NPPA which reduce the profitability of US pharma companies’ patented drugs.
USA’s Generalized System of Preferences (GSP) list
- If a developing country’s name is in this list, its exports will be subjected to zero/lower import duties in USA (for selected products only).
- 2019: Trump removed India from GSP list, citing India has imposed heavy import duties on Harley Davidson bikes and other American exports.
- As such most of the Indian exported goods to USA are not in the GSP list in the first place, so this blacklisting will not harm India much, albeit, Indian textile companies are worried that GSP-removal will make Indian garments more expensive in USA.
USA Reciprocal Trade Bill/Act 2019
- 2019: United States Reciprocal Trade Bill was introduced in the American parliament (US congress)
- If the partner nation has imposed a high level of tariff/non-tariff barriers on American products, then:
- US President can unilaterally increase the taxes on imported products of that trading country.
- US President can even ‘undo’ his commitment from the free trade agreements with that country.
- If the Intellectual Property Rights (IPR) of American products are not respected/enforced in a country → US President can raise taxes on imported products from that country.
India-USA limited trade deal
- 2020-Jul: India and USA are negotiating for a ‘limited trade deal’ i.e. only for selected commodities taxes may be decrease. Basically, they’re looking for following
- India should reduce taxes à on American farm & dairy products, pharmaceuticals, electronics etc
- USA should reduce taxes à on Indian steel & Aluminium etc, and USA should restore India’s name in the Generalized System of Preferences (GSP).
Impact of US/EU/China trade war on India
Previous economic surveys observed:
- US’s protectionism is targeted more towards Chinese goods than towards Indian services (IT/BPO) because of their local political / vote bank perception that Chinese manufacturing industries are more responsible for the loss of American jobs than Indian call-centres. So, India need not worry excessively.
- Besides, Chinese tariffs on USA creates opportunities for India to export its soyabean, cars, medical equipment to China. Commerce Ministry has recorded growth in over 300+ Indian exports including vulcanized rubber, paper, copper wires, electrodes, natural honey and pipes to China.
- Similarly, USA’s 25% import duty on Chinese seafood has made American consumers shift to Indian frozen shrimps which don’t attract such large duties in USA. This has positively boosted India’s seafood exports.
- However, with the rise of nationalistic political groups in the 1st world nations, India will face following challenges →
- 1st world nations’ local industrial groups keep pressuring their governments to impose more tariffs on Indian fisheries, textile and pharma sectors.
- With the fall in (overall) exports of India, there has been a glut the supply of commodities in the domestic market, resulting into inflation levels falling below 3%. According to Phillips curve, there is an inverse relationship between inflation and unemployment. This could pose a challenge to our economy in the days ahead.
- 1st world nations tighten their visa / immigration policies – NRIs suffer.
- Protectionism has a mixed impact on Indian macroeconomic stability because while helped boosting Indian exports in some sectors (seafood & soybean), it has harmed the other sectors.
- Protectionism will only hurt the US economy & Chinese economy in the long run.
BREXIT (BRITAIN EXIT)
|1993||· Maastricht Treaty formed European Union, a political and economic union to allow easy movement of goods, services, citizens among themselves.|
|2002||· EU introduced its common currency, Euro. Although Britain was an EU member, it continued with its own currency ‘Pound Sterling’
· Later, Britain’s political parties campaigned that:
o migrant workers from other EU countries could results into job loss for local Britishers.
· 2) EU framework is harming our economic and foreign diplomacy interests.
|2016||· Britain held a referendum & asked its citizens “whether the Britain should exit or remain in the European Union?” 52% voted yes, 48% voted no.|
|2017||· Britain invokes Article 50 of Lisbon Treaty, which gives them 2 years’ timeframe to work out a deal for exit / divorce. e.g. What happens to UK citizens living elsewhere in the EU and EU citizens living in the UK etc. How much money Britain must pay to EU for leaving?|
Accordingly, Britain is scheduled to leave at +2 years = 29th March 2019. But there is internal political bickering among British parliamentarians on the terms of exit deal.
How does BREXIT affect India?
BREXIT creates both opportunities and challenges for India. We will have to rebuild / update our trade agreements with both parties separately.
- With the rise of ‘nationalism’, ‘protectionism’ in Britain/EU → India’s textile, pharma, automobile exports may get hurt. Although Britain may ease its travel & education visa norms to attract Indian students for their college fees.
- EU is planning to create a ‘Digital Single Market by 2020’ to cover digital marketing, E- commerce and telecommunications related services. Indian companies can provide backend services.
- British goods will no longer get easy entry in EU, so they will try to export more towards India – because of India’s rising middle class & their growing purchasing power. We can demand reciprocal treatment e.g. “we will cutdown tariff for your ‘x’ list of goods, if you do the same for ‘y’ list of Indian goods.”
- Britain becomes ‘free’ of EU’s foreign policies so it may come up with new initiatives for Palestine, Middle East, Afghanistan etc. and to keep India on board, Britain may give some concessions e.g. “Vote in favour of our “x” resolution at UNGA & we’ll cut down tariff on Indian goods by y% & will give a cheap infra. loan at z%”.
|Q. The term ‘Digital Single Market Strategy’ seen in the news refers to (CSE-2017)
|Q. ‘Broad-based Trade and Investment Agreement (BTIA)’ is sometimes seen in the news in the context of negotiations between India and__________(CSE-2017)
OTHER NOTABLE GROUPINGS RELATED TO ECONOMY
GROUPINGS: INDIAN SUBCONTINENT
- Mekong- Ganga Cooperation
- Shanghai Cooperation Organization
|· South Asian Association for Regional Cooperation.
· HQ: Kathmandu, Nepal (1985)
· 8 member states: Afghanistan, Bangladesh, Bhutan, India, Nepal, Maldives, Pak & Sri Lanka.
· 2016: summit @Islamabad cancelled after India and others boycotted due to Uri attack.
· Then no annual summits in 2017, 2018. Although 2019 summit is planned at Colombo, Sri Lanka.
|· Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC)
· Dhaka, Bangladesh (1997)
· 7 members: Bangladesh, India, Myanmar, Sri Lanka, Thailand , Nepal and Bhutan.
· Summits every four years.
· 2018 summit in Kathmandu, Nepal
· Next will be in Colombo, Sri Lanka.
India has setup South Asian University (SAU-2010) at Delhi (2010) for SAARC students. India also launched South Asia Communication Satellite (GSAT-9) in 2017 to provide tele- medicine, tele-education, banking and television broadcasting facilities to SAARC nations.
Mekong- Ganga Cooperation (2000)
- India + five of the ASEAN countries, namely, Cambodia, Laos, Myanmar, Thailand and Vietnam.
- Objective – cooperation in tourism, culture, education, transport, communications.
- Mekong river starts from China → flows through Myanmar, Laos, Thailand, Vietnam, Cambodia → drains in South China Sea.
- Association of Southeast Asian Nations
- Formed in 1969 by Bangkok declaration
- HQ: Jakarta, Indonesia
- 10 Members: Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam.
- 2018: marked the 25th Anniversary of ASEAN-India Dialogue Relation, their leaders were invited to India. Delhi declaration with the theme “Shared Values, Common Destiny”
- Their 10 leaders also graced our 26th January 2018 Republic Day parade as chief guests. 2019 celebrated as ASEAN- India Tourism Year
- 2019: Summit at Thailand‘s capital Bangkok. Theme: Advancing partnership for sustainability.
- Result – Bangkok declaration against Marine Debris
Shanghai Cooperation Organization (SCO)
- 2001 → HQ: Beijing, China.
- Regional Anti-Terrorist Structure (RATS) at Tashkent, Uzbekistan
- 6 founding members: Russia, China, Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan.
- 2 new members: India & Pak.
- 2017: SCO summit at Astana, Kazakhstan → India, Pak formally given membership.
- 2018: SCO summit at Qingdao, China resulted Qingdao declaration- a 3-year plan to combat terrorism. India refused to endorse China’s One belt one road (OBOR) policy in this summit.
- 2019-June: SCO summit at Kyrgyzstan’s capital Bishkek. Bishkek declaration major points:
- Condemn terrorism,
- Settle Syrian issue with political dialogue,
- Roadmap to peace in Afghanistan through dialogues,
- Appreciated WTO
- 2020: SCO Summit at Russia’s Chelyabinsk.
- Indian Ocean Rim Association (IORA)
- Asia-Pacific Economic Cooperation (APEC)
Indian Ocean Rim Association (IORA);
- 22 Indian Ocean rim nations. India is a member. China-USA are dialogue partners.
- Setup in 1997, HQ: Ebene, Mauritius
- 2018 council of ministers’ meeting at S. Africa’s Durban- established Mandela Scholarship, added Maldives as a member but blocked membership of Myanmar due to S. Africa’s opposition.
Asia-Pacific Economic Cooperation (APEC)
- 21 Pacific Rim ocean economies. India is not a member, China-USA are members.
- 1989, HQ: Singapore
- 2018 summit at Port Moresby, Papua New Guinea. India is keen to become member but not yet added.
- 2019 summit at Chile cancelled due to civilian unrest in the country.
GROUPINGS:BRICS, OECD, OPEC, G20, JAI, QUAD
|· Brazil, Russia, India, China and South Africa. S. Africa joined later in 2011.
· 2014: BRICS New Development Bank
· 2018: summit at Johannesburg, S. Africa with theme “Collaboration for Inclusive Growth and Shared Prosperity”
· 2019-Nov: summit at Brasilia, Brazil. Theme: “BRICS: economic growth for an innovative future”.
· 2020: 12th BRICS summit at Saint Petersburg, Russia
· Role of secretariat is played by its pro tempore presidency, so accordingly, 2018: S. Africa. 2019: Brazil. 2020: Russia
|· Organization of the Petroleum Exporting Countries
· HQ at Vienna, Austria.
· A group of oil producing countries Saudi, UAE, Venezuela, Iran, Iraq etc with total 14 members.
· Qatar withdrew from 1 Jan 19. Russia is NOT a member
|· Organisation for Economic Co-operation and Development-
· HQ at Paris, France.
· Works for International cooperation in the matters of economy and taxation. Known for Base erosion and profit shifting (BEPS) Norms. India is not a member.
|· International forum for the governments and central bank governors from 19 countries and the European Union.
· Annual summits: 2018 at Buenos Aires-Argentina, 2019 at Osaka – Japan….2022 at Delhi.
|· e.g. India Japan 2+2 = meeting of the foreign minister & defense minister from each side.|
|JAI trilat eral 2018
|· Prime Minister Narendra Modi, US President Donald Trump and Japan Prime Minister Shinzo Abe met in a trilateral format in the sidelines of G-20 Summit in Buenos Aires, Argentina. It was called the first-ever ‘JAI’ meeting.
· Objective – Economic growth, common prosperity.
|· Quadrilateral Security Dialogue is an informal strategic dialogue between the United States, Japan, Australia and India.|
G20: OSAKA DECLARATION
2019-June: G20 summit at Osaka, Japan. Its declaration announced following points:
- We will work together to foster global economic growth using technological innovation, esp. Digitalization.
- Cross-border flow of data, information, ideas and knowledge generates higher productivity, greater innovation, and improved sustainable development. So, we will encourage free flow of data to harness the opportunities of the digital economy. There should not be any restriction on companies from storing personal information, in foreign servers. Japanese PM Shinzo Abe called this initiative ‘Data Free Flow with Trust’ (DFFT).
- We will cooperate to encourage the interoperability of different frameworks, and we affirm the role of data for development.
- We endorse the G20 Fukuoka Policy Priorities on Aging society’s Financial Inclusion.
- We affirm our support to G20/OECD Base Erosion and Profit Shifting (BEPS) Agreement; FATF’s regulations against money laundering, terrorist financing. No safe haven be given to any economic offenders.
- Tourism, Agriculture, Global Health & Environmental Issues.
- Next summits: Saudi Arabia in 2020, in Italy in
2021 and in India in 2022 (it is also India’s 75th anniversary of independence)
Osaka declaration: why India refused to sign
India, South Africa and Indonesia remained absent when G20 members formally signed Osaka declaration because:
- India believes that all of the countries must individually manage data. Otherwise MNCs will use data for their commercial benefits, harming privacy of citizens and sovereign interests of the States. (e.g. Huawei mobiles’ send their data to China, they may be hacked by Government-sponsored hackers to spy on India.)
- Such free flow of data may be misused for influencing public opinion through targeted advertisements and articles on social media. (e.g. The alleged Russian hand in Trump’s election.)
- Data is a new form of wealth. US opposes data localization policies so, this entire matter should be discussed within WTO and not outside of it.
Conclusion: While India understands and appreciates the role of ICT in economic development and good governance. The issue of data flow requires a wider global cooperation without undermining an individual’s privacy or a State’s sovereign interests. Considering these facets, India has refused to sign the Osaka declaration on cross border data flow.
G7 – Group of Seven (1975)
- Consist of seven major developed countries: Canada, France, Germany, Italy, Japan, USA, UK.
- 1997: Russia was added so it became G8 but then Russia annexed Crimea region of Ukraine to Russia was Expelled from this group so again it became G7 in 2014.
- 2019: Summit at Biarritz, France. India was also invited to attend.
- 2020: Summit was to be held at USA. But postponed due to Corona.
- Trump proposed Australia, India, South Korea, Russia etc should also be invited at G7. Although the UK hates the idea of inviting Russia back.
D10: 5G club proposed by UK (2020)
- UK proposed “D10” club of democratic partners including –
- G7 countries – UK, US, Italy, Germany, France, Japan and Canada
- + 3 more plus Australia, South Korea and India
- Objective – create supply chain for 5G equipment and technologies. To avoid relying on China/ Huawei- for data security and data privacy.
GROUPINGS: GCC VS OIC
|Gulf Cooperation Council (GCC); 1981||Organisation of Islamic Cooperation (OIC); 1969|
|HQ – Riyadh, Saudi Arabia||HQ – Jeddah, Saudi Arabia|
|6 members: Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the UAE||Around 50 Islamic countries from across of the world.
|2017: some of these members have cut off diplomatic and business ties with Qatar.
|2019-March: While India is not a member, but first time invited in OIC meeting as guest of honour. Sushma Swaraj attended at Abu Dhabi, UAE while Pakistan (OIC member) skipped the event in protest.|
MISC GROUPINGS / ORGANIZATIONS
UN specialized agencies related to Economy
|· UNCTAD: United Nations Conference on Trade and Development
· UNDP: United Nations Development Programme known for its Human development report.
· UNIDO: UN Industrial Development Organization
· World Intellectual Property Organization (WIPO)
· International Labour Organization (ILO).
· Note – List not exhaustive
World Economic Forum, 1971
|· Not-for-profit think-tank in Cologny (a municipal area in Geneva), Switzerland.
· Known for its annual summit at Davos resort in Switzerland where they invite selected world leaders, thinkers, NGOs and industrialists.
· Davos Theme 2020: Stakeholders for a Cohesive and Sustainable World.
· Davos Theme 2019: Globalization 4.0 in 4th industrial revolution
· Annual reports of WEF
6. Global Competitiveness Report,
7. Global Information Technology Report,
8. Global Gender Gap Report,
9. Global Risks Report,
10. Global Travel and Tourism Report,
11. Financial Development Report,
12. Global Enabling Trade Report.
|Free Trade Area of the South American countries of Bolivia, Colombia, Ecuador, and Peru.|
|Southern Common Market of Argentina, Brazil, Paraguay, Uruguay + ANDEAN + other countries. However Venezuela was suspended in 2016.|
|Q.The Global Competitiveness Report is published by the _______________(CSE -2019)
EXPORT CONTROL / NON-PROLIFERATION REGIMES
|– Nuclear Suppliers Group (NSG) is a group of countries that control the export of nuke materials, equipment and technology & aim to prevent its use in making nuclear bombs.
– China is a member, India not a member yet due to China’s objection.
|Australia – Group
|Informal group that encourages members not to export chemical or biological weapons or technology.
China not a member, India became member (2018).
|· Missile Technology Control Regime is an informal group that encourages members not to export missiles equipment, software, technology.
· China not a member, India became member (2016)
|Wassenaar Arrangement 1996
|· Wassenaar is an area in Netherland. This arrangement (1996) requires members to be strict and transparent in the export of conventional arms and dual-use goods and technologies (e.g. Night Vision Googles). So they don’t fall in the hands of terrorists and rogue states like N. Korea.
· China not a member, India became member (2017)
PREVIOUS YEAR QUESTIONS
|GSM2-2018||What are the key areas of reform if the WTO has to survive in the present context of ‘Trade War’, especially keeping in mind the interest of India?|
|GSM2-2014||The aim of Information Technology Agreements (ITAs) is to lower all taxes and tariffs on information technology products by signatories to zero. What impact should such agreements have on India’s interests?|
|GSM2-2014||India has recently signed to become founding a New Development Bank (NDB) and also the Asian Infrastructure Investment Bank (AIIB). How will the role of the two Banks be different? Discuss the significance of these two Banks for India.|
|GSM2-2014||WTO is an important international institution where decisions taken affect countries in profound manner. What is the mandate of WTO and how binding are their decisions? Critically analyse India’s stand on the latest round of talks on Food security.|
|GSM2-2013||The World Bank and the IMF, collectively known as the Bretton Woods Institutions, are the two inter-governmental pillars supporting the structure of the world’s economic and financial order. Superficially, the World Bank and the IMF exhibit many common characteristics, yet their role, functions and mandate are distinctly different. Elucidate.|
|How would the recent phenomenon of protectionism and currency manipulations in world trade affect macroeconomic stability of India?|