The real threat to WTO

Sanjaya Baru | July 31, 2014

The US must address Indian concerns that it may abandon the WTO and pursue a trade agenda inimical to India once it gets the trade facilitation deal through. Source: Reuters

Aside from war and migration, observed the Nobel prize winning economist, Thomas C. Schelling, “trade is what most of international relations are about. For that reason, trade policy is national security policy.”

One of the few economists to take any serious academic interest in national security issues, and known for his analysis of nuclear deterrence from a game theoretic perspective, Schelling made these observations in 1971 to a United States Congressional Commission on “National Security Considerations Affecting Trade Policy”.

While economists like to believe that trade policy is defined by rational calculus, the wielders of power and policy have always known that trade policy is integral to a nation’s strategic policy. The transatlantic powers created a post-war trading regime under the auspices of the General Agreement on Trade and Tariffs (GATT) designed to serve their geoeconomic interests. This was sought to be democratised, though only partially, with the World Trade Organisation (WTO), creating not just a “rules-based” trading system but also a disciplinary mechanism to enforce those rules.

India correctly took the view that it had a “strategic stake” in such a multilateral rules-based system, and successive governments have worked hard with the West through the WTO. The current impasse in the WTO has in fact been created by the dilution of Western commitment to that regime, and not by developing-country intransigence, much less India’s.

In the current stand-off on India’s stance on its food security policy, Western powers are pretending as if they are the upholders of fair play and India the spoiler. The fact is that major trading powers have never shied away from being spoilers in multilateral trade talks whenever it has suited their national interest. It should be recalled that the US and EU have readily deployed non-economic weapons to threaten their trade partners whenever their economic interests have been threatened. When Japan emerged as a competitive global exporter, building a huge trade surplus vis-à-vis the transatlantic economies, the US deployed domestic laws, Special and Super 301, to get Japan to adopt “voluntary export restraints” (VERs). The EU “single market” was created in the early 1990s as a conscious response to Japan’s rise.

Hence, it would be churlish for the West to criticise the Indian government for giving primacy to domestic politics in external trade negotiations. The real threat to the WTO-based multilateral trading system has come in recent months from the US initiative to enter into WTO-plus plurilateral agreements, namely, the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP).

While a plethora of such agreements around the world has virtually sidelined the WTO, the TPP/ TTIP challenge is the biggest threat so far to a rules-based development-oriented multilateralism. This assessment came through clearly at a recent conference on “Trade and Flag: Changing Balance of Power in the Multilateral Trading System”, organised by the Geoeconomics and Strategy Programme of the International Institute of Strategic Studies (IISS).

The TPP and the TTIP have been cooked up as a “geoeconomic” response to China’s emergence as a “mega-trader”, while being touted as defining a new “gold standard” for international trade. While Japan has reluctantly joined the TPP, most major emerging economies, especially the BRICS economies — Brazil, Russia, India, China and South Africa — remain outside TPP-TTIP.

It is against this larger “Great Game” in global trade that one must view India’s current stance. True, the shadow of domestic politics, and public concern about food inflation and food security, loom large over the Narendra Modi government’s stance, which is but a continuation of the view taken by the Manmohan Singh government.

However, it is also clear that this is not the only factor shaping Indian official thinking on trade policy. There seems to be an assessment that the transatlantic powers are digging their heels in on market access, trade liberalisation and weakening the WTO’s “rules-based” trading system. Perhaps India is not the target of their actions and China is. But India would suffer collateral damage and, so far, the US has not provided any assurance that India would not be a victim of the unintended consequences of a US-China trade war.

Differences over trade come against the background of several other differences that have dogged US-India relations during the tenure of President Barrack Obama. These issues ought to be ironed out when US Secretary of State John Kerry meets India’s new political leadership.

Regrettably, Kerry’s remarks on WTO and India, on the eve of his arrival in New Delhi, are not particularly helpful. He said on Tuesday, “India must decide where it fits in the global trading system. Its commitment to a rules-based trading order and its willingness to fulfil its obligation will be a key indication.” It could well be argued that the US too must come clean on its commitment to a “rules-based” system that is fair to developing economies.

The impasse in Geneva will get sorted out when Washington DC’s intentions behind TPP/ TTIP are better explained and the US wins the confidence of developing countries. The US must address Indian concerns that it may abandon the WTO and pursue a trade agenda inimical to India once it gets the trade facilitation deal through. For its part, India must reform its food security system and its agricultural economy as a whole, and ensure they are WTO-compatible. For now, however, the US and India must resist quarrelling on this issue and revive their relationship.

What can perhaps change the game and revive trust between India and the US is a revival of the larger strategic engagement between the two democracies that was initiated by US Presidents Bill Clinton and George Bush. Obama has not been able to retain that trust with India. Prime Minister Modi has made a new beginning. It remains to be seen whether Kerry is able to win back New Delhi’s trust and affection, restoring balance to a wayward relationship.

The writer is director for geoeconomics and strategy, International Institute for Strategic Studies, and honorary senior fellow, Centre for Policy Research, New Delhi