Need to Remove Trade Barriers to Accelerate Country’s Economy

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TOPIC: General Studies 2:

• Bilateral, regional and global groupings and agreements involving India and/or affecting India’s interests
• Effect of policies and politics of developed and developing countries on India’s interests, Indian diaspora.
• Important International institutions, agencies and fora- their structure, mandate.

In News: IMF, World Bank and WTO call for removing trade barriers to boost global growth and employment even as they blamed technology as a prime reason for job losses in some regions.

• While trade between India and Pakistan is a paltry $2 billion a year, it can potentially be $32 billion, provided some of the trade barriers are removed by both the countries. Similarly, trade between the countries of South Asia can rise three times from the current $23 billion if the costs of trade are reduced.
• These are some of the findings of a World Bank study titled A Glass Half Full: The Promise of Regional Trade in South Asia. Intra-regional trade accounts for just 5% of South Asia’s total trade as compared to 50% in East Asia and the Pacific and 22% in Sub-Saharan Africa.

The rationale behind

• The economic well-being of billions of people depends on trade. Deeper trade integration twinned with supportive domestic policies can help boost incomes and accelerate global growth.
• When it comes to trade, it is not required to choose between inclusiveness and economic growth. Evidence shows that opening of economies to trade, especially in the late 20th century, boosted incomes and living standards across advanced and developing countries.

What has led to this observation?

Since the early 2000’s, however, the pace of opening has largely stalled, with too many existing trade barriers and other policies that favour chosen domestic industries over the broader economy remaining in place, and new barriers being created. Such policies can cause a chain reaction, as other countries adopt similar measures with the effect of lowering overall growth, reducing output, and harming workers

Four specific man-made barriers that have constrained trade within South Asia are:

• Tariff and para tariff barriers
• Complicated Non-Tariff Measures (NTMs)
• High costs of connectivity
• Trust deficit among South Asian countries, which underscores the importance of people-to-people interactions.

But can free trade be a reality?

Completely free trade is unlikely because countries have vastly different economies in different stages of development, different degrees of domestic economic and political freedoms and separate currencies. To achieve free trade, governments would have to reverse much of the involvement in their economies and financial markets they have gained since the 1930s. They’d have to surrender considerable sovereignty to market forces and could no longer keep out imports in the name of health and safety, either to support local industry or due to true civic concerns. Completely free trade would also require completely free-floating currencies with no government interference. That is going to be difficult.

Does there exist a strong case for lowering of import duties?

Higher the tariff, bigger the evasion across sectors. Lower import duties will for sure create conditions for high growth in trade and investment and help the economy in at least four ways.

Increase India’s export: Lower duties will remove a big structural weakness of India’s exports by enabling participation in the global value chains (GVCs). Products manufactured in GVCs account for two-thirds of world trade, but India’s share is meagre (why – import duties and time taken at the port/Customs).

Improve ease of doing business: For industrial goods, India’s average rate of import duty is 10.2 per cent while the weighted average import duty is only 5.7 per cent. The significant difference in the two numbers is because some of the key imports attract low duty and large value of imports are allowed end-use specific exemptions. Lower duties will do away with the need for grant of many exemptions which make implementation complex. High duties also lead to smuggling, evasion, litigation, and corruption.

Reduce the need for most export schemes: Many exporters use duty exemption schemes to import inputs and machinery needed for making an export product at zero duty. Low import duties will reduce the need for such export schemes. Low duties will reduce the outgo under the drawback scheme, which allows a refund to the firm which uses duty-paid inputs. Further, higher the duties, higher the allure to take more than is due through over-invoicing of exports. Duty reduction will make export schemes simple to administer and reduce the hassle of exporters.

More robust trade policy regime: For example, low duties will reduce the adverse effects of free trade agreements (FTAs) on domestic industry. High tariff means high protection to domestic industry. If the high wall crumbles as a result of FTA, the industry gets a big shock when a high import duty country enters into an FTA — substantial trade shifts from most efficient supplier to the FTA partner as the latter supplies without high duties. Import duty in most of India’s FTA partners is lower compared to India. This means their firms gain more price advantage compared to Indian counterparts. Reform of Customs duty regime should ideally precede signing of any mega FTA.

What can government do?

Reinvigorating trade, packaged with domestic policies to share gains from trade widely, needs to be a key priority.  One part of this is to remove trade barriers and reduce subsidies and other measures that distort trade. Stepping up trade reform is essential to reinvigorate productivity and income growth, both in advanced and in developing countries.

Governments must find better ways of supporting workers. Each country needs to find its own mix of policies that is right for their circumstances. Approaches such as a greater emphasis on job search assistance, retraining, and vocational training can help those negatively affected by technology or trade to change jobs and industries. Unemployment insurance and other social safety nets give workers the chance to retool.

• On border tax distortions, the targeting on sensitive lists and para tariffs can be done to enable real progress on SAFTA.
• On non-tariff barriers, a multi-pronged effort is required, focusing on information flows, electronic data interchange, and capacity building.
• The mutual trust deficits can be addressed by reinforcing the virtuous circle between trade and trust — the experience of Bangladesh-India border haats (border trade markets between Bangladesh and India).

Must read: The new trade order: Tariff War

Connecting the Dots:

1. The issues of trade policy are too complex to be wrapped up in the slogan “liberalise trade”. Discuss.