Should India quit it ?

Rajeev Sharma

India already has Free Trade Agreements with ASEAN and her immediate neighbours—“if it left the WTO, no great harm would come to it in the areas of trade and investment."

The German research organization Bertelsmann Stiftung has assessed the contribution of WTO in the last 25 years to the economies of the world. It has found that membership of the WTO has led to increase in exports of both China and India at 37 and 18 percent respectively.

World Trade Organization Recent times have seen withdrawal from globalization across countries. Britain has quit the European Union. The United States has virtually walked out of the WTO and made bilateral trade agreements with Canada, Mexico and China, for example. This reversal of trend provides an opportunity to reassess whether we, too, should stay in WTO at all.
A key argument in favour of globalization is that China—having missed the bus in 1995 when the WTO Treaty was signed—made strident efforts to join the WTO later. Her economy has also grown fast with ever deepening integration with the global economy. However, her growth is not necessarily attributable to the WTO. China has very high domestic savings rates. Her present savings rate is 46 per cent against our 31 per cent. Her growth could be more due to high savings and less due to globalization.

The German research organization Bertelsmann Stiftung has assessed the contribution of WTO in the last 25 years to the economies of the world. It has found that membership of the WTO has led to increase in exports of both China and India at 37 and 18 per cent respectively. However, the impact on the welfare of their peoples follows a different trajectory. WTO has led to increase in welfare China at a meager 0.6 per cent against 2.7 per cent for India. Thus more increase in exports has led to lesser impact on welfare in China and lesser increase in exports has led to higher impact on welfare in India. This means that India has secured more welfare by not having adopted free trade with the same gusto as China. Thus, the high growth rates and higher wages prevalent in the Chinese economy cannot be attributed to free trade or the WTO. They are attributable to higher savings rate and other institutional factors.

The Medium Small and Micro Enterprises (MSME) sector has been particularly vulnerable to free trade. Goods made in large volumes on automated assembly lines are cheaper and leading to closure of our MSMEs.

In this backdrop, we must understand the statement of Jayshree Sengupta, Senior Fellow with the Delhibased Observer Research Foundation that India already has Free Trade Agreements with ASEAN and her immediate neighbours—“if it left the WTO, no great harm would come to it in the areas of trade and investment.”

We need to undertake a dispassionate analysis of costs and benefits of WTO. The first cost is that free trade is leading to trouble for our manufacturing sector. The Medium Small and Micro Enterprises (MSME) sector has been particularly vulnerable to free trade. Goods made in large volumes on automated assembly lines are cheaper and leading to closure of our MSMEs. These industries were the main engine of job creation. In the result, jobs are fewer, the common man has less purchasing power and the entire economy has slowed down. Quitting the WTO will enable us to impose higher import duties on such goods, revive our MSME sector, put purchasing power in the hands of our people and rev up the economy.

The second cost is that we can scrap the present “product” patents as mandated by the WTO and revert to the previous “process” patents that we had adopted before we joined the WTO. The product patents regime prohibits the manufacture of a patented product irrespective of the process of manufacture that may be adopted. The previous process patents regime allowed only a process to be patented. An entrepreneur could manufacture the same product by an alternate process. This stipulation was the base on which our prowess in the pharmaceutical sector has developed. Our companies produced the same drugs at a fraction of cost by alternate processes. Quitting the WTO would enable us to do the same in future.

The third cost of WTO is the damage to our environment. Free trade necessarily means that the country which produces goods at the cheapest price will emerge victorious. The damage to the environment does not enter the market mechanism. A factory making cheap goods by polluting the river will win and one that does not pollute will lose. Thus economic race to the top and environmental race to the bottom proceed hand in hand.

WTO is dead anyways. President Trump has refused to appoint Judges to the Appellate Body of WTO and rendered it toothless. We would only be quitting a dead organization.

The main benefit from WTO is that it enables cheap goods produced in foreign countries to enter our country. Our consumer gets access to cheap goods. However, this comes at a steep cost. Cheap imported goods lead to closure of our MSMEs and to loss of jobs. Of what use are goods lying in the shops if our people do not have the money to buy them? President Trump has withdrawn from free trade mainly because he wanted to protect the jobs of the American people. He has imposed high import tariffs even though it led to deprivation of cheap goods to the American consumers. Thus, the benefit from access to cheap goods comes together with a bigger cost of loss of jobs.

The second benefit is from the inflow of new technologies and better efficiency of our businesses. There is no doubt that free trade has forced our businesses to become efficient. However, this could also be attained without embracing the WTO. We could promote competition and create optimal pressure on Indian businesses to upgrade. We could provide funds to Indian businesses to buy frontline technologies. We could use the revenues earned from higher import duties to make investments in research.

The costs of WTO in job losses and environmental degradation are unsurmountable. The benefits of WTO in access to cheap goods and availability of frontline technologies can yet be obtained by alternate policies. Thus we must quit the WTO. It is dead anyways. President Trump has refused to appoint Judges to the Appellate Body of WTO and rendered it toothless. Thus, we would only be quitting a dead organization.

A factor that is especially relevant for India is that our exports are largely in the services sector which is not covered under the WTO treaty. These will not be affected by our quitting the WTO. We have more to gain in the manufacturing sector and little to lose in the services sector.

The danger in adopting a protectionist stance is that we could revert to our old ways of extracting bureaucratic and political rents. The imposition of higher import duties will lead to inflated domestic prices. The difference between the domestic cost of production and the inflated domestic price can be appropriated variously. It can be used to pay higher wages or higher expenditures on Community Social Responsibility or environment protection such as by adopting stricter pollution norms. It can be used to cover up the inefficiency of domestic businesses such as by using obsolete technologies as we had done for decades by producing fuel-inefficient cars until we opened to foreign investment in Suzuki India. The difference can be used to extract bureaucratic- and political rents such as by corruption. Protectionism will be beneficial only if it is used for raising the wages and environment protection and not for covering up the inefficiency of our businesses or for extracting bureaucratic and political rents.