What is the problem?
Union Commerce Minister Suresh Prabhu last week stated that India does
not subsidise its exports to the rest of the world. The Minister’s
statement comes in the wake of increasing criticism that financial
incentives offered by the Indian government to domestic exporters are
distorting international trade. Mr. Prabhu also warned that the very
existence of the World Trade Organisation (WTO) is currently under
threat amid the rise in trade tensions between the U.S. and its major
trading partners such as China, the European Union, Canada and others
since the beginning of the year. U.S. President Donald Trump is trying
to narrow his country’s trade deficit with the rest of the world,
particularly China. The trade deficit is the amount by which the value
of imports into a country exceeds the value of its exports to other
countries. The U.S. believes that sops offered to Indian exporters work
against the interests of American companies that are unable to match the
price of subsidised Indian goods. This further worsens America’s trade
deficit.
not subsidise its exports to the rest of the world. The Minister’s
statement comes in the wake of increasing criticism that financial
incentives offered by the Indian government to domestic exporters are
distorting international trade. Mr. Prabhu also warned that the very
existence of the World Trade Organisation (WTO) is currently under
threat amid the rise in trade tensions between the U.S. and its major
trading partners such as China, the European Union, Canada and others
since the beginning of the year. U.S. President Donald Trump is trying
to narrow his country’s trade deficit with the rest of the world,
particularly China. The trade deficit is the amount by which the value
of imports into a country exceeds the value of its exports to other
countries. The U.S. believes that sops offered to Indian exporters work
against the interests of American companies that are unable to match the
price of subsidised Indian goods. This further worsens America’s trade
deficit.
Is WTO under threat?
The WTO was formed in 1995 with the goal of regulating trade between
countries through appropriate ground rules. Among other things, members
of the WTO were supposed to adopt non-discriminatory trade practices
that offered a level playing field for all businesses. This has,
however, been easier said than done as countries have tried to favour
their domestic companies. Domestic companies are generally able to lobby
their governments to adopt trade practices favourable to them. In March
this year, the U.S. dragged India to the WTO for failing to curb export
subsidies that it argues give an unfair advantage to Indian exporters.
countries through appropriate ground rules. Among other things, members
of the WTO were supposed to adopt non-discriminatory trade practices
that offered a level playing field for all businesses. This has,
however, been easier said than done as countries have tried to favour
their domestic companies. Domestic companies are generally able to lobby
their governments to adopt trade practices favourable to them. In March
this year, the U.S. dragged India to the WTO for failing to curb export
subsidies that it argues give an unfair advantage to Indian exporters.
The WTO had earlier allowed India and a number of other low-income
countries with an income per capita of under $1,000 to offer export
subsidies. India, however, broke past this threshold in 2013. The Indian
government encourages exports through special economic zones and
schemes like the Merchandise Exports from India Scheme (MEIS), which
offer tax breaks to exporters.
countries with an income per capita of under $1,000 to offer export
subsidies. India, however, broke past this threshold in 2013. The Indian
government encourages exports through special economic zones and
schemes like the Merchandise Exports from India Scheme (MEIS), which
offer tax breaks to exporters.
What if tensions increase?
The increase in trade tensions between countries has raised questions
about the WTO’s purpose and relevance. The international trade body has
been used by politicians as a forum to voice and defend the needs of
various special interest groups. India’s politicians, for instance, have
been keen on protecting the interests of their farmers through the
minimum support price. Countries in the West have also tried to protect
their farmers and industries through the heavy use of subsidies. Without
these subsidies, the production and distribution of goods across the
world would be determined purely based on market forces. Many critics
have argued that a bureaucratic organisation like the WTO cannot fulfil
the ideal of unfettered free trade between countries that can vastly
improve global living standards. Instead, they argue that such a
bureaucracy is likely to be captured by special interest groups whose
demands will harm the free market.
about the WTO’s purpose and relevance. The international trade body has
been used by politicians as a forum to voice and defend the needs of
various special interest groups. India’s politicians, for instance, have
been keen on protecting the interests of their farmers through the
minimum support price. Countries in the West have also tried to protect
their farmers and industries through the heavy use of subsidies. Without
these subsidies, the production and distribution of goods across the
world would be determined purely based on market forces. Many critics
have argued that a bureaucratic organisation like the WTO cannot fulfil
the ideal of unfettered free trade between countries that can vastly
improve global living standards. Instead, they argue that such a
bureaucracy is likely to be captured by special interest groups whose
demands will harm the free market.
What is in store?
The future of the WTO hangs in the balance as the world slowly slips
into a trade war. The biggest casualty is likely to be economic growth
as tit-for-tat tariffs increase the tax burden on the global economy.
The WTO’s track record in achieving free trade is also likely to come
under scrutiny. Critics argue that the WTO, by discouraging competition
between governments, may be preventing the tearing down of global trade
barriers. In fact, they view certain export subsidies like tax breaks,
which are prohibited under the rules of the WTO but employed by
governments to attract businesses, as lowering the overall tax burden on
the global economy. Further, according to the World Bank, the tariff
rates applied between 1996 and 2008 under unilateral and preferential
trade agreements have actually been lower than under the WTO’s
multilateral framework.
into a trade war. The biggest casualty is likely to be economic growth
as tit-for-tat tariffs increase the tax burden on the global economy.
The WTO’s track record in achieving free trade is also likely to come
under scrutiny. Critics argue that the WTO, by discouraging competition
between governments, may be preventing the tearing down of global trade
barriers. In fact, they view certain export subsidies like tax breaks,
which are prohibited under the rules of the WTO but employed by
governments to attract businesses, as lowering the overall tax burden on
the global economy. Further, according to the World Bank, the tariff
rates applied between 1996 and 2008 under unilateral and preferential
trade agreements have actually been lower than under the WTO’s
multilateral framework.
