Saturday, November 1, 2014
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Trade and the Third World

Hypocrisy and trade-talk go together, as America's decision to impose tariffs on imported steel shows. Although that action is expected to be judged illegal by the World Trade Organization (WTO), developing countries remain wary. Historically, they (India prominent among them) argued that the WTO is a tool of rich countries and so resisted much of what it sought to do. Indeed, before the WTO ministerial meeting in Doha earlier this year, India's line was to oppose the launch of a new trade round, resist further trade liberalization in industrial goods, and oppose the use of trade sanctions to punish countries that fail to meet minimal labor standards.

The perception that the WTO is largely an instrument of the powerful, industrialized nations is broadly correct. To oppose it on all fronts, however, is wrong. A more sophisticated approach towards the WTO (and the North in general) is needed.

The WTO says that it is a democratic organization run on the principle of one country, one vote. Anybody who follows the WTO knows that rich countries get around this `nuisance' democratic formality by lobbying behind the scenes to fix the agenda in advance.

Despite this, constant opposition to the WTO is self-defeating. As the dispute about America's new steel tariffs illustrates, in today's globalized world a centralized trade ombudsman is vital. Eliminating the WTO would be like trying to run a modern society without a law court. While law courts are typically more lenient towards the rich and powerful, it is still better to have them than not.

Chronic opposition also reveals a lack of self-confidence of the sort when you cannot decide what is good for yourself but, instead, demand the opposite of what your trading partners want in the belief that what is good for them must be bad for you. This implies a zero-sum view of global economics that is false. In economic transactions there are many instances where everyone gains or everyone loses.

So consider in this light India's three demands. It is right for India to have opposed injecting international labor standards into the WTO agenda, but it is wrong that India strongly opposed a new trade round.

India's average tariff rate is around 30%. While much lower than previously, it is higher than in most industrialized nations. But India independently decided to lower tariffs over the next three years. A global program to lower tariffs means that India would only be asked to do what it planned to do anyway. As others would have to lower their tariffs, India's access to other markets would increase.

Nowadays, economic policy is so complex that it is not always clear what is good for a nation and what is not. Last December, there was furor in India when a dispute settlement panel of the WTO ruled against India's practice of (1) forcing automobile manufacturers in India to buy a certain proportion of parts from Indian producers, and (2) requiring automotive manufacturers who need to import parts and kits to export goods worth the same value.

If we reflect on these conditions, it is not at all clear that these policies are good for India. Forcibly creating a market for Indian automobile parts eases pressure on these manufacturers to improve quality. Forcing Indian cars to use such parts handicaps Indian cars from matching international quality.

Similarly, coercing companies into matching every use of foreign exchange by producing foreign exchange destroys an essential feature of specialized production. Hence, the WTO ruling, at least in this case, may be a blessing in disguise. At times it is useful to be compelled to do what you may not have the will to do on your own.

India and other emerging economies must engage with the WTO, keeping pressure on it to give more voice to developing countries. There are, for example, 18 African countries without any representation in the WTO's office in Geneva. What benefit can they expect from the WTO?

When there is a WTO legal tussle and big countries bring in expensive lawyers to argue their case, what chance do poor countries have? As a democratic country with considerable expertise in economics and law, India should fight for better representation throughout the WTO. Once that is achieved, it will be easier to entrust the WTO with tasks, such as assuring minimal labor standards that appear contentious today. But a rule to remember is that even if this is not achieved, India and countries like it will gain more by being active participants in WTO deliberations than by withdrawing or being habitual naysayers.

Postscript: Fortunately, not all North-South engagements are politically charged. Some years ago I left Delhi to lecture in a city in the developing world. I told my host that I was planning to explore his city on foot. With the hospitality that comes so spontaneously to ``Third Worlders,'' he said he could not allow it, rang the bell on his desk, and asked his assistant to find out if the ``Fertility car'' was available. I was intrigued and, while the assistant was away on his errand, through deft questioning discerned the etymology of the ``Fertility car.'' The institute, it seems, had received money from a Northern nation for a project on fertility and some of the funds were used to buy a car, which was christened accordingly.

Soon, the assistant reappeared, panting, to report that the Fertility car was unavailable. But he said this with obvious pride in his ingenuity: because I was a guest of the Institute, he said, he went to another department and booked the ``Poverty'' car for me. The next day, nursing a slight feeling of ambivalence I explored that beautiful city in ``Poverty,'' never finding out what view the Northern donor took of this excursion.

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