Globalisation, trade and the WTO

Trade questions in ESI have shifted. A decade ago the standard question was "Has globalisation benefited India?" Now examiners ask about free trade agreements, supply chains moving out of China, tariff wars and whether the WTO still works. You need the theory to argue from first principles, the WTO rules to be precise, and India's recent trade policy to be current. This guide gives all three, and pairs with the balance of payments guide.

What globalisation means

Globalisation is the growing integration of economies through trade in goods and services, capital flows, technology and the movement of people. For India it accelerated after 1991: tariffs fell from very high levels, quantitative restrictions on imports were phased out, and foreign investment was opened sector by sector.

Recent years have brought talk of slowbalisation: trade growth slower than GDP after 2008, the pandemic's supply shocks, geopolitical tension, "friend-shoring" and a rise in unilateral tariffs by major economies.

Why countries trade: the theory

Worked example: suppose one unit of cloth takes India 2 hours and Country X 3 hours; one unit of software takes India 4 hours and Country X 12 hours.

1. India is more efficient in both, so it has an absolute advantage in both.
2. Opportunity cost of 1 software unit: India gives up 4/2 = 2 cloth; X gives up 12/3 = 4 cloth. India's is lower, so India has the comparative advantage in software.
3. Opportunity cost of 1 cloth: India gives up 2/4 = 0.5 software; X gives up 3/12 = 0.25 software. X's is lower, so X has the comparative advantage in cloth.
4. If they trade at any rate between 2 and 4 cloth per software unit, both gain.

Terms of trade

The net barter terms of trade = (export price index ÷ import price index) × 100. A fall is a deterioration: each unit of exports buys fewer imports.

Example: over a year, India's export prices rise 4% and import prices rise 10% (say, because of oil). Terms of trade = 104/110 × 100 ≈ 94.5, a deterioration of about 5.5%. This is how an oil shock hurts India even before the volumes change.

The WTO

• GATT (1947): India was one of the 23 original contracting parties. Eight negotiating rounds cut tariffs; the Uruguay Round (1986–94) ended with the Marrakesh Agreement (1994).
• WTO: established on 1 January 1995, headquartered in Geneva. The Ministerial Conference, meeting at least every two years, is the top body; the General Council runs day-to-day work and also sits as the Dispute Settlement Body and the Trade Policy Review Body. Decisions are normally by consensus.

Core principles: most-favoured-nation treatment (no discrimination among members), national treatment (no discrimination between imported and domestic goods once inside the market), binding tariffs, transparency, and special and differential treatment for developing countries.

Key agreements

Domestic support boxes under the Agreement on Agriculture:

• Amber box: trade-distorting support such as price support, capped. The de minimis allowance is 10% of the value of production for developing countries and 5% for developed.
• Blue box: support tied to production limits.
• Green box: minimally distorting support such as research, extension and direct income support; not capped.

India's concern is public stockholding for food security. Procurement at MSP counts as amber-box support, and could breach the 10% limit for some crops. The Bali ministerial (2013) agreed an interim "peace clause", under which such programmes will not be challenged until a permanent solution is found. India continues to push for that solution.

A WTO under strain

• The Appellate Body has been unable to hear appeals since December 2019, because the United States has blocked new appointments. Disputes can be "appealed into the void".
• Negotiations on fisheries subsidies, e-commerce and agriculture have moved slowly.
• Unilateral tariffs and industrial subsidies by major economies have tested MFN.

Trade remedies permitted by the WTO: anti-dumping duties, countervailing duties (against subsidies) and safeguard duties. In India, the Directorate General of Trade Remedies (DGTR) investigates, and the Finance Ministry imposes duties.

India's trade policy

• Foreign Trade Policy 2023 (from 1 April 2023) has no fixed end date and shifts from incentives to remission of taxes, trade facilitation and districts as export hubs.
• RoDTEP (2021) refunds embedded taxes on exports, replacing the MEIS scheme, which a WTO panel had found inconsistent with subsidy rules.
• Rupee trade settlement through Special Rupee Vostro Accounts (2022).

Free trade agreements

India left the RCEP negotiations in 2019, citing the risk of cheap imports (especially from China), weak safeguards and limited services gains.

Benefits and costs of globalisation for India

How global shocks reach India

1. Trade: slower world demand hits exports.
2. Commodity prices: oil shocks worsen the terms of trade, widen the CAD and raise inflation.
3. Capital flows: tighter policy in advanced economies causes outflows and rupee pressure.
4. Supply chains: disruptions halt production that depends on imported inputs.
5. Confidence: global risk aversion raises borrowing costs.

Model answer outline (15 marks)

Question: Should India pursue more free trade agreements? Examine in the light of its recent experience.

1. Opening: India's FTA push after leaving RCEP; UAE, Australia, EFTA and UK deals.
2. Benefits: market access for labour-intensive goods, services and mobility provisions, investment commitments, integration into supply chains.
3. Concerns: past FTAs (ASEAN, Korea, Japan) saw imports grow faster than exports; low utilisation by exporters; rules-of-origin misuse; sensitive sectors (dairy, agriculture).
4. Conditions for success: competitiveness at home (logistics, power, compliance), strong rules of origin, safeguards, standards.
5. WTO context: a weak multilateral system makes bilateral deals more important.
6. Conclusion: FTAs help when domestic reforms make firms ready to use them.

Short model answer (10 marks)

Question: Explain the "peace clause" and why it matters to India.

Under the WTO Agreement on Agriculture, trade-distorting domestic support, the amber box, is capped. For developing countries, product-specific support is allowed up to a de minimis level of 10% of the value of production. Procurement at administered prices for public stockholding is counted as such support, and the calculation uses an external reference price from 1986–88, which inflates the measured subsidy.

India buys rice and wheat at MSP for the public distribution system under the National Food Security Act. On the WTO method, support for rice could exceed the 10% limit, exposing India to dispute cases.

At the Bali ministerial conference in 2013, members agreed an interim peace clause: public stockholding programmes for food security will not be challenged under the Agreement on Agriculture, subject to transparency conditions, until a permanent solution is agreed. It protects India's food security programme, but it is interim and conditional. India therefore seeks a permanent solution, including an update of the outdated reference price.

Practice questions

1. If export prices rise 5% and import prices rise 5%, what happens to the terms of trade?
   • No change (105/105 × 100 = 100).
2. Which WTO principle requires equal treatment of imported and domestic goods once inside the market?
   • National treatment.
3. What is the de minimis limit for developing countries under the amber box?
   • 10% of the value of production.
4. Which mode of GATS covers an Indian IT professional working on-site abroad?
   • Mode 4, presence of natural persons.
5. Why has the WTO Appellate Body been non-functional since December 2019?
   • The United States has blocked new appointments.
6. Which body investigates anti-dumping cases in India?
   • The Directorate General of Trade Remedies.

What to do next

• Redo the comparative advantage example with your own numbers.
• Update the FTA table with the latest in-force dates.
• Revise with the international institutions guide.