India in the evolving global trading system Martin Wolf, Associate Editor & Chief Economics Commentator, Financial Times CUTS 10 th March 2016 Delhi, India

2 Embattled future of global trade policy Triumph of global trade Trade in the post-2007 era Challenges to the trading system Options for Indian trade policy Conclusion

1. Triumph of global trade Four features of world trade: –Greatest openness to trade and investment in world history –Almost universal embrace of globalisation: the average ratio of trade to GDP has risen from about 10 per cent in the mid- 1950s to close to 25 per cent today –Higher barriers to trade in services than in goods and sharp divide between trade in face-to-face services and services delivered as “bits” –Rise of China as a new pole for world trade 3

1. Triumph of trade 4 TRADE GROWTH IS STRONG BUT SLOWING

1. Triumph of trade 5 TRADE GROWTH IS STRONG BUT SLOWING

1. Triumph of trade 6 GLOBALISATION IS THE STORY OF OUR AGE

1. Triumph of trade 7 MERCHANDISE MORE TRADED THAN SERVICES

1. Triumph of trade 8 CHINA EMERGES AS A NEW CENTRE FOR TRADE

1. Triumph of trade 9 CHINA EMERGES AS A NEW CENTRE FOR TRADE

2. Trade in post-2007 era There was no wholesale move to protectionism during the financial crisis, unlike in the 1930s This is an important achievement. It was due to: –Policy: expansionary macroeconomic response –Institutions: especially the role of the WTO –Interests: role of multinational companies –Ideas: triumph of the ideology of the market –Welfare: role of social safety nets –Convergence: success of emerging economies 10

2. Trade in post-2007 era Yet trade growth is slowing This is probably because of: –Slowing liberalisation and some protectionism –Exhaustion of underlying trading opportunities in merchandise trade and –Technological changes and re-shoring A big question is whether the trade dynamic has permanently disappeared 11

2. Trade in post-2007 era 12 TRADE REBOUNDS BUT ITS GROWTH SLOWS

2. Trade in post-2007 era 13 TRADE REBOUNDS BUT ITS GROWTH SLOWS

2. Trade in post-2007 era 14 RISE AND FALL OF TRADE DYNAMISM

3. Challenges to the trading system Failure of the Doha round launched in November 2001 and so rising fragility of the World Trade Organisation Rise of US hub-and-spoke agreements and the super-regionals (TPP (Trans-Pacific Partnership) and TTIP (Transatlantic Trade and Investment Partnership, with the European Union) Trade as great power conflict 15

3. Challenges to the trading system TPP involves 11 countries, most significantly Japan. The partners account for 36 per cent of world output, 11 per cent of population and just under 30 per cent of world trade TTIP involves the US and EU, which account for 46 per cent of world output and just over 30 per cent of world trade The argument for these super-preferentials is that these are now the only way to liberalise trade 16

3. Challenges to the trading system 17 US SEEKS TO CARVE OUT ITS OWN BACKYARD

3. Challenges to the trading system 18 US SEEKS TO CARVE OUT ITS OWN BACKYARD

3. Challenges to the trading system There is a risk that pursuit of discrimination would fragment trade, reduce efficiency and worsen international relations, as Jagdish Bhagwati, the doyen of trade economists, has long argued There is a far stronger case for “open plurilateralism” TPP and TTIP are also different. In the words of Pascal Lamy, former director general of the WTO, “TPP is mostly, though not only, about classical protection-related market access issues... TTIP is mostly, though not only, about... regulatory convergence.” 19

3. Challenges to the trading system “Shallow integration” has led to “deep integration” Particularly difficult issues in the latter are: –Protection of intellectual property –Food safety, genetically-modified organisms and drug safety –Environmental standards –Labour rights –Cultural protection and, not least –Investor-state dispute settlement All these will create particularly big challenges for India. But even the US might not ratify its deals. 20

3. Challenges to the trading system The role of private business in subverting public choices is a concern Also, the gains from liberalisation are small, at least to the US A study of TPP by the Peterson Institute for International Economics suggests it would raise US real incomes by 0.4 per cent. Completion of TPP and TTIP might raise real incomes in the US by 1 per cent. 21

3. Challenges to the trading system Four further issues: –Global monetary system: sanctions on exchange rates? –Climate: sanctions against emitters? –Inequality: trade, wages and the new protectionism? –China: competition or co-operation 22

4. Options for Indian trade policy India will soon be the world’s most populous country India has the world’s fastest-growing large economy India needs to sustain fast growth for at least a generation Its trade needs to expand at least in line with its GDP Domestic and global liberalisation are also strongly mutually supportive India is a relatively small trading power today. But its influence will also grow. 23

4. Options for Indian trade policy 24 INDIA IS STILL SMALL IN MERCHANDISE

4. Options for Indian trade policy 25 BUT NOT IN COMMERCIAL SERVICES

4. Options for Indian trade policy Options: –Status quo: unilateral liberalisation, reliance on WTO, plus limited and undemanding FTAs Pros: the economy is already not quite well Cons: risks serious loss of opportunities for market access as super-FTAs emerge –Enter into bilateral FTA agreements with major trading powers, notably US, EU and even China Pros: large potential for gains from trade and increased domestic competition Cons: unequal bargaining power in negotiations 26

4. Options for Indian trade policy –Seek to enter relevant mega-regionals: TPP or the Free Trade Area of the Asia Pacific (FTAAP), now being considered by APEC Pros: India would enjoy even larger potential gains from trade and enhanced competition in the domestic economy Cons: these are very demanding agreements while entry into TPP might allow very little bargaining by India –Join Trade in Services Agreement, Government Procurement Agreement or Environmental Goods Agreement –Combine the bilateral, mega-regional and plurilateral options 27

5. Conclusions This is a very difficult and confused time for trade policy India is seen from the outside as a recalcitrant player in the system But India very much requires an open world economy It also needs to use trade as a lever for domestic reform and enhanced competition It should take a proactive and ambitious role in the emerging trade architecture 28