India's Trade Overview



The imprints of trade and commerce began to be felt on the relations between nations and major economic phenomena began to have ripple effects on the international political landscape. In fact, gradually, among other things, deterioration of international trade & protectionism became one of the factors, which culminated into World War II. The turmoil that accompanied the war made great powers of the world realise that international economic collaboration and enduring peace and security are closely entwined. This prompted US President Franklin Roosevelt & British Prime Minister Winston Churchill to sign the Atlantic Charter.

A few decades down the line, developing nations like India realised that in order for them to prosper, they need to change their outlook from an inward-looking protectionist stance to an outward orientation. Policies like Look East Policy and globalization became a medium for India to engage with the rest of the world and to strengthen its position in world trade.

The significance of trade remains vital to the global politics even today, as the world’s largest economies – US and China – are embroiled in an ensuing trade war which is likely to have a major effect on the economies of the world, including India.

Several attempts were made to placate the global trading network after the establishment of GATT (General Agreement on Trade and Tariff) in 1947 with the primary focus on liberalizing and escalating world trade. The GATT’s main objective was the reduction of barriers to international trade and it was achieved through the reduction of tariff barriers, quantitative restrictions and subsidies on trade through a sequence of agreements. Also it was established to scheme lucid and transparent network for international trade henceforth the agreement comprised few set of principles like:

• Most Favoured Nation (MFN) principle under which each economy engaged under trade has to treat all other economy analogous with respect to tariffs and other trade scenario as it treats its most favoured nations.
• Reciprocity principle under which an economy has to share its advantage which is enjoyed by it in the form of any given bilateral agreement whether it is market access or tariff reduction simultaneously with residual contracting economies. This principle is cohort to most favored nation.
• Transparency principle is indispensable for harmonized system of trade for import shield henceforth GATT restricted the practice of quota except for agricultural trade.
• Tariff reduction was the most crucial principle for trade protection during inchoation phase for negotiation because GATT text lays out the compulsion of the contracting parties.

First negotiation round of GATT was held at Geneva in 1947 with 23 member countries which targeted 10 billion US dollars of trade worked on 45000 tariff line concessions. Seventh round of negotiation of GATT took place at Tokyo in 1973-79 having 99 member countries which worked on 4400 tariff lines and targeted 300 billion US dollars of trade. In these seven rounds of negotiation agricultural trade was ostracized. One of the main causes of abandoning agriculture in the GATT negotiation was its member nations, as they were developed economies they majorly focused on manufactured and industrial products. Uruguay round of negotiation which took place in 1986 finally fixated agriculture for the first time. Objective to bring agricultural trade in their agenda was to eradicate resistance between European Union and USA with respect to agricultural trade but it took seven years to reach the consensus and at last agreement was framed. Because of isolationist policies of industrialized economies world food markets were distorted due to which prices of agricultural products started plummeting making global market instable. Nearly 60% of trade disputes submitted between 1980 and 1990 to GATT were related to agriculture. Also economic rationale of including agriculture within GATT framework is:

a.) Comparative Advantage
b.) World market instability
c.) The effects of protectionism

Initially economies with comparative advantage in agricultural products were unable to export and therefore could not enjoy the export revenues and those economies with no comparative advantage had been producing agricultural commodities with high assistance from government due to which efficient production was getting distorted. Primarily when the dialogues on agriculture initiated European Union (EU) and USA were apart in their stand. First negotiation on agricultural trade came from USA suggesting a “zero-zero” option which appeared non pragmatic and was opposed by EU.

Table 2.1: Summary table of GATT Negotiations since 1947

Round Year No. of member countries Value of trade ($ US billion) No. of tariff concessions
Geneva 1947 23 10 45,000
Annecy 1949 33 5,000
Torquay 1950 34 8,700
Geneva 1956 22 2.5
Dillon 1960-61 45 4.9 4,400
Kennedy 1962-67 48 40
Tokyo 1973-79 99 300
Uruguay 1986 118

Source: FAO corporate document repository

To liberalize trade and to raise the living standards WTO (World Trade Organization) the successor to GATT was set up on 1st January 1995. Agreement on Agriculture includes three pillars which are the following:

a.) Domestic support: Agreement on agriculture negotiated during Uruguay round classifies subsidies into three categories of boxes which are amber box, blue box and green box. The domestic support allows the reduction of domestic subsidies but on the basis of trifling distortions in trade and production some kind of subsidies was exempted from reduction. Green box measures comprise government support to research and development, and promotion policies. It also includes environmental protection and regional development programmes. All kind of domestic support measure which are considered to distort trade and production fall under amber box. Blue box measures referred to decoupled income support and it covers payment directly linked to animal numbers, but under arrangements which also bound production by imposing production quotas or requiring farmers to set aside part of their land.

b.) Export subsidies are another pillar in which developed nations are required to reduce export subsidies by minimum 36% by value or 21% by volume over a span of 6 years. Figures for developing nations are either 24% minimum cut in export subsidies by value or 14% cut by volume within the span of ten years.

c.) Market access: This tool refers to the reduction to tariff barriers to trade by the members of WTO. All non-tariff barriers were to be converted into corresponding levels of tariffs. All nations avowed a schedule of base period tariffs which is known as bound tariffs. All the bound tariffs has to be reduced in the following manner:

I. For developed countries the quantum of reduction has to be 36% over a span of 6 years.
II. For developing countries the quantum of reduction has to be 24% over a span of 10 years.

The World War II, one of the deadliest military wars of all time, was followed by the formation of the General Agreement on Tariffs and Trade (GATT). Formed in 1948, GATT was intended to lift economic recovery after the war. It is the product of the Bretton Woods Conference, 1944, which also envisaged financial reconstruction of the global economic system post the war. Twenty-three nations ratified GATT. There was also a recommendation to establish the International Trade Organization (ITO) in 1944. However, ITO was not ratified and failed to materialize.

GATT governed the principles of world trade until 1994. This period witnessed eight rounds of tariff negotiations: Geneva (1947), Annecy (1949), Torquay (1951-51), Geneva (1956), Geneva (1960-61), the Kennedy Round (1964-67), the Tokyo Round (1973-79) and the Uruguay Round (1986-94). Some of the major issues that this multilateral treaty addressed were tax reduction, anti-dumping agreements, and removal of tariff & non-tariff trade barriers.

The Uruguay round proved to be a major breakthrough in the global trading system, for it was this conference, which led to the birth of the World Trade Organization (WTO). The discussions led to the acknowledgement of the need for a collective approach towards addressing the challenges of globalization, which were gathering momentum in the 1990s. As the world grappled with new issues and challenges of trade, discussions revolved around several components:

(i) The General Agreement on Trade in Services (GATS):
This legal agreement attempted to supervise and liberalise trade by reducing or eradicating trade barriers such as tariffs or quotas. It, thereby, sought to create conditions of trade that are mutually advantageous to the parties involved.

(ii) The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS):
It sought to improve protection of intellectual property rights across borders. TRIPS requires members to ensure rights pertaining to copyright, geological indications, industrial designs, integrated circuit layout-designs, new plant varieties, patents, trademarks, trade names & confidential rights.

(iii) The Understanding on Rules and Procedures Governing the Settlement of Disputes:
It established rules for resolving conflicts between members.

(iv) The Trade Policy Review Mechanism:
It documented national trade policies and assessed their conformity with WTO rules. These basically apply to the domestic regulations that a country applies to foreign investors (usually under its industrial policies). The Agreement on Trade Related Investment Measures (TRIMS) allows international firms the room to operate more easily within foreign markets. For example, it bans policies like local content requirements and trade balancing rules, which have been designed to protect the interests of domestic industries against foreign competitors.

These discussions culminated in signing of agreements in Marrakech, Morocco, in April 1994, and their ratification. Thus, the World Trade Organization was born. Today, the WTO has as many as 164 members, representing 98% of the world’s trade. Afghanistan became the 164th member of WTO on 29th July, 2016.

The World Trade Organisation is a global platform for trade and a forum for governments to negotiate trade agreements. It is also a place for them to settle trade disputes peacefully. WTO operates on a system of trade rules. Though negotiated and signed by governments, the goal of these agreements is to help producers of goods and services across the world to conduct their business without the fear of erratic policy changes. It also allows governments to meet social and environmental objectives.

The WTO has three guiding principles: (i) protecting the interests of developing countries against discriminatory trade practices of large and powerful countries; (ii) to limit trade only through tariffs and to provide market access not less favourable than that specified in their schedules; and (iii) to help governments resist lobbying efforts by domestic interest groups seeking special favours.

Some of the functions of WTO include:

(i) Administration of WTO trade agreements –
The WTO agreements encompass goods, services and intellectual property. They lay down the principles of trade liberalization and the permitted exceptions.

(ii) Offering a forum for trade negotiations
These agreements are not static; they are renegotiated from time to time keeping in mind the changes in trade-related issues.

(iii) Handling trade disputes
The WTO’s procedure for resolving trade quarrels ensures that trade flows smoothly. Aggrieved countries bring disputes to the WTO, if they think their privileges under the agreements are being infringed. Independent experts are appointed for adjudication of disputes.

(iv) Monitoring national trade policies
Various WTO councils and committees seek to ensure that the requirements are being followed and that WTO agreements are being properly implemented.

(v) Facilitating technical assistance and training for developing countries
WTO agreements contain special provision for developing countries in order to help them build a robust economic foundation. For example, these include offering longer time periods to implement agreements and commitments, measures to enhance their trading opportunities.

(vi) Cooperation with other international organizations
The WTO maintains regular dialogue with non-governmental organizations, other international organizations, the media and the general public on various aspects of the WTO to enhance cooperation and increase awareness of WTO activities.

Roberto Azevedo is the current Director General of the Organization. Headquartered in Geneva, the organization consists of the following bodies:

India’s association with the World Trade Organization goes back to the days of GATT, its predecessor. India has often steered discussions in favour of the less developed and developing countries, right since its membership in the GATT.

During the Uruguay talks, India & Brazil were not too keen on negotiating on services on an equal footing with the industrialized world. They also pointed out that the industrialized nations failed to live up to their commitments w.r.t. trade in textiles and agrarian products. India & Brazil urged the members to rescind the measures that contradict GATT and not to introduce new measures. Over time, however, India softened its stance towards the First World Countries. Eventually India and other developing countries (G-10) succumbed to the US position of inclusion of new issues – services, intellectual property and investment measures – in the discussions.

A major turning point in India’s approach to trade occurred in 1991. Crippled with severe economic challenges and trade deficits, India was forced to open its doors to the outside world. Liberalization, privatization and globalization became the governing principles of India’s foreign policy. The dismantling of trade barriers and welcoming foreign investors was in sharp contrast to India’s earlier protectionist stance. This proved to be a game changing year for India’s economy.

After its integration with the global economy, India made efforts to emerge as a growing economy. The WTO membership was one such platform, which seemed to be promising for India’s growth. Thus, India joined the WTO on 1st January, 1995. Some of the major areas where India has benefited from this membership include granting access to various markets, reduction of tariff and non-tariff barriers, peaceful resolution of disputes on an equal footing, granting of concessions and getting an impetus for trade.