International Trade Notes for UPSC

International Trade Notes

Balance of Payment

1.  Balance Of Payment (BOP) is a statement which records all the monetary transactions made between residents of a country and the rest of the world during  a year.
2. Current Account – Goods and services, wages, dividend, interest, remittances, gift, donation
3. Capital Account – FDI, FPI, Loan
4. Balance of trade – Difference between export of goods and services
5. Trade deficit as a percentage of GDP has continuously increased for last three years

India’s Import basket

1. Petroleum
2. Gold
3. Pearl and precious stones
4. Coal
5. Telecom instruments
6. Electronics components
7. Organic chemicals
8. Iron and steel

India’s export basket

1. Petroleum products
2. Pearl and semi precious stones
3. Pharmaceuticals
4. Iron and steel
5. Organic chemicals
6. RMG cotton accessories
7. Motor vehicles
8. Electric machineries

Top Import sources

1. China
2. USA
3. UAE
4. Saudi
5. Iraq
6. Switzerland

Top Export sources

1. USA
2. UAE
3. China
4. Hong Kong
5. Singapore
6. UK

Trade data

1. India’s top trading partner – USA (87 billion dollar) [China is almost close]
2. Overall trade – 446 billion dollar
3. In 2018-19, India has a trade surplus of USD 16.85 billion with America, while it has a deficit of USD 53.56 billion with the China.
4. India receives largest amount of remittances (80 billion $)

How to reduce oil import?

1. Domestic exploration

HELP

1. Single uniform licence
2. Revenue sharing model over profit model (To increase gov revenue)
3. Open Acreage Licensing Policy – Company can pick and choose the blocks from designated area
4. Shift to the E Vehicle
5. Indian strategic oil reserve – When prices are low buy and store

Why gold consumption increased?

1. Economic slowdown in decreasing confidence in the bond and share market
2. Gold’s appeal as a safe haven asset increases in times of geo-political tensions.
3. Decrease in repo rate

Curbing gold import?

1. RBI mandated minimum 20% of imported gold must be exported (Under FEMA act)
2. Sovereign gold bond scheme – 2% interest and principle equivalent to gold price in redemption
3. Gold monetisation scheme – RBI allows commercial banks to accept idle gold jewellery for 1 to 15 years. 2% interest rate. Gold is used on maturity you het deposit in the form of gold coin or cash equivalent

Maharashtra GI

1. Alphanso
2. Sangali Turmeric

Baba Kalyani Report on SEZ

1. Convert SEZ to employment and economic enclaves (Both domestic and export centric)
2. Develop transport infrastructure
3. Encourage MSME
4. Focus on electronics

Promoting exports

1. Infra
2. Promotion of MSME
3. Increasing competitiveness of the MSME by streamlining labor laws
4. Focus on assembly line

International financial service centre

1. Nation will not apply its local taxation and investment norms
2. GIFT city (Gujarat International Finance Tec-City)

Triffin Dilemma

1. System of Bretton wood system will collapse as gold price will increase and people will exchange local currency in dollar then dollar to gold and will sell gold in the market
2. Solution – SDR (Special drawing rights)
   1. SDR is an international reserve asset, created by the IMF
   2. Weighted average of currency
   3. 1 $ = $1.40

Currency war

1. When countries try to depreciate their currency for export gains
2. Indian currency fall because fed was increasing interest rate

Currency Swap Agreement

1. India Japan – 75 billion $
2. RBI – $ 5 billion currency swap with domestic banks

Bretton Woods Organisation

World bank group 

1. Family of five international organization at Washington (IBRD, IDA, IFC, MIGA, ICSID)
2. International Bank for Reconstruction and Development (IBRD) – Commonly known as the world bank. It is the single largest provider of development loans
3. International Development Association (IDA) – assists the poorest countries
4. International Finance Corporation (IFC) – supports private enterprise in developing countries. (Masala Bod)
5. Multilateral Investment Guarantee Agency (MIGA) – offers investors insurance against non-commercial risk and help developing country governments attract foreign investment
6. International Centre for the Settlement of Investment Disputes (ICSID) – encourages the flow of foreign investment to developing countries through arbitration and conciliation facilities
7. World development report
8. Country has to join IMF before joining WB
9. IBRD + IDA = World bank
10. Blend countries – Eligible to borrow from both IDA and IBRD
11. India is not a member of ICSID (International center for investment dispute)

WTO

1. Geneva
2. 1948 GATT
3. Result of Uruguay round, 1995 (Marrakesh agreement)
4. Doha round is first round under WTO and yet to complete
5. Afghan joined WTO in 2016
6. Hong Kong and Taiwan are member but Iran is not
7. One country one vote system
8. WTO is not a part of UN
9. Highest level decision making body is ministerial conference (meet bianually)
10.  No separate DSB but general council act as DSB
11. 1996 – birth of Singapore issues
12. 2001 – China joined
13. National treatment, MFN and special and differentiated treatment (National security as exception)
14. Special Safeguard Mechanism (SSM) is a protection measure allowed for developing countries to take contingency restrictions against agricultural imports
15. Agreement on agriculture 

Green box subsidies – No limit, research funding, food stamps, disaster relief, direct payments to producers which are fully decoupled from production   Amber box – Domestic support measures, trade distortion, 5-10 % limit of 1986 (This led to peace clause sign in Bali summit) Blue box – direct payment under production limiting program, no limit G33 – 48 developing nation group having issues with agriculture

1. TRIPS allows both process and product patent (Food, pharma and chemical only product patent)
2. Parallel import and compulsory licensing act as safeguard against high prices of drugs (Voluntary licensing is done voluntarily by company)
3. Countervailing duties – anti subsidy duties
4. India and Bali package
5. Ministry of finance is nodal body dealing with BIT (Investor can use additional facility rule of ICSID)
6. SAFTA – India, Pakistan, Nepal, Sri lanka, Bangladesh, Bhutan, Afghanistan and Maldive
7. G10 – Major food importing countries
8. G90 – Group of LDC
9. Asian Clearing Union – Payment arrangement, HQ at Tehran Iran, Bangaldesh, Bhutan, Iran, India, Maldive, Myanmar, Nepal, Pakistan, Sri Lanka
10. CVD – Against subsidies
11. Anti Dumping Duty – Price below domestic market
12. Non tariff barriers
    1. Public procurement -> USA vs India in solar panel case
    2. Technical barriers to trade
    3. Quota system
13. TFA
    1. Reduce red tapism

Dispute settlement body

1. A country can file a complaint to WTO
2. WTO panel gives decision
3. If it is not accepted then appellate body (Minimum three judges / 7)
4. Fine is imposed if decision is not accepted
5. 87% decisions in favour of America
6. It will lead to the bilateral negotiation

Trade agreement types

1. Partial scope agreement – Trade between two countries for small list of goods @ reduced tariff
2. PTA – Lower tariff
3. Custom union – External tariff is same
4. Common market – Factor of production can move easily
5. Economic Union – Decides fiscal and monetary policies through common parliament

Trade treaties : A thought

1. International trade is give and take relationships

Trade war

1. Two war more nation attack each other with tariff and non tariff barriers
2. USA has $375 billion deficit with China thus American manufacturer suffers

Impact on India

1. More towards the Chinese good than Indian IT services
2. Opportunity for India to replace export of China
3. Positively boosted seafood exports

GSP

1. Developing countries export subject to 0% tariff in USA
2. Around 5.5 billion dollar loss to India

Brexit

1. 1993 – Maastricht treaty formed EU
2. Britain invoked article 50 of Lisbon treaty for exit
3. Withdrawal agreement is signed

India Impact

1. UK wont get easy entry in EU so they will export more toward India
2. It is opportunity to sign trade deal with them
3. Indian students will get easier entry in the UK universities
4. Companies have to shift HQ to EU

G20 Osaka declaration and India (Rejected)

1. All countries must individually manage data for the privacy of citizens and sovereignty of state
2. Free flow of data may be misused for influencing people opinion

RCEP

Advantages

1. 40% of World’s Economy, 50% of population
   1. It is going to be world’s largest trading bloc accounting for one third of the world’s GDP. Moreover it will include Asia’s top three economies- China, Japan and India. Hence it was great potential for trade and investments.
2. Benefits of Trade , Reduces Trade Diversion due to TPP
   1. Since India is not a part of the two of the three major regional trade agreements- TPP and Trans Atlantic Trade and Investment Partnership TTIP. This will reduce the potential negative effects of such exclusion.
3. Benefits of ASEAN FTA
   1. Economic Survey
4. Reduces the intensity of Spaghetti Bowl Situation
   1. ‘Spaghetti bowl’ situation due to multiple FTAs and trade deals with members of RCEP. This will streamline the rules and will allow effective utilisation of trade agreements.
5. Issues in WTO
   1. Stalled
   2. Other interests of India are- removal of technical barriers like sanitary and phytosanitary measures, and trade in pharmaceuticals and textiles.
   3. Juggernaut Effect [In particular, the size of the pro-tariff lobby (import competitors) shrinks in each participating nation while the size of the anti-tariff lobby (exporters) rises, Gradual reduction in tariff]
6. Services:
   1. India MAY get market access to the products in which it enjoys comparative advantage like IT, IT-enabled services, professional services, healthcare, and education services etc.
7. Geopolitical
   1. Complements Act east Policy of India. It will impact economic and strategic relations with East Asia.

Challenges

1. All the Spaghetti Bowl (FTA counter productive in promoting free trade through multilateralism)
   1. points of Bhagwati
2. Trade Imbalance
   1. India’s tariff barriers are much higher than the other members. Hence India can end up giving up a lot for nothing substantial in return.
   2. Already our Trade Deficit with RCEP nations is 97 billion $ ( 2015)
   3. Trade balance will China may become more unfavorable. India- China trade deficit is around $50 billion.
      • India may face dumping of Chinese products especially steel sector
   4. Issues created due to ASEAN FTA
   5. The RCEP countries especially ASEAN countries are Export Oriented Economies and have high comparative advantage
   6. Offensive Interests of Australia and New Zealand in sectors like Dairy, Wines, and will increase in imports of agricultural products into India.
3. Lack of Convergence on Product Coverage
   1. RCEP countries are insisting for 92% product line coverage
   2. India does not want to extent beyond 80%
   3. Similarly, India had to give up a 3 tiered formula for rate of duties after opposition from RCEP
4. Poor progress on services–
   1. India’s main interest. T
   2. here is no agreement that trade deal will be signed as a single undertaking (that includes goods, services and investment) which India has insisted on
5. TRIPS + Issues
   1. IPR: Japan and South Kprea are pushing for stronger IPR standards , Labour, Environemnt like such as patent term extension, data exclusivity and lowering of patentability criteria.
   2. It may undermine Make in India
   3. Doctors without Borders has warned that these proposals are threat to India’s status of ‘pharmacy of world’
6. Geopolitical
   1. India and China
   2. China and ASEAN
   3. As economic dependencies on China will raise, China may resort to arm twisting tricks which may hurt India’ s strategic interests

Why India didnt sign RCEP?

India’s concerns for protection for its domestic industries were not adequately answered leading to it pulling the plug.

India USA free trade agreement issues

1. A roadblock on the contentious issues of import duty on European cars and alcohol (wines and spirits) levied by India
2. Recognition of India as a ‘data-secure’ nation by the EU.
3. A greater access for its professionals in the EU is also desired by India.

India USA FTA

Issues

1. Dairy product
2. E commerce and data localisation
3. We want them to import mangos
4. IP rights
5. H1b visa
6. USA charge India for high tariff wall. However our tariff regime is fully compliant with its commitments under the World Trade Organisation rules.
7. Election in USA

How to sign deal?

1. We should show them that Real trade deficit is much lesser (Use jewellery example)
2. Satisfy the ego. Its very difficult to expect reciprocate market access from USA

Early harvest scheme is a precursor to a free trade agreement (FTA) between two trading partners. This is to help the two trading countries to identify certain products for tariff liberalisation pending the conclusion of FTA negotiation. It is primarily a confidence building measure.

Between 1995 and 2018, India’s overall export growth averaged 13.4% (in dollars) annually.  (Subramaniyam)

1.7% share in global trade

Studies of trade agreements by NITI Aayog show that Indian exporters suffer logistics, compliance and transaction costs twice as high in other countries.

Between 1995 and 2018, India’s manufacturing exports (in dollars) grew on average by 12.1%, nearly twice the world average. (India third after China and Vietnam)