Friday, 25 May 2012

“Trade with India and trading strategy” a column by Dr Kamal Monnoo

newspaper 1

Trade with India and trading strategy

By: Dr Kamal Monnoo | May 23, 2012
There exists a lot of confusion at home on issues of bilateral trade with India in particular and on what should be Pakistan’s strategy at WTO (World Trade Organisation) forums vis-à-vis global trade and protectionism in general. Actually, when one closely looks at these two main policy decisions confronting the Pakistani policymakers, one realises that, in essence, for us the right way forward in both cases is common and one which firmly hinges on the elements of free and fair trade. Expand the scope of free and fair bilateral trade and you get a global model, Mother of free trades, in the shape of the WTO, an institution that promotes a culture ofinternational trade reflecting these very principles.
Its message statement: “Establishment of a rule-based global trading regime based on free, fair and ethical trading practices in order to promote global equality and alleviate poverty from the world.” Likewise, the guiding principles for trade relations between any two countries cannot be different either – a win-win for both and gestures of reciprocity that ensure not only enhanced mutual returns, but also control the pace of trade in a manner that the trading partners keep pace with each other and that one does not race too far ahead of the other. One cursory glance at the Indo-Pak trading history and it becomes obvious that when it comes to bilateral trade, India has been the main beneficiary between the period 1996 (period when WTO policies on removing quotas and lowering tariffs started coming into effect) to date!

While working out the modalities of trade, the important thing to remember is that protectionism can almost never be a sustainable solution for economic growth and prosperity. A recent study by international tradeexperts, Robert Z. Lawrence and Lawrence Edwards, shows that there exists a good correlation between import and employment growth. The study argues that if imports can be managed successfully, they can in fact increase productivity and in some cases also make domestic manufacturing more competitive.
The prime example that these experts use to define this logic is by applying the model to the field of services in the US. They argue that the export of another country to the US or the import of the US in IT and ITES helps American corporations improve their cost competitiveness. For example, the Indian IT majors, generally considered to move jobs away from the US, have in fact created direct and indirect employment opportunities for the Americans. According to a recent CII survey, in the last five years, the Indian companies in the US haveinvested $26 billion and created 100,000 jobs. A healthy percentage of employees of Indian software companies like TCS, Wipro or Infosys in the US are non-Indians.
Protectionism, according to the study, is a high-cost option in an interdependent environment and the socialist countries of the post-World War II era learnt this the hard way. The Lawrence and Edwards lesson basically argues on how increased but prudent imports induce indigenous industries to be more competitive. Ultimately, this enhanced competitiveness leads to an increase in exports and again they quote the example of India. Post-liberalisation, India’s exports have increased from $18.50 billion in 1990-91 to $251.1 billion in 2010-11.
Further, protectionism especially for high debt countries carries higher dangers. An unsustainable debt situation invariably forces reduction in domestic consumption that, in turn, increases reliance on the export markets for growth. And if the economic managers choose to resort to protectionism in such a scenario, it not only leaves the economy with a compromised growth outlook, but also with serious social and economic issues arising from high unemployment.
However, bilateral or regional trade agreements can only be the second-best alternative to the multilateral trade liberalisation under the framework of WTO. And this is precisely what needs to be realised by the leading economic powers of the world to avoid the ‘noodle culture’ from taking root, where a surge of regional and bilateral trade agreements can end up endangering the larger global agreement on free and fair trade. The leading economic powers of the world need to ensure the successful culmination of the Doha Round of Trade Talks. Having said this, Pakistan at the same time needs to be very clear on its own policy plans vis-à-vis its role in the Doha trade talks: how it plans to conduct itself and what part it wants to play on the WTO forum to make its importance felt? So far, it has been one of confusion where we have failed to take a clear position or stand up and be counted!
What the Western economies (primarily the US) are looking for is to engage the emerging economies (China, India, Russia and others) on issues with serious trade implications. For example, in India’s case, they are seeking the removal of rural subsidies, in particular those on cotton, on the sectoral proposal under NAMA (Non-Agricultural Market Access) and on Mode 4 services. The sectoral proposal seeks to impose duty-free trade in 14 key industrial sectors, including textiles and clothing, chemicals, fertilisers, pharmaceuticals, plastics, electrical and electronic goods.
Considering the sensitivities attached to these sectors, it won’t be easy to get India (or most developing countries) to agree to the proposal. Securing acceptability for the sectoral proposal remains the key to breaking the logjam at the Doha trade talks, but it requires flexibility, manoeuvring, lobbying and some smart economic diplomacy. It requires models that have ‘walked the talk’ and by the sheer dint of their positive actions in global trade can take up this leadership mantle!
In this way, Pakistan is in an ideal position since over the years we are one of those few countries in the world that have successfully demonstrated on how to maintain a prudent balance between providing support to the domestic rural sector, while side by side opening up the local markets. If we can take up this role of playing the moderator, with some smart leadership, we can gain political and economic mileage by brokering an agreement between the US, Europe and the emerging markets where, perhaps, the West backs down from its demand of making the sectoral proposal mandatory for all the WTO members and the economies of India, China, Russia, Brazil etc can agree to work with a mutually acceptable sensitive list, while opening up their remaining sectors. When it comes to free trade, India has a lot to learn from Pakistan!
To conclude, while there is no denying that the inter- and intra-regional development dreams do not become realities in the absence of seamless movement of goods and services and the case of Pakistan and India can be no exception, the real challenge lies in managing these movements in order for them to become the instruments for addressing wider national and international issues so that the outcome can be a win-win for the future of people in both countries.
Also, that any bilateral and regional deals that we negotiate do not in any way compromise our position in the overall global trade. What is required is that prior to complete liberalisation of trade with India, our managers negotiate a comprehensive and a prudent trade framework to ensure that a level playing field is available to the Pakistani businessmen and that in the long-term the increased economic ties between the countries tend to also align the overall national aspirations of these two South Asian giants and not merely remain limited to transaction to transaction profit taking!
n    The writer is an entrepreneur             and economic analyst.