October 31, 2019
GS Paper II, Paper III
Free trade over fair trade
An editorial contends the anomalies around the definitions and permit of free trader versus fair trade practices. Economist around the world vigorously support free trade while the politicians severely dissent the usage in the context of widening trade deficit and its perspectives.
What are free trade agreements?
FTAs are arrangements between two or more countries or trading blocs that primarily agree on certain obligations that affect trade in goods and services, and protections for investors and intellectual property rights, among other topics. Its primary agenda is to reduce or eliminate customs tariff and non-tariff barriers on substantial trade between them.
FTAs, normally cover trade in goods (such as agricultural or industrial products) or trade in services (such as banking, construction, trading etc.). FTAs can also cover other areas such as intellectual property rights (IPRs), investment, government procurement and competition policy etc.
In the era where there is global integration on various verticals, it become naturally important for developing countries with the potential of becoming a superpower nation like India to flow with the current. Trade without barriers – free trade – is promoted by institutions like World Trade Organisation (WTO) and has been suggesting this policy since the 1990’s to the country.
There are many forms of trade barriers like tariffs, customs duty, import-export duty, etc. Another way countries limit the movement of goods and services across borders are non-tariff barriers like regulatory laws, taxes, levies, sanctions, quota, embargo and government subsidy to a domestic industry.
Author opines that;
- With the recent US-China trade war, US fiercely blames China that it is hurting the American producers by favouring more of the China companies by adopting domestic policies. This, China is doing by imposing high tariffs on American goods that are imported into China, by artificially lowering the value of yuan against the US dollar. Hence, through retaliatory tariffs there must be a fair trade game that could be expected.
- The definition of benefit from trade is no longer viewed in terms of “fair practices. However, countries that follow unilateral liberalization of trade practices still tend to benefit economically as the beneficiary must be the consumers.
For instance, Hong Kong and Singapore has pledged by the same vision and has benefitted its citizens by the improved access to foreign goods. It must be enough to promote the free trade practices in and around the world.
There is a misconception amongst the politicians that the trade policy must be deviced based on the pros and cons it has on the producers rather than the consumers. It is widely accepted that more the competition amongst the producers, better would be the quality and connectivity of their products both in the domestic and global market, though some would fall back due to lack of innovation and technology backed mechanization.
However, consumers benefit with access to cheaper and better quality goods. Hence, it is opined that the retaliatory tariffs and duties are justified as the foreign governments persistently subsidize the domestic producers, while the author asserts that the American economies are losing out on the access to the subsidized goods. The Trump government alleges that countries like India and China are misusing the advantages of the status of a “developing country” before the World Trade Organisation (WTO) and pressurizing the American producers by subsidizing domestic producers.
3. Trade deficit is a highly misunderstood economic jargon according to the author. It is regarded as just another economic yardstick that is pitched in to support protectionist tendencies of trade policies.
Trade deficit or surplus is the situation where the value of the country’s imports is greater than the value of its exports. It merely means that the people all over the world prefer to buy different commodities from one another.
An example the author has quoted is that of the trade demand across USA and China. American prefer Chinese goods over their real estate assets , while the Chinese prefer the American financial assets over their goods causing US to build a trade deficit with China as it buys more goods from China than it sells. Simultaneously US shall experience a capital account surplus as US has bounty sectors to attract foreign investments and the foreigners invest the difference of the trade deficit and help indirectly in the productive capacity of the country and financial funding.
Hence the situation is a win-win as the voluntary trade is initiated with profit as the pivotal strand. The author concludes that the world would be a better and richer places if fair trade practices are replaced with free trade policies and liberalise economies.
GS Paper II, Paper III
Ahead of RCEP summit, India stands unclear
With the deadline to finally conclude the 16-nation FTA at the Regional Comprehensive Economic Partnership (RCEP), India still stands unsure about joining the ASEAN-driven FTA – including India, China, Japan, South Korea, Australia and New Zealand. Union Commerce Minister says that the country does not lack on strong leadership to rush into signing an FTA at the upcoming RCEP summit.
- Though India is striking a tough posture on aligning with the rest of the countries with the pressure of proving the fine balance between the imperative of safeguarding the domestic interests yet peacefully engaging with the rest of the world.
- It is of paramount necessary for India to stay neutral on contagious issues but cannot afford to isolate itself from the world on FTAs.
India’s major concern like with the possible flushing of the domestic market with the Chinese goods with its already superior trade tactics. India does not want to hurt the social fabric dependent on agriculture, local/ domestic industry and trade unions by lowering their subsidies and down-trenching their growth.
According to the RCEP partners already on-board, India cannot achieve its target of a $5 trillion GDP if it does not open its market or gets no access to RCEP markets.
Regional Comprehensive Economic Partnership – It aims to create a free trade zone of 10 ASEAN nations and Australia, China, India, Japan, South Korea and New Zealand. This means a zero-customs duty zone in a geography that contributes 34% of global gross domestic product (GDP) and 40% of world trade. The region is also home to almost half of the world’s population.
What is keeping India worried on RCEP?
- India is worried that FTA is going to worst-hit the steel, copper, dairy and agricultural sectors.
- The negotiations remove customs duty on about 80-85% of items.
- It becomes a long-term cost for the economy as there can be no customized changes in trade policies from time to time.
- With India already signed in with South Asian Free Trade Agreement (SAFTA) and Indo-Sri Lanka Free Trade Agreement (ISFTA), it is but natural for India to hesitate to further open access into its market.
- The cheap imports have been an alarming threat to the potential of Make in India initiative as the country is already having sleepless nights with the widening trade deficits
- India has so far offered to eliminate tariffs for 70-80 % of goods for China and is now not ready to provide any further concessions. The trade surplus that China has with India stands at a whopping $60 billion and the domestic industry is reeling under unfair competition from Chinese products.
GS Paper II, Paper III
‘Nirvik scheme may giver fillip to export credit’
The government says that under the Nirvik Scheme, the Export Credit Guarantee Corporation of India (ECGC) will provide 90% coverage as against the current 60% being given by the banks. This would give a fillip to the export lending and insurance cover for export credit.
What is export credit insurance?
Export credit insurance is a policy offered by both government export credit agencies and private entities to businesses that want to protect assets from the credit risks of importers. These risks include non-payment, currency issues and political unrest.
- Broadly defined, export credit is an insurance, guarantee or financing arrangement which enables a foreign buyer of exported good and/or services to defer payment over a period of time. Short term export credits are provided on cash or near cash terms through, e.g. open account or letter of credit facilities.
- Governments provide officially supported export credits through Export Credit Agencies (ECAs) in support of national exporters competing for overseas sales. Such support can take the form either of “official financing support”, such as direct credits to foreign buyers, refinancing or interest-rate support, or of “pure cover support”, such as export credits insurance or guarantee cover for credits provided by private financial institutions. ECAs can be government institutions or private companies operating on behalf of governments.
- An export credit agency is an institution that offers to finance domestic companies’ international export operations and other activities. ECAs provide loans and insurance to companies to help eliminate the uncertainty of exporting to other countries.
Export Credit Guarantee Corporation of India (ECGC) is a fully government-owned company that was established in 1957. It aims to promote exports by providing credit insurance services and to protect the banks from losses on account of export credit due to the risks of insolvency or protracted default of the exporter borrower.
The government released the Nirvik scheme on September 16, 2019, to ease the lending process and enhance loan availability for exporters.
Positives of the Nirvik Scheme under ECGC:
- It provides details of nearly 1.5 lakh overseas buyers and 20,000 exporters.
- It will catalyze the banks to enhance the volume of export credit lending, especially to the MSME Sector with optimal pricing due to capital and risk optimization.
- Has the provision of live data and credit profile information along with providing various direct covers.
- Under the Nirvik scheme, ECGC will provide 90% cover and the additional outgo, if any, due to enhanced cover would be supported by the government. The scheme will be valid for 5 years.
- The insurance cover will include not only the principal outstanding but also the unpaid interest for a maximum of two quarters or the NPA date, whichever is earlier.
- The coverage has been increased to 90% from the present average of 60% for both principal and interest.
- It will also cover both pre-shipment and post-shipment advances unlike the present system, where two different documents are issued by the ECGC.
- The scheme also aims to simplify the procedure for settlement of claims and provisional payment of up to 50% within 30 days on production of proof of end-use of the advances in default by the Insured Bank.
- The gems, jewellery and diamond (GJD) sector borrowers with a limit of over Rs 80 crore will have a higher premium rate in comparison to the non-GJD sector borrowers of this category due to the higher loss ratio.