1
Q
3 international institutions proposed after WW2?
A
- Conference was held in Bretton Woods town, New Hampshire in USA after the WW2 (1939-45) to restore the global economy.
- Total 44 nations participated, incl. India. It proposed 3 international institutions:
- International Bank for Reconstruction and Development (IBRD), commonly known as World Bank and International Monetary Fund (IMF). - These two are considered “Specialized Agencies of UN”
- (Proposed) International Trade Organization (ITO). But could not materialize due to American opposition. Instead, the countries later setup GATT → WTO - WTO is considered “Related organization” of UN because it doesn’t fulfil all requirements of UN charter on specialized agencies
2
Q
Objective of the World Bank? World Bank consists of? World bank group consists of?
A
Bretton Woods → World Bank ,Washington, 1945
originally focused on reconstructing war-torn European countries. After 50s, focusing on poor countries of Asia and Africa.
World Bank = IBRD + IDA.
World Bank Group = comprises of 5 institutions, namely
1) International Bank for Reconstruction and Development (IBRD) - Commonly known as the world bank. Gives development loans with interest.
2) International Development Association (IDA) - Assists the poorest countries via interest- free long-term loans (= “Concessional Loans or “soft loans”).
3) International Finance Corporation (IFC) - supports enterprise of developing countries. Known for its Masala Bonds.
4) Multilateral Investment Guarantee Agency (MIGA) - offers (foreign) investors insurance against non-commercial risk (such as political instability, regime change etc.). This helps 3rd world nations attract foreign investment.
5) International Centre for the Settlement of Investment Disputes (ICSID) - Helps in dispute resolution related to foreign investment / foreign companies in 3rd world countries. India is not a member of this organization.
3
Q
Voting power off World bank group?
A
- In the first four organizations- IBRD, IDA, IFC, MIGA - voting power depends on the share capital provided by a country. USA highest, followed by various European giants.
- Fifth is a “dispute settlement” body, so the concept of ‘each country’s voting power’ does not apply to it.
4
Q
World Bank President?
A
- Since USA and European powers collectively command large shareholding in World Bank & IMF, so their informal arrangement is- USA’s favorite will be picked as World
Bank chief, while European countries’ favorite will be picked as IMF Chief. - 2017: Jim Yong Kim (USA) given 5 years tenure, but resigned at 2019-Feb. New President: David Malpass (USA).
- 2019: SBI Managing Director Anshula Kant has been appointed as the Managing Director and Chief Financial Officer of the World bank.
5
Q
World Bank is known for which Reports?
A
World Development Report,
Ease of doing business Index,
Remittance & Migration Report,
Global Economic Prospects report 2019 titled “Darkening Skies”.
6
Q
What is a multilateral development bank?
A
A multilateral development bank (MDB) is an institution, created by a group of countries, that provides financing and professional advising for the purpose of development.
EG: BNDB and AIIB
7
Q
(BRICS Bank) New Development Bank (NDB) - Started in, members, voting power, HQ, corona loan to India?
AIIB - Started in, members, voting power, HQ, corona loan to india?
A
New Development Bank (NDB)
Started in - 6th BRICS Summit in Fortaleza (2014) members signed treaty
members- Brazil, Russia, India, China, South Africa
voting power- Each member is given equal 20% voting power.
HQ: Shanghai, China
Corona loan to India - $1 billion. (2020-Apr)
AIIB: Asian Infrastructure Investment Bank
Started in - 2015-16
members - China, India, UK, Switzerland, >100 nations as of 2020.
voting power - Based on share capital provided.
- Asian countries control about 75% voting.
- China largest ~27%, India second largest shareholding ~7%. India is the largest borrower.
HQ: Beijing, China
Corona loan to India - $750 million (2020-June)
- BRICS member have also setup $100 billion BRICS Contingent Reserve Arrangement to help members during BoP crisis- similar to IMF.
- BRICS nations also planning to setup their BRICS payment system parallel to SWIFT and BRICS rating agency
8
Q
❓MCQ. (Pre19-SetA Q71). Find correct statement(s) about AIIB:
1. AIIB has more than 80 member nations.
2. India is the largest shareholder in AIIB.
3. AIIB does not have any members from outside Asia.
Codes: (a) 1 only (b) 2 and 3 only (c) 1 and 3 only (d) 1, 2 and 3 only
A
a
9
Q
❓MCQ. (CDS2019-II). Which one of the following countries is not a founding member of the New Development Bank? (a) Brazil (b) Canada (c) Russia (d) India
A
b
10
Q
Other Multilateral Development Banks?
A
BIS: Bank for International Settlements -
- 1930: setup in BASEL, Switzerland.
- Made up of 60 countries’ Central Banks. Its committee on banking supervision set norms in 1988 (I), 2004 (II), 2011(III) to ensure global financial stability.
African Development Bank -
1964: setup in Abidjan in Ivory Coast
India is a member, also gets loans.
Asian Development Bank (ADB) -
- 1966: setup in Manila, Philippines
- India is a member, also gets loans.
- Corona loan 2 India $1.5 billion (2020-Apr)
European Bank for Reconstruction & Development (EBRD) -
- 1991: setup at London.
- India became member (shareholder) in 2018. India will not be eligible for loans from EBRD but India can initiate joint loan proposals for Asian, African, European nations for its soft-diplomacy. (usually India does it for winning poor nations friendship. so they vote in favour of India during Kashmir-Arunanchal etc resolutions in UN General Assembly)
11
Q
❓MCQ. Find correct statement(s):(Asked in UPSC-Pre-2016)
1. New Development Bank has been set up by APEC.
2. The headquarters of New Development Bank is in Shanghai.
Answer Codes: (a) 1 only (b) 2 only (c) Both 1 and 2 (d) Neither 1 nor 2
A
b
12
Q
What is IMF?
A
BRETTONWOODS →2)IMF, WASHINGTON, 1945, DEC
- International Monetary Fund (IMF) helps in global currency exchange stability, helps against balance of payment crisis.
- Acts as a reservoir of the currencies of all the member countries, from which a borrower nation can borrow the currency of other nations- using the Special Drawing
Rights (SDR) mechanism. - IMF important decisions need to be passed with 85% majority. USA has 16.52% voting power so it can effectively block/veto it.
- 2020-May: IMF wanted to issue $500 billion FRESH SDR to help member countries combat the corona crisis. But the USA blocked it. India also supported the USA. India
has 2.6% voting rights.
13
Q
Who is the IMF chief?
A
IMF Chief?
o 2019: Christine Lagarde (France) resigned to become chief of European Central Bank (ECB, HQ Frankfurt, Germany). Then,
o Kristalina Georgieva (Bulgarian economist, previously CEO of the World Bank) becomes the second woman IMF Chief after Christine Lagarde. Her five-year term starts on October 1, 2019.
14
Q
IMF’ Chief Economist (CE)?
A
Gita Gopinath, an Indian-American economist, she became the first woman to be the Chief Economist of IMF (2019-Jan).
Previously Raghuram Rajan has also served in this position.
15
Q
Notable reports of IMF?
A
Global Financial Stability Report, World Economic Outlook
16
Q
Conditions for IMF’s loan to Pakistan (2019)
A
2019-July: IMF approved $6 billion loan to Pakistan. It’ll be released in tranches (=instalments) over the next three-years depending on the conditional reforms taken by Pakistan’s Government, which includes:
- Pakistan will have to comply with Financial Action Task Force (FATF) norms against anti-money laundering and terror financing → so, if Pak gets added in FATF-blacklist, then Pak’s IMF loan release may stop.
- Fiscal Deficit and Primary deficit must be controlled to x% of GDP → indirectly, Pak will be forced to cut down on its Defence Expenditure
- Pak Govt will have to ⏬subsidy on gas & electricity
- Loss making PSUs like Pakistan Steel Mills, Pakistan International Airlines and Pakistan Railways etc. have to A) become profit making OR B) be Privatized OR C) be Shutdown.
17
Q
❓MCQ. ‘Global Financial Stability Report’ is prepared by :(Asked in UPSC-Pre-2016)
a) European Central Bank
b) International Monetary Fund
c) International Bank for Reconstruction and Development
d) Organization for Economic Cooperation and Development
A
b
18
Q
❓MCQ. Which of the following organizations brings out the publication known as ‘World Economic Outlook’? (Asked in UPSC-Pre-2014)
(a) The International Monetary Fund (b) UN Development Programme
(c) The World Economic Forum (d) The World Bank
A
a
19
Q
What are the Theories of International Trade?
A
- Mercantilist Theory
- Adam Smith’s Theory of Absolute Cost Advantage (1776)
- David Ricardo’s Theory of Comparative/Relative Cost Advantage (1817)
- Heckscher and Ohlin’s Factor - Proportions Theory (1919)
20
Q
What is Mercantilist Theory?
A
- From the 16th to 18th century, economists believed in mercantilism i.e. The amount of wealth in the world is static.
- A nation’s wealth and power were best served by increasing exports and receiving payments in gold, silver and precious metals.
- Therefore, any import was seen as loss of nation’s wealth in gold payment.
- So, colonial powers tried to flood their colonies with readymade goods but always prevented entry of goods in their home country.
21
Q
What is Adam Smith’s Theory of Absolute Cost Advantage (1776)?
A
- India has an absolute cost advantage over China in wheat production.
- So, India should focus on producing more wheat, and import rice from China. India should not try to be a ‘rice production specialist’.
- Adam Smith’s theory assumes 1) there are no production costs except labourers 2) no transport cost 3) there is free trade (no taxes on import exports)
22
Q
What is David Ricardo’s Theory of Comparative/Relative Cost Advantage (1817)?
A
Here, we can see England requires less workers than France to produce wine and textiles. So, as per Adam Smith’s absolute cost advantage, England should not import anything from France!
- But, if plotted on graphs, it’ll appear that for England per unit labour cost to produce 1 meter textile is (relatively) cheaper than 1 bottle of wine.
- So, England should shift domestic English wine workers towards textiles. England should export textile to France and import wine from France. England should not try to become a ‘Wine production specialist’.
23
Q
What is Heckscher and Ohlin’s Factor - Proportions Theory (1919)?
A
- Capital-abundant country will export the capital intensive goods. E.g. USA’s Boeing company exporting Jet planes.
- Labour-Abundant Country will export labour-intensive goods. E.g. India exporting cotton (and imports jet planes from USA).
24
Q
How did WTO come to be?
A
BRETTON WOODS → GATT → WTO (GENEVA)
- Initially, Bretton Woods conference proposed set up the International Trade Organisation (ITO) But USA opposed → the idea could not materialize
- 1948: General Agreement for Tariffs and Trade (GATT)
- 1986-1993: Uruguay Round of GATT negotiations → set up a permanent institution to encourage international trade in goods & services and Intellectual Property Rights (IPR) →
- 1994: Marrakesh treaty → WTO started functioning from 1/1/1995 at Geneva, Switzerland. India is a founding member.
25
Ministerial Conference and General Council of WTO?
Ministerial Conference
✓ Supreme Decision-Making body.
✓ Usually meets once every two years, deliberates on trade agreements.
✓ One country = one vote. (unlike IMF & World Bank, where the money power → shareholding → determines the voting power)
✓ Appoints Director General to look after administrative
work. Presently: Roberto Azevêdo (Brazil)
General Council
✓ Day to day decision making body @Geneva.
✓ Implements the decision of ministerial conferences
✓ Has representative from each member country.
has two bodies, with separate chairmen
1. Dispute settlement body: → Appellate Body
2. Trade policy review body: Below general council, there are committees on individual agreements and annexes e.g. Anti dumping, Subsidies & countervailing measures (SCM) etc.
26
WTO functions?
Today all countries try to protect domestic industries against foreign imports by creating two types of barriers against the international trade:
1) Tariff Barriers against international trade
Increasing the taxes, duties, cess, surcharge, on imported goods and services e.g. Trump imposed 25% custom duty on imported steel.
1. 1 - CVD
1. 2 - Anti-Dumping Duty
2)Non-Tariff Barriers against international trade
If a foreign country does not increase import tax but imposes other conditions like:
2. 1 - Subsidies to domestic industries
2. 2 - Public Procurement
2. 3 - Technical Barriers to Trade
2. 4 - Quota system
WTO aims to reduce such tariff and non-tariff barriers to encourage international trade through its agreements and dispute settlement body.
27
What are Tariff Barriers against international trade?
1) Tariff Barriers against international trade
Increasing the taxes, duties, cess, surcharge, on imported goods and services e.g. Trump imposed 25% custom duty on imported steel.
1.1 - CVD
two scenarios when foreign goods will appear cheaper to Indians than domestic goods:
- If foreign country is giving subsidies to their exporters AND / OR
- If Indian government imposes higher amount of taxes, cess or surcharge on the locally manufactured products
THEN Indian Govt tries to protect local (domestic) industry by imposing Countervailing Duty (CVD),
Special Countervailing Duty, Additional Customs Duty on imported items.
- These duties have been removed in India. Now imported items are subjected to [Basic Customs Duty + Social Welfare Surcharge on it]+IGST
1.2 - Anti-Dumping Duty
- If a foreign country exports goods to India at a price below their normal price in domestic market or at a price below their cost of production- then it is termed as
“Dumping”
-- Then, India's commerce ministry →
Directorate General of Trade Remedies (DGTR)
investigates → recommends Finance ministry to impose “Anti-Dumping Duty” on such imported items.
- E.g. $185 on every one tonne of imported Steel, Then its prices will become equivalent to India Steel, thus Indian steel industry will be protected.
-Not yet abolished in India. They’re imposed subjected to WTO norms.
- Inverted duty structure is a situation where import duty on finished goods is low compared to the import duty on raw materials, then it becomes difficult to produce the concerned good domestically at a competitive price
- Commerce Ministry → DG foreign trade (DGFT) launched ‘ARTIS’ portal (Application for Remedies in Trade for Indian industry and other Stakeholders). Applicants can file complaints against dumping.
- 💼Budget-2020: Purified Terephthalic Acid (PTA) is used in manufacturing (synthetic) textile fibres and yarns. Cheap PTA = boost to Indian textile sector, so no longer charge Anti-dumping duty on it.
28
What are Non-Tariff Barriers against international trade?
If a foreign country does not increase import tax but imposes other conditions like:
1. Subsidies to domestic industries: Giving free electricity to domestic car manufacturers. OR giving tax benefits & free car-insurance to residents for buying domestically made cars.
2. Public Procurement: Making rule that only local domestic companies can fill up tender for supplying stationery, school bags etc. in government schemes.
3. Technical Barriers to Trade e.g. imported mango must
have 0% pesticides residue, imported cars must have airbags for each passenger.
4. Quota system: e.g. not more than 50 metric tonnes of steel can be imported from a single foreign country.
WTO aims to reduce such tariff and non-tariff barriers to encourage international trade through its agreements and dispute settlement body.
29
What are the WTO disputes involving India and USA?
India’s Solar procurement preference
Ban on American Poultry
India’s export incentive schemes
30
What is India’s Solar procurement preference under WTO disputes involving India and USA?
India’s Solar procurement preference
USA argued India’s Jawaharlal Nehru Solar Mission gave public procurement preference & subsidy to India-made solar panels thus creating a non-tariff barrier for American solar panels.
India lost the case @WTO & forced to withdraw such barriers (2017).
However, USA still alleges that India is playing mischief in solar schemes by giving preference to local manufacturers over American-made products (2018)
31
What is Ban on American Poultry under WTO disputes involving India and USA?
In 2007, India had imposed the ban on American poultry under the Indian Livestock Importation Act, 1898 stating avian influenza / bird flu danger in India.
USA claimed there was no scientific basis- India merely banning us to protect local poultry business interest.
WTO ruled in favour of USA (2016). But India has only allowed partial import of poultry from selected states of USA so, USA has demanded $450 million compensation from Indian Govt. @WTO (2018).
32
What is India’s export incentive schemes under WTO disputes involving India and USA?
2018: USA complained to the WTO's Dispute Settlement Body (DSB) that India is running various export incentive schemes such as:
o Merchandise Export from India Scheme (MEIS),
o Export Oriented Units (EOU),
o Electronics Hardware Technology Parks (EHTP),
o Special Economic Zone (SEZ)
o Export Promotion Capital Goods (EPCG)
- Under above schemes India gives tax reliefs / subsidies to its exporters. So, it is creating tariffs and non-tariff barriers against American companies, & thus India is violating the WTO Agreement on Subsidies and Countervailing Measures (SCM).
- India’s position is “We’ll phase out these schemes after 8 years from 2017 (=2025). Since we are a developing country, we should be given such relaxed deadline under SCM agreement.”
- 2019-Oct: WTO’s Dispute Settlement Body (DSB) ordered in favour of USA and ordered India to stop such schemes within the next 90-180 days.
- 2019-Nov: India goes to WTO Appellate Body to undo DSB’s order.
- WTO Appellate Body members are appointed by the WTO members by consensus, (i.e. no member-nation should formally object to candidate’s name). USA is presently opposing appointment of new members in Appellate Body. So, body is under-staffed/ dysfunctional.
- 2020-Mar: Indian Commerce Minister says, “we will not implement WTO's dispute panel orders, because the appellate body is not functioning so our appeal is pending.”
33
WTO notable agreements?
Objective - reduce tariff barriers
Agreement(s) - 1. 🚗 General Agreement on Tariffs and Trade (GATT) for goods
2. 📡 General Agreement on Trade in Services (GATS):
Objective - reduce non-tariff barriers
Agreement(s) - 1. For non-food: Agreement on Technical Barriers to Trade (TBT) e.g. talcum powder should not have more than x% of asbestos.
2. For food: Agreement on Sanitary and Phytosanitary Measures (SPS) e.g. ‘x’ food item must not have more than y% pesticides residue.
Objective - reduce non-tariff barriers -> subsidies
Agreement(s) - 1. For non-food: Subsidies and Countervailing Measures (SCM)
2. 🌽 For food: Agreement on Agriculture (AoA)-
which aims to regulate the subsidies on agriculture through its ‘box’ mechanism.
a. 📦 Subsidies that are classified in Green & Blue box category- are allowed (e.g. Research, Cattle-Vaccination).
b. 📦 Amber box category subsidies will be subjected
to quantitative limits (e.g. Fertilizer, Electricity, Diesel, MSP.)
Objective - Misc. measures to encourage global trade
Agreement(s) - 1. Trade-Related Aspects of Intellectual Property Rights (TRIPS)
2. Trade-Related Investment Measures on Foreigners. (TRIMs)
3. Plurilateral agreements: They are not signed by
all the members of WTO e.g. Agreements on aircrafts, dairy product, bovine meat, Information Technology Agreement (ITA)
34
WTO’s Notable data?
World Trade Report (Annual). World trade growth has slowed down from 2017 (4.6%) to 2018 (3%), mainly due to protectionism.
35
❓MCQ. In the context of which of the following do you sometimes find the terms 'amber box, blue box and green box' in the news? (Asked in UPSC-Pre-2016)
(a) WTO affairs (b) SAARC affairs (c) UNFCCC (d) India-EU negotiations
a
36
❓MCQ. The terms 'Agreement on Agriculture', 'SPS Agreement and 'Peace Clause' are in the context of affairs of the _ _ _ (Asked in UPSC-Pre-2015)
(a) Food and Agriculture Organization (b) UN Framework Conference on Climate Change (c) World Trade Organization (d) United Nations Environment Programme
c
37
❓MCQ. TRIPS Agreement pertains to (Asked in UPSC-CDS-2017-I)
(a) international tariff regime (b) intellectual property protection (c) international practices on trade facilitation (d) international taxation of property
b
38
❓MCQ. Which of the following are the main functions of WTO? (UPSC-IES-2020)
1. To organize meetings of member countries to arrive at trade agreements covering
international trade.
2. To ensure that member countries conduct trade practices as per agreements agreed
upon and signed by the member countries.
3. To provide a platform to negotiate and settle disputes related to international trade
between and among member countries.
codes: (a) 1 and 2 only (b) 1 and 3 only (c) 2 and 3 only (d) 1, 2 and 3
d
39
What is Most Favoured Nation (MFN) under WTO Negotiations/ Summits/ Packages?
- Suppose India levies 15% custom duty on imported pen-drives from any country. But, later India-Japan trade agreement is signed wherein Japanese pen-drives are subjected to only 5% custom duty in India. Then implies Japan has become the Most Favoured Nation for India (as far as the pen-drive trade is concerned).
- WTO agreements require that whatever treatment is being given to the Most Favoured Nation, must also be extended to all other member countries. A member should not discriminate between its trading partners. But in practice, MFN is not implemented in letter and spirit by the members.
- 1996: India granted MFN status to Pakistan but Pakistan didn’t reciprocate (mainly) due to their local textile industrialists’ lobby who feared competition from Indian textile imports.
- 2019-Feb: India withdrew MFN status for Pakistan, following Pulwama attack on CRPF personnel. India also ⏫customs duty by 200% on goods originating from Pakistan.
- Since Pakistan is not giving India MFN treatment. So, there is no ‘legal-compulsion’ on India to give them MFN status. even if Pakistan complained to WTO’s dispute redressal panel, it’ll lose the case.
40
❓MCQ. The Most Favoured Nation (MFN) Clause under WTO regime is based on the principle of [UPSC-CDS-2017-I]
a) non-discrimination between nations
b) discrimination between nations
c) differential treatment between locals & foreigners
d) uniform tariff across commodities
a
41
What are Least Developed Countries (LDC) under WTO Negotiations/ Summits/ Packages?
- LDCs are identified by the UN Economic and Social Council (ECOSOC). Somalia, Ethiopia, Congo, Bhutan, Bangladesh etc.
Least Developed Countries’ economic growth can increase if they are able to export more. So, WTO agreements permit other countries to give duty free quota free access to exports from LDC. and that is not considered as a violation of any other agreement.
- e.g. If India levied 0% custom duty on Somalian pendrives, India will not be required to give same treatment to Japanese pen drives under “MFN norm”, Bcoz Japan is not LDC.
42
What are some of the burning and contentious issues between 1st world vs. 3rd world at WTO?
Doha Development Round (Qatar 2001)
Food subsidies & peace clause
Bali Package & Trade Facilitation Agreement / TFA (2013)
Nairobi Package & SSM (2015)
Buenos Aires Summit (#flop) (2017)
Kazakhstan Summit #cancelled (2020-June)
43
What was Doha Development Round (Qatar 2001) burning and contentious issues between 1st world vs. 3rd world at WTO?
3rd world countries wanted following:
✓ 1st world should liberalize their trade regulation further so that 3rd world’s goods and services can enter more easily in the first world’s domestic markets.
✓ 3rd world should be allowed to keep various barriers to slow down the entry of 1st worlds agriculture, manufactured goods and service exports in their domestic market.
✓ 1st world shd give financial + technical assistance to 3rd world.
- Obviously, USA and European countries would not like this. So, Doha round of negotiation continues without conclusion.
- And in future summits the USA/EU would want WTO officials to begin negotiations on the new matters lucrative to their MNCs (like ICT, E-Commerce) whereas 3rd world nations will continue to insist that Doha round negotiations must be concluded first.
44
What is Food subsidies & peace clause under burning and contentious issues between 1st world vs. 3rd world at WTO?
- Under WTO’s Agreement on Agriculture (AoA), 1st world and 3rd world countries are required to limit their food-subsidies to 5% and 10% respectively to the value of their agriculture production.
- But, in absolute quantitative terms USA’s 5% will be much bigger than India’s 10% → 1st world countries are able to give larger amount of food subsidies to their farmers → export them to 3rd world countries @cheap price, and ruining local farmers.
- Further, India has a large population of poor farmers who require Govt support in the form of subsidies & procurement at Minimum support prices (MSP)
- India also has a large number of malnourished poor families who need subsidized food grains under National Food Security Act (NFSA)
- 2013: WTO ministerial conference at Bali (Indonesia) → India refused to sign any new agreements until this food subsidy issue was resolved.
- So, WTO Peace Clause → it gave temporary immunity to India and other developing countries.
- Basically, 3rd world nations can give any amt of subsidy for their food programs:
- (1) USA/Other countries cannot impose countervailing duty.
- (2) USA/Other countries cannot complaint to WTO about this.
- 2020-April: India informed WTO that in rice production, India crossed the 10% subsidy limit (in 2018-19). But as per Peace clause, India has immunity!
45
What is Bali Package & Trade Facilitation Agreement / TFA (2013) under burning and contentious issues between 1st world vs. 3rd world at WTO?
Bali Package is the trade agreement / outcome resulting from the WTO ministerial conference 2013 @Bali, Indonesia. Its two significant components are :
1. Trade Facilitation Agreement (TFA)
a. requires member countries to decrease their bureaucratic delays, red tapes, inspector raj in import-export of goods.
b. They’ve setup online portals where traders can seek permissions, pay fees, custom duties, self declaration forms (like e-way bill) etc.
c. India & others ratified in 2016 → TFA became effective from 2017.
d. India set up a National Committee on Trade Facilitation (NCTF) under Cabinet Secretary (IAS). Below him → a steering committee jointed headed by Revenue secretary (IAS) and Commerce secretary (IAS)
2. Peace Clause on subsidies
46
❓MCQ. Find correct among the following statements: (Asked in UPSC-Pre-2017)
1. India has ratified the Trade Facilitation Agreement (TFA) of WTO.
2. TFA is a part of WTO’s Bali Ministerial Package of 2013.
3. TFA came into force in January 2016.
Answer Codes: (a) 1 & 2 only (b) 1 & 3 only (c) 2 & 3 only (d) 1, 2 and 3
a
47
What is Nairobi Package & SSM (2015) under burning and contentious issues between 1st world vs. 3rd world at WTO?
Nairobi Package resulted from the WTO ministerial conference 2015 @Nairobi, Kenya →
1. We’ll extend the Peace Clause for another “x” years.
2. Members must stop the subsidy on Agriculture Exports: 1st world countries must comply immediately while 3rd world countries given a relaxed deadline.
3. If there is a surge of cheap agro exports from 1st world to 3rd world, then 3rd world countries will have the right to temporarily increase tariff / taxes on them, to protect
their local farmers. It’s called “ Special Safeguard Mechanism (SSM).”
4. 1996 → Information Technology Agreement (ITA) plurilateral agreement (i.e. not signed by all member nations) → It aims to abolish import export taxes on ~200 IT products. We’ll try to get more members sign this, so global IT-trade can increase.
5. Technical reforms to help the exports from Least Developed Countries (LDC).
48
What Happened at the Buenos Aires Summit (2017) (under burning and contentious issues between 1st world vs. 3rd world at WTO?)
The 11th WTO Ministerial conference 2017 @Buenos Aires, Argentina failed to deliver any notable outcome because :
1. Food subsidy related reforms remained inconclusive because neither India- China nor USA-EU were willing to compromise.
a. So, in reality ‘Peace clause’ is extended for infinite period-
b. which is not a good thing because large amount of food subsidies given on (chemical) fertilizers harm the environment.
2. USA-EU were more keen for a new agreement on e-commerce
a. but India-China opposed that such agreements will benefit 1st world countries more (because they’ve Amazon, Walmart, Facebook etc) than 3rd world.
b. India-China insisted that first finish negotiations of the original Doha agenda subjects, before proposing such new topics like e-commerce.
3. Members also failed to conclude negotiations related to Special Safeguard Mechanism (SSM), investment facilitation, MSME etc..
As a result, this conference ended without a joint declaration by the members.
49
What is the Kazakhstan Summit (2020-June)
2020-June: WTO ministerial conference was to be held at Kazakhstan’s Astana (new name of this city: Nur-Sultan) But, cancelled due to Corona.
50
❓MCQ. Find correct statements relating to WTO: [UPSC-CDS-2014-II]
1. The WTO deals with the global rules of trade between nations.
2. The goal of the WTO is to help producers of goods and services, exporters, and
importers conduct their business.
3. The WTO, which is a successor body of the General Agreement on Tariffs and Trade,
came into being following the Uruguay Round of Negotiations.
4. The WTO distances itself in framing of rules on trade in intellectual property rights.
Codes: (a) 1, 2 and 3 (b) 2, 3 and 4 (c) 1, 2 and 4 (d) 1 and 3 only
a
51
What are the types of Trade Agreements?
Partial Scope Agreement (PSA)
Preferential Trade Agreement (PTA)
Customs Union (CU)
Common Market (CM)
Economic Union (EU)
52
What is Partial Scope Agreement (PSA)?
Trade between two countries for a small list of goods @reduced tariffs.
53
What is Preferential Trade Agreement (PTA)?
Preferential Trade Agreement (PTA) / Free Trade Agreement (FTA): Member= lower tariff; non-members: regular tariff.
a. All FTAs are not same. Tariff and list of allowed goods/services could vary depending on country to country.
b. Depending on number of participants it can be bilateral or multilateral or regional or global (e.g. WTO).
c. If countries go further beyond just lower tariffs e.g. relaxed norms for entry of foreign investment and foreign workers → then it becomes
i. CEPA = Comprehensive Economic Partnership Agreement or
ii. CECA = Comprehensive Economic Cooperation Agreement.
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What is Customs Union (CU)?
FTA in which members apply a common external tariff (CET) for non- members. E.g. East African Community (EAC), Caribbean Community (CARICOM)
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What is Common Market (CM)?
Customs union where factors of production (capital, labour) can move freely amongst members e.g. MERCOSUR- S.America.
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What is Economic Union (EU)?
EU is common market where member countries keep
common currency & tariff.
Allow entry of goods, services, capital and labour among themselves with minimum restrictions.
They decide their fiscal policies and diplomatic policies through a common parliament ‘European Parliament’, and their monetary policies through a common central bank – ‘European Central Bank’.
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List the various Free Trade Agreement?
Trans Pacific Partnership (TPP)
Comprehensive and Progressive Agreement for Trans-
Pacific Partnership’ (CPTPP or commonly called TPP-11)
Transatlantic Trade and Investment Pact (TTIP)
Regional Comprehensive Economic Partnership (RCEP)
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What is the Trans Pacific Partnership?
USA proposed free trade agreement among 12 countries: US, Japan, Malaysia, Vietnam, Singapore, Brunei, Australia, New Zealand, Canada, Mexico, Chile and Peru.
– Aimed to have lower tariffs for participant countries, easier norms for labour, environment and investment.
– 2016: USA withdrew from the negotiation claiming, “TPP will take away jobs from USA because companies will setup factories in Mexico where labour is cheaper, and then such cheap products will be dumped in USA, yet we’ll not be able to impose heavy taxes on them.” So TPP has become defunct.
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What is TPP-11 or CPTPP?
- While USA-led TPP could not materialize, but some of the nations in Pacific region separately worked out a ‘Comprehensive and Progressive Agreement for Trans-
Pacific Partnership’ (CPTPP or commonly called TPP-11) in 2018-Dec.
- Presently, it has 11 signatories: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam.
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What is Transatlantic Trade and Investment Pact (TTIP)?
TTIP Proposed free trade agreement between USA & EU
with objectives similar to TPP- reduce tariff, easier entry of foreign investment etc. Negotiations are ongoing but it is not yet signed mainly due to opposition from the European Union side. E.g.
1. In USA’s Farm, Dairy and Meat industry, the standards related to pesticide residue, pathogens, antibiotics, growth hormones, genetically modified (GM) crops etc. are slightly lower than EU. So, EU’s animal rights & environmental groups worried it will lead to unrestricted flow of those “harmful” products from USA to Europe.
2. EU has strict norms on private companies to cut their emissions and compulsorily invest in renewable energy. In USA such norms are relaxed. EU’s environmental groups don’t want such ‘polluting US companies’ to profit via exporting to EU.
3. USA wants EU nations to cut down the subsidies & preferences given to EU’s state owned enterprises (SOE) / PSUs. EU civil rights / labour rights group fear it will lead to privatization of health, education, insurance cos which will cause unemployment of PSU-workers, and when pvt. MNCs are providing such essential services it’ll become unaffordable for many poor citizens.
USA had been lobbying for TPP and TTIP because USA is disillusioned with the WTO-wherein India, China and other emerging economies have equal voting rights and have become more assertive, so USA and its MNCs are not gaining much benefit out of WTO led agreements.
But, If TPP/TTIP materialized, it’d harm Asian economies exports towards US/EU so to compensate that loss, Asian economies came up with their own idea RCEP....
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What is RCEP? India decided not to join RCEP in Nov 2019, discuss.
Introduction to RCEP:
- RCEP is a proposed free-trade agreement between the 10 ASEAN countries and their six Free-Trade Agreements
partners viz. Australia, China, India, Japan, New Zealand and S. Korea.
- Collectively, these countries command 25% of global GDP, 30% of global trade.
- RCEP requires them to reduce the tariff and non-tariff barriers against each other, encourage investments, economic and technical cooperation, protect Intellectual Property Rights (IPR) etc.
- This will boost trade, economic growth and employment in each of these countries.
Why India didn't join RCEP in 2019-Nov
India already has over $100 billion trade deficit with RCEP countries. Out of this, China alone accounts for $54 billion trade deficit. So India had following apprehensions about this agreement.
1) China: RCEP will result in increased flow of Chinese manufactured & electronic goods → Indian MSME, automobile, steel industries harmed → So, India wanted separate levels of customs duty against Chinese imports.
2) Dairy: India is among the largest producers of milk but our specialty is mostly in the liquid products whereas New Zealand is renowned for its solid products (milk powder, butter, cheese etc.) These solid dairy products have a longer shelf-life & easier to transport over long-distance. So if trade-barriers removed, India will be flooded with cheap dairy products → Indian farmers & dairy entrepreneurs will suffer.
3) Agriculture: Southern India’s plantation farmers afraid of cheaper tea, coffee, rubber, cardamom and pepper from Malaysia, Indonesia & other RCEP nations.
4) So, India wanted an Automatic Trigger Safeguard Mechanism (ATSM) to protect itself from surge in imports.
5) Ratchet Obligation: It means a nation can not go back/undo its commitments under the RCEP agreement. India wants certain exemptions here.
6) Base Year for tax cuts: India wants base year for tax-cuts fixed at 2019 instead of 2014. Because since 2014, India has raised customs duties on over 3,500 products.
7) Data localisation: India wants all RCEP countries to have the rights to protect data & prohibit cross-border data flow in the national interest. For this reason, India even refused to sign G20 Osaka declaration on cross-border data flow.
2019-Nov: RCEP summit at Bangkok, Thailand. Here, Indian demands were not agreeable to the majority of other members. So, India announced not to join the RCEP Agreement.
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RCEP counter view and conclusion?
RCEP: Counterview: India made a mistake by not joining
1) Competition brings excellence. Unless the Indian industrialists are subjected to the competition from Asian giants, they will not invest further in the R&D, product
upgradation, customer service & customer satisfaction.
2) If India doesn’t join RCEP, our products will not be able to compete in those nations because of the higher taxes on Indian exports viz a viz other RCEP exports.
3) Indian manufacturers could import intermediate goods from RCEP countries at cheaper price → process them further → re-export towards Middle East, Africa and European. Thus, RCEP could have provided the perfect opportunity for India to become integrated with the global value chain
4) World Bank’s “A Glass Half Full: The Promise of Regional Trade in South Asia” report (2019) estimates India’s potential trade in goods with South Asia at more than 60 billion, but at present the actual trade is less than $20 billion- due to tariff barriers and connectivity issues. Hence, RCEP is necessary for boosting India’s exports.
5) RCEP was still ‘less strict’ in comparison of India’s ongoing FTA negotiations with the USA or EU. It was a low-hanging fruit, we should have signed it.
6) India will have to eventually shed-off its ‘big but poor’ mentality. International agreements always require some sort of bargaining / give and take.
RCEP: Conclusion?
- While it is true that India could have gained in certain export-sectors by signing RCEP Agreement, but its present format did not fully address India's issues and concerns regarding the protection of the domestic industry.
- So we’ve opted not to sign it. The remaining member-nations have planned to sign the RCEP agreement in 2020 and they are trying to convince India to get onboard.
- India has not permanently shut the doors for negotiation. In future we may sign it, if our concerns are addressed.
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What does the economic survey say about India's trade agreement?
Economic survey 2015-16: Observations about India’s Trade Agreements
- India has signed 40+ trade agreements with various countries, our global trade has improved but more on import side than export side.
- RCEP, TTIP, TPP are mega regional agreements that will undermine the WTO processes
- India must prepare for this changing world. India should shed its “big but poor” dilemma/mentality i.e.
- “Our India is poor nation we must protect farmers & MSME so we have moral right to impose tariff and non-tariff barriers on US/EU goods/services &
- yet US/EU must allow our goods/services into their countries without any barriers!”
- It’s for this reason, India-European Broad-Based Trade and Investment Agreement (BTIA) is not reaching conclusion. International trade is a give-and-take relationship, we’ve to reduce our trade barriers only then we can expect them to reduce their trade barriers.
ES20: Observations about India’s Trade Agreements
- Critiques allege that most of India’s FTAs have not worked in “India’s favour.” e.g. India’s FTA with S.Korea, Japan and Sri Lanka= %⬆in imports >> are higher than %⬆ of exports.
- However, after lengthy data analysis, the ES20 concluded that overall India has gained in terms of increase in exports by signing FTAs.
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What is FTA ‘rules of origin’?
- 1998: India - Sri Lanka FTA. So ink manufactured in SriLanka = 0% Indian customs duty when imported in India.
- But sometimes Chinese company manufacture ink bottles in China, transports to its Sri Lankan company → Sri Lanka’s company pastes a label “this bottle manufactured in Sri-Lanka” → sell them in India @0% customs duty?
- So, FTA agreements contain 'rules of origin'. Which requires that minimum x% manufacturing/processing/value addition must be done in originating country before it’s eligible for 0% customs duty.
- Originating country (Srilanka) cannot dump goods from some third country (China) in the Indian market by just putting a label on it.
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❓MCQ. Consider the following countries:(Asked in UPSC-Pre-2018)
1. Australia 2.Canada 3.China 4.India 5.Japan 6.USA Which of the above are among the 'free-trade partners' of ASEAN?
(a) 1, 2, 4 and 5 (b) 3, 4, 5 and 6 (c) 1, 3, 4 and 5 (d) 2, 3, 4 and 6
c
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What are thee Trade agreements losing shine?
NAFTA 1994
- North American Free Trade Agreement (1994) involves Canada, USA and Mexico.
- However, USA felt NAFTA harms the American interests → 2018: made a deal with Mexico and Canada to replace NAFTA with a new agreement called United States-Mexico-Canada-Agreement (USMCA).
SAFTA 2004
- South Asian Free Trade Area is a trade agreement of SAARC nations- Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka.
- 2016: India refused to attend SAARC Annual summit @Pakistan, after Uri- Attack. In 2019 India raised duties on Pakistani goods so SAFTA’s is losing its shine.
AfCFTA, 2019: African Union (AU) members have signed the African Continental Free Trade Agreement (AfCFTA). It’s world’s largest FTA covering 54 nations.
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What are the burning issues in International Trade?
```
Protectionism, Trade war
Protectionism →Medicine and Defence
Protectionism → Indian Govt procurement
USA’s Special 301 report
USA’s Generalized System of Preferences (GSP) list
USA Reciprocal Trade Bill/Act
India-USA limited trade deal
```
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What is Protectionism, Trade war?
- Protectionism means the use of tariff and non tariff barriers to protect the local industry against foreign competition.
- Trade war happens when two / more nations attack each other's exports through tariff and non tariff barriers.
- 2017: USA had $375 billion trade deficit with China. Cheap import from China → domestic American manufacturers suffer. US companies outsourcing to China → unemployment of American workers.
- 2018: USA announced 25% tariff on imported steel, semiconductors, chemicals, plastics, motorbikes and electric scooters etc. from China. So, China retaliated by hiking tariff on imported American soybean & other food products, chemicals, medical equipment & vehicles.
- Both also filled complaints against each other at WTO.
- EU also making similar protectionist moves against China and India.
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What is Protectionism →Medicine and Defence?
- Hydroxychloroquine: anti-malarial drug, could be used in the COVID-19 treatment.
Earlier India had imposed a ban on its export to ensure supply for the Indian patients. But 2020-june: India lifted the ban for 1) export earning 2) 1) soft-diplomacy: winning support of its friendly nations.
- 2020-Aug: Defence ministry has put 101 defence items in negative import list i.e. they will be purchased from local manufacturers. They'll not be imported e.g. Multi barrel rocket launchers, assault rifles, radars. Benefit? Local industry will get contracts worth ₹4 Lcr. → Make in India, Atma-Nirbhar, ⏬CAD.
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what is Protectionism → Indian Govt procurement?
- Atma-Nirbhar: PM asked the nation to be "local ke liye vocal" (to promote local goods) with an aim to make India self-sufficient in every way.
- So, in Government procurement tenders up to ₹200 crore. → Foreign (global) companies will not be allowed to apply.
- This will help Indian Micro, Small & Medium Enterprises (MSME) and large Indian companies to revive business through increase purchase from the Government.
Sidenote: In an excessive and unplanned enthusiasm, Home Minister Amit Shah ordered Central Armed Police Force (CAPF) canteens not to sell any “imported” items. But, many Indian companies were also kept on the banned list because of miscommunication or haste in preparing the list. So, the order has been withdrawn.
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What is USA’s Special 301 report?
Annual report that lists the countries who are harming the Intellectual Property Rights copyrights, patents and trademarks of American companies.
- These countries are classified into categories such as “Priority Foreign Country” (Most dangerous)> "Priority Watch List" > "Watch List" etc.
- Depending on the classification, USA will complaint to WTO and / or spend money on those countries to reduce the piracy (e.g. training and capacity building of Russian
police officers & China’s cybercrime courts etc.).
- 2018: India, Russia, China etc. are in priority watchlist. Mainly because of their hackers, movie piracy, counterfeit products; India because of its drug patent norms & NPPA which reduce the profitability of US pharma companies’ patented drugs.
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What is USA’s Generalized System of Preferences (GSP) list?
- If a developing country’s name is in this list, its exports will be subjected to zero/lower import duties in USA (for selected products only).
- 2019: Trump removed India from GSP list, citing India has imposed heavy import duties on Harley Davidson bikes and other American exports.
- As such most of the Indian exported goods to USA are not in the GSP list in the first place, so this blacklisting will not harm India much, albeit, Indian textile companies
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What is Global System of Trade Preferences among Developing Countries ?
Global System of Trade Preferences among Developing Countries (GSTP) is a trade agreement among developing countries and LDC signed under the aegis of United Nations Conference on Trade and Development (UNCTAD) in 1988. It aims to reduces the trade barrier among themselves. India is a member.
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What is USA Reciprocal Trade Bill/Act?
2019: United States Reciprocal Trade Bill was introduced in the American parliament (=US congress)
- IF the partner nation has imposed a high level of tariff/non-tariff barriers on American products, then
o US President can unilaterally ⏫ the taxes on imported products of that trading country.
o US President can even 'undo' his commitment from the free trade agreements with that country
If the Intellectual Property Rights (IPR) of American products are not respected/enforced in a country → US President can ⏫ taxes on imported products from that country.
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What is India-USA limited trade deal?
- 2020-Jul: India USA are negotiating for a 'limited trade deal' i.e. only for selected commodities taxes may be ⏬.
Basically, they're looking for following
- India should ⏬ taxes on American farm & dairy products, pharmaceuticals, electronics etc
- USA should ⏬ taxes on Indian steel & Aluminium etc, and USA should restore India's name in the Generalized System of Preferences (GSP).
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How does US/EU/China trade war impact India?
Previous economic surveys observed:
- US’s protectionism is targeted more towards Chinese goods than towards Indian services (IT/BPO) because of their local political / vote bank perception that Chinese manufacturing industries are more responsible for the loss of American jobs than Indian call-centres. So, India need not worry excessively.
- Besides, Chinese tariffs on USA → opportunities for India to export its soyabean, cars, medical equipment to China. Commerce Ministry has recorded growth in over 300+ Indian exports including vulcanized rubber, paper, copper wires, electrodes, natural honey and pipes to China.
- Similarly, USA’s 25% import duty on Chinese seafood has made American consumers shift to Indian frozen shrimps which don’t attract such large duties in USA. This has positively boosted India’s seafood exports.
- However, with the rise of nationalistic political groups in the 1st world nations, India will face following challenges:
- 1st world nations’ local industrial groups keep pressuring their governments to impose more tariffs on Indian fisheries, textile and pharma sectors.
- With the fall in (overall) exports of India, there has been a glut the supply of commodities in the domestic market, resulting into inflation levels falling below 3%. According to Phillips curve, there is an inverse relationship between inflation and unemployment. This could pose a challenge to our economy in the days ahead
- 1st world nations tighten their visa / immigration policies = NRIs suffer. (Although positive in the sense it’ll result into ‘brain gain’ for India, instead of ‘brain drain’- says Mukesh Ambani!)
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Brexit timeline?
- 1993: Maastricht Treaty formed European Union, a political and economic union to allow easy movement of goods, services, citizens among themselves.
- 2002: EU introduced its common currency, Euro. Although Britain was an EU member, it continued with its own currency ‘Pound Sterling’.
- Later, Britain’s political parties campaigned that 1) migrant workers from other EU countries= job loss for local Britishers. 2) EU framework is harming our economic and foreign diplomacy interests.
- 2016: Britain held a referendum & asked its citizens “whether the Britain should EXIT or remain in the European Union?” 52% voted yes, 48% voted no.
- 2017: Britain invokes Article 50 of Lisbon Treaty, which gives them 2 years timeframe to workout a deal for exit / divorce. e.g. What happens to UK citizens living elsewhere in the EU and EU citizens living in the UK etc. How much money Britain must pay to EU for leaving?
- 2020-Jan-31st: United Kingdom has officially left the European Union. However in reality, till 31st December 2020, UK is under "Transition Period / Implementation Period" During this transition time, most of the things will remain the same as before e.g. visa-travel/driving license etc. But, gradually 'divorce' will be implemented in phase wise manner.
- 2020-May: EU announced 750 billion euro (=826 billion$) economic stimulus package. Basically, the EU will borrow money from the market → give it to Member states in the form of loans and grants for reviving their economy.
