- Viewpoint: Why international trade matters
- As of today, international trade is facing the most unexpected challenges – a continuing global pandemic, a war in Europe, widespread economic sanctions, tattered supply chains, and sudden national bans and caps on the import and export of essential commodities. Perhaps paradoxically, this may be the best time to reemphasize why international trade matters more than ever before in reviving the fortunes of both the global economy, and many national economies along with it. We need to remember that the Indian economy has also benefited considerably by liberalizing its complex and restrictive trade regime over the past three decades, and aligning its exchange rate more closely with global market realities.
- The current situation in Ukraine has heightened many geo-economic fragilities, including supply chain vulnerabilities, food and energy insecurities, volatility in financial markets, and even the prospect of a tense and long-drawn out period of global geopolitical realignment. All these developments pose challenges – but also opportunities – for enhancing international trade. We need to look beyond the obvious and focus on the importance of international trade in enhancing global economic growth that fosters inclusion, reduces inequality, and ensures a sustainable future to millions worldwide … and see all this being achieved in a framework of constantly increasing digitalization.
- The US dollar continues to play a disproportionate role in global markets even as the American economy has been producing a shrinking share of the world’s output over the past two decades. This is a paradox the world will have to learn to live with. As far as India is concerned, America is an economic counterweight to China, and any rebalancing of Sino-Indian trade will need to focus on developing strategic commercial engagements with the USA. Thus, the continued dominance of the USA in world trade could be a blessing in disguise for us.
- India needs to rationalize its tariff policy. All tariff increases that have occurred in the past five years (maybe even earlier) need to be phased out. In the long run, a tax on imports amounts to a tax on exports. In dealing with external payment pressures, the instrument of choice for policymakers should be exchange rate manipulation, rather than tinkering with tariff or quota restrictions. Likewise, in dealing with domestic inflation, monetary and fiscal measures are preferable to export bans and duties, which sometimes lead to balance of payments issues. However, to significantly enhance our currently low engagement in global and regional value chains, a strategic involvement with the dynamic Regional Comprehensive Economic Partnership (RCEP) in our Asian backyard, needs to be seriously considered.
World trade will eventually recover from the complex challenges of 2022. The question is whether India will be nimble enough to capitalize on the changing scenarios and follow the policies necessary to make the most of that recovery. In the long run, it is important to implement reforms and build strong institutions that increase our resilience to shocks and address the underlying drivers of socioeconomic inequality. International trade matters, but it cannot be a panacea for all ills. Policymakers must use this opportunity to build a new and stronger regulatory architecture, taking a holistic and visionary view of what the future of our economy is likely to be.
Picture Credit: Google