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Free Trade: Way Forward For Emerging Markets

Bhanu Pratap Singh Choudhary

Food trade versus food security has become a cause of worry for Emerging Markets (EMs) like India. Despite all the advances of achieving self-sufficiency in production, there are wide-spread inequalities that exist in India and are causing grave issues of hunger and malnutrition among a major chunk of its citizens. However, this is only one among the several challenges that are continuously faced by the EMs when it comes to their participation in the ‘free trade’ or liberalised trade regime in the world. In this article, I wish to touch upon the aspects that encourage the EMs participation in the liberalisation process and also try to enlist the challenges that lie ahead during the course of its journey towards the same.

Borrowing from the Ricardian thought of comparative advantage, classical economics has time and again reinforced its proposition of free-flow of trade and its relevance for prosperity. As some countries in the west industrialised, there was a need to expand markets and this led them to look for new markets in other countries. The result for the rapidly industrialised countries contained all the virtues of higher economic growth and the prosperity due to a rising working class, that participated in the manufacturing processes as suppliers of labour.

Over the years, this phenomena evolved into much larger themes of ‘globalisation’ and ‘liberalisation’. Only a part of the tenure of these broad cyclical events of ‘protectionism’ and ‘globalisation/ liberalisation’ can be attributed to the institutionalised mechanisms under World Trade Organisation (WTO) in world history. However, considering the relative recency of such global institutions, these multilateral bodies have assumed greater significance for humanity, owing to the large-level participation by the majority of the countries in the world. Specially, after the replacement of the General Agreement on Trade and Tariffs (GATT)  by WTO in mid 1990s, the turn of the century marked the beginning of a new era in the field of trade and its importance.

Introduction to Indian markets

Emerging markets like India have a huge presence of its working population in the primary sector i.e. agriculture. Even this huge chunk of population is largely composed of the small and marginal farmers, that have very less bargaining power and access to the formal markets and price realisations. Lots of distortions, opacity & power imbalances are influential in the market mechanisms in India. Similar instances could be deciphered in the other developing nations, and thus are classified alongside India as EMs. It is often argued that the Indian share in world trade is miniscule (around 2.1%) given the size of population ( approx. 1.3 Billion) and an economic powerhouse it is (approx. 2 Trillion $ growing at a faster rate among large economies).

 Arguments in favour of free trade

Higher price realisation of food products in the DMs is often put forward as a primary argument for encouraging the trade. Along with some conflicting evidence (Salim, S. S., Safeena, P. K., & Athira, N. R., 2015), there is a widespread consensus (Adhikari, A., Sekhon, M. K., & Kaur, M., 2016) on the better growth in price realisations through exports rather than selling in only domestic markets. Not even economic gains, there is evidence of the social welfare improvements (Meena et al., 2018) when the agricultural & food commodities are traded to the other countries.

Geetha, R. S., & Srivastava, S. K. (2018) find support to the argument that post-WTO, there has been considerable improvement in the stability of trade among countries on the front of various commodities. They also find that the short-supply due to low production of Maize in the domestic markets can also lead to scenarios where the domestic prices can effectively overshoot & exceed the world prices. In such cases, the export becomes impossible and a reverse flow might also be happening (through imports). Therefore, it is fair to consider the importance of a liberalised regime in reducing the uncertainties & risks associated with supply-led deficiencies in the biologically dependent food and agricultural commodities.

Quality convergence might prove to be a boon for the EMs that are interested in exporting the food and agricultural commodities to the DMs. Existence of Sanitary and Phytosanitary (SPS) and Technical Barriers to Trade (TBT) in most of the DMs can be seen as an opportunity for improvement rather than a challenge. Some evidence of improvements in quality of exported goods (Disdier, A. C., Gaigné, C., & Herghelegiu, C., 2018) has been put forward as an argument for long term gains for competitiveness of these industries. This will ensure a long term participation in the export value chain by simultaneously improving the quality for domestic consumption also as learning effects might also play a role.

Low participation in world trade has considerably lowered the prospects of India coming to a position of being a super-power internationally. In order to gain and subsequently assert its prominence in the matters that concern the world, the EMs, particularly India is needed at the forefront with a better proportion of world trade. The rise of China as an important influencer of world politics has been possible only because of the aggressive effort in boosting manufacturing and then trade in such products.

The Free Trade Agreements (FTAs) are also instrumental in improving the Intra-Industry Trade (IIT). The original proposition of factor endowments by Heckscher Ohlin (HO) Model can be reinterpreted in terms of increased Vertical IIT in the industries e.g. the food processing sector of India. As shown in Varma, P. (2015), due to differences in the stages of processing or product differentiation, there is a higher VIIT & low HIIT between the countries. Thus, the structure of trade is largely dependent on the nature of the product and the stage of processing. In this line of argument, it is essentially arguable that the participation of EMs has a higher likelihood of starting at a lower level of processing, but in the subsequent years, possibilities of moving up the value chain can’t be ignored.

Arguments against free trade

Apart from the Leontief paradox that was originally observed in the US, for higher imports of capital-intensive goods, as a case against the Heckscher-Ohlin Model, there is often a ‘virtual water export’ from EMs to DMs. This has been explained by study (Ngo et al., 2018; Xu, A. 2018) to have negative consequences for the exporter, as there is a rampant exploitation of natural resources by the EMs to supply the requisite commodity to the DMs. This is a central argument against the proposed free trade regime, as the resource constrained EM countries will face an acute crisis and that is indirectly caused by the lack of concern by the importing DMs.

Environment friendly logistics or ‘green logistics’ are emerging as a new non-tariff barrier for the EMs. In the name of creating sustainable development through improved practices, the burden of compliance is passed on to the EMs by the DMs. Whenever the importing countries have more stringent norms and regulations, there is evidence (Van Beers, C., & Van den Bergh, J. C. J. M. 1997) that suggests that stricter environmental regulations makes it more difficult to import commodities & goods from other countries. Also, as per the study done with trade flows from EMs to DMs by (Wang et al., 2018), it is seen that the export volumes significantly decline for the EMs when the environmental regulations are enforced by the DMs.

High inequality among the population of the EMs in terms of income, health and education is put forward as an argument to reflect the insufficient capacities to cater towards the demands of ‘free trade’. Among various such demands, the challenge of ‘food security’ is a major competing trade-off  against the ‘free trade’ of commodities. Huge stocks of food grains are kept as a buffer for feeding a large fraction of the population as a measure to mitigate the ill-effects of the pervasive scenarios of inequality. Food subsidies are thus, always at the target of the trade-promoting bodies like WTO. Indian experience with the Public Distribution System (PDS) that is a centrally sponsored scheme to ensure an almost universal coverage, is often at the centre of controversies. There might be various reasons for doubting the efficacy of the top-down approach, as has been the case with the Indian food security programs, like PDS, which emphasise subsidising the food for the poor through institutionalised procurement and subsequent disbursement to the poor households at subsidised rates. However, there is almost a consensus on the necessity of such programs in Indian scenario.

Conclusion

Free trade is allegedly designed to suit the big corporations of DMs in their endeavour to exploit the consumption aspirations of upward-moving & large human capital base of EMs. However, that assertion needs a lot of assumptions to be entirely the reason for pro-trade advocacy by the DMs. Again, at the same time, it is worth noting that the EMs like India have a host of challenges to overcome before it gears up for a full-fledged participation in the ‘free trade’ with the DMs. Most importantly, the issues around the inequality of wealth and income that translates to the poor health indicators of population makes it a priority for EMs like India to pay higher attention towards ensuring the food security of its inhabitants. In sum, this calls for the government to go urgently for enabling mechanisms towards a competitive domestic industry in EMs like India. This can potentially keep the products affordable, of reasonable quality & within-reach of its largely low-income population.

 

(About the author: Bhanu Pratap Singh Choudhary, FPM II, IIM Ahmedabad)