International Trade and Economy

CSS Editorial: It is one of the finest articles on subsidy issue in the WTO related to India for a logical understanding of India’s stand in the WTO; really very beneficial for students!

Few things symbolise the WTO’s failure as evocatively as the developing world’s fight over food subsidies does. This has stalled various trade rounds because, while developing countries like India want more time to phase out their subsidies, especially since the Europeans and the US spend billions of dollars every year to subsidise their farmers, the latter give “data” to show this isn’t true. Most lay observers are swayed by the “data” and think countries like India are indeed guilty. Perhaps the best example of this is the latest submissions by India on its subsidies—Aggregate Measure of Support (AMS) in WTO jargon—and the US response to this. The US submission says that while India claims its AMS for rice was 5.45% in 2013-14, the actual number was 76.9%—that is, while India says its support to rice farmers adds up to 5.45% of the value of the crop in that year, in reality, India gave farmers more than three-fourths extra by way of price support. The corresponding figures for wheat are 3.53% and 65.3%. A figure below 10% is acceptable according to the WTO negotiations for developing countries, and below 5% for developed ones. How the US and India get such remarkably different numbers is at the heart of the problem with how the WTO operates.

Apart from the price that India guarantees its farmers, what obviously matters is the proportion of the crop that this applies to. Since India’s minimum support price (MSP) is, theoretically a price at which every farmer can sell to the government, the US assumes India’s price support extends to 100% of the crop; India, however, buys only 25-30% of the crop, so, logically, the price support should only apply to that amount. The fact that wheat/rice prices in India are way below MSP in most parts of the country is testimony to the view that MSP is not an effective price support to 100% of the crop. Indeed, while the US calculates India’s AMS for just wheat and rice as Rs 274,515 crore in 2013-14, the entire budget for the ministry of consumer affairs, food and public distribution that oversees all MSP and ration shop functions was Rs 92,927 crore! Just correcting for this distortion will reduce the US estimate of Indian subsidies from the 65-77% range to 16-19%.

This, it turns out, is the minor part of the story. When you look at the US calculation, it talks of the MSP of Rs 13,500 per tonne for wheat in most parts of the country. It then takes a “reference price” of Rs 3,540, multiplies the difference (13,500-3,540) by the 71 million tonnes of crop and arrives at the AMS; the same exercise is done at a higher price in some states that offer a bonus over the MSP. Given value of wheat was Rs 147,795 crore, the US arrives at an AMS of 65.3%. In the case of paddy, the US takes an MSP of Rs 13,100 per tonne and a “reference price” of Rs 2,346.67. But, and here’s the catch, the current global price of wheat is not Rs 3,540 per tonne, it is around Rs 16,900—in 2013-14, prices were 25-30% higher. With India’s MSP lower than the international price, its price support is negative, not a positive 65.3% as the US alleges! In the case of paddy, the US uses an MSP of Rs 13,100 vs a reference price of Rs 2,346.67, and uses this to arrive at a 77% AMS. Yet, when you look at the current price of Rs 19,500 per tonne, it is obvious India’s price support is negative —indeed, it is because India’s prices are lower than global prices that it is able to export in large quantities.

So, why is the US using the wrong “reference price”? When the WTO reached its agreement, it needed a “reference price” to avoid disputes based on annual fluctuations in global prices. It used the average global price between 1986-88 for this. Logically, this price should have been revisited regularly or adjusted by, say, the level of inflation or the exchange rate. India’s WPI, for instance, is up 5.6 times since then; not surprisingly, the exchange rate to the dollar which was 13.4 then is also up 5-6 times. Such is the rigidity in the WTO process, in 2018, we are using 30-year-old prices to calculate market support.  But, the serious question is, why doesn’t this trip up the US and Europe who spend a lot more on farmers? Because, when the WTO focussed on trade-distorting subsidies—that meant anything like MSP that affected the domestic price—the US and Europe simply converted their price support to unconditional cash transfers to farmers which were not related to a particular crop. Each system gave, say, Rs 100 to a farmer, but the Indian one required him to grow wheat or rice while the US/EU didn’t.

Now that India has got Aadhaar-based cash transfers, it too can follow EU/US and stop its MSP while ensuring the farmer gets the same amount of subsidies. Indeed, there are attendant benefits to doing this since higher MSPs mean Punjab and Haryana grow too much wheat and rice and that hurts their soil and lowers the water table. But at a more basic level, why does India need to change its system of MSPs just because the WTO is unable to learn basic maths?

According to the World Inequality Lab’s World Inequality Report 2018, the richest 1% captured twice as much as the poorest 50% of world population since 1980. In other words, since 1980, 27% of all new income worldwide was captured by the richest 1%, while the poorest 50% captured only 13% of growth.

 The World Inequality Report 2018 relies on a cutting-edge methodology to measure income and wealth inequality in a systematic and transparent manner. By developing this report, the World Inequality Lab seeks to fill a democratic gap and to equip various actors of society with the necessary facts to engage in informed public debates on inequality.

Outlook on global income inequality

Income inequality has increased in nearly all world regions in recent decades, but at different speeds. The fact that inequality levels are so different among countries, even when countries share similar levels of development, highlights the important roles that national policies and institutions play in shaping inequality.

 Income inequality varies greatly across world regions. It is lowest in Europe and highest in the Middle East -Inequality within world regions varies greatly. In 2016, the share of total national income accounted for by just that nation’s top 10% earners (top 10% income share) was 37% in Europe, 41% in China, 46% in Russia, 47% in US-Canada, and around 55%  in sub-Saharan Africa, Brazil, and India. In the Middle East, the world’s most unequal region according to our estimates, the top 10% capture 61% of national income.

 Findings on global wealth inequality

The combination of large privatizations and increasing income inequality within countries has fueled the rise of wealth inequality among individuals. In Russia and the United States, the rise in wealth inequality has been extreme, whereas in Europe it has been more moderate. Wealth inequality has not yet returned to its extremely high early-twentieth-century level in rich countries.

 Increasing income inequality and the large transfers of public to private wealth occurring over the past forty years have yielded rising wealth inequality among individuals. Wealth inequality has not, however, yet reached its early-twentieth-century levels in Europe or in the United States.

The rise in wealth inequality has nonetheless been very large in the United States, where the top 1% wealth share rose from 22% in 1980 to 39% in 2014. Most of that increase in inequality was due to the rise of the top 0.1% wealth owners. The increase in top-wealth shares in France and the UK was more moderate over the past forty years, in part due to the dampening effect of the rising housing wealth of the middle class, and a lower level of income inequality than the United States’.

 Evolution of private and public capital ownership matter for inequality

Economic inequality is largely driven by the unequal ownership of capital, which can be either privately or public owned. We show that since 1980, very large transfers of public to private wealth occurred in nearly all countries, whether rich or emerging. While national wealth has substantially increased, public wealth is now negative or close to zero in rich countries. Arguably this limits the ability of governments to tackle inequality; certainly, it has important implications for wealth inequality among individuals.

 Outlook for India

Deregulation and opening-up reforms in India since 1980s have led to substantial increase in inequality so much that top 0.1% of earners has continued to capture more growth than all those in the bottom 50% combined.

 In 2014, the share of national income captured by India’s top 1% of earners was 22%, while share of top 10% of earners was around 56%. Top 0.1% of earners has continued to capture more growth than all those in the bottom 50% combined. The bottom 50% now have about 15% share in the total income. This rising inequality contrasts to the 30 years following the country’s Independence, when income inequality was widely reduced and the incomes of the bottom 50% grew at a faster rate than the national average.

 Future of global inequality and how to tackle it

World Inequality Report 2018 projects income and wealth inequality up to 2050 under different scenarios. In a future in which “business as usual” continues, global inequality will further increase. Alternatively, if in the coming decades all countries follow the moderate inequality trajectory of Europe over the past decades, global income inequality can be reduced—in which case there can also be substantial progress in eradicating global poverty.

Rising wealth inequality within countries has helped to spur increases in global wealth inequality. If it is assumed that the world trend to be captured by the combined experience of China, Europe and the United States, the wealth share of the world’s top 1% wealthiest people increased from 28% to 33%, while the share commanded by the bottom 75% oscillated around 10% between 1980 and 2016. The continuation of past wealth-inequality trends will see the wealth share of the top 0.1% global wealth owners (in a world represented by China, the EU, and the United States) catch up with the share of the global wealth middle class by 2050.

Global income inequality will also increase if countries prolong the income inequality path they have been on since 1980—even with relatively high income growth predictions in Africa, Latin America, and Asia in the coming three decades. Global income inequality will increase even more if all countries follow the high-inequality trajectory followed by the United States between 1980 and 2016. However, global inequality will decrease moderately if all countries follow the inequality trajectory followed by the EU between 1980 and today.

Going ahead, more equal access to education and well-paying jobs is key to addressing the stagnating or sluggish income growth rates of the poorest half of the population. Governments need to invest in the future to address current income and wealth inequality levels, and to prevent further increases in them.

The Asia-Pacific Economic Cooperation (APEC) Summit was held in Da Nang, Viet Nam (November 6-11, 2017). Amid the fast changing geostrategic context and domestic situation in a number of countries, APEC Summit was marked by commitment to free trade and globalization despite US president Donald Trump’s reservation. It was the culmination of year-long hosting of APEC meetings in Vietnam. It marks the second time Vietnam was playing host to the APEC, having hosted the event previously in 2006. Earlier, a Round Table Meeting with the theme, “Stronger Joint Action for APEC’s Shared Vision”, had been held in Hanoi in December 17, 2015 by the Vietnamese Ministry of Foreign Affairs to discuss preparation efforts for the 2017 APEC Summit. This was the first APEC meeting for United States President Donald Trump, South Korean President Moon Jae-in, Hong Kong Chief Executive Carrie Lam, and New Zealand Prime Minister Jacinda Ardern, since their inaugurations on 20 January 2017, 10 May 2017, 1 July 2017 and 26 October 2017, respectively. Apec brings together 21 economies from the Pacific region – the equivalent of about 60% of the world’s GDP.

The Da Nang Declaration

The 2017 APEC Summit in Vietnam officially wrapped up with the Da Nang Declaration, which reiterated the commitment of the 21 economic members to multilateral trade that fosters inclusive growth and reaffirmed their confidence in the forum’s ability to tackle future challenges together. The declaration, coming at the conclusion of the Summit, themed “Creating New Dynamism, Fostering a Shared Future”, reaffirmed leaders’ long-standing commitment to APEC’s mission of fostering sustainable economic growth and prosperity in the Asia-Pacific region. According to many experts, the Da Nang Declaration expresses a new vision for APEC, establishes new directions to create growth momentum for the region, and maps out new directions for APEC economies in the future.

The 2017 APEC under the host of Viet Nam proposed four areas for cooperation: a) sustainable, innovative and inclusive growth; b) regional economic integration and connectivity; c) dynamism for micro, small, and medium-sized enterprises (MSMEs) — a key driver of the region’s growth; and d) food security and achieving sustainable agriculture. Topics of discussion also included improving work force skills to meet the new demand for the fourth industrial revolution, reducing income gaps and, and promoting inclusive and equitable development. The Danang Declaration — unanimously adopted at the Summit — reaffirmed all these and called them “long-standing commitments” by all member economies. Similarly, the dramatic revival of the Trans Pacific Partnership Agreement talks (now changed to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership) after intensive negotiations in Danang has helped tighten an embrace of “high-stardard”, “balanced” “free”, and “fair” game of trade for concerned stakeholders. Chinese President Xi Jinping also drew a lot of attention because the meeting took place not long after China’s 19th Party Congress. The region wanted to know Beijing’s major policy lines for the new term as could be seen in President Xi’s numerous sideline meetings, and Vietnam was the first foreign country President Xi visited. Russia, Japan, Canada, South Korea, and Australia (an APEC founding member) certainly took APEC seriously with their respective agreement on the host country’s proposed agenda. As for ASEAN, with the presence of Secretary General Le Luong Minh, it was able to seize the opportunity to cement its solidarity and the working principles that have brought about its successes in the last five decades.

Another highlight of the 2017 APEC Summit was the commitment to and innovative ideas for global growth. The APEC CEO Summit was a great success, with speeches given by leaders of APEC economies, including US President Donald Trump and Chinese Party General Secretary and President Xi Jinping, as well as leaders of leading local and global economic groups and representatives from major international economic institutions.

CPTPP

Ministers of the eleven remaining signatories to the TPP agreed on “core elements” of a new trade pact, to be implemented without the US. The agreement will now be called the Comprehensive and Progressive Agreement for the Trans-Pacific Partnership (CPTPP). While the “TPP-11” accord was not endorsed by leaders, as expected, ministers said the new name reflects a focus on inclusive growth.

APEC and ASEAN

At the APEC Summit, for the first time ASEAN leaders had a dialogue with APEC members’ heads of delegation. This is a testament to both ASEAN and APEC’s continued aspirations for a wider community of cooperation. APEC, like ASEAN, constitutes a significant building block for the region’s deeper integration and connectivity. ASEAN has endeavored to keep its centrality in the regional architecture, one with values shared by APEC, such as open regionalism and inclusiveness.

Vietnam remakes its image

For Vietnam APEC Summit culminated in creating a brand image. President Xi congratulated Vietnam on successfully organizing the 2017 APEC Summit and highly appreciated the results of the conference in promoting regional and global development.President Trump said he was impressed by the sincere sentiments and warm welcome of the people of Da Nang and Hanoi, and asked Prime Minister Nguyen Xuan Phuc to thank the Vietnamese people.  The achievements not only express Vietnam’s new role in the international community but also show that APEC continues to be a leading regional economic cooperation mechanism that initiates and promotes cooperation, connectivity, and intellectual convergence in the region and the world.

This success is reflected in the participation of major international organizations such as the International Monetary Fund (IMF), the World Bank, the Organization for Economic Co-operation and Development (OECD), and the Asian Development Bank (ADB). A number of senior analysts and commentators participated at the event and contributed significantly to its success.

More than 21,000 delegates took part in the 243 activities held during APEC Year 2017 in Vietnam. The APEC Economic Leaders’ Week alone attracted about 11,000 delegates, Mr. Minh said, adding that these figures reflect the world and the region’s great attention to APEC.

Relevance of APEC

APEC is the premier forum in the region to facilitate the realization of the development goals set forth by the United Nations. Home to around 2.8 billion people, approximately 59 percent of world GDP and 49 percent of world trade, APEC includes the world’s biggest economies, such as the US, China, Japan, ASEAN, and thus has the potential to make important economic contributions to the region — and the world. APEC could help to promote economic development in the region in many important ways. Even though the Asia Pacific is the fastest-growing region at a time when the world economy is witnessing positive growth, there are lurking risks such as inward-looking policies of many countries, aging populations, as well as traditional and emerging security challenges.

Differences between the US and China

On 09th November 2017, Ministers from Asia-Pacific countries ended amid differences on the issues like trade and protectionism. Foreign and trade ministers of 21 Pacific Rim economies meeting in Vietnam extended their talks for an extra day Thursday as they struggled for a consensus on open markets and other strategic issues ahead of a regional summit. The problem arose because of insistence of the US on changes to the language used concerning issues such as free trade and protectionism. In a speech in the Vietnamese port city of Da Nang on November 10, President Trump railed against the World Trade Organization, which sets global trade laws, and said it “cannot function properly” if all members do not respect the rules. He complained about trade imbalances, saying the US had lowered market barriers and ended tariffs while other countries had not reciprocated. He further said that such practices hurt many people in the US  adding that free trade had cost millions of American jobs. But he did not lay the blame on Apec countries, and instead accused earlier US administrations of not acting earlier to reverse the trend. He said America would make bilateral agreements with “any Indo-Pacific partner here who abides by fair reciprocal trade”, but only “on a basis of mutual respect and mutual benefit”. Since taking office, President Trump has pursued his “America First” agenda and pulled the US out of the regional Trans-Pacific Partnership – a major trade deal with 12 Apec nations – arguing it would hurt US economic interests.

In contrast, President Xi said globalisation was irreversible. Speaking minutes after his American counterpart, Chinese President Xi Jinping took to the podium to espouse his country’s credentials as the new champion of world trade. Globalisation, he said, was an “irreversible historical trend” but the philosophy behind free trade needed to be repurposed to be “more open, more balanced, more equitable and more beneficial to all”. In contrast to President Trump, the Chinese leader defended multilateral trade deals, which he said helped poorer nations to benefit. He said, “We should support the multilateral trading regime and practise open regionalism to allow developing members to benefit more from international trade and investment.”

Conclusion

President Trump was clear – he wants bilateral trade deals and large, multilateral arrangements don’t work for him. This was a speech saying that America is open for business, but on America’s terms. Contrast that with China’s Xi Jinping, who spoke about the digital economy, quantum science, artificial intelligence – presenting a vision of the future that is connected, and comprehensive.

Increasingly these days Mr Xi appears as the poster child for free trade and globalization on the international stage, but ironically China itself has yet to become a fully free economy. On the other hand, the US was the architect of many of the multilateral and free trade agreements for Asia. Under its tutelage, many of these countries opened up and reformed – playing by America’s rules. But under Donald Trump, that role has gone into reverse. This has left China with a gaping hole to fill – and one it is only more than happy to take on (BBC).

Despite differences, the 2017 APEC Summit presents a key medium for regional stakeholders to tackle current problems and promote better understanding. APEC’s consensus-based approach, broad inclusiveness, and efficient platform for numerous multilateral and bilateral meetings make the venue important. Cooperative programs within the APEC framework may be either substantive or symbolic, but given all the present challenges and needs, both are valuable for the region (Ley Dinh Tinh, huffington post).