TRADE AGREEMENTS – THE INDIAN PERSPECTIVE

WHY TRADE AGREEMENTS MATTER

Trade agreements play a catalytic role in enhancement of trade between partners by helping them leverage their mutual complementarities and providing greater access to each other’s industries. David Hume, renowned classical economist whose essay “Of the Balance of Trade” is regarded as the first true economic model by most celebrated economist of 21st century Paul Krugman had sternly disregarded the narrow opinion of attributing free trade to growing at the expense of other.

In support of free trade and mutual growth he quoted that “Nothing is more usual, among states which have made some advances in commerce, than to look on the progress of their neighbours with a suspicious eye, to consider all trading states as their rivals, and to suppose that it is impossible for any of them to flourish, but at their expense. In opposition to this narrow and malignant opinion, I will venture to assert, that the increase of riches and commerce in any one nation, instead of hurting, commonly promotes the riches and commerce of all its neighbours; and that a state can scarcely carry its trade and industry very far, where all the surrounding states are buried in ignorance, sloth, and barbarism.

It is obvious, that the domestic industry of a people cannot be hurt by the greatest prosperity of their neighbours; and as this branch of commerce is undoubtedly the most important in any extensive kingdom, we are so far removed from all reason of jealousy. But I go farther, and observe, that where an open communication is preserved among nations, it is impossible but the domestic industry of every one must receive an increase from the improvements of the others.”

Two important assertions that David Hume made is that-

1. Growth of a nation fuels the growth of the neighbouring countries.
2. Open communication is a prerequisite for the first assertion to hold true.

Adam Smith, the father of modern economics has been a major proponent of laissez-faire economic policies. Most of the economists agree on the proposition that free trade between economies too result in similar efficiency and growth. Such sentiments has been the drivers to the formation of first the GATT and later the WTO.

Free trade literally means absence of trade barriers. Trade barriers can be in the form of tariffs, quotas, or other governmental impediments to international trade.

Free trade has several benefits such as it allows a country to specialize in the goods it can produce cheaply and efficiently relative to other countries (Concept of Comparative Advantage). Most of the developed world is an example of how resultant efficiency and specialisation has enabled countries to achieve higher real incomes and upward movement in the product life cycle.

Although free trade provides innumerable benefits, but it hurt a few interest such as shift of low value addition industry from developed to developing world has resulted in large scale unemployment of low skilled labour of the developed world. It further exposes domestic industry to global competition. Consequently, barriers to trade continue to exist despite their sizable economic costs but as secondary to free trade.

But with the rising protectionist sentiment, unilateralism and inward looking policies the major economic entities of World has turned the narrative against the globalisation and free trade. The world is growing wary of free trade. WTO emerged as a champion of rule based world order established on free and open trade is losing its sheen in the 21^st century. Also, open communication has remained a challenge, solution for which the world is probing. Lack of transparency in terms of non-tariff barriers and coupling of political and economic goals has been a vexation for the world as whole. These trends have contributed to rise in the regional trade agreements e.g. TPP, RCEP etc. encompassing more than half of the world GDP.