The end of the Doha Round, the first such multilateral trade round to fail since World War Two, has brought to the fore the issue of what to do to move forward in trade liberalisation. This has coincided with the publication of an important book by one of the world's leading economists, Columbia University's Jagdish Bhagwati, Termites in the Trading System (Oxford University Press), which makes the case against Free Trade Agreements (FTAs).
Over the past decade and a half or so, countries impatient with the slow pace of multilateral trade negotiations decided to "take the bull by the horns" and move on their own, going for FTAs, that is, bilateral agreements that eliminate (or almost do so) tariffs and other barriers to trade between nations. Many economists since David Ricardo have been leery of them, as allegedly inefficient and suboptimal solutions leading to a "spaghetti bowl" of treaties, difficult to monitor and enact, a form of protectionism in disguise that distracts from the real task of either unilateral tariff lowering or a massive multilateral trade agreement that will effect it. Bhagwati's work is in that tradition.
Yet, the issue is not as clear-cut. As the WTO reassembles and reconsiders its options, which may include the start of a new round in the not too distant future, should countries in the developing world stay put and give up on efforts to otherwise move forward, or should they try to make the most of a difficult situation and go the bilateral and plurilateral route? At least in theory, everybody is in favour of a more open and liberalised trade regime, one with lower subsidies and lower tariffs. The real question is how to get there; there are, as they say, many ways to skin a cat. Are FTAs such a bad idea that we would be better off without them even after the death of Doha?
The issue is an especially critical one for India as it continues to open up its economy and its industry aims at gaining a foothold in foreign markets. With a $1.2 trillion economy, the fourth largest in the world in PPP terms, exports of $150 billion in 2007 and a growth rate of 9.3 per cent, more than twice the growth of the world economy, projections indicate it will reach 5.6 per cent of the world product by 2013, up from 4.4 per cent in 2006.
India has been slowly getting into FTAs. It has signed them with Sri Lanka in 1998 and with Thailand in 2003, as well as PTAs with Afghanistan, Chile and MERCOSUR. It has reached agreement on one with ASEAN this month, and it is negotiating one with the European Union since July 2007, as well as one with Japan.
The one country in the world at the forefront of FTA-signing has been Chile, with 54; it is presently negotiating four more - with Australia, Malaysia, Turkey and Ecuador. Many attribute the enormous success of the Chilean economy - the best performing in the world outside Asia since 1990, and now invited to join the OECD, which it is expected to do in 2009 - to the market access these FTAs have gained for Chilean exports. In 2007, Chile exported $67 billion and projections indicate this year it will be $75 billion, half of what India exports. This has been critical for Chile's export-led development model, whose 5.6 per cent average annual growth since 1990 needs export growth of 8 or 9 per cent a year to keep going.
To rely on export-driven growth is like riding a bike. The moment your exports stop growing, you fall. This entails a constant search for new markets - expanding current ones and adding new ones. It also means export promotion policies at home, raising productivity to stay competitive, aggressive phytosanitary policies to protect your agricultural environment, and an export-oriented culture and mentality even among medium and small size enterprises. But the foundational stone of it all is access to foreign markets. Without it, all the rest is for naught.
India has a huge internal market and much of its remarkable growth over the past two decades has been driven by internal demand. But as India's industry starts to take on the world, as it attracts more FDI and as the country makes its weight felt around the globe, access to foreign markets becomes imperative. The growth of the volumes of international trade in goods and services continues to be higher than that of the global product. The IMF projects a 5.6 per cent growth of global trade in 2008, and 5.8 per cent in 2009, versus 3.8 per cent of the world product in 2008 and 3.9 per cent in 2009. FTAs are one way to go forward and be part of the action. To look with a magnifying glass at one particular case allows us to see its contours in more fine-grained detail.
One year after the PTA between Chile and India came into effect (in August 2007) and given that last April in Santiago, President Michelle Bachelet mooted to President Pratibha Patil a possible expansion of it into a full-fledged FTA, what is the balance of that agreement between these two unequal and distant partners ?
Remarkably, despite this distance (no country in the world is farther away from India) Indo-Chilean trade is thriving. In the first year of the PTA (that is, the second half of 2007 and the first half of 2008), Indian exports to Chile reached $315 million, an increase of 82 per cent over the previous period. This is six times what they were in 1999 ($55 million), and the growth rate of exports was much higher than what it was from 1999 to 2006 - 17 per cent. In fact, during the first half of 2008, Indian exports to Chile grew 129 per cent.
Chilean exports to India, on the other hand, had a slight decline of 2 per cent, (though from a very high 2006 base of $1.6 billion, when they had tripled), to $1.99 billion, due to a slight decline in copper orders, the main item India buys from Chile. Though copper makes the bulk of Chilean exports (94 per cent), agricultural and industrial goods are also going up - for a total of some 155 products. On the other hand, in terms of India's exports to Chile, the second most significant item is cars - in which the Mahindra Scorpio has been at the most visible and making quite an impact among Chilean consumers - but also tractors, motorcycles and other such high-value consumer goods. As Latin America's strongest economy, Chile is a trailblazer in consumption patterns. Foreign products that do well in Chile get immediate attention in the rest of the region and many doors open. Doing well in Chile is an excellent visiting card. Thus, though Chile runs a huge surplus in its balance of trade with India, it is not something that worries the Indian government or Indian business. Chile is providing India with something it sorely needs (mostly commodities like copper but also other raw materials) and is in turn buying Indian capital goods and high-end consumer goods like cars.
Win-win deal
Contrary to what many sceptics thought, then, the Chile-India PTA has been a win-win deal. Its limited reach, though (only 178 Chilean products got tariff reductions and only 296 Indian ones) means that its expansion into a full-fledged FTA would be a welcome step. If a PTA triggered an 82 per cent growth of Indian exports, one can imagine what an FTA would do.
For economists, who look at the world through the lenses of abstract models, based on assumptions that have often very little to do with actual reality, FTAs are messy, confusing, suboptimal solutions, far inferior to a situation in which all 220 countries, or at least the 150 WTO members, would lower their tariffs in one fell swoop to zero. Not surprisingly, many of them don't like FTAs. My argument as a political scientist is that, for better or for worse, the world itself is messy and imperfect, and we might as well deal with it as it is rather than the way we would like it to be. An incrementalist, iterative approach like the one followed by Chile in terms of FTAs, with the results mentioned above, has shown to be a fruitful way of gaining market access and fostering domestic growth, whatever its theoretical shortcomings.