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China as a champion of free trade

LiveMint logoLiveMint 21-03-2017 Ajit Ranade

We are in a period of constant unpredictability. Not just the Brexit outcome, or the victory of US President Donald Trump, or the mighty sweeping mandate of the Uttar Pradesh elections, but even the outcome of more mundane stuff like football matches and cinema awards is filled with unexpected drama these days.

The New England Patriots beat the Atlanta Falcons in a stunning last-minute comeback in the football Super Bowl last month. They were not supposed to win, and certainly not from a position of near-certain defeat. So also, at the Oscars, the wrong movie was announced as the winner of best picture. Such outcomes don’t happen, especially not at carefully choreographed and rehearsed events with billions watching on live television.

In this sequence, notch up one more outcome at the G20 meeting of finance ministers in Germany last week. If there’s one thing that all G20 members agree to, it is commitment to free trade. In this meeting, the communiqué dropped the traditional pledge of G20 members against protectionism. This is the first time that commitment to free trade has been silently dropped, and it is obviously at the insistence of the US. The fact that the US view prevailed over 19 other members, including the European Union, India and China, shows not just its own clout, but perhaps that other members also secretly subscribe to raising trade barriers. What is remarkable is that this G20 communiqué is so different from the one issued by it just six months ago in Hangzhou, China. That’s quite a turnaround, and protectionist sentiment might now snowball.

Indeed, in the seven years since 2010, the World Trade Organization (WTO) reports that protectionist measures have risen by 400%. According to the WTO, there are more than 2,200 measures in place worldwide which are anti-free trade in nature. These might be in the form of anti-dumping or safeguard duties, or compulsory domestic procurement requirements from governments, which put foreign competitors at a disadvantage, and thus curb free trade. This trend will probably accelerate as countries pursue copycat protectionist policies.

US President Donald Trump has made his intentions quite clear in his “make and buy in America” approach. Apart from raising tariffs, which might breach WTO commitments, the US is also contemplating a border adjustment tax, which would disallow cost of imports to be deducted, and would treat export income as tax-free. The full details are as yet unknown, and this scheme needs to pass legislative hurdles. But it would be an unprecedented (and historically unpredictable) move on the part of the US, which has been the traditional champion of free trade in the world. Indeed, the US imports the equivalent of almost one-fifth of its gross domestic product (GDP)—much of it from other G20 members. Hence the cost of the border adjustment tax will largely fall on domestic consumers. But such seems to be the strength of anti-free trade sentiment that the tax might sail through. Trump, as one of his first executive decisions, also cancelled the US-initiated mega trade pact called the Trans-Pacific Partnership (TPP). The TPP was in the works for more than three years, and involved 12 countries.

As the US cedes ground, guess who is the new champion of free trade? It is not one of the Western economies, but China. At the World Economic Forum in Davos this year, President Xi Jinping said: “Pursuing protectionism is like locking oneself in a dark room. While wind and rain may be kept outside, that dark room will also block light and air. No one will emerge as a winner in a trade war.” His speech contained a stirring defence of globalization and free trade, once attributed to the “Washington Consensus”. Referring to the emerging sentiment of isolationism, Xi also said, “Any attempt to cut off the flow of capital, goods and people between economies, and channel the waters into the ocean back into isolated lakes and creeks is simply not possible.”

This turn of stances is quite ironic, because for years US lawmakers tried to label China as a currency manipulator, i.e. not playing by the rules of free trade. It is now China which has taken on the mantle of defending frictionless borders.

In fact, with the collapse of TPP, it was expected that the Regional Comprehensive Economic Partnership (RCEP) would also slacken. The RCEP is also like a mega trade deal between 16 nations, which include 10 from Asean (Association of South-East Asian Nations), and India, China, Japan, South Korea, Australia and New Zealand. Notably, the US is absent. Just as the TPP was seen as a US initiative that sought to exclude China, so also the RCEP was seen as a China-led free trade grouping counter to the TPP. But at the most recent meetings of the lead negotiators of the RCEP members, the Chinese made it very clear that RCEP would go full steam ahead, and that too in the spirit of cooperation and partnership, not as led by China. A rather sweet word used in this context to describe China’s role in the RCEP was “non-hegemonic”.

India, of course has its own reservations on the RCEP, in the light of experience from earlier free trade deals with Asean and other regional partners. These reservations make India more cautious in embracing the wholesale removal of trade barriers. Some of the perceived ill-effects of trade deals on Indian industry could be because of lack of domestic reforms. But India remains firmly on the side of those championing the benefits of free trade. With China’s championing, the free trade caravan has travelled from the far west to the far east.

Ajit Ranade is chief economist at Aditya Birla Group.

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