Focus on comparative edge

Focus on comparative edge

INDIA-US BILATERAL TRADE: There is a need for both countries to identify areas where they enjoy or develop comparative advantage in international trad

When two countries confabulate for greater inter-state trade, they continuously seek to improve upon the scale and quality of it, endeavour for avenues for increased cooperation and symbiotic arrangements, paper out solutions from potential logjams where disagreements and acquiescence are interspersed – the former usually lesser than the latter – and emphasise on its respective areas of expertise.

The scale and extent of international trade between India and the USA is inching toward such state of things. Both countries seem to look forward to streng­then the area of bilateral trade. Bilateral trade between India and the US was about $4.8 billion in 1980. It increased to about $9 b in 2015. Thereafter, former American president Barack Obama and Prime Minister Narendra Modi set a target to increase volume of trade between the two countries to about $500 b.

Despite hollering against reportedly unjustified acts against America, real and imaginary, that its President Donald Trump has made and is making intermittently, he has appropriately given no indication or insinuations that he wishes to revisit or decelerate progress towards that ambitiously valued Indo-American trade level.

Flow of goods and services between two or more countries as also among certain regional economic blocs still adheres to, in notable ways, to the application from the insightful economic theory of “Comparative Advantage” propounded by the British economist David Ricardo during early 19th century. It has since then been a crucial constituent of the foundation of international trade theory and policies. To the extent that political and economic situations evolve and other concepts have been relegated or revisited, and new ones have emanated, “comparative advantage” continues to retain and reinforce its relevance.

The central perspective of this advantage states how mutually beneficial trade can take place even if a country is in certain ways or wholly less efficient than or reflects an absolute disadvantage with respect to another country in the production of all commodities or services.

In such a scenario, the potentially less efficient nation should specialise in and concentrate upon the production and export of that commodity or commodities in which its absolute disadvantage is smaller — those commodities of its comparative advantage — and should import those commodities in which it is disadvantageously positioned to produce and export.

India, which was mired in controls and an inward looking economic approach even when it smacked of outright irrationality, has in the past 25 years or so, gradually, yet steadily, oriented itself for increased international trade with other countries. Today, it is in an enviable position to increase the level of mutually beneficial trade with other countries, notably with the US.

Its internal economic reforms are currently proceeding apace. It would allow organised and vibrant bona fide trade; greater flexibility would be possible for Indians as regards the array of goods and services available while giving more scope to the country to utilise its areas of comparative advantage to export to other countries without the undesirable attributes of excessive high tariffs and avoidable import quotas for Indian goods and services.

The annual trade report of the United States Trade Representative (USTR) has appreciatively noted the ongoing economic reforms in India and the country’s resolve to create a common market within the country internally, thereby giving scope for the relative reduction of transaction costs.

It would relatively ease the path for exports of American goods to India. What is inherent in such aspects is that India could also be significantly hopeful that the US would also be more receptive to Indian products without palpable bias and decide according to the merit of a particular situation.

Highly noteworthy to the future of Indo-American trade is the aspersion-laced statement of the American trade representative-select, Robert Lighthizer, during his confirmation hearing procedure of the Senate finance committee. He told members that he is inclined to take a rather aggressive position with India regarding “Intellectual Property” protection in international trade, should the situation call for. He raised concerns regarding slow and inefficient patent protection, theft of intellectual property and insufficient property protection.

If such issues are raised and solved fruitfully in Indo-American trade, then India would undoubtedly be at an advantage alongside potential American satisfaction. While India should look into earnestly at lapses in these areas, it could also pull up potential American unscrupulousness in these realms.

The attempts at unfair patenting of the Indian Basmati rice in America in the 1990s was a major source of New Delhi’s displeasure, which got resolved satisfactorily after some avoidable donnybrooks.

Trade deficits

Indian has a clear comparative advantage notably in the services and pharmaceutical sectors. America enjoys the same in various sectors across the board. Nevertheless, both countries are running trade deficits. While trade deficits are an outcome of factors other than trade and need not always cause apprehension, narrowing its extent is always desirable for a stronger national economic position.

Exports from India to the global market have increased by 17.48% lately. But imports have also increased to 21%, thereby dampening the enthusiasm from high exports. The country’s trade deficit has spread to about $8.8 b. The principal reasons for it are an equal import of various services and a high import of gold and jewellery items.
The American treasury is committed to building on the progress it has made in cooperating with emerging-market countries, of whom India is a notable entity.

Trump has also somewhat watered down his aggressive statements on that score. Skilled products would need to be traded globally for ultimate national expediency.
Furthermore, the USTR report has noted that the trump administration is optimistic of Indian economic reforms and is keen for greater economic diplomacy with the country. While efforts for a more dynamic Indo-USA trade would surely be undertaken, both countries would need to identify areas where they enjoy or could develop comparative advantage in international trade.

The process would definitely bring to the fore the attendant necessity to improve human resources development, as required in either country. Finger-wagging or expressing unwarranted scepticism on benefits of free trade would be self defeating.

(The writer is an analyst on international finance)

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