Price negotiations and trade benefits

During economic exchanges between countries, negotiations surrounding prices for various goods and services are crucial. Besides, certain additional costs imposed by national governments often determine the flow of foreign trade.

In the endeavour to strike a consensus on the final price for any particular commodity, the attendant attributes of cost advantage, tax framework and tariffs or quotas for imports and exports inexorably demand earnest look in. The purpose is to make the best of market forces, yet ensure that there is a win-win situation for those involved — the advantage for consumers, producers and government are primary considerations. The ongoing negotiations for a mutually acceptable price for imports of Liquefied Natural Gas (LNG) by India from the United States of America (USA) are a pointer to the earnestness of it.

With the conclusion of Prime Minister Narendra Modi’s visit to the USA, there appears to be a nominal relief, if not mirth, within the corridors of power of both countries. Modi and President Donald Trump seem to have come round to realise the necessity to proceed from the framework of mutual expediency which their predecessors weaved. Apart from strategic and defence cooperation, economic relations are possibly the principal tenet, notably determining the net trajectory of the relations between two countries.

There is no doubt that both sides realise that the necessity to continue, if not strengthen, the intensity of constructive cooperation in ties, is a high priority. But, hitches in economic negotiations and on other issues could arise, as that surrounding the agreed price of American exports of LNG to India, at present.
With Modi by his side at a press conference at the White House, Trump had stated that USA, led by his administration, was keen to export energy through major long-term contracts to purchase American natural gas.

By so doing, Trump was merely reiterating his stated policy of promoting American power across the world by exporting energy resources like natural gas, petroleum, and coal. For India, this demands careful scrutiny, because India and the USA have a long-term supply contract for American LNG supplies to India, signed in 2011.

The Gas Authority of India Limited (GAIL) and American firm Cheniere are the protagonists of the deal, worked out by Gail’s agreement to purchase 5.8 million tonnes of American LNG per annum, essentially from Cheniere, for about 20 years for an estimated price of $22 billion. It is undoubtedly a coherent, stable agreement.

But global equilibrium price of LNG has relatively plummeted than before. Particularly, Asian spot LNG prices have fallen by more than 40% this year. This is due to increased supply of LNG, notably from Australia and the USA. Price finalised by the contract is somewhat more than the prevailing market spot price.

This is akin to hedging the exchange rate between two currencies among two or more individuals or organisations, for final payment. The hedged exchange rate would prevail for the agreed period of time, irrespective of fluctuations in exchange rate levels in the open market. The Gail authorities are negotiating for a reduced price while Cheniere officials have stated that the terms of the contract are complete and that in this deal, even if the Indian side might be at some contemporary disadvantage, it should take it in its stride. It is part and parcel of international trade operations.

The contract has been priced at America’s spot prices for natural gas. Its price for India is $8.50 per million British thermal units (mmBtu). The reduced prevailing Asian spot price for LNG is pegged at $5.40 mmBtu. It appears that India is keen for a price of $5 to $7 per mmBtu.

Negotiations should be made in earnest. Nonetheless, it should be in a way which does not prompt the Americans to feel that the Indians are not adhering to the terms of contract, agreed upon through full participation and knowledge of both sides. Similarly, the Americans should unhesitatingly accept that perhaps some minutes of the deal might be tweaked, without undermining the essence of the agreement. In this way, neither side would feel miffed.

However, trade is not limited to only this particular aspect. An admonitory rider, attendant with this situation, that both countries should take care not to impose unnecessary trade barriers in the net flow of organised, accountable trade with each other.

Fleeting advantage

If that is done, then apart from some fleeting advantage to some producers of both countries, consumers would be at an undue disadvantage, equilibrium prices would be higher than they would have been without arbitrary trade barriers, and the net outcome would be loss of valuable resources, which could have used for appropriate welfare causes.

If and when unnecessary trade barriers are erected by a country to ostensibly support any sector of its economy, the first and foremost reaction could be that the targeted country retaliates by imposing its own set of trade barriers, thereby significantly defeating the very purpose of it. Furthermore, trade barriers in the form of tariffs or higher import duties and subsidies – given to help producers of country to improve their market position – ultimately results in pushing up the market prices of various goods.

Appropriate policies, necessary restructuring, increased competitiveness, and only contextual trade barriers, are the best antidotes to manage unfavourable market conditions, at any period of time. Otherwise, such barriers could turn out to be boondoggles.

The World Bank has advised India to reduce its subsidies and import duties to improve competitiveness and to enhance exports. While the country’s export growth between 2000 and 2013 was, on average, and admirable 14%, in merchandise exports its goods still reach only about 1.5% of the international exports market.

India appears to be at a crucial stage of reorienting its economy for the better. Its policies should be geared for the maximum national benefit while taking care to see that emotional, knee-jerk actions do not eclipse efficacy and competitiveness.

(The writer is an analyst on international finance)