Free Trade Post-Pandemic: Rationale vs. National
“Shouldn’t we try to see the post-Corona period as a reboot to rebuild supply chains in a more diverse and sustainable way?”
A virus, not visible to the naked eye, has put the world on pause. With the prospect of some sense of relief, sparked by the advances in vaccination, we can now begin to gradually think about what the world will look like after Corona.
The pandemic has shown us how fragile our globalised world is. The bottlenecks in the supply chains revealed how much our domestic economies depend on global cooperation.
India’s government seems to search for economic solutions in national self-reliance. But will this be the right approach to reach Prime Minister Modi’s declared ‘$5Tn’ dream in the long run? Or perhaps Mr. Modi meant strategic national self-reliance when he spoke of Atmanirbhar Bharat. Can we thus consider the current tendencies of de-globalization as an opportunity? Shouldn’t we try to see the post-Corona period as a reboot to rebuild supply chains in a more diverse and sustainable way? Couldn’t this also represent an opportunity to create new forms and ways of multilateral cooperation and partnership?
Need for open borders
Even prior to this global health-crisis, the world order had begun to shift with the rise of an extremely belligerent China. The US-Chinese trade war was just the first noticeable event that underscored this fact.
The new presidency under Biden presents a possibility to return to a more liberal global order. Nevertheless, the experiences from the recent years have shown the risk of relying exclusively on one partner, not just politically but also economically. However, we should not see this as a reason to tear down all bridges and brick ourselves in, but rather as a chance to build new coalitions of like-minded countries with common respect for international rule of law and having democratic ethos.
In Europe, the initial reaction on the first wave of the pandemic was to close down the borders. Now, Europe has strengthened its cooperation in other areas and built a common and supportive European health policy.
It is now up to all of us to decide what we will make out of this historic hiatus that the pandemic forced us into, for what could be a historic rethink! None of us can predict the future—but we can shape it in an environmentally sustainable manner, bringing us closer together and making the world safer for generations to come.
“We will see the emergence of two distinct economic spheres.”
The post pandemic phase will not see the end of globalisation but we will see a reshaping of globalization, primarily due to the geopolitical conflict with China rather than due to the Coronavirus. We do not have simple answers to the question on how to deal with China, but broadly, I will discuss Three Key Issues:
• Why I am skeptical about China
• Why I am optimistic about India
• The merits of free trade
Skeptical about China
On a provocative note, I would like to say that China, probably, will not be prospering as much as many people have been expecting it to prosper.
The talk about Chinese economy is a bit of an exaggeration and it is not doing all that well. China is drowning in debt. China has significant demographic issues too. In 2020, the number of babies born in the People’s Republic of China declined by 15%, to the lowest level since its foundation in 1949. China is becoming old before it becomes rich. Much of its economic growth of the last four decades was not a miracle; it was due to the rising use of labour in the economy. The world is turning away from China, but simultaneously China is also turning away from the world. What does that decoupling mean for the institutions that regulate international trade and for WTO, in particular? India could be the winner of this new form of globalization but its success is not guaranteed.
India and trade policy
I have been a regular visitor to India. In the last 15 years, I have seen remarkable changes in India, starting with infrastructure. There have been dramatic changes in airports. Since 1991, India has implemented a policy of reducing tariffs. The value of imported goods has come down significantly due to this. India has not been enthusiastic about free trade. But the bottom line is, trade liberalisation contributed to a rising GDP in India. India’s population also grew rapidly but per capita GDP quadrupled in the years since 1991. I realise that Prime Minister Modi’s government is changing the rhetoric on trade. In 2020, he announced ‘atmanirbhar,’ and emphasised national economic development.
India has not been enthusiastic about free trade. But the bottom line is, trade liberalisation contributed to a rising GDP in India. ~ Dr Heribert Dieter
If I look at the historical experience that India has had with protectionist trade policies, Gandhi promoted an economic autarchy on the sub-continent and his words sounded very similar to the statements of Mr Modi. Gandhi argued that economic development is more than just material prosperity and that it has ethical and spiritual dimensions.
Companies all over the world are looking for an opportunity to replace production in China. They want to move out of China and are looking to find new countries. There is not much future in China. Does PM Modi want to reduce dependency only on China or is it indeed a new form of protectionism and emphasis on self-reliance which sounds more diplomatic? Whether an inward-looking India will be able to achieve the growth targets of 8 to 10%? The Indian economy is about 3 trillion US Dollars and the global economy is 30 times as large. It is easier to grow in a market that is significantly larger than the Indian market.
Currently, China is looking all right, but its borders are closed and the vaccination rates in China are very low. People don’t trust the China made vaccines. This will make it very difficult for China to return to the previous situation. What does the Chinese Communist party want and what are its preferences?
When Xi Jinping took over in 2012, he made it very clear that he does not want to suffer the fate of Mikhail Gorbachev and doesn’t want to preside over the collapse of a Communist Party. Openness is an issue for the Communist Party in China. They feel that foreign thought should not be taught in Chinese universities and that thinkers from abroad should have a smaller role in the future.
Dual circulation policy
Last November, China announced its new economic strategy called Dual Circulation. It is a relatively simple concept. China wants to continue to be important to the rest of the world, but the rest of the world should not be important for China. The rest of the world shall continue to buy goods made in China, but the Chinese companies and consumers should buy fewer goods made from the rest of the world.
China has had a very long tradition of dissociation from the world. China had a very traditional understanding of the economy and society rooted in Confucianism. Its people were ranked in four classes. The highest class was made up of Scholars, followed by Farmers and then Craftsman. The lowest class were Traders and even within trade, those that traded with abroad had lesser reputation. Today, the emperor is gone and has been replaced by the rule of the CCP. Even the English language might be at risk in China. A leading Chinese politician suggested in March that English should no longer be taught in Chinese schools because it would no longer be needed. So China is more inward-looking and deliberately fuelling the process of decoupling.
The free trade was repeatedly interpreted as a form of imperialism and an obstacle to achieving full independence. The Indian experience with free trade was mixed. In the days of the British colonial power, Britain supported free trade only when British factories became competitive. The force used in the Opium Wars left scars in the collective memory of Chinese society. It is fair to say that China is not the only country that evaluates trade policy primarily from the point of view of producers. France, India and my own country, Germany, may be in that category. We look at the benefits of exporting but do not emphasize the benefits of importing.
There is still an opportunity for like-minded countries and democracies to cooperate and expand their trade with each other. The case for cross-border division of labour is still intact, and between liberal democratic societies we can still expand.
A WTO without China?
We may have to discuss whether we should recreate a World Trade Organization (WTO) without China. We may return to the trade governance structures in the GATT evolved during the Cold War. If that isn’t working, we should probably look at plurilateral trade agreements amongst like-minded countries. We have one scheme in the Indo-pacific that is already intact, which is the CPTPP (The Comprehensive and Progressive Agreement for Trans-Pacific Partnership). It was originally called TPP (The Trans-Pacific Partnership). After Trump withdrew from TPP, it was renamed CPTPP. In February this year, the UK applied to join CPTPP. Now my proposal is that the European Union, US and India should also join this and we would have a coalition of like-minded countries that could do trade with each other; China would be out of that. We will see the emergence of two distinct economic spheres. India has ample opportunities in that geopolitical globalization, but a closed-door policy would probably do more harm than good.
“Free trade post-pandemic is a far deeper and complex subject and requires a helicopter view”
Everyone agrees that the post pandemic world order will change forever. The Cold War order was based on the ideology of democracy versus autocracy. The Cold War order changed when the Communist block began dismantling, and the new order that emerged was based on balance of power or rather balance of convenience. It was given a kind of a philosophic shape by Francis Fukuyama, who said that liberal democracies and free market will constitute the foundation of the emerging World Order, which later came to be known as globalization.
So, free market is a product of democracy. There cannot be free market without democracy. Democracy means information, and information means market. But what happened in the post-cold war world order? China- an illiberal and non-transparent country was brought into a liberal democratic world order. It had nothing to do with free market. It was purely based on balance of power. China is a country with two systems—Marxian politics with market economics. The two cannot go together.
Liberal democracies in troubled waters
The Foreign Policy magazine came out with a paper in 2019 in which it said that India is the only silver lining and golden lining of democracy, for the simple reason that western democracies are fatiguing.
The world order will change and it is not just the geopolitical order; it will also be the commercial, economic and trade order. Globalization is at an end as an idea. Now we will not look for the cheapest source but safe source –safe politically, economically and nationally. There will be multiple factors which will shape the future world.
The world order will change and it is not just the geopolitical order; it will also be the commercial, economic and trade order. ~ S Gurumurthy
Collapse of the WTO?
I am seeing a virtual collapse of the WTO. WTO itself came to a conclusion that China is not a market economy. Nothing has changed between 2001 when it was admitted into the WTO and now. After the 2008 financial crisis, the west began sliding from its prime position and China began to lead with its undue advantage. The west must realise its mistakes and revisit its foundations. Allies have to be brought in. Rooting for unbridled individualism has created complications. The west which insists on ultra-human rights could never talk about human rights in China, because China was a source of economic prosperity. Thus the political discourse was morphed by economic advantages resulting in both political and economic problems. This caused the rise of Trumpism; Trumpism is a phenomenon—not just an event nor associated with one name.
Future world order
Democracy will be the foundation or the fulcrum of an ideal world order. The emerging world order will get bifurcated (or trifurcated) between democracies and autocracies in the ratio of 46% and 54%. Only 46% is under democracy and of this, 13% is liberal democracy. I see a world order which will postulate democracy as the pivot around which politics, economics and even civilizational alliances will have to develop. If there is a broad alliance of democracies, then the future world order—political, geopolitical, economic as well as national order—will be in alignment. It will require people who are studying the history of the world.
The US is realising the importance of Taiwan, which they gave up. Taiwan has a strong grip in semiconductor, which is going to be the future technology. Taiwan needs protection against China, as China wants to grab Taiwan.
Nature and environment
Each nation can have its own economy, but it cannot have its own environment and climate. The world is getting apart in dealing with these. The environmental pollution which one country is making is affecting the whole world, but there is no world order to bring together people. Only a philosophy can bring us together. We have to look at nature as a partner and not as a source.
Each nation will have to work out its own model of development. There cannot be a one-size-fits-all model. We need to rework the rules and recognize the diversity of the world.
“We should formulate, reframe and rethink.”
In 2016, Condoleezza Rice, the former US Secretary of State, talked about the rise of the Four Horsemen of the Apocalypse—the old biblical myth. The Four Horsemen were populism, isolationism, nativism and protectionism. This was even before President Trump got elected and unleashed Trumpism. Rice alerted the world to the storm clouds of the Four Horsemen.
The Four Horsemen post-pandemic
Fast forward to March 2020 when the world literally went into lockdown. A year later, we are still not out of the woods. What started out as a global health crisis unleashed a secondary crisis namely the economic and financial meltdown from the lockdowns and leading to social crisis in the form migrant crisis and other movements in the US and Europe.
So there are four crises that we are now trying to tackle—health, economic, social and environmental. It might take two years to come out of some of these; some countries will do it faster than other countries.
Populism, nativism, isolationism and protectionism have been unleashed in every single country starting with the Mecca of Capitalism—the US; they exist even post-Trump. It’s not going to be a magic switch for Biden to restore what might have been the original order.
Rice says the Four Horsemen rode the world stage during the interwar period between 1920 and 1940 which also saw events like the World War II, the rise of Nazism and the Great Depression.
Trade then was done with less than 40 countries in the world signing the agreements when colonialism was still rampant. We now have close to 200 countries and, if we follow ‘one country-one agreement’ style, it becomes much more complex. The biggest player that doesn’t play by the rules is our own neighbour: China.
We need world architecture, as that’s what John Maynard Keynes argued and that’s what led to Bretton Woods, WTO and the UN system. We cannot wish for a world in which there is no super architecture. We should formulate, reframe and rethink.
Free trade has become unregulated. Freedom is something everybody fights for. So free trade is very cleverly posited as something we should all aim for. In 1991, the communistic economic experiment collapsed. We are left with variable versions of market openness and capitalism, and each country picks a flavour. Hong Kong does it differently; so does India or Germany.
Democracy, as Churchill said, and capitalism which I am arguing for, both may have tremendous flaws, but they are better than every other alternate system. The pandemic and the four crises it unleashed has made us rethink about global supply chains: we are for economic isolationism, more self-reliance or atmanirbhar.
The magic of 8 billion
At no point in our world history, we were dealing with humanity of close to 8 billion people as we do today. What does that mean for us? Obviously, the environmental crisis is a very critical one. Covid-19 happened. We are also in the midst of the fourth industrial revolution with the incredible explosion of AI and technology and the fact that the globe is shrinking for quite some time. Finding jobs for eight billion people is going to be a fascinating challenge. In many countries, because of AI and the fourth Industrial Revolution, we are creating incredible wealth, but doing it in a jobless way. Many countries opt for a tit-for-tat against other countries in trade and they forget that ultimately trade is a two-way street. For instance, China wants to export everything and they do not want to import. Then it becomes a one-way street. As Gandhi said, ‘an eye for an eye will make the whole world blind.’ We have to wake up as countries and figure out how to do this multilaterally, even if we redefine what multilateral structure is and reframe what WTO needs to do. Otherwise we will make ourselves blind, as Gandhi said.
“The reason why things have gone haywire in India is because of increased specialisation…”
The collapse of the Indian economy is unprecedented and its impact will be long lasting. The pandemic has hit Indian economy hard because of the largeness of its unorganised sector, which employs 94% of the workforce and produces 45% of the output. The reason why things have gone haywire in India is because of increased specialisation, division of labour and disruptions in supply chain due to the lockdown. The service sector has been hit badly. Because of infodemic and false information circulating, people’s sense of science has been impacted and this has come in the way of government’s policy making.
We need to work on transparency, social justice, improving demand, generation of large employment opportunities ~ Prof. Arun Kumar
• Pandemics will keep coming and we need to be prepared.
• We are a collectivity and we need to deal with the virus collectively.
• The role of public sector and that of government intervention during such crisis moments is very important.
We need to work on transparency, social justice, improving demand, generation of large employment opportunities, strengthening of education and R&D and the nation’s as well as people’s capacity to deal with future crises collectively. We need to pay workers a living wage.
Based on my experience in the manufacturing sector, isolationism is not a great idea. India should look at integrating with the global supply chains even more than what is being attempted now, as a matter of compulsion and not choice because that is essential for getting access to the latest technology, manufacturing global brands, and to access markets in India and abroad, while being Atmanirbhar at the same time. Like Korea has Samsung, we do not have manufacturing brand either at the country level or at the industry level or at the product level. In the absence of technology, it will take a long time to build world-class brands that are competitive. One more reason why we need to be connected is the lack of scale in India. For the industry to access customers outside India, we need to scale up. Therefore, we need to be integrated with the global supply chains.