The rise of bilateralism

Depending solely on bilateral trade agreements is unwise

India has long been committed to multilateralism in trade policy. This commitment was chosen for good reason. Unlike plurilateral trade pacts, which involve a subset of countries, multilateral-trading agreements do not distort trade; and, unlike bilateral-trade agreements, they empower even relatively small trading nations. This latter group can be said to include India, given that the country is involved in only a small fraction of world trade, far less than its proportion of the world’s population or even output. There are signals, however, that this commitment to multilateralism — though it continues to be a rhetorical pillar for Indian delegates to the World Trade Organization — is no longer being put into practice. The latest evidence for this was the announcement, alongside Prime Minister Narendra Modi’s visit to the United States, that six disputes between the countries at the WTO are being withdrawn. These disputes included the well-known case over solar panels, but also others involving chickpeas, aluminium, and steel. Both countries have agreed to withdraw retaliatory tariffs they had imposed on each other.

While this may appear at one level to be a victory for the broader India-US relationship, it should be seen in context as a loss for Indian trade policy more generally. A genuine victory would have come if India had successfully persuaded the US to drop its veto on the appointment of new judges to the WTO appellate body. The lack of judges in this body has rendered the WTO’s dispute resolution process toothless. There is no solution now to trade disputes other than the sort of bilateral deal that India and the US just agreed on. But such bilateral deals are inherently unfair. The stronger trading power tends to be able to dominate. They have more ways in which to retaliate, and more ways of hurting a smaller trading nation. It is also inappropriate and unsustainable for good trade relations to be dependent upon close strategic partnerships. A rule-based system such as the one WTO seeks to set up would insulate trade from momentary dips in the strength of various bilateral relationships. In this specific case, for example, the US has a recent history of shifting its policies on trade sharply alongside political changes in Washington. Depending on bilateral agreements rather than multilateral rules exposes India to such arbitrariness and whims.

India’s broader approach to trade has also been infected by bilateralism. The best opportunity for a big opening up to trade in recent years was the Regional Comprehensive Economic Partnership, but India dropped out of this pact at the very last minute. It has since shifted its attention to negotiating and signing relatively shallow and narrow trade deals with countries like Australia. The government’s emphasis on free-trade agreements (FTAs) with developed-world partners rather than on broadening and deepening its multilateral engagement has yet to pay off. A trade agreement with, for example, the European Union (EU) is of course a major step forward for many sectors and for Indian workers and consumers. But even an India-EU FTA would not have the same effect on trade locally and globally as restoring the multilateral trading order to health.