World trade is the exchange of goods and services and capital across international borders based on the principles of markets, where price acts as the primary regulatory mechanism. The patterns of world trade are shaped by the forces of demand and supply of goods and services and capital along with the pricing mechanism of markets whereby demand, supply and prices co-determine each other.
The world market however, is not completely autonomous and countries and institutions place legal regulations to check the circulation between the interlinked global economy and domestic markets. When a country purchases something from global markets, it is called an import, and when a country sells something to global markets, it is called an export.
Theoretical Basis of World Trade
World trade is governed by many theories that economists use in their inference with world trade. In the patterns of world trade, the dominant contribution was made by David Ricardo in his Ricardian model of comparative advantage, which has a huge influence on neoclassical economic theory.
The Ricardian model is based on comparative advantage due to differences between the individual capacity of countries (such as labour, technology and natural resources) as the primary driver of world trade.
In the Ricardian model, comparative advantage has a bearing on exchange rates between countries and market prices available in traded items in markets in the resulting global hierarchy. The structure of global trade is thus fixed by the trading capacities of individual countries and the comparable advantage that they can wrest in determining market prices of items in markets and market valuations.
However, in an emerging global order where countries are not the only major players in global markets, with multinational corporations and global communication technologies entering the fray, the patterns of world trade are changing to accommodate a range of theories that depict the changes wherein, such as the new trade theory, the gravity model and the specific factors model.
Commodity Trading
Among the traded goods are commodities, which is defined as raw materials that can be bought or sold (in a market). Commodity markets are those that trade in items of primary production and not manufactured goods.
Commodities represent a bulk of the natural resources extracted for economic purposes and can include agricultural produce and biofuels and also materials excavated from the Earth such as gold and oil.
Both types of commodities can be called physical commodities, which are commodities that are produced by forces of nature. Physical commodities can be primary commodities that are extracted directly from natural resources such as agricultural harvests and coal, and also secondary commodities that are produced from primary commodities for the market as primary goods for the economy such as conversion of crude oil to gasoline, which is used as a fuel source (Commodities Demystified, 2016).
The volumes of traded goods are calculated on the basis of the shares or contracts traded for a specified security, such as futures contracts, bonds, stocks, etc (Investopedia, LLC, 2017). The volumes are calculated for specific time periods and are represented as increases or declines from previous periods. The total volume of futures and options exchanged globally was 25.22 billion contracts in 2016 (FIA, 2017).
Among commodities, the chief sort of commodities exchanged include agricultural, energy, and metal and mineral commodities, along with investments in commodity futures. Commodity futures are contractual agreements that mandate a particular commodity to be traded at a particular exchange as per specifications, which function to protect investors and markets from price fluctuations in commodities.
Patterns of World Trade
Prominent among the patterns of world trade globally is that the prices of global commodities except oil have overall been falling since 2011. However the World Bank predicts that due to tighter supply and increasing demand, the prices of commodities such as energy and metals could rise in 2017. Cumulatively, prices for agricultural commodities however, are expected to rise by not more than 1 per cent in 2017 (World Bank, 2017).
Fig: The Global Decline in Commodity Prices Since 2011
Source: The Economist
By the end of 2016, the prices for most commodities had bottomed out. This fall in commodity prices, especially energy, can be attributed to an easing of energy requirements globally after the 2008-09 recession, leading to a lessening of consumption and use.
Commodity prices fell further with the appreciation of the US dollar in 2014-15, as most primary products are represented by their dollar price, and the dollar’s appreciation allows quantities of primary goods to be purchased with fewer dollars (WTO, 2016). Other reasons include productivity increases in countries and increased efficiency in supply chains. Also, there is slowing demand from China, which incidentally is a top destination for shipments from 29 countries (UN, 2016).
Although the prices of certain commodities are lower than others, most prices are in the low range. The economic slowdown in China and the recession in Brazil, the falling prices of commodities and exchange rate volatility have all contributed to a weakness in the cumulative patterns of world trade since 2015.
The trajectory of India’s exports since India liberalized its economy in 1991, opening up its economy to global trade, has been a shift towards more value-added manufactured and technology-based products such as pharmaceuticals, refinery goods and engineering goods.
For example, according to CMIE, Economic Outlook, only 12.5 per cent of India’s exports for FY 2014-15 were made up of agricultural and allied products while 18.3 per cent were made up of petroleum and crude products.
The rest of the exports were composed mostly of value-added products. Among imports, the highest share before liberalization and after has been crude petroleum and petroleum products, with most other principal imports being value-added goods with the exception of gold and precious stones.
With a growth rate of 3.6 per cent expected for global trade in 2017, the sluggish world economy means that India’s exports overall might suffer, which might mean incentives for increased competition in the economy (FICCI, 2016). The lack of an overarching dependence on global markets for essential commodities has protected India to a great extent from the negative shortfalls of world markets.
World Trade and Climate Change
The most fundamental question to ask as regards climate change and global trade is whether climate policies are in sync with the legal regime around the World Trade Organization (WTO) – the organization that governs the rules that supplement international trade.
According to the United Nations Conference on Trade and Development (UNCTAD), climate change policies and trade policies internationally and of individual nations can be mutually reinforcing if they are both focused on achieving sustainable development goals to the greatest extent possible (UNCTAD, 2015). However, we must ask as to how attuned the WTO’s current policies are to climate change.
A giant leap forward in regard of climate legislation has been the Paris Climate Agreement. In order to fight climate change however, a significant road block is the lack of access to clean technologies for underdeveloped nations.
Alternatives to certain policies of the WTO that govern preferential market access regulations, investment regimes and laws governing intellectual property rights between countries such that underdeveloped nations benefit from access to clean technologies from other nations is a basic necessity in curbing carbon emissions.
The Trade Related Investment Measures (TRIMS) Agreement which allows developing nations to protect certain industries temporarily and at will can also be reworked to include stipulations concerning climate change. Preferential Trade Agreements (PTAs) can also be reworked to include protection for climate policies (R. Saner, 2016).
All these represent potential benefits that attuning WTO’s legal regime to the Paris Agreement can provide. Although the WTO displayed symbolic support for the Paris Climate Agreement by lighting the World Trade Center building in green in light of the Paris Agreement, a more compelling gesture would be adjusting its legal regime to accommodate climate policies.
In practice the world is still very far from sustainable trade policies and such would require international consensus and co-operation in favour of climate change policies before the trade balance globally moves towards sustainable climate policies. This is especially important given how the world economy is largely based on goods that are produced by natural forces, which should only make the goal of achieving sustainability more necessary.
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Steve Ovett, the famous British middle-distance athlete, won the 800-metres gold medal at the Moscow Olympics of 1980. Just a few days later, he was about to win a 5,000-metres race at London’s Crystal Palace. Known for his burst of acceleration on the home stretch, he had supreme confidence in his ability to out-sprint rivals. With the final 100 metres remaining,
[wptelegram-join-channel link=”https://t.me/s/upsctree” text=”Join @upsctree on Telegram”]Ovett waved to the crowd and raised a hand in triumph. But he had celebrated a bit too early. At the finishing line, Ireland’s John Treacy edged past Ovett. For those few moments, Ovett had lost his sense of reality and ignored the possibility of a negative event.
This analogy works well for the India story and our policy failures , including during the ongoing covid pandemic. While we have never been as well prepared or had significant successes in terms of growth stability as Ovett did in his illustrious running career, we tend to celebrate too early. Indeed, we have done so many times before.
It is as if we’re convinced that India is destined for greater heights, come what may, and so we never run through the finish line. Do we and our policymakers suffer from a collective optimism bias, which, as the Nobel Prize winner Daniel Kahneman once wrote, “may well be the most significant of the cognitive biases”? The optimism bias arises from mistaken beliefs which form expectations that are better than the reality. It makes us underestimate chances of a negative outcome and ignore warnings repeatedly.
The Indian economy had a dream run for five years from 2003-04 to 2007-08, with an average annual growth rate of around 9%. Many believed that India was on its way to clocking consistent double-digit growth and comparisons with China were rife. It was conveniently overlooked that this output expansion had come mainly came from a few sectors: automobiles, telecom and business services.
Indians were made to believe that we could sprint without high-quality education, healthcare, infrastructure or banking sectors, which form the backbone of any stable economy. The plan was to build them as we went along, but then in the euphoria of short-term success, it got lost.
India’s exports of goods grew from $20 billion in 1990-91 to over $310 billion in 2019-20. Looking at these absolute figures it would seem as if India has arrived on the world stage. However, India’s share of global trade has moved up only marginally. Even now, the country accounts for less than 2% of the world’s goods exports.
More importantly, hidden behind this performance was the role played by one sector that should have never made it to India’s list of exports—refined petroleum. The share of refined petroleum exports in India’s goods exports increased from 1.4% in 1996-97 to over 18% in 2011-12.
An import-intensive sector with low labour intensity, exports of refined petroleum zoomed because of the then policy regime of a retail price ceiling on petroleum products in the domestic market. While we have done well in the export of services, our share is still less than 4% of world exports.
India seemed to emerge from the 2008 global financial crisis relatively unscathed. But, a temporary demand push had played a role in the revival—the incomes of many households, both rural and urban, had shot up. Fiscal stimulus to the rural economy and implementation of the Sixth Pay Commission scales had led to the salaries of around 20% of organized-sector employees jumping up. We celebrated, but once again, neither did we resolve the crisis brewing elsewhere in India’s banking sector, nor did we improve our capacity for healthcare or quality education.
Employment saw little economy-wide growth in our boom years. Manufacturing jobs, if anything, shrank. But we continued to celebrate. Youth flocked to low-productivity service-sector jobs, such as those in hotels and restaurants, security and other services. The dependence on such jobs on one hand and high-skilled services on the other was bound to make Indian society more unequal.
And then, there is agriculture, an elephant in the room. If and when farm-sector reforms get implemented, celebrations would once again be premature. The vast majority of India’s farmers have small plots of land, and though these farms are at least as productive as larger ones, net absolute incomes from small plots can only be meagre.
A further rise in farm productivity and consequent increase in supply, if not matched by a demand rise, especially with access to export markets, would result in downward pressure on market prices for farm produce and a further decline in the net incomes of small farmers.
We should learn from what John Treacy did right. He didn’t give up, and pushed for the finish line like it was his only chance at winning. Treacy had years of long-distance practice. The same goes for our economy. A long grind is required to build up its base before we can win and celebrate. And Ovett did not blame anyone for his loss. We play the blame game. Everyone else, right from China and the US to ‘greedy corporates’, seems to be responsible for our failures.
We have lowered absolute poverty levels and had technology-based successes like Aadhaar and digital access to public services. But there are no short cuts to good quality and adequate healthcare and education services. We must remain optimistic but stay firmly away from the optimism bias.
In the end, it is not about how we start, but how we finish. The disastrous second wave of covid and our inability to manage it is a ghastly reminder of this fact.