Category: Trade

WTO Faces Scrutiny in Director-General Appointment Amid Fears of Trump’s Return

This week could be pivotal in deciding who will be the next director-general of the WTO.

Geneva: Rigging elections and manipulating selection processes is not merely a prerogative of the authoritarian rulers. The virus has seemingly spread to the so-called member-driven and rules-based multilateral organisations like the World Trade Organization (WTO). 

This week could be pivotal in deciding who will be the next director-general of the WTO. It could be the incumbent, Ngozi Okonjo-Iweala, a dual citizen of Nigeria and the United States, or another person should ex-President Donald Trump capture the White House and signal to the current administration that their views on who should be the next director-general should be taken into account.

Paragraph 7 of the WTO procedures for the appointment of directors-general adopted by the General Council in 2002 makes it clear the process should commence 9 months before the expiry of the incumbent’s term of office. Since Okonjo-Iweala’s term ends on August 31, 2025, the process should legally commence on December 1. 

In ignoring the explicit language of paragraph 7 of the relevant WTO procedures, the chair of the General Council, ambassador Petter Olberg of Norway, bypassed the General Council and initiated the selection process on October 8 giving countries up until November 8 to nominate candidates on the basis of the detection of a “convergence”, instead of consensus among the WTO members as mandated by WTO rules and practice.  The consensus principle is at the core of decision-making of Article IX of the Marrakesh Agreement that established the WTO in 1995, following eight years of Uruguay Round of trade negotiations.

Normally, envoys of the Nordic countries are respected for adhering to international rules of law. However, the current Norwegian, unlike his illustrious predecessors, appears to have blatantly disregarded the rules to ensure that the incumbent director-general can clear the selection process clear the decks without a contest. 

When asked whether the United States gave the green signal to the allegedly inconsistent practice, a spokesperson of the office of the United States told this writer that “this action was taken based on the chair’s assumption of convergence, rather than consensus.”

Later, the WTO members had expected that the US would speak its mind to stop the allegedly illegitimate process. Instead, at the crucial WTO’s General Council meeting, the decision-making body during the biennial ministerial conferences, the US remained silent and gave an impression that Washington is not pressing ahead with its stand as conveyed.

Why circumvent the WTO rules and procedures?

It is obvious that the WTO director-general and the General Council chair want to circumvent the rules because of the fear that President Trump may block the reappointment of director-general Ngozi, as they had blocked her original appointment. 

It was the Biden administration which lifted the block and allowed her appointment. It is ironic that the director-general wants to circumvent the very process which enabled her to be appointed. Had the Biden administration not been given the option, she would not have become the director-general.
Also read: WTO’s E-commerce Moratorium: Will India Betray the Interests of the Global South Again?

The General Council chair and the director-general have denied that the decision to bring forward the selection process is because of the possible return of Trump to the White House. They both allege that it was started at the request of the African Group. What is interesting that there was no formal decision by the African Group to make the request. 

It was made by the Ambassador of Chad who was obviously coerced into making the request. It is noteworthy that the Africa Group recently rejected attempts by the director-general and the chairman of the Special Session of the Committee on Agriculture to appoint facilitators on the basis of a “possible convergence”. The Group insisted that the process should only be launched only when there is consensus among the membership. It may be asked, what has changed?

The whole process is illegimate and should be discarded. The General Council chair exceeded his authority and the process should be relaunched on December 1. It is being speculated that the intention of the General Council chair is to convene a special General Council meeting and request for the formal reappointment of the director-general should no one step forward to compete with her by November 8. 

A formal decision of the WTO’s General Council would be required but the director-general and the General Council chair are hoping that the US would not block her reappointment at the specially convened meeting of the General Council. Ambassador Olberg is understood to have told some members that while the US expressed its concerns about the illegitimate process, it did not request him to stop it. They are therefore hoping that the US will feel constrained to veto the reappointment of the director-general should no candidate step forward.

Obviously, the calculations would change should Trump win the election on November 5 and request the outgoing Biden administration to let his administration decide on who should become the next director-general.

Trump administration’s trade priorities

Meanwhile, the Trump administration’s likely trade policy czar ambassador Robert Lighthizer, who always plays the victim card of getting a raw deal from its trading partners and the multilateral trading system, particularly the WTO, has already signaled what is in the offing for Beijing, Brussels, and New Delhi. 

The backdrop of Trump’s calls for jacking up tariffs on all countries, including India, and clamping reciprocal tariff regime to ensure countries import US goods at rates similar to what they export to the US market, portends chaos.

“There are essentially three ways to bring about fairness and balance, and so help (US) businesses and workers,” writes Lighthizer. “First, the US could impose a system of import/export certificates (known as export quotas which the Reagan administration had imposed on Japan in the 1980s). Second, it could legislate a capital access fee on inbound investment, meaning that buying up our assets would be more expansive. Or, finally, the US could use tariffs to offset the unfair industrial policies of the predators.”

On trade policy, there is always continuity between the two parties in the US with varying levels of emphasis on some of the key determinants. Despite repeated pronouncements of respecting international rule of law, the Biden-Harris administration opted for more than a trillion dollars of subsidies programs on advanced chips/semiconductor sector to maintain its hegemonic position, and create new supply-side chains in critical raw materials and green goods.

Perhaps, the main difference between the two sides – Republicans and Democrats – is the degree of unilateral cowboy ruthlessness that harks back to early 20th century when tariffs were used as a policy tool to ensure Uncle Sam perpetuates its hegemony across the world.

Ravi Kanth Devarakonda is a financial journalist based in Switzerland.

MEA: Entities US Accused of Evading Russia Sanctions Don’t Break Indian Law; Working to Sensitise Firms

Washington had earlier this week accused 19 Indian firms and two Indian nationals of ‘enabling Russia’s prosecution of its illegal war’.

New Delhi: After the US government sanctioned 21 Indian entities for allegedly supplying Russia with technologies it needs to support its invasion of Ukraine, India said the entities did not violate domestic laws but that it was working to “sensitise Indian companies on applicable export control provisions”.

The external affairs ministry was also working with relevant Indian government departments and agencies to “inform them [the entities] on new measures being implemented that could impact Indian companies in certain circumstances,” it said.

“We are also in touch with the US authorities to clarify issues,” ministry spokesperson Randhir Jaiswal added on Saturday (November 2).

Jaiswal did not reiterate India’s long-standing position of opposing unilateral sanctions by countries, i.e. those not imposed by the UN.

On Wednesday, the US state and treasury departments sanctioned 19 Indian companies and two Indian nationals among a total of close to 400 entities in countries including China, Malaysia, Thailand, Turkey and the UAE whom they charged with “enabling Russia’s prosecution of its illegal war” against Ukraine.

The action targets those entities that allegedly evaded sanctions against Moscow and provided Russia with “items critical to Russia’s military-industrial base” as well as other dual-use goods, which are those that may be used for civilian or military purposes.

Indian firms named include Ascend Aviation, accused of supplying Russian companies with US-origin aircraft parts; Futrevo, accused of providing electronic components to a Russian drone manufacturer; and Shreya Life Sciences, accused of sending US-trademarked servers designed for AI and machine learning applications to Russia.

Reportedly based across India, they also allegedly worked with proscribed Russian entities to procure export-controlled items and supplied aviation parts, electronic integrated circuits, machines for data processing, roller bearings and other items to Russia.

US deputy treasury secretary Wally Adeyemo said on Wednesday that Washington “and [its] allies will continue to take decisive action across the globe to stop the flow of critical tools and technologies that Russia needs to wage its illegal and immoral war against Ukraine.”

When asked on Saturday about the Indian companies being sanctioned, Jaiswal said India had “a robust legal and regulatory framework on strategic trade and non-proliferation controls” and added that New Delhi was part of three key of the four multilateral export control regimes in the world.

He continued: “Our understanding is that the sanctioned transactions and companies are not in violation of Indian laws. Nevertheless, in keeping with India’s established non-proliferation credentials, we are working with all the relevant Indian departments and agencies to sensitise Indian companies on applicable export control provisions, as also inform them on new measures being implemented that could impact Indian companies in certain circumstances.

“Regular strategic trade/export control outreach events for Indian industries and stakeholders are being carried out by agencies of the government of India.”

India has never explicitly condemned Russia for its 2022 invasion of Ukraine and has consistently abstained from UN resolutions criticising Moscow.

However, it has also called for a peaceful resolution through dialogue and the protection of civilians in conflict.

Speaking to Reuters, a US state department official said that Wednesday’s action was intended to send a message to India that Washington would take action against Indian entities if ‘progress is not made through communication’.

“With India, we have been very direct and blunt with them about the concerns we have about what we see as sort of emerging trends in that country that we want to stop before they get too far down the road,” the unnamed official said.

The sanctions were imposed under a 2021 executive order that allow the US government to impose asset freezes and visa restrictions against targeted entities.

How Can India Escape the Middle-Income Trap?

To break free, India needs to invest heavily in education and skill development, ensuring its workforce is ready to compete on the global stage.

Is India transgressing in a regressive decline towards a middle-income trap? 

Recently economists like Indermit Gill and Homi Kharas’s work on the middle-income trap explore the stagnating growth trajectories of the East Asian economies followed by a period of rapid growth. Their core idea of ‘policy misdiagnosis,’ resulting from unsupportive political and economic structures in a country is one that deeply resonates with India’s growth story. 

Economists, including Barry Eichengreen, Indermit Gill and Ricardo Hausmann, explore the concept of a “middle-income trap,” where countries struggle to transition from middle to high-income status. 

Eichengreen highlights that to break free, countries need structural reforms, more innovation, and a focus on developing human capital. Hausmann emphasises economic diversification and strengthening institutions, while Gill focuses on the need to improve economic productivity. 

Each of these ideas resonate with India’s current macroeconomic challenges. Issues like stagnant economic (especially labour) productivity, rigid labour markets, and a need for greater innovation have held back the country in its growth trajectory. By tackling these, India has the potential to avoid getting stuck and instead move toward sustained and inclusive high-productive growth.

Structural reforms mean making it easier for businesses to operate by cutting red tape and improving infrastructure like roads, ports, and digital networks. This also means giving workers better opportunities by modernising labour laws and investing in education and skills.

Developing a more holistic environment for boosting innovation is also vital. Indian economy can’t rely solely on cheap labour (largely unskilled and less educated) forever; it needs to boost investment in human capital development: from research, developing new labour-intensive technologies, and support start-ups to move into high-value industries employing new technological tools and clean energy.

Also read: Interpreting India’s Middle-Income Trap Position and its Implications

Diversifying the economy further plays a pivotal role. Instead of relying heavily on a few industries, India should expand its footprint in areas like advanced manufacturing, services, and emerging tech sectors. Finally, strong institutions – transparent, stable, and efficient – are crucial. Reducing corruption, improving governance, and creating a business-friendly environment will attract investment and help India reach its true potential. By focusing on these areas, India can chart a path to long-term prosperity.

As a part of India’s Viksit Bharat mission, India aspires to emerge as a global manufacturing hub, however, Raghuram Rajan, Rohit Lamba and others in their recent work have commented on India’s export-led growth strategy, stating that export-led growth requires conducive institutional reform and a gradual pivot towards service-based export strategy (where India already has a comparative advantage both in terms of trade and employment generation). 

Figure 1: India’s exports data

 Source: Ministry of Commerce and Industry

To sustain its export growth trajectory, India must enhance opportunities to optimise their manufacturing capabilities. In 2022-23, manufactured goods accounted for US $ 453 billion out of a total of US $ 762 billion. Furthermore, growth in formal employment can be credited to India’s manufacturing-based approach. In 2024, India’s Purchasing Manufacturer’s Index (PMI) rose to 59.1- the highest it has been in 16 years. This displays a renewal in employment opportunities and job creation.

Throughout 2023 and 2024, India’s export performance has been strong, however, conducive institutional schemes like PLI and Make in India are required for India to optimise the positive effects of its high exports. 

A stronger industrial policy that focuses on distributive growth benefits, by prioritising sectors like textiles and battery manufacturing, and by providing performance-based support for these industries can help them be at par with leading sectors in exports like pharmaceuticals, medical device manufacturing and electronics. To ensure this, the state must focus on its ‘embedded autonomy’ – a term coined by Peter B. Evans, in ‘Embedded Autonomy: States and Industrial Transformation’ – which enables business-to-government contact to ensure growth.

India’s knowledge economy

Gill and Kharas’s emphasis on ‘knowledge economies’ and how countries jump into this stage without ensuring that initial checks of structural and developmental changes are met, is noteworthy. 

The Knowledge Economy Index Report measures a country’s utilisation of its demographic dividend and knowledge economy. Here, India is at the 109th rank with a grade point of 3.06 on 10. To achieve this, India is expected to prioritise employment and skilling, development in the social sector and socioeconomic safeguards. One of the primary measures for this is India’s Human Development Index which stands at 0.64, because of the declining importance given to educational and health sectors. 

Figure 2

Source: KEI Report

Figure 3

Source: CMIE and Union Budget

Figure 3, paints a dismal image of India’s declining health and educational budgetary expenditure. Health stands at 0.21% of the GDP in FY21 and education at 0.27% of the GDP in FY24. 

Figure 4

This scatter plot shows a positive correlation between a country’s GNI per capita (PPP) and its Democracy Index score. Higher-income countries (blue dots) tend to have higher democracy scores and GNI per capita, while lower-income countries (red dots) generally score lower on both metrics. Middle-income countries (green dots) are spread across the spectrum but lean closer to lower scores, suggesting that both higher income and stronger democratic institutions are often linked. 

Interestingly, Figure 4 and Figure 2 show that high-earning and highly democratic countries like Norway, Singapore, and Sweden also figure higher on the KEI report. Sweden maintains a first rank in both the KEI reports. This emphasises the importance of prioritising development indicators in order to transition to a high-income economy. 

Persisting challenges

India’s dream of becoming a global economic leader faces a significant hurdle and that is coming from a workforce with low levels of education and skills. This gap hampers the country’s ability to attract and retain high-value industries, essential for long-term growth and innovation. Without skilled talent, India risks getting stuck in the middle-income trap, struggling to move from a low-income to a high-income economy. To break free, India needs to invest heavily in education and skill development, ensuring its workforce is ready to compete on the global stage.

India’s path to becoming a high-income economy faces another major challenge: inadequate healthcare and infrastructure. Poor health outcomes drain workforce productivity, while outdated infrastructure in transportation, energy, and other sectors makes it hard to attract the kind of investment needed for sustained growth. These issues contribute to the risk of India getting stuck in the middle-income trap, where progress slows, and the leap to high-income status feels out of reach. Without immediate, bold reforms, India is on a path to economic stagnation, watching its competitors surge ahead while it remains bogged down by its failures. 

India’s rising inequality is alarming. According to the Oxfam report, ‘Survival of the Richest: The India Story’ the bottom 50% of the population owns less than 3% of the country’s wealth, while the top 10% controls over 80%. With 228.9 million people living in poverty—the highest globally—India’s number of billionaires surged from 102 in 2020 to 166 in 2022, their combined wealth reaching INR 54.12 lakh crore. 

The pandemic and inflation have hit the poor hardest, deepening debt and worsening health outcomes. This growing disparity fuels social unrest, and political instability, and stifles demand for higher-quality goods and services. To tackle this, taxing the wealthiest 1% could generate the funds needed to improve essential public services like healthcare and education, which would help reduce poverty and inequality. But the real question is: do we have the political will and moral courage to take such a bold step? Without decisive leadership, these necessary reforms may remain elusive, leaving the gap between the rich and poor to widen even further.

On the economic front, India’s limited integration into Global Value Chains (GVCs) is one of the major reasons it continues to struggle with the Middle-Income Trap (MIT). The country still focuses on low to mid-value exports like textiles and petroleum which limits its ability to climb up the value chain and achieve higher productivity. This situation reflects a broader issue: the insufficient development of manufacturing and high-tech sectors. 

While other nations excel in high-value industries, India’s manufacturing and tech sectors haven’t reached the level needed to drive significant economic advancement. There is a need to create more trade-related jobs so that the country integrates itself into the global value chains that could help in creating opportunities for innovation and productivity growth. All this could help in escaping the middle-income trap that the country is facing now.

On top of that, India’s lack of competitiveness in global markets is glaring. Countries like Germany, South Korea, and Japan are racing ahead by exporting high-value goods, while India is left behind with products that just don’t offer the same growth potential. The absence of substantial investment in research and development and the persistent skill gaps in the workforce show that India isn’t doing enough to foster innovation. To escape the middle-income trap, India needs to focus on investing in education and skill development to create more high-productivity jobs and economic growth. 

In addition to these challenges, structural weaknesses in India further entrench the middle income trap. Outdated infrastructure, such as inefficient transportation networks and unreliable utilities, severely hampers business operations and limits economic productivity. Inefficiencies within public institutions also delay crucial reforms and affect resource management. These problems make it even harder for India to advance up the value chain. 

Addressing these structural deficiencies, while also boosting innovation and enhancing integration into GVCs, is essential. Investing in research and development, closing skill gaps, and supporting the growth of high-tech industries are critical steps toward economic advancement. By tackling these issues head-on and making strategic changes, India can move closer to escaping the middle-income trap and achieving its fuller economic potential.

With research inputs from Ankur Singh, Bhanavi Bahl, Niharika Amte and Theresa Jose.

Deepanshu Mohan is a Professor of Economics, Dean, IDEAS, and Director, Centre for New Economics Studies. He is a Visiting Professor at London School of Economics and an Academic Visiting Fellow to AMES, University of Oxford.

Read the analysis by data researchers of the Centre for New Economics Studies’ InfoSphere team at O.P. Jindal Global University here and here.

India Cleared Investment Proposals Involving Firms With China Links: Report

The report notes that there is pressure from the electronics manufacturing industry to approve investments with Chinese links.

New Delhi: A report on Economic Times, citing internal sources has it that the government has cleared some electronics manufacturing investment proposals involving Chinese companies or companies with links to China.

The move, if true, signifies a loosening of what the Narendra Modi government had claimed would be a strict policy around Chinese products and Chinese involvement in the Indian economy. The Indian government banned over 200 Chinese apps in the aftermath of deadly border clashes between the two countries in 2020 in which 20 soldiers died. New Delhi also said that India will not allow Chinese companies to participate in highway projects, including through joint ventures.

However, in the meantime, satellite images have purported to show China’s ingress into Ladakh and Arunachal Pradesh, with opposition repeatedly calling for the Modi government to take the nation into confidence on the situation with China.

According to the report, an inter-ministerial panel has approved “five to six” proposals including from Apple vendor and Chinese electronics major Luxshare, and a joint venture between between Bhagwati Products (Micromax) and Huaqin Technology, in which the Chinese company will own a minority stake.

Other proposals cleared include some Taiwan-based firms listed in Hong Kong or having investments from there, the report says.

“Some are Taiwanese companies which have one beneficial owner who has some interest in Hong Kong or is listed on the Hong Kong exchange while a few are genuine Chinese firms,” an anonymous official is quoted by ET as having said.

The report notes that there is pressure from the electronics manufacturing industry to approve investments with Chinese links as well.

In submissions to various ministries, the electronics manufacturing industry had also said that India had lost out on export opportunities worth $10 billion as well as $2 billion in value addition, the report added.

In February this year, India opposed a proposal led by China on investment facilitation at the World Trade Organisation, stating that it is a non-trade issue. A China-led group of over 120 countries has pushed for an Investment Facilitation for Development Agreement (IFD) proposal to become part of the WTO.

China Tries Arctic Route to Ship Containers to Europe

Two Chinese container ships set sail for the Arctic with the aim of reaching Europe via that ice clad marine geography. Both these ships are small (of feeder size).

As the insecurity over conflict in West Asia grows, what was once a temporary setback to one of the world’s arterial shipping routes, may now become prolonged. To understand this and other contemporary trends in perspective we must comprehend the full impact of the container shipping trade losing its once safe passage via the Red Sea. It’s a story of conflict, hardship for shippers and profit for container shipping lines.

In the aftermath of the pandemic

According to UNCTAD’s (UN Trade and Development) Handbook of Statistics 2023, 11 billion tons of goods traded in 2021 was moved by sea. As per statista, international sea borne trade carried in containers annually rose from 0.1 billion tons in 1980 to 2.2 billion tons in 2023.

The spike in movement of goods and commodities globally soon after the COVID-19 pandemic’s peak, resulted in very busy logistics networks that pushed up freight rates for a fair period of time and left little capacity idling in the container shipping business.

The period witnessed record profit for container lines. In some cases, annual profit for individual companies were in excess of a billion dollars. Alongside, the world woke up to the centrality of logistics in everyday existence and how developments therein could influence inflation. These years also saw the emergent prominence of container shipping tycoons and giant companies, which then used their new found cash chests to increase fleet size and expand into related businesses.

The ranking of top players in the field experienced churn. Having stayed at the top for several years, Danish company, Maersk, slipped in rankings in terms of overall container carrying capacity. Swiss-based shipping giant, Mediterranean Shipping Company (MSC), has moved to the top spot, while French rival CMA-CGM is now snapping at the heels of Maersk for second place, and has since narrowed the gap.

A more recent example of just how seriously logistics is being viewed currently may be found in the decision of the Taiwanese government to support the container fleet expansion of Taiwanese line, Yang Ming. The line which had been less active in ordering new ships and saw its market ranking in the global top ten lower, will now commission new buildings (including the possibility of ships of 24,000 TEUs-size) to boost its fleet. 

Gaza and Houthi make Red Sea risky

Not long after the spike in freight rates (caused by pent-up consumer demand flooding the market) following the pandemic’s peak started to settle down, the conflict in Gaza threatened to render passage through the Suez Canal insecure.

It became a genuinely worrisome reality when the Yemen-based Houthis commenced attacking ships sailing through the Red Sea. As the attacks gathered momentum, major container lines stopped their voyages to Europe from Asia via the Red Sea and the Suez Canal and instead, dispatched their ships around Africa’s Cape of Good Hope.

This was a longer route. Besides impact on freight rates, the longer voyage time meant more ships drawn into the work of transporting containers. Two other developments serve as motif for this setting of altered sailing route as well as the general demand for ships (for replacement as well as fresh addition). There are container ports in Spain and Morocco, which have assumed importance as transshipment terminals for cargo destinations in the Mediterranean region. Second, although not comparable to the ship building boom of the late 2000s, reports in July 2024, spoke of shipyards across China increasing capacity and manufacturing ships (of all categories including container vessels) at a pace not seen since 2008. According to one such report, broking company Arrow estimated that ship building capacity in China, South Korea and Japan was up 20% from the year ago-level with the bulk of new capacity concentrated in China and South Korea.             

The cost of disruption

Depending on how long it lasts, conflict may impact the use of global sea lanes in some fundamental ways. It is now several months since the conflict in Gaza and the attacks by the Yemen-based Houthi militia forced major container shipping lines to avoid using the Red Sea and the Suez Canal to access ports in Europe and the US east coast.

Bloomberg reported that the number of container ships passing through the Suez Canal had reduced by about 77% from year ago levels. The lines ended up sailing around Africa at considerable extra cost, which in turn added to freight rates. Local proof of this impact was visible in news reports about the first quarter (2024-2025) results declared by Indian steel company, Jindal Stainless.

Moneycontrol wrote:  “The ongoing Red Sea issue extended transit times and freight costs from India to the western markets, and paucity of containers further affected exports, the company said in a statement.’’ 

It further noted that to address the ongoing container shortage, Jindal Stainless will opt for breakbulk shipping. On the other hand, for container lines, the emergent situation appears one of both increased costs and increased profitability.

Early August 2024, industry reports suggested that the World Bank had finally managed to quantify the impact of the trade disruptions. A newly launched Global Supply Chain Stress Index (GSCSI) shows that each one million TEUs of the container trade coming under stress raises the Shanghai Containerised Freight Index (SCFI) – a leading indicator of spot freight rates – by 2300 dollars per TEU.

For most of 2024, the SCFI has been at high levels never seen outside the period of the pandemic. This August 1, news reports said that shipping major A.P. Moller-Maersk A/S (APMM) has raised its financial guidance for the third time in three months due to a combination of the ongoing Houthi attacks on shipping in the Red Sea (and ships forced to sail around Africa as a consequence) and robust container market demand. 

The continuing search for alternative routes 

Needless to say, the most affected by the conflict-induced uncertainty in the Red Sea would have been cargo leaving Chinese ports and ports in Far East Asia for destinations in Europe, and vice versa. These voyages have traditionally counted on the Suez Canal for a shorter transit. Now a long spoken of alternative route, tried some years ago by a major container carrier and abandoned respecting environmental considerations, has witnessed Chinese ships moving in.

As per a report in gCaptain in July, 2024, two Chinese container ships set sail for the Arctic with the aim of reaching Europe via that ice clad marine geography. Both these ships are small (of feeder size). The Xin Xin Hai 1, a light ice-class vessel carrying 1220 standard containers, left the port of Taicang near Shanghai on July 5. It is accompanied by a nuclear-powered ice-breaker. Significant portions of the Arctic are said to be ice free this summer but the assistance of an ice-breaker is required to tackle the frozen East Siberian Sea. By end July (when the above said report appeared), the Xin Xin Hai 1 was already past the Bering Straits and on its way to the North Sea route.

A second Chinese ship, the Xin Xin Hai 2, left for the same route a week behind the first one. Both ships are headed for the north west Russian port of Arkhangelsk and from there, to ports in the Baltic Sea in Europe. The report said that some Panamax ships of 5000 TEUs capacity, belonging to a Hong Kong-based company, have also received clearance to transit to Europe via the Arctic, potentially making them the biggest ships yet to try the northern route. Among major container lines from the West, only Maersk Line has completed a trip via the Arctic previously; the Venta Maersk in 2018. Several large western operators like MSC, CMA-CGM and Hapag Lloyd held back from sailing through the Arctic for environmental reasons.  

No sign of Red Sea risk reducing

The disruptions of the 2020s are said to have gifted the world’s liner business, market conditions for its greatest earnings ever. There was COVID-19, the drought in the Panama Canal, which affected transit of ships from the Atlantic Ocean to the Pacific and vice versa. The evolving unrest in Gaza and West Asia has also impacted shipping through the Red Sea and the Suez Canal.

Tough for shippers, the predicament, as mentioned earlier, has aided shipping industry revenues and the world’s container ship fleet is set to touch a new landmark. The global container shipping fleet may exceed 30 million TEUs (twenty-foot equivalent units) in capacity, for the first time ever, by the end of the third quarter of 2024. It could hit 30.5 million TEUs when the year concludes, according to industry reports citing estimates from The Baltic and International Maritime Council (BIMCO), the world’s largest direct-membership organisation for shipowners, charterers, ship brokers and agents.

But it is not entirely an expansionist trajectory. Growth in cargo volumes is not forecast to be as bullish and therefore ship recycling could rise with commensurate check in the growth of overall fleet size. It has also been mentioned that a potential return of peace to the Suez Canal and Red Sea region with normalcy reinstated to voyages via that route may see a fall in the demand for ships courtesy voyage length and duration restored to earlier patterns. That last bit may have now come under a fresh question mark.

This July 31, roughly ten months after the October 2023 attack by Hamas on Israeli civilians and several months into Israel’s subsequent war on Hamas in Gaza, Hamas leader Ismail Haniyeh was assassinated in Teheran. Separately, Hezbollah commander Fuad Shukr was killed in Beirut, an act, Al Jazeera said, Israel has claimed responsibility for. Iran has pinned responsibility for Haniyeh’s death on Israel and vowed retaliation. The United States has said that it will deploy additional fighter aircraft and war ships in West Asia to defend Israel.

Few in the container shipping business expect the insecurity in the Red Sea region and its impact on global trade, to end soon.  The spectre of Chinese container ships in the Arctic, should perhaps be seen against this backdrop. As should humanity’s willingness to test that environmentally sensitive region. It’s the price of conflict.

Shyam G. Menon is a freelance journalist based in Mumbai. 

Is India’s Toy Exports Success Sustainable?

The broad trends of toy exports and imports demonstrate that India has turned into a net exporter of toys.

The Economic Survey is an important policy document presented just one day prior to the budget. It provides a comprehensive assessment of the health of the economy and its challenges. Chapter 5 of the Survey applauds the country’s trade performance amid global economic uncertainty, global supply chain disruption(s) and geopolitical flux. It states that a number of policy interventions played a crucial role in boosting exports of specific product categories such as toys, defence, footwear and smartphones.

One needs to carefully weigh the policies implemented and look at further strategies to boost trade. We discuss these issues for the toy industry, which has a huge potential in both domestic and international markets.

Exports of the toy sector have witnessed a significant rise 2020 onwards. The total exports of the toy sector were $224.3 million in 2020 and reached $304.8 million in 2023. On the other hand, imports were $200.1 million in 2020 and reached $217.9 million in 2023 (Figure 1). However, imports experienced a sharp decline in 2021 and 2022.

The broad trends of toy exports and imports demonstrate that the country has turned into a net exporter of toys. In terms of export markets, India’s toy exports are mainly to developed economies. More than 70% of toy exports are to the United States, the UK, Germany, the Netherlands, Denmark and Australia (Table 1).

Several issues are worth studying in this context. First, the toy industry is highly fragmented and dominated by micro and small enterprises, representing 90% of the toy sector. They are also geographically dispersed in the country and produce low-quality toys only for the domestic market.

This means that exports of toys to developed markets are controlled by a handful of organised firms, who have production capabilities, the ability to adhere to international quality standards and a sound understanding of international markets.

Source: ITC Trade map, 2024. Chart by authors.

Consumers in developed economies are more quality-conscious and hence willing to pay premium prices. Moreover, standards for toys in developed economies are stringent, and only those firms that have the capability to comply with higher product and technical standards can export.

This essentially means that a large number of unorganised toy manufacturers in India cannot comply with the stringent quality standards and regulatory requirements of developed economies. Consequently, they may not succeed in the export business. The success story painted in the Economy Survey might thus be linked to a few firms.

This could lead to the development of oligopolies in the toy sector, which in turn make the sector much more capital intensive and jeopardise the potential opportunities for employment generation. The cartelisation of the toy sector will not only undermine competition, but can also exacerbate economic inefficiencies. Lack of competition will force consumers to buy products at higher prices and will negatively impact consumers’ welfare.

Table by authors.

Second, India’s success in shoring up exports in the toy sector is driven by trade policy intervention. India has increased import tariffs from 20% to 60% in almost all tariff lines of toy products. High-level import protection has provided protection from international competition, thereby supporting domestic manufacturers in scaling up domestic production and exports.

It is important to note that a high degree of import protection to the domestic toy industry has also contributed to an increase in the domestic prices of toys between 30% and 40%, which in turn promotes producers’ welfare at the expense of consumers’ well-being.

It needs to be noted that an initial increase in price fuelled by a tariff increase may not come down later (as domestic supply goes up) if the producers have greater market power due to limited competition.

Furthermore, the government introduced quality standards to regulate the import of low-quality toys in the Indian market. Quality standards act as double-edged swords, given the diversity and heterogeneity of firms in the toy sector. As the toy sector constitutes a bulk of MSMEs who are geographically located in small towns, the need to comply with quality standards poses a formidable challenge for them.

Large firms can comply with the quality standards, but small informal sector firms face significant challenges to adhere to these quality standards given their limited technical know-how and financial constraints. This naturally places them at a disadvantageous position vis-à-vis large firms, not only in the domestic market but also in their ability to capture the export market.

Hence, initiatives like the UNIDO National Programme for Development of Indian Toy Industry for technology transfer to toy manufacturers may be looked at. Common Facility Centers in identified clusters can be a cost-effective way to maintain standards for MSMEs.

Also read: Economic Survey Reads Like a Part Fantasy, Part Mythology Document

Third, the toy sector has been identified as one of the sectors for production-linked incentives (PLIs). Given the industrial configuration of this sector, the financial incentives under the PLI scheme require careful deliberation with a diverse range of stakeholders involved in toy supply chains.

The toy sector is highly complex owing to its heterogeneous structure. The requirements of different segments differ in terms of raw materials, production processes, technology and manpower. Understanding the value chain of the toy sector is important to provide financial incentives. A one-size-fits-all approach used in other, more homogenous sectors may not work here.

In addition, the toy sector is also dependent on Southeast Asian economies for imports of certain kinds of intermediate inputs and equipment, such as raw materials, testing and cutting instruments, moulding, and embroidery machines. This requires trade policy alignment with the PLI scheme.

Further, PLI benefits need to be given in such a manner that they not only augment domestic production capabilities, but also enhance the competitiveness of the sector vis-à-vis other countries.

In conclusion, it is heartening to note that India is a net exporter of toys. The benefit from increasing tariffs on imported toys and quality control have helped us achieve this feat. The global market for toys stood at a staggering $60.3 billion in 2022. If we want to increase our market share, which is dominated by China, the ecosystem of the sector must be boosted further.

Policies to incentivise the domestic production of critical inputs, encouraging FDI by global giants and using technical requirements to produce according to the buyers’ need, both at the international and national level, can benefit the sector.

Bibek Ray Chaudhuri is a professor at Indian Institute of Foreign Trade, Kolkata. Surendar Singh is an associate professor at FORE School of Management, New Delhi. Views are personal.

Who Was Most Dominant in World Trade: UK in 1800, US in 1948 or China Today?

When modern trade was taking off in the early 1800s, the UK ruled the waves and dominated world manufacturing.

It is easy to think that China dominates world trade today in a way that is without precedent. Or at least it is if one gets one’s information from snackable newsfeeds.

Today’s Factful Friday compares the position of China in today’s world trade scene with that of two other countries that were once the top dogs of world trade, namely the UK in 1800 and the US in 1948.

The charts below, which come from two different data sources, answer the question quickly, unambiguously, and resoundingly. When modern trade was taking off in the early 1800s, the UK ruled the waves and dominated world manufacturing (as we saw in last week’s Factful Friday).

  • The UK accounted for almost half of world trade in 1808 (48% to be precise, but what is two percentage points among friends?).
  • The US share was 22% in 1948.
  • China’s world share is a paltry 14% in 2023.

If I were wise, I’d end the essay right here and go for a bike ride. But then again, if I were wise, would I spend all this time writing stuff that doesn’t even get published?

Photo: The International Institute for Management Development.

Allow me to share a few bits of historical context and a couple more charts, or three.

Britain’s rapid share decline.

Britain’s share plummeted after the Napoleonic wars ended in 1815. It was down to 20% by 1840. Part of this decline was due to the end of the artificial suppression of trade caused by the blockade of the old continent by His Majesty’s Navy and Napoleon’s reciprocal policy. But part of it reflects the explosion of growth and industrialisation after the wars and the rapid improvement of transportation technology.

After the US Civil War ended, the US industrialised rapidly behind a protectionist wall (that was back in the day when import substitution industrialisation worked). The external implication of this ‘overcapacity’ in manufacturing was a rapid expansion of exports. During WWI, the US overtook the UK, as can be seen in the left chart.

While China’s world share wasn’t too far from that of the US when the data start in 1830, China was not even an ‘also ran’ in the late 1800s and early 1900s. This was due to the interplay of its national preference for autarky (which had been in place for centuries) and British gunboat diplomacy.

China and India in 1820: Small in trade, giants in GDP.

One of the most curious and least recognised economic-history facts is the enormous share China and India made up of the world economy in 1820. In the year 1000, India had the number one economy in the world with 28% of world GDP. China’s share was over 20%, so together they added up to over half the world GDP. Britain and the US had tiny fractions.

In 1820, not much had changed except that China and India had swapped the gold- and silver-medal positions in the world’s largest economy race. The US and UK were still small – probably too small to have qualified for the large-economy Olympics if there were such a thing.

A corollary of this is how weird it was that such a small nation (Britain) dominated world trade. It is even weirder that such a small island was able to dominate two economic giants (India and China) militarily.

Having watched movies about the British colonial days as a kid (like when I was in my 30s) and not having taken any history classes in university, I had the impression that the British army and navy were huge. And they were huge in terms of military effectiveness. But they were not in numbers of soldiers and sailors. The UK’s edge was its industrial base which could churn out masses of modern military equipment that completely outclassed what non-North Atlantic economies could muster.

Comparing the chart below with the one above makes it clear that India and China were spectacularly closed compared to the US and the UK.

Jumping ahead to 1950, we see in the chart below that the US has the top spot on the podium, while India and China, with their hundreds of millions of citizens, are smaller economically than the United Kingdom with its dozens of millions.

At this point – just after WWII, the US had 27% of world GDP and 22% of world trade. It was big and open by the standards of a mega-economy.

Photo: The International Institute for Management Development

Why were India and China so big economically if they weren’t industrialised?

The answer to the question in the heading is easy – a very large share of the world’s population lived in India and China – and always has for the last 80 centuries or so.

As the maps below show, much of the world is not very hospitable to human life. Until modern technology dialled up, people lived where they could scratch a living out of the soil. And that, as it turns out, was largely in the Indo-Gangetic Plain, and the North China Plain. The left map shows the geographical distribution of humans in the year 1. The right map shows the same in the year 1700. Each yellow dot represents a million people.

The determining factor is climate in terms of suitability for growing food. Most of the world is too cold, too wet, or too dry to grow food. India and China just so happen to have gotten VIP portions of the best cropland.

Photo: The International Institute for Management Development

By the way, you’ll enjoy this animation of the rise and spread of humans from the AD 1 to today in this YouTube video made by the American Museum of Natural History. Or at least show it to your students to give them a bit of perspective on why they should think that the world is reverting towards, rather than deviating from, historical norms when it comes to the roles of India and China.

India had about 28% of the world’s humans, and people all around the world were all poor on average. Most lived only a couple bad harvests from starvation. This was the era when Reverend Malthus’s theory fit the facts.

The summary is easy: The UK in 1808 was far, far more dominant in world trade than the US was in 1948, or China is today.

This is a bit curious since it had a very modest share of world GDP and population at the time.

My most faithful readers will have noticed that I haven’t managed to shoehorn in a reference to either of my books, so I’m going to have to add some concluding remarks.

Concluding remarks.

I recently saw a real economic historian, Joel Mokyr to be precise, present ideas from a book he is writing with Guido Tabellini on the “Great Reversal” at the Festival Internazionale dell’Economia in Torino. By Great Reversal, they mean the fact that up to about the year 1000 CE, India, China and the eastern Mediterranean economies dominated every aspect of human civilisation.

Around 1000, today’s “advanced economies” started growing and innovating faster than the traditional centres of economic activity. My favourite line from his presentation was “much of economic history is driven by unintended consequences.” They believe that the European marriage pattern was the turnkey factor in explaining this change of guards, which is surely the world’s greatest reversal of fortune.

Without taking issue with the importance of marriage as an institution, I dodged the primary cause question entirely in my 2016 book (Baldwin 2016). I don’t try to explain why the industrial revolution started in England, but given that it did, falling trade costs allowed first the UK and then the rest of the G7 to ride an updraft to world economic and political dominance. To quote myself:

“As history would have it, the G7 nations specialised in manufacturing, and this launched them on a happy helix. Industrial agglomeration fostered innovation, which boosted competitiveness and this, in turn, promoted further industrial agglomeration in G7 nations.

The helix twirled upwards as the resulting income boosted market size and the bigger markets led to more agglomeration, innovation, and competitiveness.”

What was a happy helix for today’s rich nations was a venomous vortex for the former kings-of-the-hill in Egypt, Mesopotamia, India and China.

Another great reversal started around 1990 when the ITC revolution allowed G7 manufacturing firms to send their firm-specific knowhow to be combined with low-wage labor in a handful of emerging markets – China above all, but also in India after the 1990s reforms. And that, my faithful readers, is the act that led to the unintended consequence of China’s dominance today. Or at least that’s my story and I’m sticking to it.

Richard Baldwin is a professor of International Economics at IMD.

This article first appeared on author’s LinkedIn page.

Xiaomi Reclaims Top Spot in Indian Smartphone Market, Beats Samsung and Vivo

Notably, Xiaomi India is currently under investigation by the Enforcement Directorate (ED) for alleged illegal remittances to third parties since its incorporation in 2014.

New Delhi: In a significant turnaround, Chinese smartphone manufacturer Xiaomi has reclaimed the top spot in India’s competitive smartphone market, surpassing Samsung and Vivo in the June quarter.

According to market research firm Canalys, Xiaomi’s shipments grew by 24% annually, expanding its market share to 18% in the June quarter from 15% a year ago. Vivo secured the second position with a 4% annual growth, maintaining its 18% market share. In contrast, Samsung dropped to third place with an 8% decline in shipments, resulting in a 17% market share, Economic Times reported.

The quarter saw Chinese brands Realme and Oppo ranking fourth and fifth, respectively, with a a volume share of 12% and 11% respectively. The total mobile shipments in the June quarter grew by a marginal 1% to 36.4 million units, with Canalys forecasting a mid-single-digit increase in shipments during the upcoming festive season and for the full year.

“Muted shipment growth in the fiscal second quarter was due to elections, subdued seasonal demand, and heatwaves in several parts of the country,” the market research firm said, as per ET.

Despite the Indian government’s scrutiny, Chinese brands have maintained their popularity, with the cumulative market share — of Xiaomi, Vivo, Oppo, Realme, Transsion and Motorola — rebounding to over 75% in the June quarter from a low of 61% in the September quarter last year, as per market trackers.

Also read: Your Smartphone May Be Messing With Your Mind

Xiaomi’s resurgence comes after a brief decline, with the company’s leadership attributing its success to a deep understanding of the Indian market and technological strength.

“While reclaiming the top spot in Indian smartphone market is an achievement, we are proud of, our priorities go beyond rankings…our deep understanding of India coupled with our inherent technological strength has allowed us to become an integral part of the country’s social fabric,” B. Muralikrishnan, president, Xiaomi India, said in a statement on social media platform X.

Notably, Xiaomi India is currently under investigation by the Enforcement Directorate (ED) for alleged illegal remittances to third parties since its incorporation in 2014. The ED claims that Xiaomi illegally transferred funds to third parties under the guise of royalty payments to its Chinese parent company. Xiaomi India has denied any wrongdoing, and the case is currently in court, the ET report mentioned.

“Xiaomi seems to have emerged clear of the impact of their past troubles with the ED and senior management exits. Their India leadership is steering operations stably. They have taken a calculated approach to offline channel expansion, starting in 2023,” ET quoted Shilpi Jain, a research analyst at Counterpoint. Jain also noted that Xiaomi has increased margins for its offline dealers and offers an in-house financing scheme, which has further boosted consumer confidence in the brand.

India’s Goods Trade Deficit on Year-on-Year Basis Widens in June

merchandise exports registered a positive growth of 2.55% in June, since last year, while imports rose by 5%.

New Delhi: The Union commerce ministry’s data has it that India’s goods trade deficit has widened to $20.98 billion on a year-on-year basis in June from $19.19 billion in June last year.

The Economic Times has reported that the deficit was $23.8 billion in May.

Merchandise imports during June 2024 were US $ 56.18 billion as compared to US $ 53.51 Billion in June 2023, reportedly thanks to a rise in demand for gold and industrial machinery.

Total imports (merchandise and services combined) for June 2024 is estimated by the government at US $ 73.47 billion, registering a positive growth of 6.29% vis-à-vis June 2023.

India’s total exports (merchandise and services combined) for June 2024 is estimated at US $ 65.47 billion. India’s goods and services exports thus rose 5.4% year-on-year to $65.47 billion in June. The government has attributed the growth of goods exports in June to demand in engineering and electronic goods, drugs, coffee, etc.

Thus, merchandise exports registered a positive growth of 2.55% in June, since last year, while imports rose by 5%, ET has reported.

The following is a table offered by the commerce ministry, showcasing trade during April-June 2024 versus April-June 2023.

    April-June 2024

(USD Billion)

 April-June 2023

(USD Billion)
Merchandise Exports 109.96 103.89
Imports 172.23 160.05
Services* Exports 90.37 80.57
Imports 50.67 45.45
Total Trade

(Merchandise +Services) *

 Exports 200.33 184.46
Imports 222.89 205.50
Trade Balance -22.56 -21.03

 

 

Could China Help India Achieve Viksit Bharat?

At the end of the day, China is the world’s second-largest economy, a manufacturing giant and a significant scientific and technological player.

Those of us who sweltered through the heatwave that swept northern India last month might feel that the worst rigours of climate change have already arrived. They would be wrong. An editorial in the Business Standard quotes a grim forecast from a recent report of the National Bureau of Economic Research (NBER): the damage from climate change will be around six times larger than earlier estimates. To be specific, a rise of 3°C by 2100 in the average global temperature above the pre-industrial level – as deemed likely by the United Nations Environment Programme in its Emissions Gap Report for 2023 – would mean a 36% drop in global output, even if all countries fully implement their climate change mitigation commitments. Tropical and subtropical countries like India will be severely affected, and people in general would be 50% poorer by 2100 than they would have been otherwise. Achieving “Viksit Bharat 2047” – a formidable target at any time – will be even more challenging.

Logically, such a dire outlook should propel every country to harness their scientific and financial resources and come together to counter this threat to humanity. But undertaking collective action is always hard, and particularly so when the costs occur today with the benefits following in the distant future. As a result, global cooperation on climate mitigation has been consistently slow, fitful and ungenerous over the years. In recent times, the wars in Europe and the Middle East along with the growing US-China stand-off, have complicated these prospects even further. 

Consider another piece of news. The Economist last month published an item titled “China has become a scientific superpower”. This assertion relies on a range of data, including citations of ‘high-impact scientific papers’, patent figures, R&D manpower, investment statistics and publications in prestigious journals such as Nature, Science and Lancet. In particular, China seems to lead in the physical sciences, chemistry, agriculture and the environmental/earth sciences.

Despite US suspicions and its “small yard, high fence” approach to collaboration with China, about 25-30% of its scientific collaborations in the fields of telecom, imaging, chemistry and new materials are with Chinese universities or research institutions. Robotics and AI – where China has a 40% share of published papers – is off-limits for the US, but it is still involved in about 20% of other Chinese research. The global circulation of scientific ideas, whilst constricted, has not ceased completely between these increasingly hostile camps.

On the technological front, China has a clear lead in green mobility and green energy. China’s electric vehicles (EVs) are not only highly efficient and inexpensive but are also catching up in style and design. As the world’s largest producer of EVs, China makes 93% of the world’s photovoltaic cells, where demand has been escalating exponentially. The World Resources Institute says that at least 75% of the planet’s cars must be electric by 2030 for the Paris agreement climate goals to be met. Could China’s leadership in climate-mitigating technology be harnessed to face this challenge? Logically, it is difficult to see how any global climate initiative can succeed without China’s full participation, but the current 100% import duties levied by the US on Chinese EVs (and 25% on batteries) are not encouraging. However, the reaction from Europe has been more nuanced and is worth studying carefully by us in India. 

On top of an existing tariff of 10%, Europe has just imposed a levy of 38.1% on EVs imported from China. This precise figure – it seems – has been calculated to arrive at a sale price that will permit the most efficient Chinese manufacturers to make a modest profit, whilst protecting Europe from a deluge of cheap EVs. However, to become effective, this tax awaits approval from individual European countries, so there is yet some space for bargaining with China on Europe’s counter-demands. Still, tariffs are blunt instruments, easy to introduce but thereafter highly addictive for both industry and government, and come with a range of negative effects, familiar to us with our long experience of the licence-permit raj. 

Fortunately, there is a second string to Europe’s bow. Some countries like Hungary and Poland have encouraged Chinese companies like BYD, the battery-maker CATL and upstream suppliers to invest and produce EVs, batteries and a whole EV ancillary eco-system in partnership with European companies. This collaborative model not only creates local employment but allows European producers room to modernise and develop their own businesses into niches of globally competitive expertise. It is an approach that India could well consider.

In the wake of the Galwan shock in 2020, India imposed a range of restrictions on Chinese imports, investments and business activities in India, with the intention of developing greater self-sufficiency, at least in critical items. Four years later, we continue to remain as dependent upon the Chinese supply chain – even for our key exports including pharmaceuticals, auto-components, electronics and iPhones – as ever. We need Chinese technicians to install and commission equipment that we have already bought from them. Further, the recent elections have sent a very clear message. People want jobs, not just hand-outs.

Though climate change was not a specific election issue, the increasing pollution of air, water and soil, as well as the rising frequency of adverse weather events, is a worry for rich and poor alike. And if India’s manufacturing businesses – large, medium, small and start-ups – are modernised, they are best placed to tackle both these issues. To do so, they need investment, R&D inputs, key skills and technology. Why not start with a clean slate?

First, let the government clearly specify a limited ‘negative list’ where any Chinese involvement is not permitted on security grounds.

Second – other than those restrictions – let Indian companies freely choose their source for all these inputs (including from China), based on their business and risk assessments.

At the end of the day, China is the world’s second-largest economy, a manufacturing giant and a significant scientific and technological player. Such a move would revitalise our manufacturing industry, create jobs and accelerate our fight against climate change. Let us welcome all companies – whether from China, the West or elsewhere – to partner us on Indian soil and create prosperity for our citizens. 

Ravi Bhoothalingam  is a corporate coach and an Honorary Fellow of the Institute of Chinese Studies, Delhi.)