Many in the US believe that emerging economies like India or China are dumping cheap goods into the US markets and eating away manufacturing jobs. Outsourcing to Indian IT companies is taking service sector jobs away from the US to the Indian cities. They think that increased demand in fast-growing emerging markets is responsible for higher oil prices. Their solution: the US should stop practising free trade, as it is not serving its economic interest well.

However, a recent study by international trade experts, Robert Z. Lawrence and Lawrence Edwards, shows that there is a good correlation between import and employment growth in the US. The study concludes that increase in labour productivity and shift in demand away from manufacturing to services have caused the decline in manufacturing jobs, rather than cheap imports. The contribution of manufacturing to employment in the US has been declining by 0.4 per cent a year during the last 50 years, long before the US started running trade deficits with China or India.

Further, the major cause of rising oil prices is the relative decrease in the oil production in Organisation for Economic Co-operation and Development (OECD) countries, as compared to the rise in demand for it. The increased demand for oil in emerging economies, at best, partly explains the rising oil prices. High growth in emerging economies and improved productivity result in the deteriorating terms of trade for such economies and welfare gains for importing countries. As a result, exports from China or India benefit the US.

This logic can be applied to the services. Export of IT & ITES to the US helps American corporations improve their cost competitiveness. Indian IT majors (considered to move jobs away from the US) have, in fact, created direct and indirect employment opportunities for the American people.

According to a recent CII survey, in the last five years, Indian companies in the US have invested US$ 26 billion, and created 100,000 jobs. In fact, 5 per cent of the employees of Indian software companies like TCS, Wipro or Infosys in the US are non-Indians.

INDIA'S EXPERIENCE

Protectionism is a high-cost option in an interdependent environment. India and the rest of the socialist countries have learnt it the hard way. Increased imports induce indigenous industries to be more competitive. Ultimately, it leads to increase in exports, as has been the experience of India. Post liberalisation, India's exports have increased from US$ 18.5 billion in 1990-91 to US$ 251.1 billion in 2010-11.

In this period, India's GDP has also increased from US$ 300 billion to US$1.8 trillion. Now, trade has become a key policy instrument for achieving economic growth in India.

With the slow progress of WTO Doha Round, all major countries, and blocs such as EU, ASEAN, India, China and Brazil are keen on signing bilateral and regional trade agreements to supplement domestic markets.

Realising the importance of freer trade in achieving faster growth, African countries are also contemplating a pan-African free trade area. Article 24 of GATT 1994 (and Article 5 of GATS) allows bilateral or regional trade agreements (BTAs/RTAs) if they cover substantial trade of the participating nations. But regional trade agreements can only be the second-best alternative to multilateral trade liberalisation under the framework of WTO.

TRADE POLICY DILEMMA

Unsustainable debt situation will force future reduction in domestic consumption, a reality that the US cannot ignore. The US, then, will need export markets more than it does today to sustain its growth. This won't be the case with China (with less than 40 per cent share of domestic consumption expenditure in GDP as compared to 70 per cent in the US) which possesses enough maneuverability to increase domestic consumption. The US needs free trade more than their emerging economy counterparts.

Trade barriers are higher in emerging economies than in the US. As a result, the cost of further opening up and remaining a free economy is less for the US. Emerging economies like China or India, too, need open markets for their exports and sourcing of raw materials that they don't produce. This fact can be leveraged to break the Doha Round logjam.

WTO DOHA ROUND

Given the current economic clout of advanced emerging economies like China, India, or Russia (which is now a WTO member), it wouldn't be easy for the US to insist on its trade agenda when increase in intra-trade among developing nations has reduced their dependence on the US or EU. Only 9.8 per cent of India's merchandise exports were shipped to the US in 2010-11, as compared to 8.3 per cent to Africa.

To conclude the Doha Round, the US will need to engage emerging economies by being flexible on issues having serious trade implications. In India's case, they are agricultural subsidies, in particular, those on cotton, sectoral proposal under NAMA (Non-Agricultural Market Access) and Mode 4 services.

Sectoral proposal seeks to impose duty-free trade in 14 key industrial sectors, including textiles & clothing, chemicals, fertilisers, pharmaceuticals, plastics, electrical and electronic goods. Considering the sensitivities attached to these sectors, it won't be easy to get India (or any developing country) to agree to the proposal. Securing acceptability for sectoral proposal will require provisions for keeping a few items under each chapter in the sensitive list, rather than making its acceptance mandatory.

The US will also need to improve its offer on Mode 4 (movement of professionals) services. This will require greater flexibilities on the immigration policy than what the US would ideally want. Despite the growing sentiment against immigration in the US, it suits the US. Studies have shown that educated immigrants play a significant role in innovation, something the American manufacturing sector badly needs when competing with low-cost countries like China.

Services account for more than 65 per cent of global GDP, so any real trade gain has to come from opening up trade in services. Therefore, trade in services should be the focus of any multilateral trade negotiation, as manufacturing alone cannot provide job opportunities for everyone, either in India or in the US.

Hence, a speedier recovery of the US is the key to lessen the adverse impact of the Euro Zone crisis. This isn't possible in the absence of seamless movement of goods and services across regions. It's time the US recognised its role in getting WTO Doha Round negotiations concluded. Its successful conclusion is good for the US and rest of the globe, all suffering from one economic crisis after another. Waiting for the next US Presidential election will be too late.

(The author is a subject matter expert (International Trade) for a top corporate house.)

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