WTO & Trade Issues - International Trade Environment.pptx

International Trade Environment

An Introduction
• Trade is the concept of exchanging goods and services between two people or entities.
International trade is then the concept of this exchange between people or entities in two
different countries. People or entities trade because they believe that they benefit from the
exchange. They may need or want the goods or services. While at the surface, this many sound
very simple, there is a great deal of theory, policy, and business strategy that constitutes
international trade.
• In today’s world, no country remains isolated. Various components of the national economy like
industries, service sectors, level of income and employment, and living standard — are linked to
the economies of its trading partners. This linkage takes the form of international movements of
goods- and services, labour, business enterprise, investment funds, and technology. In truth,
national economic policies cannot be formulated without evaluating their probable impacts on
the economies of other countries.
• Certain important developments occurred in the post-Second World War period which led to
growing interdependence among nations. Mention may be made in the context of the for-
mation of the European Community (now known as the European Union) in the 1950s, the
growing importance of multinational corporations in the 1960, and the increasing power in
world oil markets enjoyed by the Organisation of Petroleum Exporting Countries (OPEC) in the
1970s. All these developments have resulted in the evolution of the world community into a
complicated system based on a growing interdependence among nations. Source: Secondary Sources on Google

An Introduction
• In the past decade, the world’s market-based economies have been integrated as never before.
Exports and imports as a share of national output have reached unprecedented levels for most
industrial nations. But foreign investment and international lending have expanded more rapidly
than would trade. In spite of this, demands have grown for protection against imports. For indus-
trial nations, protectionist pressures have been strongest during periods of rising unemployment
caused by economic recession.
• Moreover, developing countries often maintain that the so-called liberalised trading system
called for by industrial nations works to the disadvantage of developing nations. The main reason
for this is that the prices of developing nations exports have not increased as much as the prices
of developing nation imports over the 20th century as a whole.
• Managers have to analyse the consequences of developments in the global economic
environment because international economic forces, national government policies, international
economic, financial and trading institutions affect management in complex and subtle ways
Source: Secondary Sources on Google

International Trade Theories
• To better understand how modern global trade has evolved, it’s important to understand how
countries traded with one another historically. Over time, economists have developed theories
to explain the mechanisms of global trade.
• The main historical theories are called classical and are from the perspective of a country, or
country-based.
• By the mid-twentieth century, the theories began to shift to explain trade from a firm, rather
than a country, perspective. These theories are referred to as modern and are firm-based or
company-based. Both of these categories, classical and modern, consist of several international
theories.

Classical Country Based Theories
• Mercantilism:
Developed in the sixteenth century, mercantilism was one of the earliest efforts to develop an
economic theory. This theory stated that a country’s wealth was determined by the amount of
its gold and silver holdings. In it’s simplest sense, mercantilists believed that a country should
increase its holdings of gold and silver by promoting exports and discouraging imports.
In other words, if people in other countries buy more from you (exports) than they sell to you
(imports), then they have to pay you the difference in gold and silver. The objective of each
country was to have a trade surplus, or a situation where the value of exports are greater than
the value of imports, and to avoid a trade deficit, or a situation where the value of imports is
greater than the value of exports.
Although mercantilism is one of the oldest trade theories, it remains part of modern thinking.
Countries such as Japan, China, Singapore, Taiwan, and even Germany still favor exports and
discourage imports through a form of neo-mercantilism in which the countries promote a
combination of protectionist policies and restrictions and domestic-industry subsidies.

• Mercantilism:
Nearly every country, at one point or another, has implemented some form of protectionist
policy to guard key industries in its economy. While export-oriented companies usually support
protectionist policies that favour their industries or firms, other companies and consumers are
hurt by protectionism. Taxpayers pay for government subsidies of select exports in the form of
higher taxes. Import restrictions lead to higher prices for consumers, who pay more for foreign-
made goods or services.
Free-trade advocates highlight how free trade benefits all members of the global community,
while mercantilism’s protectionist policies only benefit select industries, at the expense of
both consumers and other companies, within and outside of the industry.

• Absolute Advantage:
The concept of absolute advantage was developed by Adam Smith in his book "Wealth of
Nations" to show how countries can gain from trade by specializing in producing and exporting
the goods that they can produce more efficiently than other countries
Trade between countries shouldn’t be regulated or restricted by government policy or
intervention. Smith stated that trade should flow naturally according to market forces. In a
hypothetical two-country world, if Country A could produce a good cheaper or faster (or both)
than Country B, then Country A had the advantage and could focus on specializing on producing
that good. Similarly, if Country B was better at producing another good, it could focus on
specialization as well. By specialization, countries would generate efficiencies, because their
labor force would become more skilled by doing the same tasks. Production would also become
more efficient, because there would be an incentive to create faster and better production
methods to increase the specialization.
Smith’s theory reasoned that with increased efficiencies, people in both countries would benefit
and trade should be encouraged. His theory stated that a nation’s wealth shouldn’t be judged
by how much gold and silver it had but rather by the living standards of its people.

• Comparative Advantage:
The challenge to the absolute advantage theory was that some countries may be better at
producing both goods and, therefore, have an advantage in many areas. In contrast, another
country may not have any useful absolute advantages.
To answer this challenge, David Ricardo, an English economist, introduced the theory of
comparative advantage in 1817. Ricardo reasoned that even if Country A had the absolute
advantage in the production of both products, specialization and trade could still occur between
two countries.
Comparative advantage occurs when a country cannot produce a product more efficiently
than the other country; however, it can produce that product better and more efficiently than
it does other goods. The difference between these two theories is subtle. Comparative
advantage focuses on the relative productivity differences, whereas absolute advantage looks at
the absolute productivity.

• Comparative Advantage:
Let’s look at a simplified hypothetical example to illustrate the subtle difference between
these principles:
Miranda is a Wall Street lawyer who charges $500 per hour for her legal services. It turns out
that Miranda can also type faster than the administrative assistants in her office, who are paid
$40 per hour. Even though Miranda clearly has the absolute advantage in both skill sets, should
she do both jobs? No. For every hour Miranda decides to type instead of do legal work, she
would be giving up $460 in income. Her productivity and income will be highest if she specializes
in the higher-paid legal services and hires the most qualified administrative assistant, who can
type fast, although a little slower than Miranda. By having both Miranda and her assistant
concentrate on their respective tasks, their overall productivity as a team is higher. This is
comparative advantage.
A person or a country will specialize in doing what they do relatively better. In reality, the world
economy is more complex and consists of more than two countries and products. However, this
simplistic example demonstrates the basis of the comparative advantage theory.

• Heckscher-Ohlin Theory (Factor Proportions Theory)
The theories of Smith and Ricardo didn’t help countries determine which products would give a
country an advantage. Both theories assumed that free and open markets would lead countries
and producers to determine which goods they could produce more efficiently. In the early 1900s,
two Swedish economists, Eli Heckscher and Bertil Ohlin, focused their attention on how a
country could gain comparative advantage by producing products that utilized factors that
were in abundance in the country.
Their theory is based on a country’s production factors—land, labour, and capital, which provide
the funds for investment in plants and equipment. They determined that the cost of any factor
or resource was a function of supply and demand.
Factors that were in great supply relative to demand would be cheaper; factors in great demand
relative to supply would be more expensive. Their theory, also called the factor proportions
theory, stated that countries would produce and export goods that required resources or factors
that were in great supply and, therefore, cheaper production factors. In contrast, countries
would import goods that required resources that were in short supply, but higher demand.
For example, China and India are home to cheap, large pools of labor. Hence these countries
have become the optimal locations for labor-intensive industries like textiles and garments.

Leontief Paradox
In the early 1950s, Russian-born American economist Wassily W. Leontief studied the US
economy closely and noted that the United States was abundant in capital and, therefore,
should export more capital-intensive goods. However, his research using actual data showed
the opposite: the United States was importing more capital-intensive goods.
According to the factor proportions theory, the United States should have been importing
labour-intensive goods, but instead it was actually exporting them. His analysis became known
as the Leontief Paradox because it was the reverse of what was expected by the factor
proportions theory.
In subsequent years, economists have noted historically at that point in time, labour in the
United States was both available in steady supply and more productive than in many other
countries; hence it made sense to export labour-intensive goods. Over the decades, many
economists have used theories and data to explain and minimize the impact of the paradox.
However, what remains clear is that international trade is complex and is impacted by
numerous and often-changing factors. Trade cannot be explained neatly by one single theory,
and more importantly, our understanding of international trade theories continues to evolve.

Modern or Firm Based Trade Theories
In contrast to classical, country-based trade theories, the category of modern, firm-based theories
emerged after World War II.
The firm-based theories evolved with the growth of the multinational company (MNC). The
country-based theories couldn’t adequately address the expansion of either MNCs or intra industry
trade, which refers to trade between two countries of goods produced in the same industry. For
example, Japan exports Toyota vehicles to Germany and imports Mercedes-Benz automobiles from
Germany.
Unlike the country-based theories, firm-based theories incorporate other product and service
factors, including brand and customer loyalty, technology, and quality, into the understanding of
trade flows.

• Country Similarity Theory
Swedish economist Steffan Linder developed the country similarity theory in 1961, as he tried to
explain the concept of intra industry trade.
Linder’s theory proposed that consumers in countries that are in the same or similar stage of
development would have similar preferences. In this firm-based theory, Linder suggested that
companies first produce for domestic consumption. When they explore exporting, the
companies often find that markets that look similar to their domestic one, in terms of customer
preferences, offer the most potential for success.
Linder’s country similarity theory then states that most trade in manufactured goods will be
between countries with similar per capita incomes, and intra industry trade will be common.

• Product Life Cycle Theory
Raymond Vernon, a Harvard Business School professor, developed the product life cycle theory
in the 1960s. The theory, originating in the field of marketing, stated that a product life cycle has
three distinct stages: (1) new product, (2) maturing product, and (3) standardized product. The
theory assumed that production of the new product will occur completely in the home
country of its innovation.
It has also been used to describe how the personal computer (PC) went through its product
cycle. The PC was a new product in the 1970s and developed into a mature product during the
1980s and 1990s. Today, the PC is in the standardized product stage, and the majority of
manufacturing and production process is done in low-cost countries in Asia and Mexico.
The product life cycle theory has been less able to explain current trade patterns where
innovation and manufacturing occur around the world. For example, global companies even
conduct research and development in developing markets where highly skilled labour and
facilities are usually cheaper. Even though research and development is typically associated with
the first or new product stage and therefore completed in the home country, these developing
or emerging-market countries, such as India and China, offer both highly skilled labour and new
research facilities at a substantial cost advantage for global firms.

• Global Strategic Rivalry Theory
Global strategic rivalry theory emerged in the 1980s and was based on the work of economists
Paul Krugman and Kelvin Lancaster. Their theory focused on MNCs and their efforts to gain a
competitive advantage against other global firms in their industry. Firms will encounter global
competition in their industries and in order to prosper, they must develop competitive
advantages. The critical ways that firms can obtain a sustainable competitive advantage are
called the barriers to entry for that industry. The barriers to entry refer to the obstacles a new
firm may face when trying to enter into an industry or new market. The barriers to entry that
corporations may seek to optimize include:
 research and development,
 the ownership of intellectual property rights,
 economies of scale,
 unique business processes or methods as well as extensive experience in the industry, and
 the control of resources or favourable access to raw materials.

• Porter’s National Competitive Advantage Theory
In the continuing evolution of international trade theories, Michael Porter of Harvard Business
School developed a new model to explain national competitive advantage in 1990. Porter’s
theory stated that a nation’s competitiveness in an industry depends on the capacity of the
industry to innovate and upgrade. His theory focused on explaining why some nations are more
competitive in certain industries. To explain his theory, Porter identified four determinants that
he linked together. The four determinants are:

 Local market resources and capabilities (factor conditions)
Porter recognized the value of the factor proportions theory, which considers a nation’s
resources (e.g., natural resources and available labor) as key factors in determining what
products a country will import or export. Porter added to these basic factors a new list of
advanced factors, which he defined as skilled labor, investments in education, technology,
and infrastructure. He perceived these advanced factors as providing a country with a
sustainable competitive advantage.
 Local market demand conditions.
Porter believed that a sophisticated home market is critical to ensuring ongoing innovation,
thereby creating a sustainable competitive advantage. Companies whose domestic markets
are sophisticated, trendsetting, and demanding forces continuous innovation and the
development of new products and technologies. Many sources credit the demanding US
consumer with forcing US software companies to continuously innovate, thus creating a
sustainable competitive advantage in software products and services.

 Local suppliers and complementary industries
To remain competitive, large global firms benefit from having strong, efficient supporting and
related industries to provide the inputs required by the industry. Certain industries cluster
geographically, which provides efficiencies and productivity.
 Local firm characteristics
Local firm characteristics include firm strategy, industry structure, and industry rivalry. Local
strategy affects a firm’s competitiveness. A healthy level of rivalry between local firms will
spur innovation and competitiveness.
In addition to the four determinants of the diamond, Porter also noted that government and
chance play a part in the national competitiveness of industries. Governments can, by their
actions and policies, increase the competitiveness of firms and occasionally entire industries.
Porter’s theory, along with the other modern, firm-based theories, offers an interesting
interpretation of international trade trends

Trade Barriers
No country however rich or large can make everything it needs or has all the resources it requires
for its manufacturing industries. Yet, some countries are against free trade. They believe that free
trade is bad for their economies and hurts growth and employment. So, what are the arguments
used to impose trade barriers?
Let’s look at some of the reasons why government are for trade barriers:
• To protect domestic jobs from “cheap” labour abroad
• To improve trade deficit: Trade barriers make imports more expensive, and as a result, they also
decrease the demand for imports. However, in retaliation trade partners can do the same and
increase prices for exports
• To protect “infant industries”: Countries want to give newly developing industries (known as
infant industries) time to grow and become competitive. This is a reasonable argument for
imposing trade barriers. However, in some cases, government protection never ends
• Protection from “Dumping”: Dumping is when an importer sells products at a below-average
cost of production. Dumping is hard to prove, yet nonetheless, sometimes countries impose anti-
dumping duties just because it is competing against a locally manufactured product
• To earn more revenue: Governments gain extra revenue from tariffs

Trade Barriers
Types of Trade Barriers
• Voluntary Export Restraints (VERs): They are agreements between an exporting and an
importing country that limits the quantity businesses can export during a period. Even though
the term says the agreement is voluntary, it is usually not. By reducing the quantity exported, the
exporting country can increase prices and total revenue
• Regulatory Barriers: Any “legal” barriers that try to restrict imports. These include things like
safety standards, pollution standards, product standards that specify that the product should
meet or exceed standards set by the local government.
For example, car manufacturers often have to pass certain safety ratings to sell the car in the
importing country
• Anti-Dumping Duties: Dumping happens when the exporting producer sells goods below cost.
The government then can impose a duty on the good till the World Trade Organization decides
the issue
• Subsidies: Governments offer subsidies to help make firms more competitive by lowering their
costs

Trade Barriers
Types of Trade Barriers
• Quotas: A quota, a type of trade barrier, is a restriction on the quantity that can import into a
country
• Tariffs: A tariff is a type of trade barrier that acts as a tax on imports. Tariffs raise the price of the
imported good to lowers their consumption. This price increase encourages consumers to pick
the local option

Tariffs – An Overview
• A tariff is a duty or tax imposed by the government of a country upon the traded commodity as
it crosses the national boundaries. Tariff can be levied both upon exports and imports
• The tariff or duties imposed upon the goods originating in the home country and scheduled for
abroad are called as the export duties. Countries, interested in maximising their exports
generally avoid the use of export duties. Tariffs have, therefore, become synonymous with
import duties
• The import duties or import tariffs are levied upon the goods originating from abroad and
scheduled for the home country
• Sometimes a country may also resort to what is called as a transit duty. It is imposed upon the
goods originating in the foreign country and scheduled for a third country crossing the borders of
the home country. For instance, if India imposes tariffs on goods that Bangladesh exports to
Nepal through the Indian Territory, these will be called as transit duties

Types of Tariffs
There are several types of tariffs that a government can employ. Let’s discuss common types of
tariffs:
• Specific Tariffs: A fixed fee levied on one unit of an imported good is referred to as a specific
tariff. This tariff can vary according to the type of good imported. For example, a country could
levy a $15 tariff on each pair of shoes imported, but levy a $300 tariff on each computer
imported.
• Ad Valorem Tariffs: The phrase "ad valorem" is Latin for "according to value," and this type of
tariff is levied on a good based on a percentage of that good's value. An example of an ad
valorem tariff would be a 15% tariff levied by Japan on U.S. automobiles. The 15% is a price
increase on the value of the automobile, so a $10,000 vehicle now costs $11,500 to Japanese
consumers. In the most common application of ad valorem taxes, which are municipal property
taxes, the real estate of property owners is periodically assessed by a public tax assessor to
determine its current value. The assessed value of the property is used to compute a tax
annually levied on the property owner by a municipality or other government entity.

Types of Tariffs
There are several types of tariffs that a government can employ. Let’s discuss common types of
tariffs:
• Compound Tariff: The compound tariff is a combination of specific and ad valorem tariff. The
structure of compound tariff includes specific duty on each unit of the commodity plus a
percentage of ad valorem duty.
• Sliding Scale Tariff: The import duties which vary with the prices of the commodities are termed
as sliding scale duties. These may either be on specific or ad valorem basis.

Trade Agreements
Countries negotiate mutually beneficial agreements with each other to simplify trade between
nations, eliminate tariff and non-tariff barriers, recognize each other’s standards, etc.
There are 2 types of international trade agreements:
• Multilateral (or Regional) Agreements: They set rules of trade between several countries.
Multilateral agreements shape international trade unions, such as WTO (World Trade
Organization), EU (European Union), NAFTA (The North American Free Trade Agreement), etc.
For example, WTO is regulated by General Agreement on Trade and Tariffs. European Union is
regulated by several treaties
• Bilateral Agreements: They set rules of trade between two countries. For example, there are
Canada-Peru, EU-South Africa, US-Australia and other free trade agreements. The agreements
may be limited to certain goods and services or certain types of market entry barriers.

Trade Agreements
When choosing countries for export or import consider following benefits of international trade
agreements:

General Agreement on Tariffs and Trade (GATT)
• The General Agreement on Tariffs and Trade (GATT), signed on Oct. 30, 1947, by 23 countries,
was a legal agreement minimizing barriers to international trade by eliminating or reducing
quotas, tariffs, and subsidies while preserving significant regulations.
• The GATT was intended to boost economic recovery after World War II through reconstructing
and liberalizing global trade.
• The GATT went into effect on Jan. 1, 1948. Since that beginning it has been refined, eventually
leading to the creation of the World Trade Organization (WTO) on January 1, 1995, which
absorbed and extended it. By this time 125 nations were signatories to its agreements, which
covered about 90% of global trade.
• One of the key achievements of the GATT was that of trade without discrimination. Every
signatory member of the GATT was to be treated as equal to any other. This is known as the
most-favored-nation principle, and it has been carried through into the WTO. A practical
outcome of this was that once a country had negotiated a tariff cut with some other countries
(usually its most important trading partners), this same cut would automatically apply to all GATT
signatories. Escape clauses did exist, whereby countries could negotiate exceptions if their
domestic producers would be particularly harmed by tariff cuts

World Trade Organization
• The Uruguay round* of GATT (1986-93) gave birth to World Trade Organization. The members of
GATT singed on an agreement of Uruguay round in April 1994 in Morocco for establishing a new
organization named WTO.
(The Uruguay Round was the 8th round of multilateral trade negotiations (MTN) conducted
within the framework of the General Agreement on Tariffs and Trade (GATT), spanning from
1986 to 1993 and embracing 123 countries as "contracting parties“)
• It was officially constituted on January 1, 1995 which took the place of GATT as an effective
formal, organization. GATT was an informal organization which regulated world trade since 1948.
• Contrary to the temporary nature of GATT, WTO is a permanent organization which has been
established on the basis of an international treaty approved by participating countries.
• The WTO has nearly 153 members accounting for over 97% of world trade. Around 30 others are
negotiating membership. Decisions are made by the entire membership. This is typically by
consensus.

Objectives of World Trade Organization
• To improve the standard of living of people in the member countries
• To ensure full employment and broad increase in effective demand
• To enlarge production and trade of goods
• To increase the trade of services
• To ensure optimum utilization of world resources
• To protect the environment
• To accept the concept of sustainable development

Functions of World Trade Organization
• To implement rules and provisions related to trade policy review mechanism
• To provide a platform to member countries to decide future strategies related to trade and tariff
• To provide facilities for implementation, administration and operation of multilateral and
bilateral agreements of the world trade
• To administer the rules and processes related to dispute settlement
• To ensure the optimum use of world resources
• To assist international organizations such as, IMF for establishing coherence in Universal
Economic Policy determination

GATT vs WTO – Let’s Understand the Difference!!
• It is probably best to be clear from the start that the General Agreement on Tariffs and Trade
(GATT) was two things:
(1) an international agreement, i.e. a document setting out the rules for conducting
international trade, and
(2) an international organization created later to support the agreement. The text of the
agreement could be compared to law, the organization was like parliament and the courts
combined in a single body.
As its history shows, the attempt to create a fully fledged international trade agency in the 1940s
failed. But GATT's drafters agreed that they wanted to use the new rules and disciplines, if only
provisionally.
Then government officials needed to meet to discuss issues related to the agreement, and to
hold trade negotiations. These needed secretarial support, leading to the creation of an ad hoc
organization — that continued to exist for almost half a century.
• GATT, the international agency, no longer exists. It has now been replaced by the World Trade
Organization.

GATT vs WTO – Let’s Understand the Difference!!
• What Happened?
When GATT was created after the Second World War, international commerce was dominated by
trade in goods. Since then, trade in services — transport, travel, banking, insurance,
telecommunications, transport, consultancy and so on — has become much more important. So
has trade in ideas — inventions and designs, and goods and services incorporating this
"intellectual property".
The General Agreement on Tariffs and Trade always dealt with trade in goods, and it still does. It
has been amended and incorporated into the new WTO agreements. The updated GATT lives
alongside the new General Agreement on Trade in Services (GATS) and Agreement on Trade-
Related Aspects of Intellectual Property Rights (TRIPS). The WTO brings the three together
within a single organization, a single set of rules and a single system for resolving disputes
In short, the WTO is not a simple extension of GATT. It is much more.
While GATT no longer exists as an international organization, the GATT agreement lives on. The
old text is now called "GATT 1947". The updated version is called "GATT 1994". As the more
mature WTO developed out of GATT, you could say that the child is the father of the man.

Implication of WTO on International Marketing
• Growth in Merchandise Exports: The exports of developing countries like India, Brazil, etc., have
increased since the setting up of WTO. The increase in exports of developing countries is due to
reduction in trade barriers — tariff and non-tariff
• Growth in Services Exports: The WTO has also introduced an agreement on services called GATS.
Under this agreement, the member nations have to liberalise the services sector. Certain
developing countries like India would benefit from such an agreement
• Foreign Direct Investment: As per the TRIMs (Trade Related Investment Measures) agreement,
restrictions on foreign investment have been withdrawn by member nations of WTO including
developing countries. Therefore, the developing countries have been benefited by way of foreign
direct investment as well as by Euro equities and portfolio investment
• Benefits of TRIPs Agreement: The TRIPs (Trade-Related Aspects of Intellectual Property Right)
agreement has benefited the developing countries like Brazil, India, China, and others. The firms
in developing countries have also developed new products and got them patented

Implication of WTO on International Marketing
• Textiles and Clothing: At the Uruguay Round, it was agreed upon by member countries to phase
out MFA (Multifiber Arrangement) by 2005.
Under MFA, the developed countries like France, USA, UK, Canada, etc. used to import quotas on
the amount of clothing & textile exports from developing countries to developed countries.
The MFA has been withdrawn w.e.f. 1.1.2005, and therefore, it would benefit the developing
countries including India by way of increase in export of textiles and clothing.

Overview of India’s International Trade

a) Pre-Independence Phase:
• India, historically, has a global trading background for past many centuries. India was carrying
out trade with far-off lands in West Asia and beyond. During this period India had trade
surplus with whole world which used to be settled by inflow of gold.
• During Mughal period, there was satisfactory progress of trade and industry.
• During the period, 1780-1860, India changed from being an exporter of processed goods for
which it received payment in bullion, to being an exporter of raw materials and a buyer of
manufactured goods.
• By the second quarter of the 19th century, India’s exports were mainly of raw materials like
raw cotton.
• Starting in the 1830s, British textiles began to appear in the Indian markets, with the value of
the textile imports growing from £5.2 million 1850 to £18.4 million in 1896
• In the British era, India’s trade included heavy exports of textiles and heavy imports of bullion
into India through the East India Company.

a) Pre-Independence Phase:
• After British rule, India’s international trade was concentrated in the countries of British
Empire Before 2nd world war, India was exporting more than imports on account of unilateral
transfer of payments to Britain, to arrange for salaries and pensions of British officers
• Second World War (1939-1945) changed nature of India’s foreign trade. The British
Government commandeered from poverty-stricken people of India large supplies of
foodstuffs, leather-ware besides iron and steel. During this period India had a positive trade
balance with Britain
• World trade and economy was severely affected by world war (1914-1918), the great
depression period (1929-1933) and 2nd world war (1939 -1945). Between 1919- 1939, both
imports and exports of India declined
• Systematic planning was started in India after independence

b) Post-Independence Phase:
• During the first decade and a half after independence India’s export earnings remained
stagnant. Exports as a percentage of world exports declined sharply from 2.5% in 1947 to 0.9%
in 1966. This lack of performance on the export front was policy induced and not due to
independent external factors beyond India’s control
• The stagnation in exports from the country continued till the early 1970’s, followed by
significant growth in the rest of the decade. Two factors paved the way for a return to
liberalization in the late 1970s. First, industrialists came to feel the adverse effect of the tight
import restrictions on their profitability and began to lobby for liberalization of imports of the
raw materials and machinery for which domestically produced substitutes did not exist.
Second, improved export performance and remittances from overseas workers in the Middle
East led to the accumulation of a healthy foreign exchange reserve, raising the comfort level of
policymakers with respect to the effect of liberalization on the balance of payments
• From 1985-86, export growth picked up significantly and continued till 1989-90, however it
was reduced during the economic crisis of 1991 to 1993

c) Post-Liberalization Phase:
• India initiated series of economic reforms in 1991 aimed at establishing macro-economic
balance, economic growth and regain external credit worthiness. The liberalisation was aimed
at decreasing the government intervention in the business, thereby pushing economic growth
through reforms. The policy opened up the country to global economy. It discouraged public
sector monopoly and paved the way for competition in the market
• The Asian financial crisis of 1997-99 laid India low, yet it proved far more resilient than other
Asian nations. Soon after came two droughts (in 2000 and 2002), the dot-com collapse and
global recession of 2001, and the huge global uncertainty created in the run-up to the invasion
of Iraq in 2003. The Indian economy sputtered in those difficult years but then followed the
global boom of 2003-08, spearheaded by China, which lifted all boats across the world. India's
GDP growth soared during 2005-08
• The euphoria of those days then dimmed. Many serious problems arose: the economy slowed
plus the anticorruption public mood led to the crushing defeat of the Congress Party-led
coalition in the 2014 election after a decade of mostly successful rule
• The new government of BJP has sought to tackle some of the worst problems, and growth has
picked up to an estimated 7.5 percent in 2015-16

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