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Looking beyond the debate of bilateralism versus multilateralism

by Varsha Ramachandran

It is important to not to look at bilateral and multilateral engagements as being mutually exclusive of one another. In fact, bilateralism is the first step towards broader economic integration.

For a country to enhance its national power in the era of globalisation, it is important that it has strategic, yet unbiased economic agreements with countries across the globe. Taking this idea of economic integration further is the concept of one global economy which involves unification of economic policies, monetary policies, abolishing tariffs and taxes between various countries, and providing promising prospects of peaceful livelihood.

To engage internationally, a country can enter into several kinds of agreements. Such agreements can be classified into two categories based on the number of countries involved. Bilateral agreements are the ones that exist between only two countries, while multilateral agreements exist between several countries. Both these agreements can further be classified as Free Trade Agreements (FTAs), which does not involve any kind of tariff or non-tariff barriers to trade, or Preferential Trade Agreements (PTAs) which involves partial elimination of tariff or non-tariff barriers.

The debate on advantages and disadvantages of bilateral and multilateral trade agreements has existed for many decades in the field of international trade. Numerous studies have been conducted, using empirical data, to determine the success or failure of bilateralism and multilateralism. While the general consensus among economists is that multilateralism is more effective in the long run, this is sharply contrasted by the failure of the WTO multilateral agreements in the past few years and the success of multiple bilateral agreements instead. Economists who believe in multilateralism however point out that although bilateralism and regionalism increases trade, it harms the welfare of the world trade system.

The first half of nineteenth century saw a more closed global economy where nations engaged in bilateral agreements. Studies have noted that bilateralism contributed majorly towards harming the world trade during the inter war period. Economists argued that the highly discriminatory agreements made war inevitable. Similar opposition towards bilateral trade occurred post the Great Depression where it was argued that discriminatory agreements created vicious cycles of rising prices which further deepened economic depression.

The “Bandwagon Effect”, a situation where the non-trading partners will try to enter an existing bilateral agreement, thus rendering the original agreement less meaningful, is considered to be the biggest shortcoming in bilateralism. Creation of bilateral agreements can immensely complicate the trading environment due to creation of multiple rules. Most of these agreements have their own specific rules of origin which only complicate the production process and thus business and trade. At the same time, this also complicates the functioning of customs union as they have to assess same product differently for different countries. In the words of Professor Bhagawati, this is known as the “Spaghetti Bowl” phenomenon.

There is enough evidence to prove the failure of bilateral arrangements made way for openness among economies around the globe thereby leading to the formation of International Monetary Fund, World Bank, GATT, etc. Multilateralism soon gained popularity among policymakers as they started to explore the benefits of multilateral trade by removing stringent discriminations.

Though bilateralism allows countries to venture into different territories of similar interests, facilitate trade diversification and provides for simplified processes, multilateralism is often preferred because the risks and responsibilities associated with it get distributed among the members. Multilateralism acts as a central point to systematically deal with global concerns such as environment. Multiple countries can achieve better results than single countries working independently. Transaction costs reduce when nations pool in their resources. Multilateralism leads towards the realization of “one world, one law” with minimal complications and complete cooperation among all nations. It ensures that all nations participate in the management of global affairs.

Is multilateralism then the best option? Unfortunately, no!

The economic and geopolitical multilateral cooperation of eight countries of South Asia, SAARC, is a perfect example of the failure of a multilateral setup. Two of the largest economies of the SAARC, India and Pakistan have had inherent and long standing political tensions. The Indo-Pakistan dispute over Kashmir has proved to be one of the biggest impediments in the progress of SAARC. This shows that failure of a strong bilateral relationship between two countries will only cause a multilateral agreement including the same two countries to fail.

Economists have also pointed out some rather interesting shortcomings of multilateral arrangements. For instance, the United States was accused of having become increasingly dominant and inclined towards acting unilaterally, thus, making a number of developing nations question the very relevance of multilateralism. It is much more complicated and challenging as it involves many nations coming to a consensus which may become a tedious task. It may even happen that certain issues remain unresolved due to lack of cooperation among few countries.

Despite bilateralism and multilateralism, both, having strong drawbacks, bilateralism is believed to be here to stay. The fact is that bilateralism has always been around makes it very unreasonable to believe that it will cease to exist. The need of the hour is to identify how best bilateral trade can be used in the ultimate goal of reaching complete free trade. Practical ways of how integrate the two can be identified. For instance, a stronger multilateral system that has a bigger control over bilateral trade agreements, which are used to supplement the multilateral trading system by addressing issues that are more specific to countries and regions.

Multilateralism is necessary to reach a world of free trade. The first step towards multilateralism is, of course, bilateralism. Better regulation and a robust policy framework will educate nations engaged in bilateral agreements to expand their horizons and become part of multilateral trading blocs.

Varsha is an intern at the Takshashila Institution.

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The Indian Electronics Manufacturing Industry – Performance, Problems & Proposals

by Aparna Ravikumar

The electronics market in India has grown immensely – but the country’s production capacity lags far behind.

Performance

India has emerged as the world’s third largest market for electronics. The demand for electronics goods has cut across classes.  The smart phone market, for example, has seen tremendous growth; Indian smart phone makers are making healthy margins of profit and creating a strong customer base. The overall Indian electronics industry is expected to grow at 9.9% CAGR, to touch $94.2 billion by 2015, according to the IESA-Frost & Sullivan report.

The country, however, has been unable to scale up its production to meet these burgeoning demands. Electronics imports now stand in the third position, behind oil and gold, and are expected to reach $42 billion by the end of next year, according to Frost & Sullivan estimates. Advisor to the Former Prime Minister Dr. Manmohan Singh, Sam Pitroda warned that electronics imports could surpass the oil import bill.

Problems

Manufacturing needs are currently outsourced to facilities in China. Electronics goods sellers in India, like Micromaxx and Karbonn Mobiles, draw out specifications of their goods, which are then manufactured by contract manufacturers in China, shipped to India and then sold in the Indian market. The Indian market also relies heavily on imports for most of the building blocks of  finished electronic goods known as Integrated Circuits (ICs). The current Indian electronics manufacturing sector does not have major chip fabrication centers (Fab centres), forcing the market to rely on imports. Despite generating immense demand and providing a pool of cheap labor supply, India’s electronic manufacturing sector has been unable to serve the needs of the electronics market. There are several challenges that the electronic manufacturing industry faces.

The first is lack of capital.  Fab centres specifically are highly capital intensive. They require heavy capital to carry out the manufacturing of ICs .The manufacturer needs to ensure that their unit produces a competitive volume of finished goods, and not prioritize quality alone. This raises capital requirements.

The second is a lack of availability of raw materials. The manufacturing industry, especially the fab centres, require the supply of semiconductor grade materials and gases (nitrogen, argon, etc). There is no supply of these materials in India because there are no major Fab centres that generate demand – the classic chicken and egg situation. In contrast, in the city of Hschinchu in Taiwan, pipelines of semiconductor gases have been set up, which allows any manufacturer to tap into the supply.

The third major challenge is irregular power supply. In most parts of the country, power outages are a daily or hourly occurrence – steady power supply is hard to come by, causing expensive delays in the manufacturing process.

The fourth obstacle is the inefficient transport system and unavailability of a steady supply of water act as major hurdles. Deionised water is required by manufacturing units in large volumes. Poor water supply and inefficient transport force the manufacturing unit to incur unnecessary time costs.

The fifth issue is the absence of major Indian electronics players, which has prevented the industry from taking off in a big way.  Important electronics companies of the country, like Reliance and TATA, have not set up manufacturing units because of the rapidly changing face of the industry. The products that are manufactured do not have a long shelf life in the constantly evolving market, introducing the element of high risks into the industry.

From a human resources perspective, a large percentage of the electronics engineers that graduate from technical and engineering institutions are hired by non-electronics companies: the IT sector, investment banks, etc. The industry requires the expertise and insights of these highly trained engineers and managers, which can help overturn the large manufacturing deficit that the electronics industry faces.

Proposals

Despite the several obstacles to electronics manufacturing in the country, there have been many attempts made at pushing up the growth of the industry. The National Electronics Policy, adapted in 2012, proposed the setting up of electronic manufacturing clusters. Clusters are being developed in Rajasthan, Karnataka, Odisha and Tamil Nadu, among others.

In an attempt to encourage the setting up of Fab centres, the previous Union government introduced the Modified Special Incentives Package (M-SIPS) scheme, under which capital will be made more easily available to electronics manufacturing sector. The government will provide a 20% investment subsidy in SEZ and 25% investment in non SEZ. The M-SIPS will serve to ease the investment bottleneck, providing the sector with much-needed capital influx.

With the government encouraging the growth of the manufacturing sector, it is important for Fab centres to not attempt to catch up with the mobile market. The mobile/Smartphone industry has raced far ahead of the manufacturing capabilities of India. Attempting to reach the manufacturing abilities of the likes of Hon Hai/Foxconn in mobile-manufacturing will have the industry playing the catch up game for many years, forcing the industry to incur heavy losses, smothering all avenues of growth. Instead, the industry can cater to the growing demands of the medical and healthcare industries. These industries need ICs which are manufactured with feature sizes greater than 45 nanometers. In contrast, the mobile industry market needs ICS manufactured at feature sizes around 10nanometers so that more circuitry is packed in the available area. As the feature sizes become smaller, costs of manufacturing increase exponentially, and not linearly. Thus, the nascent Indian manufacturing industry should not set its sight on the mobile market right away.

A robust electronics manufacturing sector in India will bring positive externalities in the economy and put India at the forefront of electronics technology.

 Aparna is an intern with the Takshashila Institution

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