'Foreign Trade and the National Interest', 19 July, 2004.

ecently I was witness to a presentation by a senior civil servant who claimed that India’s national interests had been upheld at Cancun last year. The claim was being made that by holding out against Western efforts to prise open Indian markets for agricultural products the then Minister for Commerce Mr. Arun Jaitley had attained great gains for India. Now that some months are past we are perhaps in a position to look back at this episode a little more coolly. This is no academic pastime as we may rest assured that the issue of trade is not going to go away, as it is likely to be brought to the table from within the country itself and not just at the WTO. The reason for this is that there seldom is a unified national interest when it comes to foreign trade. So long as there are within a country groups positioned differently vis-à-vis the good in question, the possibility exists of trade benefiting some and harming others.   

 

            The idea that there is a clearly defined national interest in trade was put out by the British economist David Ricardo. It is ironic that Ricardo was to argue that free trade was in England’s national interest for he was himself member of a group that was set to gain disproportionately from trade even as significant sections of the country were set undoubtedly to lose. It has been suggested that the denial of differential outcomes for the citizenry had been strategically motivated for the very suggestion of losers from trade would make it difficult to claim it for the undivided national interest. Ricardo’s claim that free trade was in England’s national interest was made in the aftermath of the Napoleonic Wars. Britain had by then been at war with France for close to a quarter of a century following the French Revolution. As may be expected this had seriously destabilised trade. As an importer of agricultural products Britain found that thwarted supplies meant a higher domestic price of food. While customers actually prospered during the war, if not from it, manufacturers actually suffered. After the war and the consequent restoration of trade food prices fell. The powerful English aristocracy, disproportionately represented in Parliament, were able to have legislated the Corn Laws that taxed the import of grain. Himself a successful stockbroker and wary of the rural rich Ricardo clearly had the potential repeal of the Corn Laws in mind when he argued for free trade as a mutually beneficial arrangement between countries. In his story, where the income distributional shifts are ignored, it is always in the nation’s interest to trade. It has been suggested that Ricardo had smothered the feature that under free trade the landowners would have to suffer lower profits to ensure that his case does not fetch detractors.

 

For reasons that I shall reveal at the end of this piece I believe that it was right to take the battle into Pascal Lamy’s court at Cancun. However, the national interest is not one of them. Recall that the issue at stake was that opening up the Indian grain markets while the US and the EU were subsidizing their farmers would render Indian farmers uncompetitive. There is also a point to the claim that the ensuing competitive would be unfair as Western farmers were being turned competitive via subsidies. But this is beside the point when there are sections of Indian society such as rural non-agricultural and urban labourers  – net purchasers of grin – whose standard of living would undoubtedly be higher were free grain import to be allowed. It is a different matter that we may wish to invoke the national interest to keep out certain imports. But we then choose to forget that as with free trade protection too has income distributional consequences that might  leave many already very poor Indians poorer. The fact that the Japanese restrict the import of rice or that the Americans restrict the import of sugar into their economies is not relevant to us. The average level of income in these countries is approximately ten times ours, implying that the impact of restrictive policy on the poor of these countries is minimal by comparison. The price of food relative to per capita income is among the highest in India. We have tended to overlook this cost of self-sufficiency. However, as I had indicated, it maybe argued that India’s position at Cancun is not without political virtue so long as we believe that Monsieur Lamy and the US Government must be opposed as representatives of the farming and corporate interests of their respective countries. Though such recognition per se would reveal to us that trade and the national interest are seldom reconciled for any country. But so are the ‘national interest’ and moral reasoning.