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Trade for Geopolitical Stability: Lessons for India and Pakistan

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One of the most volatile zones today apart from the 38th parallel between the North-South Korea is the India-Pakistan border. With attacks and counter-attacks being reported almost every day, the threat of full-fledged war between the two largest nations in the South Asian region cannot be overlooked. Although last time both the countries were at war was in 1999 but the recent decision of the Indian Government on State of Jammu and Kashmir has increased tensions between the two countries. As a result of this rivalry, both the governments have been trying to feed their people with their own narratives and hence it becomes important to ascertain what can be the way out of the age-old conflict between the two nations. While India and Pakistan both are members of various international organizations like UN, WTO, IMF, etc. as well as regional organizations like SAARC, SCO, etc., none of these forums have ever come even an inch closer to resolution of the dispute between the two. Most recently with the decision of India to revoke Article 370, Pakistan has retaliated with the suspension of trade ties with India. The current bilateral trade between the two countries accounts for only a mere 2.1 bn $ and as it only forms 0.83% of total trade between the two countries hence both the countries have nothing to lose in the discourse. This article analyses how trade can ensure regional stability among two major players of the South Asian region.

While trade could have been a measure to ensure harmony between any conflicting nations, yet the first retaliatory measure that countries opt for is to cut off bilateral trade with each other in order to show their resentment over a policy. Although such instances have decreased in number since the formation of World Trade Organization (WTO), yet they cannot be altogether ruled out. At this stage,it is equally important to understand that since the formation of WTO, the world has not seen major wars as it was understood in its traditional meaning as a war between nations. One can equally not neglect the rise of belligerency and insurgency often supported by foreign institutions. Still, one of the credits that cannot be taken away from WTO is that it has ensured that the countries which have higher volume of bilateral trade often prefer peace over war, despite the odds. This claim is not without merit. History is a great educator. A brief comparison before the formation of General Agreement on Tariffs and Trade (GATT) and after the formation of GATT would prove it. The GATT was negotiated between countries in 1948. It was one of the founding pillars on which our modern-day WTO is based.

The countries came to an agreement where they fixed a range for tariffs or bound rate beyond which the tariffs cannot be imposed on import of goods. This mechanism ensures certainty in tariff rates which prevents the countries to turn into protectionist regimes. It would not be wrong to say that the first idea of globalization pursued by international community was not freedom of movement of people but the freedom of movement of goods and services. Prior to GATT, during the early 1930s, also known as the period of the Great Depression, lack of such an affirmation in form of GATT and the consequent fear that imports would throw more people out of work led governments to raise their trade barriers, thus creating a vicious cycle of retaliation. As a result, the world economy shattered, eventually contributing to the outbreak of World War II. Such a protectionist approach with no such affirmation as we find in GATT can easily lead us to a situation where everyone loses. However, a deeper analysis in the post-World War II period would establish that the recovery of Western European nations from the aftermath of the war was much quicker as compared to the Eastern European nations.

The effect was such that most of the western European nations today are part of a customs union with free movement of goods as well as of people. Even the Soviet Union (USSR), which opposed the idea of market economy before its disintegration showed interest in becoming a member of GATT in 1986. Several letters and correspondence between GATT members and USSR prove this point. Much later after its disintegration, during 2000s most of the newly formed nations acceded to the GATT with Russia ultimately joining the WTO in 2008. What was realised much later in form of European Union (EU)found its place in the writings of French Philosopher Montesquieu and Italian Economist Pareto. Montesquieu, in 1748,quoted, peace is a natural effect of commerce. Pareto argued in 1889 that customs union can help to achieve peace between European nations. None of these claims have been proven wrong. Since the formation of EU, none of the surveys have ever claimed of Europe being the centre for next major war between nations. It can be equally argued that this has been made possible because now the focus of nations has shifted from acquiring territories to improving their respective economies. Yet, the importance of economics behind a war cannot be totally neglected. Going by the report of UNICEF conducted by M Humphreys of Harvard University in 2003 came to a similar conclusion stating, countries which trade with each other are less likely to fight each other. He illustrates his argument with how most of the leftist scholars have yet not come out of the mercantilism hangover as the modern trade regime is not based on mercantilism which believed that imports per se are bad for any country.

Another recent example can be seen in the shift that UNDP’s Sustainable Development Goals (SDGs) have brought in contrast to Millennium Development Goals (MDGs). The interlinkage between the idea of development and conflict which was missing in MDGs find their place, and rightly so, in the SDGs. Even the ASEAN which today has become a successful economic bloc was formed with the intention of stopping the spread of communist ideas in the region. Since 1990s the organization has remained an important voice in nearly all the economic platforms. Even scholars from all around the world have supported similar idea.Daniel Griswold, examined the idea that whether free and open markets promote human rights and democracy. He observed, “Economic liberalization provides a counterweight to governmental power and creates space for civil society. The faster growth and greater wealth that accompany trade promote democracy by creating an economically independent and political aware middle class. A sizeable middle class means that more citizens can afford to be educated and take an interest in public affairs. They can afford cell phones, Internet access, and satellite TV. As citizens acquire assets and establish businesses and careers in the private sector, they prefer the continuity and evolutionary reform of a democratic system to the sharp turns and occasional revolutions of more authoritarian systems. People who are allowed to successfully manage their daily economic lives in a relatively free market come to expect and demand more freedom in the political and social realm.”

Turning to the question in context, i.e. South Asia, especially India and Pakistan, this is probably not the first time that someone has come up with the idea of trade as a means to ensure peace and stability in the region. In one of his recent articles,Dr. Ranjan, Professor at South Asian University, arguesThe people of South Asia surely deserve a prosperous and a peaceful future.  The onus is on the leadership of the two biggest countries in the region to deliver. While solving difficult political questions will undoubtedly take time, it won’t be a bad idea to start working towards creating an atmosphere where even difficult questions can be resolved. Increasing bilateral trade can be one such step towards creating such a positive atmosphere.

In a study published by Woodrow Wilson International Centre, “trade relation between India and Pakistan have often blossomed even while political relations wilted. In 1948–49, 56 percent of Pakistan’s exports were sent to India. For the next several years—a period of tense political relations—India was Pakistan’s largest trading partner. Between 1947 and 1965, the two nations entered into 14 bilateral agreements related to trade facilitation.”

Source: Bloomberg (Quint)

In a recent report by World Bank, the potential of trade between the two nations is a whooping 37 bn $. However, in reality it is at 2.4 bn $ which is insignificant for both the countries. The informal trade between the countries stands much higher at 4 bn $, which is routed through UAE. With regards to the Most Favoured Nation (MFN) clause, India granted MFN to Pakistan in 1996 and withdrew it post Pulwama attacks in 2019. Pakistan has yet not reciprocated the same. It is however quite strange that none of the successive governments in India has ever brought the issue to the WTO against Pakistan’s non-compliance of MFN obligations. Even under the regional trade arrangements like South Asian Free Trade Agreement (SAFTA), Pakistan maintains a negative list of over 1200 products which it doesn’t import from India. Apart from these tariff measures there are other non-tariff reasons such as port restrictions prevailing between both the countries which further narrows down the scope of increased trade. The other logistical reasons include the transport restrictions through Wagah Border, where none of the transport vehicles are allowed to move out of the border zone and have to unload their cargo.

The condition worsened post article 370 amendment, when Pakistan decided to suspend all trade ties with India. Although none of the decisions taken by either of the governments ever impacted their respective economies, yet retaliatory measures undertaken by both the countries with respect to not granting or withdrawal of MFN or even suspension of trade cannot be justified if brought before the dispute settlement body of WTO. A measure which goes against the principles enunciated under the WTO agreements is only allowedin cases when they either fall under the category of General Exceptions or National Security Exception. However, a prima facie observation of all the measures ever undertaken by either of the governments shows that none of these qualify either under the general exceptions or national security exception.

The problems pertaining to the conflict between the two nations is not merely political but also dependent upon the perception of ordinary people. Recent survey by Pew Research Centre found that 76 percent of Indians viewed Pakistan as a serious threat and 61 percent of Pakistanis viewed India as a threat, more than 55 percent who viewed Taliban as a threat. Another survey by Pulse Consultant in 2017 found 95 percent of Pakistanis designating India as the worst enemy. This narrative has further been deepened by the media houses in both the countries who often during debates promote the hatred. This public perception depends a lot on the population and what narrative they read and follow. As the median population in both these countries is around 24-28, most of them have not witnessed the horrific impact of either the 1965 war or the 1971 war between the two nations. To change this perception, free trade can be one of the ways. With freer trade in place, it is not only the products which cross borders, but also the ideas and other forms of expressions in form of magazines, news etc. It might not be as effective as educating and spreading awareness among people, yet when the political class of both the countries is occupied with bashing each other at international forums, this can be a good start.

Overall, with such a trade potential between the two nations it is imperative for the governments of both the countries to ensure that their trade policy should be separated from other policies. One suggested method as Raj Bhala, a trade expert, explains can be in form of use of clause 11 of Article XXIV of GATT which deals with the concept of regional trading arrangements. As prior to partition, the entire Indian subcontinent was seen as a single customs territory, the clause provides that the provisions of this Agreement shall not prevent the two countries from entering into special arrangements with respect to the trade between them, pending the establishment of their mutual trade relations on a definitive basis.As it is quite clear from the text of the provision, if India and Pakistan make use of this provision grant of any bilateral preferences between them will not be considered as a violation of any principle of WTO. Unfortunately, as Dr. Ranjan remarks, this has become a forgotten rule.

The countries can ensure better trading network by removing impediments to trade such as trade infrastructure and logistics, changes in their visa policy, easing cross border financial transactions etc. As Zareen F Naqvi, Director of Institutional Research at University of Fraser Valley, Canada, argues in his article, “both India and Pakistan need to tackle their restrictive visa regimes. A number of issues related to trade infrastructure and logistics can be done unilaterally such as the initiation of Electronic Data Interchange (EDI), more efficient customs processing at land border crossings, setting up or upgrading and warehousing, testing and security facilities, and setting up bank branches to ease financial transactions on both sides of the border.

As already proven above through various researches and surveys, trade has the potential to provide political stability to any volatile region. With continuous threat of full-fledged war lurking on both the nations, economic development cannot be ensured as most of the times these countries tend to focus on their military needs. Human development in both these countries still remains low on the HDI index. Today, the future of around 2 billion people in the world rests on few politicians in both these countries. The improvement in standards of living, poverty, employment, etc. rest a lot on the political willingness of the countries. It is the need of the hour to ensure that the two nuclear capable countries should not involve in a full-fledged war with each other as it would lead to a major catastrophe. The economic development of Singapore, Hong Kong, South Korea and Taiwan do show us a path which follows the same narrative of freer trade between nations. Both these nations have to realise that trade ensures the active involvement of manufactures involved in export, civil societies and middle class in foreign relations. Once that is achieved, it would not be easy for any government to go for a fur fledged war as it is peace which ensures that the interests of these sections of the society are preserved.

Samarth Trigunayat is LLM graduate from South Asian University, New Delhi. South Asian University was established by SAARC member nations to enhance cooperation between the member states through the tool of education. The author is currently employed as Young Professional (Law) at Ministry of Commerce, Government of India. The author has previously worked as Assistant Professor at Faculty of Law, Shree Guru Gobind Singh Tricentenary University, Gurugram, India. His area of interest includes International Trade Law, International Investment Law, Feminist Jurisprudence and Constitutional Law. The author can be reached at: lawyer.samarth[at]gmail.com

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Biden should abolish corporate tax for small business, and make Big Tech pay what they owe instead

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If Biden wants to increase tax revenue, create jobs and protect the American Dream, he should abolish corporate income tax for startups and small businesses.

In America, mom and pop businesses pay the same tax rate as multinationals. Individual income tax has seven tax rates, depending on how much an individual has made. We need the same system for corporate income tax, instead of a flat rate that strangles small businesses. Small businesses that are essential for our post-pandemic recovery.

For companies to pay their fair share of tax, corporate tax rates need to be fair. Individuals have a progressive tax system – the more you earn, the higher rate you pay – but for companies it is a flat rate. That’s not fair, especially when the US, like many countries, is committed to the idea of corporate personhood: that a corporation is a legal person.

For small businesses – which are the majority of American businesses – there is really no difference between corporate and individual income. If the mom and pop store does well, so do Mama and Papa. This is what makes the current system even more unfair.

The inherently fair idea of progressive taxes (where the more you earn, the higher rate you pay) has deep roots in Western civilization. The famous economist Adam Smith wrote about this concept centuries ago. Even John Locke, a man who famously hated taxes, was in favour of progressive taxation. The idea originates in Ancient Greece and in the arguments of Aristotle and is intimately linked with democracy itself. 

We can all agree that this makes sense for individuals. So why does this same principle not apply to business? I think it should, especially because I believe every individual has an entrepreneur within them. Anyone can – and should – be a CEO, a builder of opportunity and wealth. But government policies have to encourage that, and protect capitalism from the threat of increased social divides.

Two individuals, Elon Musk and Jeff Bezos now have more wealth than the bottom 40% of Americans. The share of total wealth of the upper class in the US has increased from 60% to 79% in the last 40 years, while the lower class share has decreased from 7% to 4%, and the middle class’s share has dropped from 32% to 17%. 

This doesn’t mean that we shouldn’t aim to raise more corporate taxes – we should. Out of $3.46 trillion revenue income realized by the US government only about $230 billion or close to 6.6% was contributed by corporates.

Some corporates can afford to pay more – especially Big Tech, because they don’t even pay the low flat rate they should be paying. In the UK, for example, Amazon paid £293 million in tax, even though it made £13.73 billion in sales in 2019 or about 2%. This is in stark contrast to the 21% corporation tax it is supposed to pay. 

We need more fairness, to protect true capitalism. Fairness isn’t just a socialist value, it is about providing equal opportunity for all citizens to prosper through wealth creation.

It’s unfair that those small businesses and start-ups end up paying proportionally more than their multi-national counterparts. But this is also economically stifling: Instead of allowing founders the space to breathe, grow and make new hires, they are faced with big, strong competitors who pay effectively lower taxes (because they can afford the best tax attorneys).

The American Dream is predicated on the idea that one can start a new business, work hard and be the master of his or her own destiny. A regressive corporate tax policy, which we have now, flies in the face of this ideal. 

In 2020, 804,398 new businesses were started in the US. We have to give these businesses a fair opportunity to grow. By taxing them at the first hurdle, we stifle the chance of the next Facebook and Google being born, which could equally lead to much less tax revenue down the line. 

Lowering, or abolishing, start-up business tax can counter-intuitively increase tax revenue for the federal government in the long-term.

More importantly, it can remind us what America is really about, and bring our communities and generations together at a time when we need unity, growth and innovation more than ever before.

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Role of WTO in Regularization of International Trade

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International trade is one of the main features of the globalized world and global economy. There it needs also a well-organized institutional mechanism to regulate it. World Trade Organization is an international organization established in 1995, whose main objective is to facilitate trade relations among its member countries for their mutual benefits. Currently 164 states are its members. The activities and works of WTO are performing by a Secretariate of about 700 staff located in Geneva, Switzerland, led by the Director General. English, Spanish and French are the official languages of World Trade Organization. The annual budget of WTO is about 180 million dollars.

Since its creation it is playing an important role in the regularization of international trade. It offers a forum and facilitation for negotiating trade agreements in order to reduce the barriers in the way of smooth international trade among member countries. Thus, the role of this organization is playing very important role in the regularization of international trade which is contributing to economic development and growth of member countries in this globalized world. The World Trade Organization also offers an institutional structure and legal framework for the execution and supervising of the international trade related agreements which are very helpful in regularization of international trade. It also settles disputes, disagreements and conflicts occurring during the interpretation and execution of the components of the international agreements related to international trade. During the past 60 years, the World Trade Organization and its predecessor organization the GATT (General Agreement on Tariffs and Trade) have assisted to establish a solid and flourishing global trade system, by this means helping to extraordinary international economic development.

The WTO is regularizing international trade more specifically through negotiating the decrease and finally elimination of barriers to trade among countries and try to make smoothly the working of the rules and principles governing the international trade e.g. tariffs, subsidies, product standards, and antidumping etc. It also administers and monitor the execution of the World Trade Organization’s determined guidelines for trade in services, goods as well as intellectual property rights related to international trade. It also monitors and review the member states international trade policies as well as make sure the transparency in bilateral and multilateral trade agreements. Likewise, it also solves disputes arising among members related to trade relations or related to the explanation of the provisions of the trade agreements. It also offers services to the governments of the developing states in the fields of capacity building of officers in matters related to international trade. WTO is also doing research on matters related to international trade and its related issues and collect data in order to find better solutions of the problems and obstacles in regularization of international trade. It is also trying to bring into the organization the 29 states who are yet not members of the organization aimed to assist and regulate their international trade according to the international standard.

One of the main barriers in way to international trade is disputes between the engaged parties. Since long this was a very critical issue limiting the trade among states. The WTO is playing very good and instrumental role in the solution of trade related disputes. Since the establishment of WTO in 1995 over 400 disputes related to trade have been brought by its member countries to WTO. The increasing number of bringing trade related disputes to WTO is showing the faith of member countries in the organization. Close trade relations have massive advantages but also create disputes and disagreements. With the increase of international trade, the possibility of its related disputes also increases. Previously, such problems and disagreements have caused in severe disputes. But at present, in the era of WTO the international trade related disputes are decreased because the member states have now dispute’s solution platform, and they are turning to the World Trade Organization to solve their trade related disagreements and disputes. Before the World War Second, there was not any such international organization or forum which could facilitate international trade and its related affairs, and there was also noany legal framework for solving trade related disputes among states of the word.

One of The World Trade Organization’s guiding principal is to continue the open boundaries for trade, ensure the Most Favoured Nation (MFN) status among member countries and stop discriminatory behaviour of members towards other member(s) and bring transparency in doing international trade. It is also assisting counties to open their indigenous markets to global trade, with justified exemptions or with suitable flexibilities, promote and support to durable growth, reduce trade deficit, decrease poverty, and promote economic stability. It is also working to integrate different international trade policies and principles. The member countries of WTO are also under the compulsion to bring their trade related disputes to this organization and avoid unilateral actions. WTO is the central pillar of the current international trade system.

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Russia and France to strengthen economic cooperation

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On April 29, Russian President Vladimir Putin held videoconference with leaders of several French companies-members of the Franco-Russian Chamber of Commerce and Industry (CCI France-Russia) to discuss some aspects of Russian-French trade, economic and investment cooperation, including the implementation of large joint projects as well as the prospects for collaborative work.

Putin noted that the Economic Council of the Franco-Russian Chamber of Commerce and Industry is still operational in spite of difficulties, and the late April meeting was the fourth time since 2016. From the historical records, France has been and remains a key economic partner for Russia, holding a high but not sufficiently high, 6th place among EU countries in the amount of accumulated investment in the Russian economy and 5th place in the volume of trade.

Despite a certain decline in mutual trade in 2020 (it went down by 14 percent compared to 2019) the ultimate figure is quite acceptable at $13 billion. French investment in Russia is hovering around $17 billion, while Russian investment in France is $3 billion.

Over 500 companies with French capital are operating in various sectors of the Russian economy. French business features especially prominently in the Russian fuel and energy complex, automobile manufacturing and, of course, the food industry. “It could have been more if the French regulatory and state authorities treated Russian businesses as Russia is treating French businesses. We appreciate that in a difficult economic environment, French companies operating in Russia have not reduced their activity,” Putin pointed out.

The Russian Government established the Foreign Investment Advisory Council, which includes six French companies. Further, there is an opportunity to discuss specific issues related to the economic and investment climate in Russia, and that opportunity is traditionally provided at the St Petersburg International Economic Forum, which will be held on June 2-5.

French companies are involved in the implementation of globally famous landmark projects, such as the construction of the Yamal LNG and Arctic LNG 2 facilities and the Nord Stream 2 gas pipeline project. This, Putin regrettably said “We are aware of and regret the amount of political speculation concerning the latter. I would like to point out once again that it is a purely economic project, it has nothing to do with present-day political considerations.”

Russia intends to increase assistance to the development of science and technology. Funds will be directed primarily to innovation sectors such as pharmaceuticals and biotechnology, nuclear and renewable energy, and the utilisation of carbon emissions.

“We are interested in involving foreign companies that would like to invest in Russia and in projects we consider high priority. In order to do this, we will continue to use preferential investment regimes and execute special investment contracts, as you know. A lot of French companies successfully use these tools on the Russian market. For example, more than one third of 45 special investment contracts have been signed with European, including French, partners,” he explained during the meeting.

He also mentioned continuous efforts to attract foreign companies to localise their production to state purchases and to implementing the National Development Projects, as well as existing opportunities for French businesses in special economic zones. Today there are 38 such zones created throughout the Russian Federation.

Russia pays particular attention to attracting high-quality foreign specialists. Their employment is being fast-tracked, and their families can now obtain indefinite residence permits. There is a plan to launch a special programme of ‘golden visas’ whereby to issue a residence permit in exchange for investment in the real economy, a practice is used in many other countries.

Taking his turn, Co-Chair of the CCI France-Russian Economic Council, Gennady Timchenko, noted that the pandemic has changed the world, people and business, and that French companies in Russia are responsible employers and socially responsible members of Russian society.

Despite the crisis and the geopolitical situation, a number of French companies have launched production in 2020–2021. Companies such as Saint-Gobain and Danone have renewed their investments. French companies have increased their export of products manufactured in Russia; they are investing in priority sectors of the Russian economy. For example, this year the French company Lidea is launching a plant called Tanais to produce seeds. Russia is dependent on the import of 30 to 60 percent of these seeds, according to various estimates.

Despite the current geopolitical conditions and information field, there are important signals for French business and the Russian side to strengthen economic cooperation, attract investment, and create partnerships on a new mutually beneficial basis.

Co-Chair of the CCI France-Russian Economic Council, Patrick Pouyanne, noted that the meeting has become an excellent tradition, the presence of 17 CEOs and deputy CEOs of French companies shows the importance of these joint meetings, and further reflect the deep interest of French business in Russia.

In addition, Patrick Pouyanne further offered some insights into Russia-French cooperation. By 2020, twenty members of the Economic Council invested a total of 1.65 trillion rubles, supporting 170,000 jobs. These companies have operated in Russia for decades and continue investing in the Russian economy despite the sanctions and the epidemic. These companies help France maintain its status as the second largest investor in Russia. In 2020, France invested over $1 billion in Russia despite the economic difficulties caused by the pandemic.

Concluding his remarks, Patrick Pouyanne stressed that the economic operators believe everyone will benefit if Russia, France and all of Europe are not divided or isolated. This is the challenge today. Indeed, diplomacy has to continue playing an important role in settling differences, and businesses are convinced that meetings like this create bridges between Russia and France to strengthen investment and economic cooperation.

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