India’s strength is its digital economy, holds huge potential for trade: WTO Chief Economist

Trade Talks: “Cleaving through one of the most unstable periods marked with geopolitical tensions, rising protectionism, India is and will surely benefit from derisking the supply chain from China,” Ralph Ossa, Chief Economist at World Trade Organisation in an exclusive conversation with Republic Business said. Ossa spoke on a range of issues-from ongoing tariff wars between US-China to Russia-Ukraine war, from the potential impact of the US recession on world trade to India’s trade potential. Edited excerpts:

On Assessment of the World Trade

Trade has had a difficult time in the past couple of years. We had the pandemic, we had high inflation, we had contractionary monetary policy, contractionary fiscal policy, and so on. But the big picture for me is that trade is really or has been and continues to be highly resilient. 

We are expecting the volume of merchandise trade to grow by 2.6 per cent in 2024 and 3.3 percent in 2025 after having seen a slight contraction of 1.2 per cent in 2023. If I think ahead, what we are looking at is the future of trade and services, particularly digitally delivered services. And this segment of trade has grown at an average of 8.1 per  cent since 2005, outpacing overall trade growth. And this is good news for India because India has traditionally been very strong in this area. 

On Downside Risks for the World Trade and India

For me, geopolitical tensions are the main risks. We already see a fragmentation of trade along geopolitical lines. For example, in a recent analysis, we have split the world into two hypothetical geopolitical blocs based on voting behaviour at the United Nations General Assembly as East Block and West Block. 

It's a bit of an oversimplification, but what you see since the beginning of the war in Ukraine is that the trade between these blocks is growing significantly more slowly than trade within these blocks, which suggests that we are seeing more friend-shoring than before. And for us, this poses a risk to the global economy. We have undertaken some simulations where we have simulated the worst-case scenario of such global fragmentation and found that worldwide bill incomes could drop by up to five per cent if this came to pass.

Top three suggestions for India to boost trade

I would see three things. The first thing I think I've already mentioned a couple of times which is built on your strength and the strength is a digital economy I think you can benefit tremendously from the trend towards digital trade towards digital services. The second one is that India is in a good position now to benefit from some of the relocation of supply chains away from China. So this is something to be aware of and to be open to. Third, I want to continue contributing to protecting and strengthening the multilateral trading system in the area of digital trade because I think India is as big as it is and as important as it is and also tends to benefit from open, predictable, and multilateral trade as all other countries are in the world, which is why we are so grateful for India for its support at WTO.

On India’s trade potential 

India is of course a very large country. It's a very large economy, it's a very fast-growing economy and I think this is widely appreciated across the world. A major player also now as firms are trying to find alternative sources of supply because of the tensions between the United States and China. For me, the main thing really to watch out for when I think about India is digitally delivered services. Digital trade. As I said before, this is a very fast-scoring segment of international trade and that's the segment where India is traditionally very strong for ex computing services, accounting services, and anything that can be transmitted electronically. So this is true. I think where we see the future going. But in the medium term, we could also see more manufacturing exports of course coming out of India as some farms are trying to relocate the supply chains away from China. 

On protectionism and tariff War 

I mean we see international trade under pressure. We see protectionist tendencies across various parts of the world at the same time we also see resilient international trade as I mentioned before. But this is something that we have to be very careful about. Because if we want to have a resilient world economy. If we want to have a world economy that pushes for inclusiveness, development, economic security, and sustainability, we do need open and multilateral international trade. So protectionism is not the not the way to go. As you know, we've seen it in the 1930s. When we had protectionism spiralling, this led us and this is of course not a place where we want to be again today.

On Instability in India’s neighborhood

We have instability in many parts of the world, we have instability in your region, we have the situation in the Middle East, and we have the situation in Europe. So wherever you look, we have uncertainty and uncertainties, of course not helpful for international trade. The best advice I can give is to really invest in an open and predictable and also multilateral trading system, because if you have uncertainty, if you have supply shocks coming from various parts of the world, you never know. Where the supply shock is going to be hitting and you also never know what trading partner may be able to help you. So really having cast your net widely and not relying on particular trading partners heavily seems like a good strategy going forward. 

We saw this, for example, when we looked at African countries in the aftermath of the beginning of the war in Ukraine, when agricultural exports to Africa dropped dramatically because of the war. And what we saw happening is that many of these countries were able to substitute a way to substitute towards alternative sources of supply from very, very diverse origins in the United States, Argentina, Europe etc. So really having these multiple options. I think it is key in the world of uncertainty.

On US recession and Its impact 

We don't have a particular forecast for the United States, but we are also observing these developments closely. A lot will also depend on what the Federal Reserve is doing. You've seen the nervousness. Let's put it like that in financial markets and given the size of the United States in the global economy, of course, it's also an important determinant of international trade. What we had to worry about more in the past was Europe. If I look at the situation in Europe last year, for example, because of high inflation rates and because of high energy prices, that's really what dragged down international trade. And so at least for now, we are looking more optimistically towards North America's contribution to international trade. 

On Russia-Ukraine war 

This conflict has not been good for the exporting prospects of both countries. When we look at our latest figures, Ukrainian exports are down 18 percent. Russian exports are four percent. This is in value times. I should say not more than volume times compared to 2019. But what's more significant than that is really the change in the pattern of trade. So Russian exports to Europe have really collapsed. For example, Russian exports to Germany fell 94 percent. And on the other hand. Russian exports to other trading partners have increased substantially, including India, where Russian exports have increased more than eightfold. 

On rising protectionism and biggest worry

Look, I think we as a world. We as a world economy face three major challenges today. The one challenge is we need to maintain peace and security. The second challenge is that we need to reduce poverty and inequality. And the third challenge is that we need to achieve a sustainable economy and my worry is that more and more people are perceiving trade as being part of the problem when it is as far as overcoming these challenges is concerned. And that's in part what's fueling these protectionist tendencies whereas really trade is part of the solution. So I think really getting back to a point where people understand the importance of trade to deliver a more secure and more inclusive more sustainable economy. That's really very important and that's what we're trying to do. We are trying to contribute. We wrote a whole report last year, you know, trying to make this case and trying to convince people that trade is really a force for good if conducted rightly. 

On US-China, EU-China tariff war and its impact

I mean we see that if we look at bilateral trade between the United States and China, it is growing much more slowly than it would have without these tariffs in place, and without these tensions mounting, that's very clear in the data we do see. 

Some of these trade flows are of course being diverted to other countries and India is one of them, and Vietnam is one of them. Mexico is one of them. And to some extent having a bit of a diversification of supply chains is also not a bad thing because of course, we don't want over-concentrated supply chains. I think what we really have to be careful about is that we get to a point where people think that making everything domestically home, showing reshoring these kinds of things are the solution because they are not, think about the pandemic, initially yes, there were supply chain disruptions, but then pretty quickly, where did all the masks come from? Where did all the home Office equipment come from? Where did the vaccines come from? Where did the personal protective equipment come from and so on? That was on international trade. So yes, international trade can be a source of instability, perhaps in the short one. But then history has shown over and over again that it's really a source of resilience and I think we really need to protect and to preserve that. 

On de-risking of the supply chain from China and its impact

I mean I sense that India is already emerging as one of the winners but of course, we have to be careful that that this relocation of supply chains now doesn't come at the expense of the integrity of the multilateral trading system, and that this is not just a short one victory for individual countries now that you know perhaps get economic activity that they wouldn't have received otherwise but that we maintained the integrity of the system which is why I must think for India to also fight for the system and continue fight for the system as they are doing so. 

But what stands out as far as India is concerned for you? 

India is an attractive place now for manufacturing firms that are looking for alternative locations but not just India, we also have Mexico, and Vietnam as well. I think it depends a lot on the industries.

But then also as I said before, even though this is the topic of today, it's really important not to forget about the longer objectives or the long-term strengths and the whole digital economy. I think it is very important. 

Outlook on India’s growth and trade growth

India has been growing very quickly over the past years and of course, we all hope and anticipate that this growth is going to continue. 

And that it is going to continue and improve the living conditions for so many millions and millions of people as it has done in the past. And I also hope that India continues to leverage international trade. I think in many Western countries at least it has a bad reputation because people think that international trade is bad for impulsiveness. And that's because import competition from countries like China has led to some disruptions and labour markets in advanced countries. But if you think about the Indian experience, if you think about the Chinese experience, you really see the power of international trade to transform the lives of millions and billions of people.