Monday, 23 July 2018

Trade: we cannot trust India

As all eyes in the UK are focused on Brexit, many are asking what form will our future trading relationships take? This is where the UK will run into trouble. We may be a ranking economy but in terms of market size we don't have the same clout as the EU and we will have to choose our relationships carefully.

This is where reality will collide with fantasy. Our Conservative government is presently obsessed with "free trade" without really knowing what that means. The basic assumption is that a free trade deal is essentially the elimination of tariffs but modern trade is considerably more than that.

A typical trade agreement will now have mutual obligations to converge on standards and will seek to promote the mutual recognition of standards and qualifications in order to facilitate cross border trade. Very often this includes the visa relaxation for trade in services. The UK may want to export its cars to India while India wants to export IT managers and developers.

There's a problem here though. A big one. Britain is particularly sensitive to immigration right now even if it is limited to skills-based immigration. Some just don't want foreigners and others don't want the competition. And I can see why on the latter point. Indians work harder for longer for considerably less in the UK.

But there's an even bigger problem. India is not presently a good country to do business with. Central to any supply chain is trust. Efficient logistics depends on eliminating customs formalities such as inspections and audits. That can happen when both parties trust each others inspectors and standards but that is unlikely given India's track record especially in the food sector.

Food adulteration acute. This is the process in which the quality of food is lowered either by the addition of inferior quality material to bulk out the weight or by extraction of valuable ingredients. It includes intentional addition or substitution of the substances but also biological and chemical contamination during growth, storage, processing, transport and distribution of food products. In India it is an epidemic.

Far worse than this is fake and adulterated medicines, often lethal, which again is a serious concern. As much as procedures are not followed and standards auditing is poor, local officials are very often easily bribed and paperwork is often forged. They may get away with it for internal trade in goods but it won't wash with international trade - and UK customs officials will likely place India on high risk listings meaning a higher rate of expensive and time consuming spot checks and inspections.

Meanwhile, Western consumers tend to be fussy about animal welfare standards and labour conditions. We want to know that the clothes we wear are not made by child slave labourers and that workers get a fair day's pay. The UK would likely demand that India commits to the conventions as set out by the International Labour Organisation.

There problem there again is there is no reason to believe the Indian government will actually uphold and enforce these standards. Similarly on trade in services the UK would be opening itself up to a wholesale theft of intellectual property. India is also unlikely to honour commitments on data protection. 

All the while it is difficult to see what broader geostrategic game India is playing. India is determined to built up its own defence capabilities and is keen to produce its own fighter jets without relying on the West, and much of their defence spending is on Russian equipment, which is usually an indicator of where loyalties lie. There certainly isn't much hope for UK defence exports. 

All in all we could very easily get the impression that India doesn't like us very much and in some respects I don't blame them either. But actually if India wants to claw its way into the modern trade arena it will face these same questions from others. As China evolves further into a market economy they will likely start making demands of their own in terms of standards and with a growing middle class there will be similar ethical requirements built into trade deals. That would be ironic since China plays equally dark games.

Ultimately production standards and their enforcement are not bureaucratic hoops to jump through. they enhance life quality and improve the profitability and reliability of supply chains. Without good technical governance importers will buy from India, but only once if they are being ripped off. Scammers are also endemic to India. 

Reading around the subject we I have seen that Indian officials very often have fake qualifications bought off the black market so there is little possibility of recognising Indian safety systems and inspections as equal and the lack of security at ports often means goods are substituted or simply stolen. 

India may have secured a reputation as a rapidly developing country but in some circumstances India is regressing and securing a reputation as dodgy dealers. It will, therefore, struggle to be treated as an equal by the West. Worse still, one suspects the Indian establishment doesn't even care. They are only interested in trade insofar as they can exploit it for criminal gains. This does not bode well for future relations. 

Over the last two decades we have seen an explosion of global governance and international standards and increasingly the World Trade Organisation is becoming the focus of global trade regulation. The WTO has no real power as the system works on the basis of good faith. the WTO can greenlight certain retaliatory measures against predatory trade practices and is respected as a neutral body.

That though could soon collapse if faith is eroded in the system. Western media tends to focus on Donald Trump's unilateralism and continued attempts to undermine the WTO, but both India and China are doing it in far more subtle ways. Effectively if China or India sign an international agreement with a number of domestic obligations, the chances are it's not worth the paper it's written on. That will ultimately erode faith in the system.

Typically an agreement will come with data reporting requirements on everything from wildlife habitat sustainability through to metrics on deforestation or air pollution. What we find is the reported figures are very often fraudulent where governments will turn a blind eye to the grubby practices of timber firms and palm oil plantations. One scam is to have criminal gangs start illegal clearance fires in rainforests so that the local authorities can certify the land as available for commercial exploitation. 

It is little wonder then that even the EU has not been in a rush to develop a comprehensive formal trade relationship with India. The European Food Safety Agency often reports that Indian seafood is not fit for export. Illegal fishing is also a major concern. Similarly there is zero basis to trust India on financial services. If ever a deal is negotiated there is a strong chance consumer groups will pressure the European Parliament to reject such an agreement. 

There is no polite way of saying it but India is a corrupt country from top to bottom. It is a caveat emptor society ever keen to exploit the unwary customer. This is why UK consumer groups will raise the alarm if the Conservative "free trade" brigade even think about cutting corners on standards. If parliament gets a say then they will likely shoot it down. 

I don't really see much scope for enhanced trade relations with India in the near future and many of these issues apply also to Malaysia, China and a number of African countries. Ghana and Malaysia are making marked improvements by engaging with the global system and there is a sense they are acting in good faith. Not so for Nigeria and certainly not India or the Middle East. Half the point of free trade agreements is to improve the quality of trade and enhance the reliability of supply chains. This is not possible if the fundamentals are not sound.

The UK can do a lot by way of technical assistance with foreign aid, but there we find there are still transparency issues and though we can supervise supply chains, they revert to type the moment our backs are turned and dishonest practices start creeping back in. As mentioned before, the key component of any value chain is trust and in many cases governance is so corrupt that any attempt at creating lasting value chains is utterly futile. 

Free trade may sound like a laudable goal, but in reality it's just a slogan, and if there is a path to a "global Britain" it is a long and slow, incremental one where we can expect no miracles. We must proceed with caution and patience. Trade with India looks superficially promising but there is a long way to go before we can say we trust them.  

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