U.S. using Russian oil, H-1B as bargaining chips to exert pressure on India; new tariffs to be horrendous for global trade: Economist Pravin Krishna

The U.S.'s drift from the global trade system is not Donald Trump-specific as the country has been moving away from the worldwide trade order for over two decades now, says economist Pravin Krishna. In an exclusive interview with Fortune India, Krishna, a Chung Ju Yung Distinguished Professor of International Economics and Business at Johns Hopkins University, states that the U.S. may be using issues such as Russian oil and H-1 B visas to exert pressure on India ahead of the trade deal. 

Disruptions have become a global norm. Post-Covid, we have seen wars, trade and tariff protectionism, and a complete decimation of multilateral institutions. In your view, why has the global economy come to such a situation? What is the way forward? 

What you are seeing with respect to the World Trade Organization (WTO), or the policies coming out of Washington, reflects a couple of things. First, for about a couple of decades now, the U.S. has been slowly losing interest in the WTO. The idea that the organisation is useful to us, promotes our interests, and expands markets for us, etc., has waned. 

The kind of relation that the U.S. had with the international trade system between 1950 and 2000 slowly started to wane. Non-discrimination is one of the major principles of the WTO, and the U.S. was a champion of that idea till the 1990s or up to 2000. 

So, what really changed the stance of the U.S.? 

Earlier, they firmly believed that one should not have Free Trade Agreements (FTAs). They used to look cynically at attempts by other countries to get into it. 

But once they themselves started getting into these agreements—Canada in 1988, Mexico in 1995—they started to think, maybe, the overarching structure of the world trade system and the way the negotiations take place, is getting harder for them. They thought they were getting much less from these deals than what they are getting from bilateral negotiations, as they can leverage their might as economic might to a much greater impact. So, the U.S.'s position relative to the world trade system has been gradually declining

You are suggesting that the U.S. trade unilateralism is not a new phenomenon? 

Yes. This is pre-Trump, pre-(Joe) Biden, pre-(George) Bush. That is the broader arc. Over the recent years, there is another thought in the U.S. political process. The de-industrialisation in the U.S., happening over many decades and accelerated by the entry of China into the WTO, has acquired a political salience in American domestic politics. Those states where people lost jobs due to de-industrialisation, etc., became very crucial for the presidential elections. Look at the last four or five presidential elections. Such states have become crucial for both sides. 

Democrats and Republicans have started to realise that it is very important in their political narrative and strategies to cater to these states. That was happening under Biden, that was happening under Obama. All of this has come to a complete peak now with Donald Trump, who has accelerated these actions. So, all this follows a longer arc. It is happening because of a gradual decline in interests or realisation that they may have to think about globalisation in a slightly different way, in line with their own political interests. And that is why they have gone ahead and disrupted it. 

But this is going to have a wider impact. Global growth projections are subdued. Where does the global economy go from here?

Trump 1.0 mostly targeted China. They also did one more thing. They completely brought the dispute settlement mechanism to an end. And when the Biden administration came, everyone expected it to be reversed, and Chinese tariffs would be reduced. This did not happen. 

That enforces the point that this is across parties and reflects something deeper. Now the implications on the world trade system are horrendous. The rules of the world trade system are there for a reason. They have evolved for a reason. They really helped the countries that were able to take advantage enormously. 

Take, for example, China. All that it did was enter the WTO around 2000. Within the space of 20 years, using the open architecture of the WTO, it rose to a superpower from being a poor country. So that was the nature of the playing field. It was our misfortune that we could not take advantage of it.

In this context, what should be the right strategy for the emerging economies?

The question is whether the remaining countries can continue to play by the rules of the WTO amongst themselves, which may at least be imaginable, but we are nowhere close to it. 

What are the options for India now? Trade diversification, bilateral agreements are being talked about. Then there are platforms like BRICS and others. What's next from here?

See, every country and every block will have several challenges for us. Take, for example, the European Union. It has very specific, institutional norms, regulations, and rules that they expect you to engage with before you enter an FTA. 

These pertain to environmental regulations, labour regulations. Then there is trade openness. Whether you are going to open to their exports and how much access you are getting to their markets. These are difficult decisions. With RCEP, the main player is China, and the trading bloc is keen on India. 

The problem when it comes to us, in India, is that our attitude is timid. Our approach is how we maintain the status quo and somehow get into an agreement. That is self-defeating. The whole point is that one is getting into an agreement as one wants to change things. But the approach is, how do we protect this sector, and how do we protect that sector? 

But don't you think India's stand on agriculture and food in deliberations with the U.S. is justified?

Agriculture is a concern for India. The question is how we address this. India has a vulnerable agricultural sector. It is a large sector. A lot of people are dependent on the sector. Should we have a sliding scale of protection where we enter the agreement now, and say over the next 15-20 years, the sliding scale of protection could gradually take off? This way, everybody has time to prepare. 

The other option is to exempt agriculture altogether. And talk about everything else. So, I think, in principle, everything is on the table. So, one can negotiate. How does one cater to that genuine, economic, moral question, while doing the other things, is a question that the government needs to think about. 

Do you expect the India-U.S. bilateral agreement to be signed any time soon? 

The U.S., currently, has become so erratic and so unpredictable that I am not sure that even extreme insiders have a clear sense of where this is going to go. On one hand, there is the basic trade component. On the other hand, there are several layers over and above it. There is the Russian oil issue, the H-1B issue, the farmer issue, and so on. It has started to look like a systematic effort by the U.S. to not reach a solution, or maybe, exert so much pressure that we capitulate on things that they really care about.

A bargaining chip, so to speak?

A super bargaining chip. How much India will concede is anyone's guess, but right now the picture is not looking great.