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Thursday, December 24, 2015

World Trade Organization (WTO) - Nairobi Ministerial (2015)

If one has been reading newspaper regularly and still has not come across any news article on WTO then maybe one needs to change the sections one is reading from the newspaper or change the newspaper itself. Jokes apart, WTO has been in news recently because of the WTO Ministerial meeting (which happens once in every two years) at Nairobi and even otherwise it is one of the more important international organizations about which one should be knowing. I have listed below some of the important points covering its origin, mandate and current issues. For more such informative articles you can browse through the archives section of my blog www.civilservicessynopsis.in and also leave your comments/queries in the comments section. Happy reading!

 Background of WTO

  • It was established on 1st January 1995 under the Marrakesh Agreement signed by 123 nations replacing GATT (General Agreement on Tariffs & Trade) which had commenced in 1948
  • WTO has at present 162 members and it is basically an international trade organization and its purpose is to regulate international trade
  • Head Quarter of WTO is at Geneva (Switzerland)
  • Director General of WTO at present is Roberto Azvedo (Brazilian Diplomat)  
  • Highest decision-making body of WTO is Ministerial which happens once every two years 
  • First WTO Ministerial conference was held in Singapore in 1996 and established permanent working groups on four issues: (1) transparency in government procurement (2) trade facilitation (customs issues) (3) trade and investment (4) trade and competition ---- These issues came to be known as Singapore Issues
  • Developed Vs Developing Countries - The most significant differences in WTO are between developed nations led by the European Union (EU), the United States (USA), and Japan and the major developing countries led and represented mainly by India, Brazil, China, and South Africa. There is also considerable contention against and between the EU and the USA over their maintenance of agricultural subsidies which operate effectively as trade barriers.
  • SSM (Special Safeguard Mechanism) - It is a trade remedy that would allow developing countries to temporarily hike import duties on farm products to counter sudden import surges and price falls thereby protecting interests of poor farmers
  • G-33 - A coalition of 48 developing nations including Indonesia, India and China that coordinate on trade and economic issues at WTO negotiations, like allowing them to continue to restrict access to their agricultural markets
    Mandate of WTO
    • WTO provides a framework for negotiating trade agreements and a dispute resolution process
    • Most of the issues WTO focuses on derives from previous trade negotiations especially from Uruguay Round (1986-94) 
    • Uruguay Round was multilateral trade negotiation conducted within framework of GATT and it led eventually to creation of WTO
    • Doha Development Round (2001) - The Doha round committed all countries to negotiations opening agricultural and manufacturing markets, as well as trade-in-services (GATS - General Agreement on Trade in Services) negotiations and expanded intellectual property regulation (TRIPS -Trade Related Aspects of Intellectual Property Rights). The intent of the round was to make trade rules fairer for developing countries. Doha Round has missed its official deadline of 2005 and the continuing impasse has made it difficult to launch new WTO negotiations beyond Doha Development Round. This has resulted in increasing number of bilateral FTAs (Free Trade Agreements) being signed between governments.
    • Doha Development Round Issues - (1) Agriculture has become the lynchpin of the agenda for both developing and developed countries (2)The second, now resolved, pertained to compulsory licensing of medicines and patent protection (3) A review of provisions giving special and differential treatment (S&DT) to developing countries (4) Problems that developing countries are having in implementing current trade obligations
    • Bali Package (Trade Facilitation Agreement) 2013 - Trade agreement aimed at lowering global trade barriers and is the first agreement reached through WTO that is approved by all its members. It forms part of Doha Development Round. 
    WTO Nairobi Ministerial (December 2015)
    • It was the 10th Ministerial of WTO
    • The key takeaways from Nairobi Ministerial are the decisions to end all farm export subsidies and liberalize global trade in information technology products.
    • From India’s perspective, the Nairobi declaration has been disappointing on multiple fronts - There is no concrete agreement on a special safeguards mechanism (SSM) to protect farmers in the developing countries against sudden import surges, and no short deadline for a permanent solution on public stockholding for food security purposes. Also there has been no unambiguous reaffirmation of the Doha Development Agenda which means that new issues of interest to developed countries, including competition policy, government procurement and investment are now open for negotiations.

    Wednesday, December 23, 2015

    Syria Crisis - UN Resolution 2254

    The continuing civil war in Syria and the dramatic rise of Islamic State (IS) and more importantly the Refugee crisis in Europe has made the world powers understand the gravity of the problem. The UN Security Council Resolution No.2254 adopted unanimously calls for a ceasefire between the regime of Syrian President Bashar al-Assad and the rebels within a month and the establishment of a credible, inclusive and non-sectarian government in Damascus in 6 months time. I have listed below some of the important points regarding Syrian Civil War that one should know for better understanding.

    Syrian Civil War
    • The Syrian Civil War is an ongoing multisided armed conflict with international interventions taking place in Syria   
    • It began in the early 2011 as part of the Arab Spring protests, with nationwide protests against Syrian government, whose forces responded with crackdowns
    • The conflict gradually morphed from mass protests to an armed rebellion and also became sectarian in nature with government forces, militias and other Shia groups fighting primarily against Sunni dominated rebel groups
    • Syrian government received technical, financial, military and political support from Russia, Iran and Iraq
    • Due to foreign involvement, the conflict had been called a proxy war between the regional powers
    • Russia and Iran are backing the Syrian regime while US, Saudi Arabia and Turkey are supporting the rebels
    • It is the first conflict since the end of the cold war where both US and Russia are militarily involved
    • Islamic State (IS) has taken advantage of the long drawn civil war to become more powerful and occupy large territory
    • The growing refugee crisis in the West has forced the US and its European allies to accelerate efforts to find a solution to the conflict
    • The Syria peace talks are also known as the Vienna Process and was first held in Vienna (Austria) on 30 October 2015 at the level of foreign ministers
    • The participants, since the second round of the talks are known as the International Syria Support Group (ISSG), which consists of: the Arab League, China, Egypt, the EU, France, Germany, Iran, Iraq, Italy, Jordan, Qatar, Russia, Saudi Arabia, Turkey, UAE, the UK, the UN, US

    Wednesday, December 9, 2015

    Rupee Denominated Bonds or Masala Bonds

    Rupee Bonds or Masala Bonds have been in news of late and what is in news is bound to be important for General studies paper of IAS UPSC Civil Services Examination. So here is some point-wise information that would be useful for understanding what are rupee bonds and what is their significance.

    What are Rupee Denominated Bonds?
    - Bonds are basically instruments of debt through which companies raise funds from investors
    - Indian companies have been borrowing money from overseas markets but these are generally denominated in dollars or other foreign currencies such as Euro
    - Offshore rupee bonds will allow Indian companies to hedge currency fluctuation risks - for example a company's cost may rise sharply if for instance the rupee's value had weakened sharply during payback time compared to its value at the time of issuing the bonds
    - A rupee denominated bond would negate such currency risks for Indian companies plus interest rates are lower by ~2% points which would help companies cut costs

    Why Rupee Bonds are also called Masala Bonds?
    -  International Finance Corporation (IFC) which is investment arm of World Bank issued a Rs.1000 crore bond in November 2014 to fund infrastructure projects in India and named them 'Masala Bonds' to reflect the Indian connection (yuan denominated bonds are called 'dim sum' bonds)
    - Indian Railways will issue rupee denominated bonds and list them on London Stock Exchange

    Benefits of Masala Bonds
    - offers opportunity to foreign investors who are not registered in India to take exposure to Indian debt
    - it will diversify the investor base for Indian corporations
    - its success will internationalize Indian currency
    - currency risk is borne by the investors and help Indian companies to hedge currency fluctuation risks
    - Indian banks reluctant to lend to sectors facing weak demand and under heavy debt 
    - global rupee bonds will be used to refinance costly loans or raise capital for new projects with little currency risk

    Risk Factors
    - Rupee bonds can influence local interest rates and domestic currency
    - Attractiveness of these rupee denominated bonds to the overseas investor

    Friday, December 4, 2015

    Making Yuan a Global Currency

    Yuan or Chinese Renminbi (yes both the names are used for Chinese currency) is now going to be a global currency as IMF (International Monetary Fund) has given its nod for including Yuan in the SDR (Special Drawing Rights) basket which currently has four major currencies - USD, Euro, Yen and Pound. As this appears to be a hot topic for civil services examination, I have listed down the important points which one must know about Yuan, SDR,  SDR basket of currencies, and most importantly implications of Yuan becoming a global currency on world and specifically for India. Happy Reading!

    Case for inclusion of Yuan in IMF's SDR basket

    • China is world's biggest exporter 
    • Currencies are included in SDR basket on the basis of two criterions 
    1. Currency's use in global transactions denoted by its share in reserves (freely usable)
    2. Country's importance in world trade (exports)
    • IMF reviews composition of SDR basket every 5 years to reflect changed circumstances in world finances
    What are SDR's and how does SDR work?
    • SDR is an international reserve asset created by IMF in 1969 to support Bretton Woods Exchange Rate System - in which every currency was pegged to USD, which was in turn pegged to gold
    • This was done as IMF felt that supply of USD and gold was inadequate to support world trade
    • SDR is not a currency per se, instead it represents a claim to currency held by IMF member countries for which they may be exchanged
    • SDR are denoted by currency code XDR (important for prelims)
    • SDRs are allocated to countries by IMF depending on its quota which is calculated by IMF based on a country's -
    1. GDP
    2. Openness
    3. Economic Stability
    4. Reserve Assets
    • For instance US has been allocated ~35 billion SDRs as compared to India's ~4 billion SDRs
    • SDRs can only be exchanged by a country with currencies of member countries at an exchange rate determined by IMF
    • IMF calculates value of SDR using SDR basket on the basis of their daily exchange rate on London currency exchange
    • Each of the current 4 currencies in SDR basket is given weightage based on their importance in world trade (USD has the highest weightage)
    Gains for China
    • China's forex reserves at $3.5 trillion are almost 12 times the size of total SDR allocation but IMF's endorsement would help China in making Yuan a global currency which has great geo-political significance
    • US Dollar's political leverage will dissipate to some extent as yuan becomes a global currency
    • US will also not be able to impose trade sanctions unilaterally as affected countries may turn to China for help
    • Still Yuan has a long way to go before it can match the share of US Dollar in global usage as over 120 countries maintain assets in USD while only around 38 do sos in Chinese Renminbi aka Yuan   
    Significance for India
    • Ability of China to manipulate its exchange rate will get more restricted as yuan becomes part of SDR basket as India in the past had to deal not only with China's over capacity but also its artificially devalued currency