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GS Paper: GS3

  • What is GST Compensation Cess?

    The Centre has extended the time for levy of GST compensation cess by almost four years till March 31, 2026.

    What is the news?

    • The Goods and Services Tax (Period of Levy and Collection of Cess) Rules were notified in 2022 by the Finance Ministry.
    • The levy of cess was to end on June 30 but the GST Council, chaired by Union Finance Minister decided to extend it till 2026.

    What is GST?

    • GST, being a consumption-based tax, would result in loss of revenue for manufacturing-heavy states.
    • GST launched in India on 1 July 2017 is a comprehensive indirect tax for the entire country.
    • It is charged at the time of supply and depends on the destination of consumption.
    • For instance, if a good is manufactured in state A but consumed in state B, then the revenue generated through GST collection is credited to the state of consumption (state B) and not to the state of production (state A).

    Compensation Cess under GST regime

    • Due to the consumption-based nature of GST, manufacturing states like Gujarat, Haryana, Karnataka, Maharashtra and Tamil Nadu feared a revenue loss.
    • Thus, GST Compensation Cess or GST Cess was introduced by the government to compensate for the possible revenue losses suffered by such manufacturing states.
    • However, under existing rules, this compensation cess will be levied only for the first 5 years of the GST regime – from July 1st, 2017 to July 1st, 2022.
    • Compensation cess is levied on five products considered to be ‘sin’ or luxury as mentioned in the GST (Compensation to States) Act, 2017 and includes items such as- Pan Masala, Tobacco, and Automobiles etc.

    Alternatives to prevent losses

    • The input tax credit can help a producer by partially reducing GST liability by only paying the difference between the tax already paid on the raw materials of a particular good and that on the final product.
    • In other words, the taxes paid on purchase (input tax) can be subtracted from the taxes paid on the final product (output tax) to reduce the final GST liability.

    Distributing GST compensation

    • The compensation cess payable to states is calculated based on the methodology specified in the GST (Compensation to States) Act, 2017.
    • The compensation fund so collected is released to the states every 2 months.
    • Any unused money from the compensation fund at the end of the transition period shall be distributed between the states and the centre as per any applicable formula.

    Significance of GST compensation

    • States no longer possess taxation rights after most taxes, barring those on petroleum, alcohol, and stamp duty were subsumed under GST.
    • GST accounts for almost 42% of states’ own tax revenues, and tax revenues account for around 60% of states’ total revenues.
    • Finances of over a dozen states are under severe strain, resulting in delays in salary payments and sharp cuts in capital expenditure outlay amid the pandemic-induced lockdowns and the need to spend on healthcare.

     

    Try this question from CSP 2018:

    Q.Consider the following items:

    1. Cereal grains hulled
    2. Chicken eggs cooked
    3. Fish processed and canned
    4. Newspapers containing advertising material

    Which of the above items is/are exempt under GST (Goods and Services Tax)?

    (a) 1 only

    (b) 2 and 3 only

    (c) 1, 2 and 4 only

    (d) 1, 2, 3 and 4

     

    [wpdiscuz-feedback id=”0fc3cnkef0″ question=”Please leave a feedback on this” opened=”1″]Post your answers here.[/wpdiscuz-feedback]

     

     

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  • Typhi: A more drug-resistant Typhoid

    The bacteria causing typhoid fever is becoming increasingly resistant to some of the most important antibiotics for human health.

    What is the news?

    • The largest genome analysis of Salmonella Typhi (S. Typhi) also shows that resistant strains — almost all originating in South Asia — have spread to other countries nearly 200 times since 1990.
    • The researchers noted that typhoid fever is a global public health concern, causing 11 million infections and more than 1,00,000 deaths per year.
    • Antibiotics can be used to successfully treat typhoid fever infections, but their effectiveness is threatened by the emergence of resistant S. Typhi strains.

    What is Salmonella Typhi?

    • Salmonella Typhi (S. Typhi) are bacteria that infect the intestinal tract and the blood.
    • It is usually spread through contaminated food or water.
    • Once S. Typhi bacteria are eaten or drunk, they multiply and spread into the bloodstream.
    • The disease is referred to as typhoid fever. S. Paratyphi bacteria cause a similar, but milder illness, which comes under the same title.
    • Paratyphoid has a shorter duration, generally, than typhoid.
    • Typhi and S. Paratyphi are common in many developing countries where sewage and water treatment systems are poor.

    How does it spread?

    • Salmonella Typhi lives only in humans.
    • Persons with typhoid fever carry the bacteria in their bloodstream and intestinal tract.
    • Symptoms include prolonged high fever, fatigue, headache, nausea, abdominal pain, and constipation or diarrhoea.
    • Some patients may have a rash. Severe cases may lead to serious complications or even death.
    • Typhoid fever can be confirmed through blood testing.

     

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  • Four new corals recorded from Indian waters

    Scientists have recorded four species of corals for the first time from Indian waters. These new species of azooxanthellate corals were found from the waters off the Andaman and Nicobar Islands.

    What are Azooxanthellate Corals?

    • The azooxanthellate corals are a group of corals that do not contain zooxanthellae and derive nourishment not from the sun but from capturing different forms of planktons.
    • They are deep-sea representatives with the majority of species being reported from depths between 200 metres and 1,000 metres.
    • They are also reported from shallow waters unlike zooxanthellate corals that are restricted to shallow waters.

    Which are the news species found?

    • Truncatoflabellum crassum, T. incrustatum, T. aculeatum, and T. irregulare under the family Flabellidae were previously found in Japan, the Philippines and Australian waters.
    • Only T. crassum was reported with the range of Indo-West Pacific distribution.

    Significance of the discovery

    • Most studies of hard corals in India have been concentrated on reef-building corals while much is not known about non-reef-building corals.
    • These new species enhance our knowledge about non-reef-building solitary corals.

    Back2Basics: Coral Reefs

    • Corals are marine invertebrates or animals not possessing a spine.
    • Each coral is called a polyp and thousands of such polyps live together to form a colony, which grows when polyps multiply to make copies of themselves.
    • Australia’s Great Barrier Reef is the world’s largest reef system stretching across 2,300 km.
    • It hosts 400 different types of coral, gives shelter to 1,500 species of fish and 4,000 types of mollusc.
    • Corals are of two types — hard coral and soft coral:
    1. Hard corals, also called hermatypic or ‘reef building’ corals extract calcium carbonate (also found in limestone) from the seawater to build hard, white coral exoskeletons.
    2. Soft coral polyps, however, borrow their appearance from plants, attach themselves to such skeletons and older skeletons built by their ancestors. Soft corals also add their own skeletons to the hard structure over the years and these growing multiplying structures gradually form coral reefs. They are the largest living structures on the planet.

    How do they feed themselves?

    • Corals share a symbiotic relationship with single-celled algae called zooxanthellae.
    • The algae provides the coral with food and nutrients, which they make through photosynthesis, using the sun’s light.
    • In turn, the corals give the algae a home and key nutrients.
    • The zooxanthellae also give corals their bright colour.

     

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  • What are Eco-Sensitive Zones (ESZ)?

    Farmers in Kerala continue to protest across several high ranges of the state against the Supreme Court’s recent order to establish 1-km Eco-Sensitive Zones around all protected areas, wildlife sanctuaries, and national parks.

    What are the Eco-sensitive Zones (ESZs)?

    • Eco-Sensitive Zones (ESZs) or Ecologically Fragile Areas (EFAs) are areas notified by the MoEFCC around Protected Areas, National Parks and Wildlife Sanctuaries.
    • The purpose of declaring ESZs is to create some kind of “shock absorbers” to the protected areas by regulating and managing the activities around such areas.
    • They also act as a transition zone from areas of high protection to areas involving lesser protection.

    How are they demarcated?

    • The Environment (Protection) Act, 1986 does NOT mention the word “Eco-Sensitive Zones”.
    • However, Section 3(2)(v) of the Act, says that Central Government can restrict areas in which any industries, operations or processes or class of industries, operations or processes shall be carried out or shall not, subject to certain safeguards.
    • Besides Rule 5(1) of the Environment (Protection) Rules, 1986 states that central government can prohibit or restrict the location of industries and carrying on certain operations or processes on the basis of certain considerations.
    • The same criteria have been used by the government to declare No Development Zones (NDZs).

    Defining its boundaries

    • An ESZ could go up to 10 kilometres around a protected area as provided in the Wildlife Conservation Strategy, 2002.
    • Moreover, in the case where sensitive corridors, connectivity and ecologically important patches, crucial for landscape linkage, are beyond 10 km width, these should be included in the ESZs.
    • Further, even in the context of a particular Protected Area, the distribution of an area of ESZ and the extent of regulation may not be uniform all around and it could be of variable width and extent.

    Activities Permitted and Prohibited

    • Permitted: Ongoing agricultural or horticultural practices, rainwater harvesting, organic farming, use of renewable energy sources, and adoption of green technology for all activities.
    • Prohibited: Commercial mining, saw mills, industries causing pollution (air, water, soil, noise etc), the establishment of major hydroelectric projects (HEP), commercial use of wood, Tourism activities like hot-air balloons over the National Park, discharge of effluents or any solid waste or production of hazardous substances.
    • Under regulation: Felling of trees, the establishment of hotels and resorts, commercial use of natural water, erection of electrical cables, drastic change of agriculture system, e.g. adoption of heavy technology, pesticides etc, widening of roads.

    What is the recent SC judgment that has caused an uproar in Kerala?

    • On June 3, a three-judge bench of the Supreme Court heard a PIL that sought to protect forest lands in the Nilgiris in Tamil Nadu, but was later expanded to cover the entire country.
    • In its judgment, the court while referring to the 2011 guidelines as “reasonable”, directed all states to have a mandatory 1-km ESZ from the demarcated boundaries of every protected area.
    • It also stated that no new permanent structure or mining will be permitted within the ESZ.
    • If the existing ESZ goes beyond 1-km buffer zone or if any statutory instrument prescribes a higher limit, then such extended boundary shall prevail, the court, as per the Live Law report, said.

    Why are people protesting against it?

    • There is a high density of human population near the notified protected areas.
    • Farmer’s groups and political parties have been demanding that all human settlements be exempt from the ESZ ruling.
    • The total extent of the wildlife sanctuaries in Kerala is eight lakh acres.
    • If one-km of ESZ is demarcated from their boundaries, around 4 lakh acres of human settlements, including farmlands, would come within that purview.

    Try this PYQ

    With reference to ‘Eco-Sensitive Zones’, which of the following statements is/are correct?

    1. Eco-Sensitive Zones are the areas that are declared under the Wildlife (Protection) Act, 1972
    2. The purpose of the declaration of Eco-Sensitive Zones is to prohibit all kinds of human activities, in those zones except agriculture.

    Select the correct answer using the code given below:

    (a) 1 only

    (b) 2 only

    (c) Both 1 and 2

    (d) Neither 1 nor 2

     

     

    [wpdiscuz-feedback id=”u2c9ck8pr9″ question=”Please leave a feedback on this” opened=”1″]Post your answers here.[/wpdiscuz-feedback]

     

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  • Need for transparency in RBI’s policy making

    Context

    Modern inflation targeting central banks are often bound by explicit statutory mandates. Critics have argued that the RBI ignored its statutory inflation targeting duty.

    Why transparency and predictability of the central bank is important?

    • Prior to the 1990s, central banks preferred secrecy.
    • Surprising market: The common wisdom was that the efficacy of monetary policy depended on taking markets by surprise.
    • This belief started changing gradually with the adoption of inflation targeting.
    • Influencing the inflation expectations: Targeting inflation required central banks to influence households’ and firms’ decisions.
    • Thus emerged the need for central banks to be transparent and predictable.

    Independence with accountability of the Central bank

    • There was growing international recognition that central banks as monetary authorities should enjoy a relatively higher degree of independence from governments.
    •  In a democratic polity, this could only be expected in exchange for increased accountability.
    • As a result, regulatory governance gradually emerged as a relevant consideration for independent central banks over the last three decades.

    Regulatory governance at the RBI

    • The regulatory governance discourse in India came into the focus with the report of the Financial Sector Legislative Reforms Commission in 2013.
    •  Like a state, regulators usually enjoy significant legislative, executive and judicial powers and should be subject to appropriate accountability mechanisms.
    • These should include internal separation of powers; a well-structured regulation making process overseen by the board, through public consultation and cost-benefit analysis; duty to explain its actions to regulated entities and public at large; regular reporting requirements; and judicial review.
    • Based on these recommendations, the Ministry of Finance released a handbook in 2013 for voluntary adoption of these enhanced governance standards by all financial sector regulators.
    • These developments turned the spotlight on the RBI’s regulatory governance.

    Reasons for the criticism of the RBI

    • Targeting exchange rate: The central bank appears to have ventured into uncharted legal territory by possibly targeting the exchange rate instead of inflation.
    • Regulatory governance issues: Separately, critics have also highlighted broader regulatory governance challenges at the RBI.
    • For instance, its alleged use of informal nudges to restrict a foreign player’s access to the Indian payment ecosystem goes against an adverse Supreme Court ruling.
    • Such criticisms underline an urgent need to improve the credibility of the central bank’s rule of law quotient.
    • Least responsive in legislative function:  A 2019 research paper found the central bank’s legislative functions to be the least responsive in comparison to three other regulators – SEBI, TRAI and AERA.
    • RBI’ss consultation papers usually presented only one solution and did not offer merits and demerits of multiple possible solutions.

    Implications of weak regulatory governance: Judicial scrutiny

    • Weak regulatory governance resulted in weak regulations, inviting judicial scrutiny.
    • Changes in master circular: In 2019, the Supreme Court effectively rewrote RBI’s master circular on wilful defaulters to provide additional procedural safeguards to borrowers.
    •  Striking down of crypto ban: In 2020, the court struck down an RBI circular that sought to ban its regulated entities from dealing or settling in virtual currencies.
    • The court found that the RBI had neither adduced any cogent evidence of the likely harm, nor had it considered any less intrusive alternative before issuing the circular.

    RRA 2.0 suggestions for the RBI

    • The recent report of the Regulations Review Authority 2.0 (RRA) offers useful suggestions to improve the central bank’s regulation-making process.
    • The RBI had set up the Review Authority 2.0 (RRA) in April 2021 to streamline its regulations.
    • Skill improvement in regulatory drafting: RRA has advocated for skill development in regulatory drafting inside the RBI.
    • Public consultation: To improve regulatory governance at the RBI, RRA suggested that its regulatory instructions should be issued only after public consultation, except if they are urgent or time sensitive.
    • They must contain a brief statement of objects and reasons clearly explaining the rationale behind their issuance.
    •  Although much softer than the FSRLC standards, RRA nevertheless signal a progressive step forward.

    Conclusion

    The RBI should heed these recommendations. It should ideally hardcode the suggested principles into a secondary legislation that is binding on itself. That would be the best way to signal that the central bank takes regulatory governance and rule of law seriously.

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  • Land Degradation

    Context

    A key element of sustainable food production is healthy soil because nearly 95 per cent of global food production depends on soil. The current status of soil health is worrisome.

    The threat posed by soil degradation

    • The challenge to food security: Soil degradation on an unprecedented scale is a significant challenge to sustainable food production.
    • About one-third of the earth’s soils is already degraded and alarmingly, about 90 per cent could be degraded by 2050 if no corrective action is taken.
    • Soil degradation in India: While soil degradation is believed to be occurring in 145 million hectares in India, it is estimated that 96.40 million hectares — about 30 per cent of the total geographical area — is affected by land degradation.
    • The FAO’s latest ‘State of the World’s Land and Water Resources for Food and Agriculture’ says: “…soil pollution is also an issue. It knows no borders and compromises the food we eat, the water we drink and the air we breathe.
    • Globally, the biophysical status of 5,670 million hectares of land is declining, of which 1,660 million hectares (29 per cent) is attributed to human-induced land degradation, according to the Food and Agriculture Organisation’s ‘State of Land, Soil and Water’ report.

    Cause of the problem

    • Use of agrochemicals: The excessive or inappropriate use of agrochemicals is one cause of the problem.
    • The global annual production of industrial chemicals has doubled since the beginning of the 21st century, to approximately 2.3 billion tonnes.
    • Extensive use of fertilisers and pesticides led to the deterioration of soil health and contamination of water bodies and the food chain, which pose serious health risks to people and livestock.
    • Salination: Another challenge comes from salinisation, which affects 160 million hectares of cropland worldwide.”

    About Soil Health Card Scheme

    • Soil Health Card (SHC) scheme is promoted by the Department of Agriculture & Co-operation under the Ministry of Agriculture and Farmers’ Welfare.
    • An SHC is meant to give each farmer soil nutrient status of his/her holding and advice him/her on the dosage of fertilizers and also the needed soil amendments, that s/he should apply to maintain soil health in the long run.
    • SHC is a printed report that a farmer will be handed over for each of his holdings.
    • It will be made available once in a cycle of 2 years, which will indicate the status of soil health of a farmer’s holding for that particular period.
    • The SHC given in the next cycle of 2 years will be able to record the changes in the soil health for that subsequent period.
    • Under the programme as of date, soil health cards have been distributed to about 23 crore farmers.
    • The scheme has not only helped in improving the health of the soil, but has also benefited innumerable farmers by increasing crop production and their incomes.

    Progress made so far on soil restoration

    • India is well on course to achieving the restoration of 26 million hectares of degraded land by 2030.
    • A study conducted by the National Productivity Council in 2017 on this programme revealed that there has been a decrease in the use of chemical fertilisers in the range of 8-10 per cent as a result of the application of fertilisers and micro-nutrients as per the recommendations on the soil health cards.
    • Overall, an increase in crop yields to the tune of 5-6 per cent was reported as a result.
    • First organic state in the world: “A Healthy Planet for Healthy Children’’ published by the United Nations Institute for Training and Research and the World Future Council highlighted success stories from various countries — including Sikkim in India, which became the first organic state in the world.

    Way forward

    • Natural farming: Several studies have established that natural farming and organic farming are not only cost-effective but also lead to improvement in soil health and the farmland ecosystem.
    • Agro-ecological practices: With the threat to food security looming large globally, the need of the hour is to adopt innovative policies and agro-ecological practices that create healthy and sustainable food production systems.

    Conclusion

    The time has come for collective global action involving governments and civil society to reverse the alarming trend of soil degradation.

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  • Agreement on Fisheries Subsidies (AFS)

    Context

    The recently concluded twelfth ministerial conference of the World Trade Organisation (WTO) adopted the trade agreement called the Agreement on Fisheries Subsidies (AFS).

    About the AFS

    • WTO negotiations on fisheries subsidies were launched in 2001 at the Doha Ministerial Conference, with a mandate to “clarify and improve” existing WTO disciplines on fisheries subsidies.
    • At the 2017 Buenos Aires Ministerial Conference (MC11), ministers decided on a work programme to conclude the negotiations by aiming to adopt, at the next Ministerial Conference, an agreement on fisheries subsidies which delivers on Sustainable Development Goal 14.6.
    • The recently concluded twelfth ministerial conference of the World Trade Organisation (WTO) adopted a sustainability-driven trade agreement called the Agreement on Fisheries Subsidies (AFS).

    Provisions adopted in the AFS

    • Prohibits three subsidies: Fundamentally, AFS prohibits three kinds of subsidies:
    • First, illegal, unreported, or unregulated (IUU) fishing.
    • Second, fishing of already over-exploited stocks.
    • Third, fishing on unregulated high seas.
    • Two-year transition period for developing countries: As part of special and differential treatment (S&DT), developing countries like India have been given a two-year transition period for phasing out the first two kinds of subsidies within their Exclusive Economic Zone (EEZ).
    • However, the final negotiated outcome, most crucially, lacks the much-needed discipline on subsidies for fishing in other members’ waters and those that contribute to overcapacity and over-fishing (OCOF).
    • Limited AFS: WTO member countries agreed to a limited AFS sans regulations disciplining OCOF subsidies, which have been pushed to the future and are expected to be completed within four years.
    • If negotiations fail, the AFS will stand terminated, as provided in Article 12.
    • Meanwhile, all countries can continue providing most OCOF subsidies, that is, except for fishing on unregulated high seas.

    What are the implications for India?

    • Longer transition period required: India has been demanding that developing countries be given a longer transition period of 25 years to put an end to OCOF subsidies within their EEZ.
    • Economic growth through ocean resources: Given its long coastline of nearly 7,500 kilometres, the blue economy — sustainable use of ocean resources for economic growth — occupies a cardinal place in India’s development trajectory.
    •  India has set a target of exporting marine products worth $14 billion by 2025.
    • Policy space for marine infrastructure: India needs the policy space to invest in developing the marine infrastructure to harness the full potential of the blue economy.
    • Livelihood concerns: Moreover, India needs to protect the livelihood concerns of close to four million marine farmers, the majority of whom are engaged in small-scale, artisanal fishing, which does not pose a great threat to sustainability.
    • However, India’s demand for a longer transition period was not acceptable to many countries who insisted on this period being seven years

    The disparity between Developed countries and Developing countries

    • India rightly contends that WTO disciplines should not be developed in a manner that throttles its emerging sector while richer nations continue to negotiate exemptions for indefinite subsidisation and exclusion of horizontal, non-specific fuel subsidies in the text.
    • Rich countries have historically provided massive subsidies to build capacity for large-scale fishing and fishing in distant waters, thereby contributing the most to depletion.
    • India provided subsidies worth a mere $277 million in 2018, in sharp contrast to the top five subsidisers: China, EU, US, South Korea, and Japan, whose subsidies range from $7,261-$2,860 million respectively.

    Way forward

    • Comprehensive agreement: For the sake of sustainability, countries need to overcome their differences soon and forge a comprehensive agreement with the inclusion of meaningful S&DT, else they risk the indefinite continuation of harmful subsidies by all players.
    • One balancing act could be to consider different ways to effectuate such flexibilities while accommodating the demands in a more targeted manner.
    • Strengthening infrastructure: India could strengthen infrastructure and mechanisms to be able to utilise any future exemptions.

    Conclusion

    For India, the AFS is less-than-perfect, with a potential of no real outcome at the end of four years if the negotiations fail. But negotiations over the global commons are not easy.

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  • Bedti-Varada Interlinking Project

    Environmental groups in Karnataka have criticised the project to link the Bedti and Varada rivers in Karnataka, calling it ‘unscientific’ and a ‘waste of public money’.

    Bedti-Varada Interlinking Project

    • The Bedti-Aghanashini-Varade river-linking project was also included in the country’s major rivers project devised by the then PM Vajpayee government.
    • The Central Government had created a task force to prepare action plans for interlinking the riverbeds in 2002.
    • The project cost and the source of investments were ascertained and suggested that the project be taken up in 2016.

    Key details

    • The Bedti-Varada project was envisaged in 1992 as one to supply drinking water by the then government.
    • The plan aims to link the Bedti, a river flowing west into the Arabian Sea, with the Varada, a tributary of the Tungabhadra river, which flows into the Krishna, which in turn flows into the Bay of Bengal.
    • A massive dam will be erected at Hirevadatti in Gadag district under the project. A second dam will be built on the Pattanahalla river at Menasagoda in Sirsi, Uttara Kannada district.
    • Both dams will take water to the Varada via tunnels of length 6.3 kilometres and 2.2-km. The water will reach at a place called Kengre.
    • It will then go down a 6.88 km tunnel to Hakkalumane, where it will join the Varada.
    • The project thus envisages taking water from the water surplus Sirsi-Yellapura region of Uttara Kannada district to the arid Raichur, Gadag and Koppal districts.

     

     

  • Places in news: Keibul Lamjao National Park (KLNP)

    Activists surrounding the Keibul Lamjao National Park (KLNP) in Manipur have now taken up the cudgels to ensure that the government does not shift the proposed heritage park from the approved site.

    Keibul Lamjao National Park (KLNP)

    • The KLNP is a national park in the Bishnupur district of the state of Manipur in India.
    • It is 40 km2 in area, the only floating park in the world, located in North East India, and an integral part of Loktak Lake.
    • The national park is characterized by floating decomposed plant material locally called Phumdi at the south–eastern side of the Loktak Lake, which has been declared a Ramsar site.
    • It was created in 1966 as a wildlife sanctuary to preserve the natural habitat of the endangered Eld’s deer.
    • In 1977, it was gazetted as national park.

    Key faunas

    • KLNP is home to the last of the brow-antlered deer (Rucervus eldii eldii), one of the most endangered deer in the world.
    • It is locally called as Sangai.
    • The animal is, in fact, in danger of losing its home—most of the phumdis, or floating swamps, are unable to sustain its weight.
    • In 1951, it was reported extinct, but British tea planter and naturalist Edward Pritchard Gee rediscovered it in 1953.

     

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  • The tricky restructuring of global supply chains

    Context

    After the go-go 1990s and 2000s the pace of economic integration stalled in the 2010s, as firms grappled with the aftershocks of a financial crisis, a populist revolt against open borders and President Donald Trump’s trade war.

    Background of globalisation

    • After the Berlin Wall fell in 1989, main theme of globalisation was efficiency.
    • Companies located production where costs were lowest, while investors deployed capital where returns were highest.
    • Governments aspired to treat firms equally, regardless of their nationality, and to strike trade deals with democracies and autocracies alike.
    • Low prices: All this kept prices low for consumers and helped lift 1bn people out of extreme poverty as the emerging world, including China, industrialised.

     

    Recent worries with globalisation

    • Volatile capital flows destabilised financial markets. Many blue-collar workers in rich countries lost out.
    • Recently, two other worries have loomed large.
    • Cost in case of disruption is high: First, some lean supply chains are not as good value as they appear: mostly they keep costs low, but when they break, the bill can be crippling.
    • Covid-19 was a shock, but wars, extreme weather or another virus could easily disrupt supply chains in the next decade.
    • Dependencies on autocracies have increased: The second problem is that the single-minded pursuit of cost advantage has led to a dependency on autocracies that abuse human rights and use trade as a means of coercion.
    • Hopes that economic integration would lead to reform—what the Germans call “change through trade”—have been dashed: autocracies account for a third of world gdp.

    The fragile state of the international trade and beginning of new phase in globalisation

    • The pandemic and war in Ukraine have triggered a once-in-a-generation reimagining of global capitalism in boardrooms and governments.
    • Supply chain resilience: The supply chains are being transformed, from the $9trn in inventories, stockpiled as insurance against shortages and inflation, to the fight for workers as global firms shift from China into Vietnam.
    • Preferring security over efficiency: This new kind of globalisation is about security, not efficiency: it prioritises doing business with people you can rely on, in countries your government is friendly with.
    • One indication that companies are shifting from efficiency to resilience is the vast build-up in precautionary inventories: for the biggest 3,000 firms globally these have risen from 6% to 9% of world gdp since 2016.
    • Many firms are adopting dual sourcing and longer-term contracts.
    • Investment pattern is inverted: The pattern of multinational investment has been inverted: 69% is from local subsidiaries reinvesting locally, rather than parent firms sending capital across borders.
    • Strategic autonomy: The industries under most pressure are already reinventing their business models, encouraged by governments that from Europe to India are keen on “strategic autonomy”.
    • Moving towards vertical integration: The car industry is copying Elon Musk’s Tesla by moving towards vertical integration, in which you control everything from nickel mining to chip design.
    • Long-term supply deals: In energy, the West is seeking long-term supply deals from allies rather than relying on spot markets dominated by rivals.

    Challenges

    • Protectionism: The danger is that a reasonable pursuit of security will morph into rampant protectionism, jobs schemes and hundreds of billions of dollars of industrial subsidies.
    • Long-run inefficiencies: The long-run inefficiency from indiscriminately replicating supply chains would be enormous.
    • Were you to duplicate a quarter of all multinational activity, the extra annual operating and financial costs involved could exceed 2% of world gdp.

    Way forward

    • Restraint: Because of the above challenges, restraint is crucial.
    • Diversification: Governments and firms must remember that resilience comes from diversification, not concentration at home.
    • Diversify in the areas controlled by autocracies: The choke-points autocracies control amount to only about a tenth of global trade, based on their exports of goods in which they have a leading market share of over 10% and for which it is hard to find substitutes.
    • The answer is to require firms to diversify their suppliers in these areas, and let the market adapt. 

    Conclusion

    Will today’s governments be up to the task? Myopia and insularity abound. But if you are a consumer of global goods and ideas—that is to say, a citizen of the world—you should hope globalisation’s next phase involves the maximum possible degree of openness.

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