International Trade, Exchange Rates & the WTO
Exchange-rate regimes, appreciation vs depreciation, FDI vs FPI, and the World Trade Organization — its principles and key agreements.
Key Takeaways
- India follows a managed-float exchange-rate regime — market-determined, with RBI intervention to curb volatility.
- The WTO (1995) succeeded GATT and governs the rules of global trade from its Geneva headquarters.
- FDI is stable, long-term investment; FPI is volatile portfolio 'hot money'.
Core concept
International trade lets countries specialise and gain from comparative advantage. The exchange rate — the price of one currency in terms of another — links a nation to the world economy. The WTO provides the rulebook that keeps global trade open and predictable.
Static foundation — exchange-rate regimes
- Fixed: the government pegs the currency's value (changed by policy — devaluation/revaluation).
- Floating: the market sets the value (it depreciates/appreciates).
- Managed float (India): mostly market-determined, but the RBI intervenes to smooth excessive volatility.
Exchange Rates & Capital Flows
Tap to reveal.
The WTO — Principles & Key Agreements
| Element | Meaning |
|---|---|
| Most-Favoured-Nation (MFN) | A trade concession given to one member must be extended to ALL members — non-discrimination among partners |
| National Treatment | Imported and domestic goods must be treated equally once inside the market |
| AoA | Agreement on Agriculture — disciplines on subsidies and market access |
| TRIPS | Trade-Related Aspects of Intellectual Property Rights — patents, copyrights |
| GATS / TRIMS | Services trade / trade-related investment measures |
Value addition — India & the WTO
India defends food security at the WTO — arguing for a permanent solution on public stockholding (MSP-based procurement) against subsidy caps. The WTO's Appellate Body has been paralysed since 2019 (the US blocking appointments), weakening dispute settlement — a major challenge to multilateralism.
Current affairs linkage
Themes: the rise of bilateral/regional FTAs as the WTO stalls, 'friend-shoring' and supply-chain realignment, and India's stance on e-commerce and agricultural subsidies. (Add the latest WTO Ministerial outcome or an FTA India signed.)
Prelims trap zones
- Depreciation ≠ Devaluation (market vs policy; floating vs fixed regime).
- A weaker rupee HELPS exporters and hurts importers — not the reverse.
- The WTO (1995) succeeded GATT (1947); GATT was an agreement, the WTO is a permanent organisation.
Knowledge Check
2 questions · check your understanding
1. Under which exchange-rate regime does a currency 'appreciate' or 'depreciate'?
2. The 'Most-Favoured-Nation' principle of the WTO requires that:
Prelims Pointers
- Currency 'depreciation/appreciation' happens under a floating regime; 'devaluation/revaluation' is a policy act under a fixed regime.
- The WTO's core principles are Most-Favoured-Nation (MFN) and National Treatment.
- Key WTO agreements: AoA (agriculture), TRIPS (intellectual property), TRIMS, GATS (services).
- The Doha Round (2001) focused on the concerns of developing countries.
Mains Angle
- 'The WTO is at a crossroads.' Examine the challenges to the multilateral trading system.
- Discuss the impact of a depreciating rupee on the Indian economy.
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