World Trade Organization (WTO) & India

World Trade Organization (WTO) & India

Guest Column by Hari Sud

India’s Commerce Minister Kamal Nath walked out of WTO meet in Geneva on June 30, 2006 and returned home. It was a well-orchestrated policy to let the West (all the leading industrialized nations) know that India and other developing countries (LDCs) are no longer a push over. The sticking point at this time has been the huge farm subsidies, which the West provides to its farming sector. Massive farm subsidies undercut the competitors and prevent the rest of the world from enjoying benefits of trade. This impasse will persist until the West works harder to level the playing field and help liberalize the trade. Geneva meet has ended. Both the developed countries as well as the LDCs (through a group called G-20) are internally busy to consolidate their respective position before the next ministerial meet. Failure to reach a deal by yearend will prevent the US and the EU, enjoying greater benefits of trade liberalization. Their industrial products, which is the other side of the trade off on farm subsidy cut, will continue to face import restrictions in the LDCs.

What is WTO?

It is a 149-member organization with Pascal Lamay as its head. It represents all the trading nations of the world, who import-export goods & services. Created on Jan1, 1995, it was considered the biggest reform in trade since WWII. Its predecessor, GATT (General Agreement on Tariff & Trade), had a tumultuous 47 years history. GATT made a beginning in 1948, and provided a framework for trade expansion vis-à-vis removing barriers on free movement of goods and services. It provided platform for 8 trade negotiations in its checkered history until 1994, the last trade negotiations the Uruguay Round, resulted in the creation of WTO. In each of these ‘Rounds’ (high level negotiations), the West, mostly Europe, Japan and North America negotiated trade deals with themselves in mind. The developing world including India, China, most of Africa and Latin America were forgotten as backward and without any clout. For Example, the Kennedy Round of 1963 quadrupled the world trade. At that time India and China had not emerged and hence did not figure in the world trade talks. Tokyo Round of 1973-79 quadrupled the already quadrupled world trade in last 25 years. In each case tariffs and trade distorting subsidies were progressively reduced on industrial goods & services. The West enjoyed unprecedented prosperity. US & Japan were the biggest gainers, followed by the all the nations of the Europe. Poor countries stayed poor. Nobody spoke on their behalf, and they had no clout to make their presence felt. There are simple reasons for that. First, the poor countries had no money to compete in the international market with quality goods, second subsidies provided by the nations to encourage development after WWII made their products much cheaper. Hence a die was cast for poor to stay poor. In 1982, China burst on the international trade scene. In 2002, India became an upcoming star for the world to take note. Hence a new trade body was needed to regulate and encourage trade. Hence at the Uruguay Round, a decision was taken to set up a new body (WTO) to manage the growing trade.

Special Mention of Doha Round
Doha Round deserves special attention, as it is the first trade related conference after GATT was re-incarnated into WTO. At a ministerial conference in Doha, Qatar, WTO member countries, 149 in all, agreed to launch new trade negotiations. This time it was different, India and China had emerged on the scene as major trading nations. Also the developing world was not going to sit around idly and watch as the West implement trade policies favoring them-selves. In short, developing countries made it clear that unless the developed world allowed them greater access to their markets, there will be no changes to the multilateral trading framework. A bunch of nations (G-20) spearheaded this policy with India & Brazil as its leaders. The G-20s approached the negotiations with the developed world with three main areas of unhappiness:

Discriminatory tariffs on goods and services between developed world and the developing world as against tariffs they use between themselves. This prevented a level playing field for all the developing nations of the world.
Farm subsidies, which the developed world gives to its farmers, distort the cost structure. Agricultural production in EU & USA is heavily subsidized. These subsidies have been in place for decades. Major beneficiaries of these subsidies are US corporate farmers, and French farm and processing sector in the EU. With these subsidies in place the developing world loses its advantage. Additionally farm imports from developing world are under heavy tariff, which effectively keeps these products out.
A major irritant in the trade policies have been the textile exports. Quota system effectively killed any cotton textile business from prospering in the developing world. Luckily, the EU & US relented on these policies. As of last year this policy has been disbanded.
Doha Round discussions began with this background. WTO intentions were good except these could not be translated into concrete policies. These irritants have resulted in the deadlock in negotiations. Brazil the most efficient agricultural products producer has concentrated its energies during Doha Ministerial discussions on reduction in farm subsidies in EU and US. India & Pakistan are concentrating on textiles and farm produce. Additional trade concessions on service sector have also been sought by India. The service sector is the key to India’s future as an economic power.

The Current Impasse and the Looming Time Table of 2006
The trade discussions take long-long time to make even a small headway. Ministers, who discuss at the meetings, revert back & forth on their position as their home governments like or dislike progress at the talks. The current inconclusive talks in Geneva were the continuance of earlier talks in Hong Kong. The latter were also inconclusive. Politically developing countries are unlikely to accept any formula on their industrial tariffs, without corresponding cuts by the developed countries in subsidies and tariffs. Anything less will be a political suicide for any political system in a democratic country. But there is a deadline looming. The present US President has been empowered by the US Congress to finish trade negotiations by middle of 2007 and present them with a trade deal, for an up or down vote. This fast track mechanism has actually simplified trade negotiation process with the world’s biggest trading nation i.e. US. In order for that to happen, virtually all trade discussions have to be completed by end of 2006. This deadline is driving all the current hectic activity. US being the most powerful of all the trading nations and with its currency as the basis of trade deal settlement is in the driver’s seat.

Agriculture is at the heart of this round of talks. Consider these few statistics: Agricultural trade is about $800 Billion worth worldwide. It is about 9% of the world total trade. Unfortunately it is the most protected sector. EU is the largest trader in agricultural products including internal trade between member countries. It exports $350 Billion worth of agricultural products (including internal trade) and imports about $380 Billion. US are distant second with $80 Billion in agricultural exports. The sticking point is amount of subsidies and tariffs to be cut by both EU & US. G-20 has urged EU to cut 54% of its tariffs on agricultural products and US to slash 75% of its agricultural subsidies. These are unacceptable to the EU & US. In return they have offered 39% reduction in tariffs and 53% reduction in subsidies.

The above gap, in what the developing countries want and what the developed countries have offered has not changed one bit in last six months of negotiations, hence the angry walk out by the India’s Commerce Minister from the Geneva discussion. Although the Western media heralded it as an astringent Indian attitude yet the truth is otherwise.

If no deal is reached and the US Congress deadline passes then this missed opportunity will not herald an end of the world trading system. Trade will continue as before. But its expansion may not be as dramatic as one would hope. Next opportunity may not arise for a decade or so. At that time, another ‘Round’ of discussions will be initiated and US Congress may empower its president to give another opportunity to negotiate a fast rack trade treaty.

Success or Failure of these Talks
In macro terms, India’s Commerce Minister laid out the impact of these talks on India. He said that success would mean that India could hope to boost its growth from about 8% to 10-11% in five years. Failure could take away a percentage or two from its growth. Hence stakes for India are very high. Similar benefits will accrue for Brazil, Pakistan, and South Africa. Other smaller nations will enjoy benefits in varying degrees. For the developed world of EU, and US, there will be a great satisfaction with the opening up of the markets, which hitherto have been closed. Industrial activity in Europe & US will multiply. As the developing world exports more, they will import more of West’s industrial goods & services. Hence, benefits to both groupings are huge. World trade could see a multifold expansion in twenty years.

World Bank has estimated that freeing trade of all barriers & subsidies, about 320 million people, living on $2 a day will be lifted out of the poverty line in about ten years. Other analysts have put a higher figure of 440 million. With that kind of possibilities, success at these negotiations is of great importance. Although, next ministerial discussions of WTO have not been scheduled yet both sides are busy re-evaluating their position. Soon they will meet again with upcoming deadline in mind. In any trade talks progress is slow. In these talks, the fundamentals have already been sorted out. It is the details, which are a contentious issue. Soon these will be sorted out too.

Challenges Within the EU Community, which are hindering Trade Talks
EU Commissioner holds the mandate to negotiate on behalf of the 25 member nations, but its hands are tied. The Common Agricultural Policy (CAP) of EU and its reform may present a big hurdle. EU also knows that in order to get a better access for its industrial goods, they have to give up something. None of the member nations are willing to give up anything. Hence it may cause split on national lines. France, a major agricultural products producer would veto any deal, which contains a significant subsidy cut. On the other hand Briton and Germany would prefer reduced tariffs worldwide for their industrial products. In short, there is unlikely be a deal in the agricultural sector without French being on board. They are unlikely to be onboard without private incentives to them from within the EU. So far nothing has happened. EU commissioner is shuttling between capitals looking for an opening to break the impasse. He has not succeeded so far.

Is failure of Trade talks an Option?
If the talks fail, credibility of WTO will at stake. Nobody will take it seriously anymore. Bilateral trade agreements between nations will proliferate. This will circumvent the whole concept of multi-lateral trade co-operation. A huge market opening opportunity will be missed and all that have been accomplished in prior discussions may or may not be salvaged. In the absence of a global instrument, trade dispute resolution may also suffer. Worst impact will be on the developing countries. Their chances of progress will be curtailed. All the above will reflect poorly on WTO.

Let us hope that these talks succeed. It is in the greater interest of developed and the developing countries that this impasse is broken. Next such opportunity may be a decade away. At that time new realities will have to be taken into consideration. Some of the developing countries like India & China may ask for bigger piece of action. The West again may refuse and impasse may continue. By then WTO will be irrelevant and would have to be re-incarnated into something else. In the preceding years bilateral trade agreements will take the place of multi-lateral agreements. These bilateral agreements will be harder to circumvent, should any time in future WTO agreement is negotiated.