Themes > Current Issues
7.09.2006
Course Change in Global Trade Negotiations
C.P. Chandrasekhar
The
indefinite suspension, on July 1, of the Doha Round of world trade negotiations
calls for some rethinking on the expectations India has from a new multilateral
agreement. The suspension proved unavoidable when it became clear that
the US was offering too little by way of reduced protection for its own
agricultural sector, while demanding large concessions in terms of agricultural
and non-agricultural market access from the rest of the world.
The US offer on reduction of support and protection to its own agriculture was absurd. The US and the EU have increasingly resorted to substituting trade-distorting support with support measures defined (incorrectly) by the Uruguay Round as non-trade-distorting. Even while exploiting this loophole in the WTO clauses, the US is unwilling to reduce the total support it provides through trade-distorting measures.
WTO negotiations regarding tariffs, subsidies and support are normally conducted with respect to the maximum level to which a country is allowed to take its tariffs or support. In keeping with that, the US offered to reduce the ceiling on its permitted level of trade-distorting support to $23 billion. This, however, meant nothing for actual trade since, in 2005, the level of total trade-distorting support to agriculture in the US was $19.7 billion. Developing countries wanted an offer that would establish the ceiling below this level, so that it would make some difference to actual farm support in the US. But, unwilling to upset its numerically small but politically strong farm lobby which awaits a new farm bill in 2007, the US refused to budge. On the other hand, it demanded huge concessions from the developing countries in terms of reduced tariffs and enhanced market access for both agricultural and non-agricultural products and services.
This turn of events was surprising, since in the past the US had always portrayed the EU as being the stumbling block to realizing an agreement on agriculture. Writing in the Financial Times of October 10, 2005, the then US Trade Representative Robert Portman declared US intentions of realizing ''a 60 per cent cut in ‘amber box' support -- the most distorting type of subsidies -- over the next five years'', and a 50 per cent reduction in the cap on the less trade-distorting support under the ''blue box''. Based on this projection, he argued that the agricultural market access offer made by the EU at that time (which envisaged a maximum reduction of 50 per cent for very high tariffs and a reduction of the percentage of ''sensitive'' products, subject to smaller tariff cuts, from 10 to 8 per cent of tariff lines) was woefully inadequate. The US wanted a reduction of 90 per cent in maximum tariffs and a decrease in the number of sensitive products to 1 per cent of tariff lines. In its view, the EU proposal did not come ''close to meeting the expectations all of us have on market access'', since it implied only an average reduction of 24.5 per cent in EU farm tariffs.
By the time the mini-Ministerial met in Geneva in late June 2006, the EU had agreed to reduce average farm tariffs by 51 per cent, as compared with developing country expectations of 54 per cent and the US demand of 66 per cent. This was a significant step forward. It was the US, now represented by Susan Schwab, that turned reluctant to reduce trade-distorting support for agriculture.
This swapping of roles between the US and the EU suggests that the former is not particularly bothered about arriving at an agreement. It obviously believes it can win significant gains in trade without making concessions that would hurt its domestic interests. The reasons are many, but prime among them is the success the US has registered in signing bilateral trade agreements with a number of countries with a host of WTO-plus features. Before 2000, the USA had Free Trade Agreements (FTAs) only with Canada, Israel and Mexico. Since then it has negotiated FTAs with Australia, Bahrain, Chile, Jordan, Malaysia, Morocco, Oman, Peru, Singapore and members of CAFTA. And negotiations are on with Columbia, Ecuador, Panama, South Korea, Thailand and the UAE. Fearing loss of access to what has become the most important market for many of them and in the hope of receiving special treatment for their exports in the US, countries have been willing to offer US producers significantly enhanced access to their markets (besides a host of other concessions).
In practice, however, these expectations have been belied. Some of the FTA participants, including traditional partners like Mexico and Canada, and new partners like Australia and Singapore, have in fact seen a decline in their share of the US export market. A few countries like Peru and Chile have only managed to maintain or slightly improve their market share. On the other hand, non-FTA participants like China and India have increased their share of the US market significantly.
This has an obvious lesson for India. Faced with the suspension of the Doha negotiations and recognizing the importance of the US market for the country, especially for services exports, there is a body of opinion which holds that India should join the FTA bandwagon. The experience of other countries which have signed such agreements indicates that such a conclusion is not warranted.
Nor is the view tenable, that if bilateral or regional trade agreements involving the US and the EU are of no great benefit, India should push for the resumption of the Doha Round at any cost. The suspension of the Doha Round, in fact, has a larger message for India's effort to be seen as a promoter of freer trade. Unlike in earlier trade rounds when the world trade regime was shaped largely by the US and leading European nations, India and Brazil were included this time, initially in the ''group of five interested parties'' or FIPs (along with the US, EU and Australia) and subsequently in the informal Group of 6 (with the US, EU, Japan, and Australia), which were expected to lead the negotiations. Brazil and India were presented as representatives of the developing world: a position they, though not all developing countries, endorsed.
In the event, an element of hierarchy was added to the already complex and opaque negotiating process, which left most negotiators inadequately informed of what was going on. As presumed representatives of the developing countries in the G-6, Brazil and India were expected to offer preliminary concessions in return for potential gains, and then report the possible deal to other developing country representatives to win their endorsement through persuasion or manoeuvre. In some cases, the concessions granted were last-minute surprises, as was the case with ‘Annex C' on services at the Hong Kong ministerial.
The fact remains that the more than 100 developing countries who are WTO members differ substantially in terms of production and trade structures, and therefore trade concerns. Most of them, however, are characterized by two features: backwardness, as measured by their development distance from the US and the EU; and agrarian distress, given a slowly growing, crisis-ridden agricultural sector. This warrants a defensive strategy to protect livelihoods and food security, even when trying to win greater market access in agriculture and other areas.
Unfortunately, India's growth strategy in the last couple of decades has meant that growth in output has come largely from the non-agricultural sector. In fact, India has developed offensive interests in manufacturing and services, particularly the latter. As a result, even though India's interests in agriculture are defensive and crucial to the majority of the country's population, the country's trade negotiators seem more willing to provide greater market access to agricultural exports from the developed countries than are other developing countries. Moreover, pushing this agenda would make it impossible to ensure unity among the developing countries, many of which are keen on defending livelihoods and revitalizing agriculture with safeguard mechanisms, protection for special products, and a reduction of agricultural subsidies and other forms of support in the developed countries.
Many developing countries were critical of the process leading to the controversial July Framework, which provided the basis for huge concessions on non-agricultural market access by developing countries without equivalent reductions in agricultural support and protection in the developed world. The Framework was drawn up largely through discussions among the five FIP members. The recent suspension of talks due to US intransigence only goes to prove that Brazil and India cannot influence the major powers, and are merely instruments to win developing country support for an unequal deal. Allegations of pursuit of self-interest are bound to proliferate.
India should shift its focus from serving as facilitator or catalyst for an agreement, to asserting its solidarity with the developing countries. Solidarity among the developing countries is the only hope for garnering a positive outcome from the Doha Round, if and when it is revived. India must, therefore, withdraw from a process that is driving a wedge between developing countries, and providing an opportunity for the US to push harder to protect its own interests. It is time to change course.
The US offer on reduction of support and protection to its own agriculture was absurd. The US and the EU have increasingly resorted to substituting trade-distorting support with support measures defined (incorrectly) by the Uruguay Round as non-trade-distorting. Even while exploiting this loophole in the WTO clauses, the US is unwilling to reduce the total support it provides through trade-distorting measures.
WTO negotiations regarding tariffs, subsidies and support are normally conducted with respect to the maximum level to which a country is allowed to take its tariffs or support. In keeping with that, the US offered to reduce the ceiling on its permitted level of trade-distorting support to $23 billion. This, however, meant nothing for actual trade since, in 2005, the level of total trade-distorting support to agriculture in the US was $19.7 billion. Developing countries wanted an offer that would establish the ceiling below this level, so that it would make some difference to actual farm support in the US. But, unwilling to upset its numerically small but politically strong farm lobby which awaits a new farm bill in 2007, the US refused to budge. On the other hand, it demanded huge concessions from the developing countries in terms of reduced tariffs and enhanced market access for both agricultural and non-agricultural products and services.
This turn of events was surprising, since in the past the US had always portrayed the EU as being the stumbling block to realizing an agreement on agriculture. Writing in the Financial Times of October 10, 2005, the then US Trade Representative Robert Portman declared US intentions of realizing ''a 60 per cent cut in ‘amber box' support -- the most distorting type of subsidies -- over the next five years'', and a 50 per cent reduction in the cap on the less trade-distorting support under the ''blue box''. Based on this projection, he argued that the agricultural market access offer made by the EU at that time (which envisaged a maximum reduction of 50 per cent for very high tariffs and a reduction of the percentage of ''sensitive'' products, subject to smaller tariff cuts, from 10 to 8 per cent of tariff lines) was woefully inadequate. The US wanted a reduction of 90 per cent in maximum tariffs and a decrease in the number of sensitive products to 1 per cent of tariff lines. In its view, the EU proposal did not come ''close to meeting the expectations all of us have on market access'', since it implied only an average reduction of 24.5 per cent in EU farm tariffs.
By the time the mini-Ministerial met in Geneva in late June 2006, the EU had agreed to reduce average farm tariffs by 51 per cent, as compared with developing country expectations of 54 per cent and the US demand of 66 per cent. This was a significant step forward. It was the US, now represented by Susan Schwab, that turned reluctant to reduce trade-distorting support for agriculture.
This swapping of roles between the US and the EU suggests that the former is not particularly bothered about arriving at an agreement. It obviously believes it can win significant gains in trade without making concessions that would hurt its domestic interests. The reasons are many, but prime among them is the success the US has registered in signing bilateral trade agreements with a number of countries with a host of WTO-plus features. Before 2000, the USA had Free Trade Agreements (FTAs) only with Canada, Israel and Mexico. Since then it has negotiated FTAs with Australia, Bahrain, Chile, Jordan, Malaysia, Morocco, Oman, Peru, Singapore and members of CAFTA. And negotiations are on with Columbia, Ecuador, Panama, South Korea, Thailand and the UAE. Fearing loss of access to what has become the most important market for many of them and in the hope of receiving special treatment for their exports in the US, countries have been willing to offer US producers significantly enhanced access to their markets (besides a host of other concessions).
In practice, however, these expectations have been belied. Some of the FTA participants, including traditional partners like Mexico and Canada, and new partners like Australia and Singapore, have in fact seen a decline in their share of the US export market. A few countries like Peru and Chile have only managed to maintain or slightly improve their market share. On the other hand, non-FTA participants like China and India have increased their share of the US market significantly.
This has an obvious lesson for India. Faced with the suspension of the Doha negotiations and recognizing the importance of the US market for the country, especially for services exports, there is a body of opinion which holds that India should join the FTA bandwagon. The experience of other countries which have signed such agreements indicates that such a conclusion is not warranted.
Nor is the view tenable, that if bilateral or regional trade agreements involving the US and the EU are of no great benefit, India should push for the resumption of the Doha Round at any cost. The suspension of the Doha Round, in fact, has a larger message for India's effort to be seen as a promoter of freer trade. Unlike in earlier trade rounds when the world trade regime was shaped largely by the US and leading European nations, India and Brazil were included this time, initially in the ''group of five interested parties'' or FIPs (along with the US, EU and Australia) and subsequently in the informal Group of 6 (with the US, EU, Japan, and Australia), which were expected to lead the negotiations. Brazil and India were presented as representatives of the developing world: a position they, though not all developing countries, endorsed.
In the event, an element of hierarchy was added to the already complex and opaque negotiating process, which left most negotiators inadequately informed of what was going on. As presumed representatives of the developing countries in the G-6, Brazil and India were expected to offer preliminary concessions in return for potential gains, and then report the possible deal to other developing country representatives to win their endorsement through persuasion or manoeuvre. In some cases, the concessions granted were last-minute surprises, as was the case with ‘Annex C' on services at the Hong Kong ministerial.
The fact remains that the more than 100 developing countries who are WTO members differ substantially in terms of production and trade structures, and therefore trade concerns. Most of them, however, are characterized by two features: backwardness, as measured by their development distance from the US and the EU; and agrarian distress, given a slowly growing, crisis-ridden agricultural sector. This warrants a defensive strategy to protect livelihoods and food security, even when trying to win greater market access in agriculture and other areas.
Unfortunately, India's growth strategy in the last couple of decades has meant that growth in output has come largely from the non-agricultural sector. In fact, India has developed offensive interests in manufacturing and services, particularly the latter. As a result, even though India's interests in agriculture are defensive and crucial to the majority of the country's population, the country's trade negotiators seem more willing to provide greater market access to agricultural exports from the developed countries than are other developing countries. Moreover, pushing this agenda would make it impossible to ensure unity among the developing countries, many of which are keen on defending livelihoods and revitalizing agriculture with safeguard mechanisms, protection for special products, and a reduction of agricultural subsidies and other forms of support in the developed countries.
Many developing countries were critical of the process leading to the controversial July Framework, which provided the basis for huge concessions on non-agricultural market access by developing countries without equivalent reductions in agricultural support and protection in the developed world. The Framework was drawn up largely through discussions among the five FIP members. The recent suspension of talks due to US intransigence only goes to prove that Brazil and India cannot influence the major powers, and are merely instruments to win developing country support for an unequal deal. Allegations of pursuit of self-interest are bound to proliferate.
India should shift its focus from serving as facilitator or catalyst for an agreement, to asserting its solidarity with the developing countries. Solidarity among the developing countries is the only hope for garnering a positive outcome from the Doha Round, if and when it is revived. India must, therefore, withdraw from a process that is driving a wedge between developing countries, and providing an opportunity for the US to push harder to protect its own interests. It is time to change course.
© MACROSCAN 2006