By: Hari Sud
July 07, 2006
expressed here are author’s own and not of this website. Full disclaimer
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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 they 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, 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
winners, 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 a 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 ideally 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
• 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 framers, and French farm
and processing sector in the EU. With these subsidies in place the
developing world looses its advantage. Additionally farm imports from
developing world are under heavy tariff, which effectively keeps these
• 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 disband.
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
The Current Impasse and 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
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
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.
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