India, US and WTO

What latest development means for India’s interest and food security agenda

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Manoj Kumar | November 19, 2014



As India and the US has reached an understanding, and Washington has recognised New Delhi’s right to food security and the claim that it cannot be denied by World Trade Organisation (WTO), all roadblocks before a possible global trade deal seem to have been cleared. Following this, India is gearing up to push its agenda on food security before the WTO’s general council during the next meeting scheduled for December.

In December 2013, the WTO at its ninth ministerial conference in Bali introduced its flagship trade facilitation agreement (TFA), which several commentators hailed as a landmark in trade reforms. India had then agreed to sign the resultant accord, but later made a series of pronouncements that seemed to indicate that it would desist from becoming a signatory unless certain allowances were made for it to be able to sustain its domestic food security policies. Due to this delay by the government in communicating its acquiescence, the original deadline to conclude TFA passed, and the WTO remained in a deadlock with India until recently.

After a period of extended negotiations, India has now assented to sign the agreement, having reached mutual understanding on the issue of public stockholding for food security purposes with the US (which is one of the main advocates for the agreement), thereby paving the way for the implementation of TFA.

This latest development shall mean that the homogenisation customs-related formalities can proceed as expected prior to the impasse, and that the reputation of the WTO as a credible platform for global trading diplomacy, though bruised by this episode, remains intact.

Here is a primer on the TFA and coming reforms in global trade.

What is the TFA and how does it impact the international economy?
In a nutshell, the TFA is an attempt to facilitate smoother international trade by simplifying customs processes and making them uniform for all 160 WTO member nations, including India. It includes a wide range of provisions for the reduction of documentary requirements, and expediting the movement, release and clearance of goods by ensuring that customs and other authorities of member nations will employ similar forms and procedures. This in turn will boost trade by reducing costs and delays (which remain a significant factor in international shipments) for traders. Predictability, simplicity and uniformity make it easier for businesses big and small to participate in trade around the world and to support jobs through that trade.

According to WTO and Organisation for Economic Cooperation and Development (OECD) estimates, the cost savings of trade facilitation pay real and substantial dividends: for every one percent reduction in trade costs, global incomes go up by $40 billion. With total world trade in goods and commercial services now exceeding $23 trillion, the impact of such significant reductions in the costs of international trade would generate very large positive gains for the world GDP – to the tune of almost $1 trillion, according to some studies.

Additionally, the TFA can cut trade costs by almost 14.5 percent for low-income countries and 10 percent for high-income countries. With the WTO member countries accounting for over 96 percent of world trade, the TFA will also create an estimated 21 million new jobs – an important factor considering the spiking rates of unemployment engendered by the global economic slowdown of the past few years.
           
The Indian Stand
The Indian government had justified its reluctance to ratify the TFA by asserting that it agreed to sign up at Bali only under the condition that interim relief would be provided to the participating developing nations with regard to domestic subsidies, meaning that no legal actions or sanctions would be imposed on them till 2017. (To put it simply, member countries will not be able to challenge or engage in litigation, poor and developing countries through the WTO dispute settlement mechanism if they breach the 10% subsidy cap set by existing WTO rules, till this year.) By 2017 a solution pertaining to their curtailment would be worked out among those nations.

These complications over the way the WTO calculates subsidies have become especially problematic for India since the introduction of the food security law, passed in 2013, which will increase food subsidies that the government cannot afford since India’s bill for the same is already approaching 10% of the value of production. Under WTO rules, domestic price support is calculated as the difference between the fixed external reference price prevailing during 1986-88 and the minimum support price (MSP) provided by the Indian government. As the government keeps increasing the MSP every year, the market-distorting subsidy limit according to WTO rules keeps increasing, too, thus threatening to breach the 10% cap prescribed by it.

Developing countries including India argue that the reference period of 1986-88 is outdated and that they need to be given flexibility to stock enough grains for the food security of millions of their poor. It is in this regard that the Indian government asked for the resetting of benchmark reference prices to allow for inflation and sought either a parallel final deal on food subsidies or else a clear interim agreement that would guarantee no WTO penalties against Indian subsidies until a permanent food security deal was concluded.

Resolution of the dispute
In bilateral meetings as prologue to the recent G20 conference in Australia, India and the US reached a compromise that allows developing countries such as India to continue to freely procure and stock grains for the public distribution system even if subsidies resulting from these breach limits under the WTO’s agreement on agriculture (AoA). Some possible reasons for this development are:

1.    In the aftermath of scuppered negotiations, it became apparent that India was struggling to keep a balance between its domestic political obligations and international commitments under the WTO. A major cause of the country's economic vulnerabilities is the high level of fiscal deficits, to which rising subsidies for fuel and food are significant contributors, and which have served to make for successive gloomy economic forecasts.

While the current government had taken steps to reduce subsidies and is likely to continue in this vein, no major changes have yet been announced that serve to assuage the concerns of the WTO or other proponents of the TFA, in either the July budget or otherwise. In this environment, if the government can achieve stronger economic growth that translates into significant reductions in the share of India’s population in poverty, this will then allow food subsidies to be reduced through more targeted food programmes.

2.    There was the matter of the discontent of the other stakeholders in the TFA to be considered, with developed countries complaining that in abstaining from ratification, India was going back on the promises it made at Bali. India maintained throughout that different timelines for various elements of the Bali package were against the WTO rules of a single undertaking where everything needed to be implemented simultaneously, and that its progress on TFA negotiations was been quicker than the WTO’s on food security, but in overview, the government seems to have responded to calls for bargaining positions.

3.    Another potentially explosive development of India’s retraction was that the stature of the WTO as it is now – recognised as a global authority on world trade – would have been compromised to the extent of rendering it redundant in the eyes of member nations; the event of India’s final non-ratification might have resulted in the end of the WTO's role as a negotiating forum for big multilateral agreements.

4.    India non-compliance would have meant that the process of trade facilitation would be pursued at a regional or bilateral level by groups of countries, rather than implementing a global solution. In such a scenario, many countries could be left out of such regional or bilateral solutions, particularly many low-income developing countries which are not part of major trade groupings or too small to be a priority partner for bilateral trade agreements - this to the detriment of the very ideals India was at loggerheads with the WTO for.

5.    The US is now likely to use its support for a permanent peace clause as a one-time cost to get the TFA ratified and block any substantial reform in the AoA framework, which, ironically, aids European Union and US farm subsidies to the detriment of those in the developing world.

Although the logjam over proceeding with the Bali pact is over now, these are early days to predict a smooth run-in for India and other developing economies at the WTO, well perceived to have a bias in favour of developed economies and against developing economies.

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