WTO: One more failure C.P. Chandrasekhar

On July 29, a meeting of ministerial representatives of a large group of members of the World Trade Organisation ended without result. The meeting itself should not have been held in the first place. It was unscheduled, and was convened to clinch a deal on the modalities that should govern the Doha Round of trade negotiations, even though there was no evidence that members were anywhere near agreement in a number of areas that mattered. Ministerials work when countries are near agreement. However, with the terms of the Bush administration and of the WTO Director General Pascal Lamy nearing their end, it was widely believed that the Doha Round, which would have to wait for new leaders with different priorities, would be delayed significantly. Powerful forces were therefore at work to push through a quick deal. What is surprising is that for a little while it appeared that Pascal Lamy, acting on their behalf, may actually succeed.

All that said, the collapse of the talks is no big deal for those working towards an agreement. For years now, an ever increasing number of WTO member countries have at all times being negotiating one or other round of a multilateral trade agreement. These talks move in peculiar stop-go fashion with gradually increasing areas of agreement. When some critical quantum of advance relative to the previous round is realised, a formal agreement is signed and talks on the remaining issues postponed for the future. Along this traverse, periodic failure of negotiations involving representatives at various levels of government is inevitable. However, each time, the effort to avoid failure results in some compromise so that even if the talks fail at that stage, the round itself has “progressed”. This is true of this episode of failure as well, with some progress on issues such as the trade in bananas and duty-free exports to industrial markets for the poorest countries.

The collapse is not a disaster for advocates of trade liberalisation also because the postponement of a “final” agreement in this round of talks does not mean that the actual degree of liberalisation of global trade would be far less than would have been the case if the deal had been clinched. This is because the deal is not all about reducing the actual extent of protection in global trade, but more about legally fixing the maximum degree and the form of protection that a country can resort to in different areas. The actual degree of protection in most cases is way below this “binding” level, because while multilateral trade talks are underway, countries either unilaterally or through bilateral and regional agreements have been liberalising their trade regime far more than required by the maximum protection they are legally committed to or are committing themselves to at the WTO.

The point to note is that the so-called progress in trade liberalisation notwithstanding, the fundamental asymmetry of the world trading system remains. It is reflected, on the one hand, in the protection afforded by the huge subsidies paid out by the US and the EU to their agricultural sectors and the non-tariff barriers periodically resorted to by them in other sectors where their competitiveness is under challenge.  On the other, it is seen in the pressure on the developing countries to open up their markets for manufacturing by relaxing regulations relating to Non-Agricultural Market Access (NAMA) and subjecting their farming sector to competition from imports, even though agriculture is a far more important source of livelihood in these countries than is the protected agricultural sector for the developed economies.

This feature of the system makes it difficult to keep developing countries at the table in the ever on-going negotiations. Many strategies have been adopted for the purpose. The asymmetry has been sought to be concealed. Inequality in power relations between the developed and the developing has been used to “cajole” the developing countries into being part of the process. Differences between developing countries with varying levels of development and differing economic characteristics are used to force them to negotiate, by pitting one group of developing countries against another. Finally, in a move to sidestep the demand that arose in the wake of the Uruguay Round that issues arising from the implementation of that agreement, including the non-realisation of benefits promised to the developing countries, should be considered first before launching on a new round, the developed countries agreed to declare the round that was indeed launched at Doha a Development Round.

The duplicity implicit in all this is visible in recent developments as well. To lend credibility to his decision to call for an unscheduled ministerial meet to push through an agreement, Pascal Lamy released drafts of agreements, with significant sections left bracketed or incomplete, in two contentious areas—agriculture and non-agricultural market access. These drafts had all elements that reproduce the asymmetry in trade relations.

Consider agriculture for example. There are two means through which support for agriculture in the developed countries is sustained through the ongoing process of make-believe liberalisation. The first is to maintain the focus on Overall Trade-Distorting Domestic Support (OTDS), with reductions in maximum possible support always kept above the actual level of support provided. The second is to shift the structure of support in favour of the so-called “Green Box” provisions that constitute permissible support.

In the many “concessions” offered by the US and Europe in the run up to the July ministerial, they promised to reduce the permissible OTDS by 70 and 80 per cent respectively. In the case of the US, this would have meant that the currently permitted OTDS of $48 billion would be reduced to $14.5 billion. What needs to be noted however is that at the prevailing agricultural prices, which influence the levels of support provided to farmers, the actual or applied OTDS level in the US stood at $ 7 billion in 1996-97, rose to $19 billion in 2005 and fell to $11 billion in 2006 and $8 billion in 2007. Rarely has the US had to give its heavily subsidised farmers even the $14. 5 billion it can provide if its current offer is included in an agreement.

In the case of the EU, the currently permitted OTDS of Euro 110 billion was slated to fall to Euro 22 billion. This compares with an estimated actual support of Euro 28 billion in 2008 and Euro 12 billion by the time the ongoing reform of the Common Agricultural Policy is completed in 2014. Here too, what is on offer is a ceiling on OTDS that is way above what the EU intends to actually provide its farmers in the coming years. In any case, all this relates to what is considered “trade-distorting” support. Over time the developed countries have shifted their support to farmers away from what are considered trade-distorting measures in favour of payments ostensibly “decoupled” from production and therefore considered non-trade distorting. The demand that these payments should be investigated and the huge support provided in the form of Green Box payments made more transparent and trimmed has not been accepted.

The real intent of the US at least comes through from the Farm Bill voted into law by the US Congress on May 22, a few weeks before the July ministerial. The bill authorizes spending of up to $307 billion over five fiscal years starting October 1, 2008, a significant part of which is available as to support farmers. As an analysis of the Bill by the Institute for Agricultural Trade and Policy put it: “Nothing in the 2008 legislation changes the basic structure of U.S. support, which will rise and fall in reaction to world prices. And the WTO rules are also fundamentally unchanged by the Doha proposals. These latest developments are yet another reminder of the urgent need to re-think agriculture trade policy, both in the U.S. and around the world.”

Meanwhile, the developing countries which expected significant concessions for their agricultural sectors in the form of “special products” and “special safeguard mechanisms” (SSMs) are being pressured into reducing their right to protect their farming sector when circumstances require. In the agriculture draft, tariffs above 130 per cent are required to be cut by between 44 and 49 per cent and those below 30 per cent by 33 per cent, with cuts within that range for duties that currently rule at between 30 and 130 per cent. This takes the average tariff cut for developing country agriculture to 36 per cent, which is much higher than what was required under the Uruguay Round.

Further, special concessions have been limited significantly. Special products are those which are important from the point of view of food security and farmers’ livelihoods, and developing countries originally wanted the right to self-designate up to 20 per cent of tariff lines under this category. These commodities would receive higher protection, with no tariff reduction commitments required in at least half of them and the rest requiring at most minimal tariff cuts.

The Lamy draft has substantially trimmed the concession that would be available under this head. It specifies that only 12 per cent of tariff lines can be special products, with 5 per cent permitted zero tariff reduction, subject to the requirement that group as a whole will be subject to an average tariff reduction of 11per cent. This implies that if a country chooses 5 per cent of tariff lines where the duty reduction is zero, duty rates in the other 7 per cent of tariff lines have to be cut by 19 per cent, so as to realise the average cut of 11per cent for the 12 per cent of tariff lines designated as SPs.

The issue which is supposed to have broken this round of talks was reportedly the SSMs, or safeguards against a sudden surge in imports. If imports of a product exceeds some 10 per cent or more of the average imports over the previous three years, the mechanism allows developing countries to raise tariffs by differing degrees depending on the size of the surge. The difficulty would be that this may require the country to impose a tariff in excess of the maximum (bound) rate of tariff permitted under its commitments under the Uruguay Round. Negotiations around the Lamy draft led to the demand that developing countries should do this only if imports equal or exceed 40 per cent of average imports during the three preceding years. Developing countries including India and China objected to this on the ground that a 40 per cent import surge would be adequate to destroy the livelihoods of a large number of farmers. Acting then would not serve the purpose the SSM is to be set up for. The US and other developed countries claim that the refusal of China and India to climb down on this issue broke the talks.

There are many who think this was too small an issue to explain the collapse and there were many other issues, including the subsidies provided by the US to its cotton growers with adverse consequences for African exports, which were far more contentious. In their view, the US chose to use this issue to sabotage the talks before it was forced to declare its position in areas like cotton that had been kept for a later stage in the talks.

That is, SSMs were chosen as the deal breaker because they involved disagreement with countries like China and India which are seen as not deserving too much by way of special concessions given their high growth in recent years. On the other hand, the US was saved the embarrassment of not offering adequate concessions to the much poorer African developing countries. The fact of the matter is that there were a large number of developing countries who were behind China and India on this issue.

But India and China are themselves partly responsible for being the target of attack. They were susceptible to an attack of this kind because they, along with Brazil, decided to negotiate separately with the US and EU, acting ostensibly on behalf of other developing countries. According to reports, although some 40 ministers were invited to the talks, most of the negotiations were conducted by only seven ministers (from the United States, European Commission, India, Brazil, China, Australia and Japan), besides Pascal Lamy himself. In practice the other developing countries had no idea of how and where the talks were heading. This desire to cut a deal with the developed by distancing themselves from the other developing countries, besides contributing to the undemocratic nature of trade negotiations, makes these countries culpable when it comes to accounting for the inequality of the multilateral trading system.