Tokyo Mini-Ministerial: No takers for free trade C.P. Chandrasekhar

The message from the WTO mini-ministerial at Tokyo (February 14-16) is clear. There are no takers for free trade in the international system. In the second of the series of “informal” mini-ministerial meetings being convened to forge an as-yet elusive consensus on the framework for the Doha Round of world trade talks, the selected 22 participating countries (out of 25 who were invited) could not agree on any issue of significance.

The challenge for the Doha Round we must recall lies in the new issues that have been taken on board, including the four Singapore issues – namely investment, competition policy, transparency in public procurement and trade facilitation. But even before discussion on these could begin, the “select” invitees were bogged down with the problem of clinching a deal on many old issues, principally agriculture and trade related intellectual property rights (TRIPs).

The principal stumbling block is agriculture. Stuart Harbinson, the chairman of WTO’s agricultural negotiations working group set up to draft the “modalities”, including the numerical targets and formulae, in terms of which countries can frame their liberalization commitments, released his draft report well ahead of a March 31 deadline and just prior to the Tokyo meet. The report has indeed made far reaching recommendations.

On agricultural tariffs, it separates commodities into three categories: those with ad valorem tariffs, greater than 90 per cent, between 15 and 90 per cent and below 15 per cent. In the case of the developed countries the report proposes that the simple average tariff reduction rate for these groups should be 60, 50 and 40 per cent respectively, and the minimum reduction per tariff line should be 45, 35 and 25 per cent. Thus, the higher is the currently prevailing tariff, the greater would be the proportionate reduction commitment.

The report also proposes that domestic support in the form of Blue Box payments or direct payments under production-limiting programmes, liberally resorted to by the European Union, be reduced by 50% over five years. Further, aggregate support, including input and price subsidies, are to be reduced by 60 per cent over a similar period and export subsidies are to be completely phased through a two-step process: those accounting for 50 per cent of budgetary outlays are to go at the end of six years and the rest at the end of nine years.

What the Harbinson report does not do is propose a reduction of Green Box payments, or fixed payments made to farmers independent of their production levels, which were defined during the Uruguay Round process as being non-trade distorting. This has been a demand of some developing countries and critics of the Uruguay Round Agreement on Agriculture. In practice, these payments too affect the level of production and, therefore, the volume of world supplies and world prices. By ignoring these payments, the draft does not fundamentally go against government protection for farmers in developed countries at the expense of “freer” world trade. What it does do is make the case for adopting the US route of migrating from conventional subsidies to Green Box payments in all countries, including those in the EU.

The problem here is that the migration from conventional support, including Blue Box payments, to Green Box payments, is far easier in land-abundant countries or land-surplus countries, like the US and parts of Latin America, than in land short countries, like the EU nations and Japan. In-land abundant countries, implicit or explicit rents are lower, and farmers do not have to extend cultivation into far less fertile tracts to maintain a reasonable level of production. Since costs would rise as less fertile land is broken into, such production levels also tend to be justified by unsubsidized market prices of inputs and outputs. As a result, a given Green Box-style fixed payment can go a long way in sustaining farm incomes. And the US does provide huge direct support payments especially to large farms.

In land-short countries, however, explicit or implicit rents are much higher and costs of cultivation rise much faster as farmers extend cultivation into less fertile, marginal lands. If in such a situation, subsidies and Blue Box payments are withdrawn and substituted with a fixed direct income payment, the effect on production is likely to be much larger, resulting in employment and income losses for farmers and a substantially increased penetration of imported agricultural commodities. It is possibly this factor which constrains the process of migration to Green Box payments in the EU and Japan. If in addition to forcing the pace of such migration, export subsidies are to be done away with, farmers from land short countries, especially the EU nations, would be deprived of any access to the large market for agricultural exports, increasing their income losses.

Not surprisingly, responses to the Harbinson proposals have differed widely even within the developed country camp. The US trade representative’s office was quick to welcome the draft, expressing its appreciation of the call for elimination of export subsidies and going on to say that deeper cuts were needed in tariffs and trade-distorting domestic subsidies that would narrow wide disparities between WTO members.

Japan agriculture minister, Tadamori Oshima, on the other hand declared that the draft was “too ambitious”, and that the proposed import tariff reductions were “not acceptable”. In his view: “If this plan is implemented it would be devastating to Japanese farming.” Franz Fischler, the EU agriculture commissioner, argued that the draft favoured exporting countries and distributed the pain unequally. Pushing the point that the draft favoured the US as compared with other countries, he denounced the proposals as “unbalanced”, since it unfairly sought to crack down on export subsidies while being much more lenient on other forms of farm support. He was also not too happy about the draft’s effort to extend special and differential treatment to developing countries. While conceding, that industrialised countries had to “give more chances” to agricultural imports from developing countries, he went on to say: “if you look at the paper, everything will be required of us and nothing of the others.”

The fact of the matter is that the Harbinson draft, while recognising the special problems of developing countries leaves untouched their demands for (i) the reduction and elimination of Green Box support, which they are financially in no position to match; (ii) freedom to impose countervailing import duties to match the huge subsidies provided by the OECD countries to their farmers and reduce imports; (iii) greater freedom to protect domestic production of strategic crops that are crucial to food security and the livelihoods of poor farmers; and (iv) more viable special and differential treatment measures.
Developing countries need to ensure greater unity not just to make sure that, if and when a deal is struck on agricultural issues, their requirements are addressed more fully than has been done in the Harbinson text. But their problems do not end there. They would have a much more difficult time when it comes to other areas, including industrial tariffs, TRIPs and the new “Singapore issues”. This was clear from the fact that the US, which was presenting itself as the champion of free trade in agriculture (even while exploiting to the full the potential of Green Box payments), refused to give in on the crucial issue of developing-country access to cheaper, life-saving patented medicines when confronted with medical emergencies.

At Doha it was recognised that WTO provisions on intellectual property needed to be amended and poor countries should be allowed to access cheaper generic versions of expensive patented medicines in order to deal with public health emergencies resulting from epidemics such as HIV-AIDS, TB and Malaria. To that end, countries were to be provided the right to resort to compulsory licensing of the drugs concerned. But, ambiguity remained on the question of defining a medical emergency and on whether a poor country without adequate manufacturing capability can obtain a compulsory licence to have the drug produced in and imported from another country with the appropriate drug manufacturing capacity.

A final decision on these matters was to be arrived at by a December 2002 deadline, which was missed because the US government succumbed to pressures from its domestic pharmaceutical industry, which claims that the provision could be misused and lead to “drug piracy”. Critics have long argued that the case for patent protection on the grounds of encouraging investment in research and development and ensuring technical progress has been much overdone. To start with, R&D investments are one among many forms of sunk costs that an entrepreneur taking a risk to make a profit has to undertake. If a poor farmer incurring the sunk cost of investing in land development is not to be protected, but forced to compete in a liberal trade environment where prices are volatile, the case to protect R&D investments by large multinationals, which can spend large amounts on marketing and distribution, from “imitative” competition, is that much weaker. If in addition such protection is to be granted for 15 to 20 years, despite the fact that rapid technical change has reduced the economic life of most product innovations, it can hardly be justified within the framework of free trade that the WTO espouses.

However, having won the concessions for its pharmaceutical industry, which is molly-coddled as much as the US farmer, the US government is not willing to step back even in the humanitarian circumstances that a medical emergency involves. As a concession to the US, Perez Motta, Mexico’s WTO envoy and chairman of the medicines talks, has proposed a compromise which avoids designating specific diseases and instead limits the compulsory licensing “concession” to circumstances that are in the nature of “national emergencies or other circumstances of extreme urgency”. But this not good enough for the US, which has also not welcomed a proposal from Brazil made at Tokyo on the manufacturing capacity issue. The proposal suggests that the World Health Organisation should be designated as the agency which would decide whether poor countries had adequate manufacturing capacity to manufacture life-saving generic drugs themselves when confronted with public health crises. Only if they were found lacking in such capacity would they be permitted to import cheaper versions of imitation drugs from more advanced developing countries with pharmaceutical sectors, such as Brazil, India or Thailand.

Though the EU, with its own contingent of large pharmaceutical producers, has welcomed the Brazilian proposal as a step forward in solving the “confidence gap”, the US has chosen to ignore the proposal for the time being. In sum, there is no agreement among the rich countries on freeing trade, on relaxing irrational patent protection mandated by the Uruguay Round, or on accommodating the special needs of the developing countries. To give the Tokyo meet some substance, ministers expressed satisfaction that the Harbinson draft is serving as a “catalyst” for debate.

This is not to say that the Tokyo meeting is without significance. Like its predecessor at Sydney, the Tokyo meeting made clear that there is little democracy in the process through which the shape of the international system is being forged. Tokyo was another example of the “informal meetings” that have become the staple of international trade negotiations since the Uruguay Round. During that Round, “consensus” was built by first getting a selected set of relatively “influential” members to agree on a minimum agenda. Having arrived at that consensus, the other WTO members, especially the smaller countries from Africa, Asia and Latin America, were forced to accept that programme at the infamous “green room meetings”, in which negotiators deprived of their aides were huddled together in long drawn out sessions and tired into submission. There were 25 selected countries out of a total of 145 WTO members invited to Tokyo, of which 22 attended. There is to be a similar meeting at New Delhi in March. And in all probability as the “Doha process” rolls on, there would be even smaller meetings, including special summits between US and EU negotiators, such as the one at which the Blair House accord on Blue Box measures and the Peace Clause was worked out during the Uruguay Round. The real losers in that game would be the poorest developing countries.

It is just not that there are no takers for free trade among those claiming to be working towards institutionalizing a freer trade regime. There is little hope of a fair deal for the developing countries either.