When the Potsdam talks among the G-4—the US, the European Union, India and Brazil—on Doha collapsed last month, US Trade Representative (USTR), Susan Schwab, squarely laid the blame on India as the villain of the piece. She did have the smarts to say that Brazil also had been a problem: but Brazil was alleged to have been bamboozled by India, and was at most an accessory to the crime.
On the public relations front, however, Schwab may have gained a march over Kamal Nath, India’s most capable minister. She had been bad-mouthing India worldwide for months. Many academics, politicians and media were busy repeating her allegations that India was offering no concessions and was the protectionist. To them, the scape-goating of India when Potsdam failed was vindication of this blitz. By arriving late for the important Potsdam talks and leaving early, Minister Nath may have unwittingly provided legitimacy to USTR propaganda, by making India look unreasonable and uninterested in Doha.
The truth of the matter, however, is that it is not the protectionism of India and Brazil that is holding up Doha; rather it is the agricultural support that the US (and the EU) cannot relinquish. To understand this clearly, it is important to remember that, contrary to the popular view, the Doha Round made substantial progress at successive meetings at Cancun in 2003 and Hong Kong in 2005 and that the G-4 negotiations are the endgame.
The “Singapore issues”, which included legitimate proposals on competition policy and investment but were strongly opposed by some developing nations and most NGOs, were abandoned by Pascal Lamy, then the EU trade commissioner, at Cancun. The demand to have export subsidies in agriculture proscribed was agreed to at Hong Kong. So were demands, first at Cancun and then more fully at Hong Kong, for the availability of easier access to generics by the poor nations. The demands of the least developed countries to have virtually free market access without duties and restrictions were also conceded at Hong Kong pretty much by the US and Japan, as earlier by the EU in its Everything but Arms initiative: not all was granted but nearly all was.
With many contentious issues settled or taken off the table, and many players placated, the endgame was then among the four “big players”: the US, the EU, Brazil and India. Each had to make substantive trade-barrier and subsidy concessions which would close the Doha Round.
The essential outlines of the deal among the G-4 were clear. The EU had to give on agriculture where its barriers and subsidies were huge. With negligible comparative advantage in agriculture, it did not seek concessions in this sector from India and Brazil, but rather wanted reciprocal concessions in manufactures and services. The problem with the US was that it had a strong farm lobby that would not permit meaningful reduction in the substantial US subsidies simply in exchange for concessions in manufactures and services; it sought “sectoral reciprocity” within agriculture itself.
But the problem is that the USTR, reflecting successful lobbying, has wound up making maximalist demands and minimalist concessions: a situation that is unacceptable to India and Brazil. Regarding concessions, the US negotiating position is almost pathetic. Even as the G-4 talks were in progress at Potsdam, the agriculture subcommittee of the US House of Representatives voted to retain the subsidy portion of the 2002 Farm Bill for another five years. At Potsdam, Schwab did not budge from her past hard-line position but insisted, even as she could not offer any real concessions on US agricultural subsidies, that the poorer countries must offer more. India had to offer market access in agriculture even as the US offered little of her own!
Her position that India is protectionist in manufactures and is not offering concessions also did not take into account the fact that India has unilaterally liberalised her import tariffs significantly, even as Doha has been negotiated since 2001. Nor does she give credit to India for continued opening up of India’s market to services.
Schwab is, in fact, caught in the middle of the US politics. With the Democrats salivating to seize power in the 2008 Presidential election, and Republicans fearful of losing the White House, neither party is willing to risk the farm vote. But then Nath has his own political problem that he cannot ask Indian peasants, many on the margin of subsistence, to compete with hugely-subsidised farmers in the rich countries. So, we have a logjam; but the logs have come down principally from Washington (and Brussels).
But Nath needs to work hard to ensure that India can itself move if the US agricultural protectionism can be dented by shifting the subsidies from those that distort production and hence matter to other nations such as ours, to ones that are not so distorting and hence should not be a matter of concern to foreign nations. A recent proposal by me and Arvind Panagariya is that the US would maintain its overall subsidies but change their composition thus.
But if this is done, surely India should be ready to move and offer some market access. Unfortunately, thanks to what trade scholars call the Wolfensohn-Stiglitz-Oxfam fallacy, many in India seem to have swallowed the ridiculous line that the US and the EU agricultural subsidies which affect us are of the order of $1 billion a day!
The distorting subsidy payments in the US last year were roughly $11 billion by contrast; and the overall distorting support, after reforms in the EU (known as the Fischler-Lamy reforms), was less than a third of the $360 billion claimed by these ignoramuses. The problem is therefore far more manageable than what is claimed and feared. Nath needs to appreciate the smaller role of distorting subsidies today in the US and the EU, just as Schwab needs to recognise our massive unilateral liberalisation in manufactures.
But the notion that India needs agricultural protection for Indian agriculture to prosper is itself an assumption that Nath needs to challenge. Why should agriculture be devastated with trade liberalisation? We felt the same about Indian manufactures, long mollycoddled, when the tariff reforms began in earnest in 1991. Today, Indian industry is flexing its muscle like Popeye.
Most of all, the Indian Government has its work cut out for itself, fighting a rearguard movement from the populist Left. As it happens, poverty has declined for the first time in spades after the ‘neoliberal’ reforms, including trade liberalisation, since 1991. Polls taken by the political scientists Al Stepan and Yogendra Yadav recently show that a majority of Indian poor claim that their lives have improved “in the last five years”. Poverty reduction has created a Revolution of Perceived Possibilities; the poor want more. That often leads to difficulties for political incumbents who cannot deliver; it also leads at times to discord.
But that is surely good, not bad. It is also a reason to have more reforms, not less. The populists are stuck in the past; we need to embrace the future.
This article appears in full on CFR.org by permission of its original publisher. It was originally available here.