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Why the Trade Talks Collapsed

July 7, 2007
Council on Foreign Relations

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The WTO talks among Brazil, India, United States and European Union (EU), known as G-4, collapsed yet again last week in Potsdam, Germany. This was not unexpected in itself. What was surprising, on the other hand, was the spin put out by USTR Susan Schwab, claiming a sympathetic alliance with the lame duck EU Commissioner Peter Mandelson, that the culprits were India and Brazil, with the latter having been bamboozled politically by India.      

The truth of the matter, however, is that the failure to make progress is to be attributed, not to the protectionist unwillingness of these two nations to make concessions, but to the fact that the US itself has been paralyzed by its inability to make progress on the longstanding demands worldwide for the reduction of its (and EU’s) agricultural subsidies. The anger of Ms. Schwab against India and Brazil, when it is her own inability to play, is reminiscent of the anger publicly vented by then-USTR Robert Zoellick against G-20, led by Brazil and India, at Cancun in 2003 for not accepting the negligible US-EU concessions on agriculture.      

With this central fact obscured, concluding the Doha Round will be beyond grasp. With it frontally faced, on the other hand, the key to Doha Round’s success is within our grasp.  

Why G-4 Negotiations are Critical     

To comprehend this clearly, it is necessary to recognize that the Doha Round has now witnessed, through successive meetings in Cancun and Hong Kong, both mischaracterized as “failures”, a substantial progress on several contentious issues. The so-called “Singapore issues”, which included agreements on competition policy and investment which 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 end game was then among the four “big players”: the US, the EU, Brazil and India. They had simultaneously to make the substantive trade-barrier and subsidy concessions which would close the Doha Round, hopefully in draft that would make the renewal of fast-track authority in the US at the end of this month a relatively certain prospect. Bob Geldof complained at the time in The Financial Times that 850 million Africans were not represented at the first G-4 meeting in London. But that missed the point. The African nations had demands that had been taken care of; they did not belong to a party where the players were required to give, not just take.     

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” in agriculture itself.


The US Problem is the Doha Problem     

But the problem is that the USTR, reflecting successful lobbying, has wound up making maximalist demands and minimalist concessions: a situation that is properly unacceptable to India and Brazil.           

Regarding concessions, the US negotiating position is almost pathetic. Just recall that, even as the G-4 talks were in progress at Potsdam, the agriculture subcommittee of the U.S. House of Representatives voted to retain the subsidy portion of the 2002 Farm Bill for another five years. At Potsdam, Ms. Schwab did not budge from her past hard-line position but insisted, even as she could not offer any ready concessions on US agricultural subsidies, that the poorer countries must offer more!

The problem that Ms. Schwab cannot ignore is that it is politically impossible for a democratic developing country such as India to persuade an aroused public opinion that its farmers, often at the margin of subsistence, should  agree to competition from rich-country farmers who are being heavily subsidized. Unless therefore the US, and also the EU, address this issue meaningfully, there is no prospect of movement on Doha. 


Is India the Villain or the Fall Guy?           

Aside from trade liberalization in agriculture, is India also a spoiler, seeking to hold on to protection and refusing to make concessions on manufactures—in jargon, NAMA or non-agricultural market access—and services? Hardly.      

Consider first the unappreciated fact that India is now substantially open on manufactures. With some tariff peaks (just like those in the U.S. and EU), its top applied tariff rate is 10 percent. Customs duty collection as a proportion of merchandise imports was down to 5 percent during the fiscal year 2005-06. While imports can grow despite tariff protection, the huge unilateral tariff reduction since 1991 is reflected in rapid expansion of Indian imports. In recent years alone, imports have expanded at 29 percent annually (in current dollars) from 2002-03 to 2005-06, and the merchandise imports-to-GDP ratio has risen from 10.7 percent in 2001-02 to 18 percent in 2005-06. To take the index of openness embraced by the U.S. Congress, despite economists’ debunking of it, India’s merchandise trade and current accounts have been in deficit during the last three years.      

India’s unilateral trade liberalization, the predominant way in which India has been liberalizing trade since her reforms intensified greatly in 1991, occurs through the budget where the Finance Minister reduced tariffs even as late as this year. The multilateral trade negotiations, on the other hand, have always related to the bound tariffs (and to “rules” such as on anti-dumping where the track record of the US is well-known to be appalling and that of the US Senate, which supported by a big majority the notorious Byrd Amendment that the WTO Appellate Body found WTO-illegal, is even worse). The result has been a very large gap between India’s bound and applied industrial tariffs.  For instance, only 72 percent of India’s industrial tariffs are bound and the simple average of the bound rate is 35 percent.  Brazil exhibits a similar distance between applied and bound rates: the simple average of its two rates is 31 and 13 percent, respectively. Notably, even countries such as Chile and Hong Kong, with extremely low applied tariffs, have significantly higher bound tariffs.     

Quite in disregard of India’s massive unilateral liberalization, Ms. Schwab now insists that India (and Brazil)  cut the bound industrial tariffs sufficiently deeply to bring about substantial cuts in the significantly lower, and low, applied tariffs.  Even excluding the unbound tariff lines, India would then have to cut its bound rates by 65 percent on the average to even begin cutting its applied tariffs on the average. The percentage cuts would have to be even larger if unbound rates are factored in. Brazil faces a similar situation.     

But these US demands for drastic cuts in the bound tariffs on manufactures are particularly resented by India and Brazil. Ministers Kamal Nath and Celso Emorim have argued that the US and EU have expressed no willingness to make matching drastic reductions in the bound subsidy rates in agriculture; indeed, Ms. Schwab has ruled out bringing the US bound rate on agricultural down even to its current applied rate. And the offered reductions in the applied (i.e. actual) subsidy payments are themselves minuscule.   And the tariff cuts in agriculture, currently on the table, are disappointing to, not just India and Brazil, but also for many countries that are agricultural exporters in the world markets.  

What Can be Done?     

So, we have a situation where the giant pothole on the road to Doha is that, unless the US moves to cut its actual agricultural subsidies drastically, there cannot be any movement in the actual tariffs of India and Brazil. Nor, for that matter, can Minister Kamal Nath persuade his people to open Indian agriculture to (heavily subsidized) US farm exports.     

In this situation, it is clear what the USTR should not do. Getting mad at India, and Brazil (and even arguinginsultingly that Brazil is simply toeing the India line), and attacking their bona fides is not going to work. Ms. Schwab, who is known for her Japan-bashing nearly two decades ago, should have learnt that lesson.     

Nor is it credible to scare other nations by saying that the US will not renew fast track authority and will go the bilateral route. The fact is that the US needs fast track to do even bilaterals, except in the case of simple “security-driven” FTAs like with Jordan and Morocco. In the absence of fast track, every other nation will pursue bilaterals—a policy that Mr. Zoellick embraced, regardless of near-universal condemnation from trade scholars—but the US will not be able to. The damage from not renewing fast track will accrue to the US, not to others.     

But what can be done to fill up that pothole? The US finds no political support, from either Party, for reducing agricultural subsidy support. The Democrats are salivating to take the White House; the republicans are traumatized that they will lose it. Neither will risk the farm belt’svote. Therefore, the only political formula that has a chance of working is to, not reduce farm support, but to change its composition from distorting to non-distorting,the latter being what affects trade of course (though James Wolfensohn and his economic advisers, including Joe Stiglitz and his predecessor, encouraged the foolish nonsense that all subsidies were to be attacked if trade was going to be “fair”). This is what the celebrated Fischler-Lamy reform to the European farm policy was all about.      

So, take the estimated 20 billion dollars worth of these distorting subsidies and turn, for example, two-thirds of that into non-distorting ones, de-linked from production and given, for instance, for environmental purposes to farmers. That worked in far more protectionist Europe; let us try it here.      

If that is done, surely Mr. Kamal Nath would be able to pry open more agricultural market access from the Indian farmers, though the expectations must be modest. The current Congress government has its own problems, not on manufactures and on service liberalization (which it has been doing amply and unilaterally) but in agriculture. It believes erroneously that it won the national elections, and the BJP lost them, because agriculture was neglected: there is much evidence that the poor in the rural areas also benefited in big numbers from the reforms since 1991 which included trade liberalization. The Congress also believes that trade liberalization will harm, not help, agriculture. This is almost certainly as wrong as the pre-1991 belief that manufactures trade liberalization would decimate industry: Indian industry has only grown more successful and the voices against liberalization have become steadily muted. But the persistence of these twin beliefs, despite their weakness, will take some time to remove.      

Ms. Schwab therefore needs to cultivate patience, maybe to work out an “understanding” that, after Doha concludes with the Fischler-Lamy type reforms in US subsidies, India will return to the agricultural agenda in the next Round. For, as with earlier Rounds, this cannot be the end of the road. Even in the Uruguay Round where Secretary Clayton Yeutter had started with a ”zero option” vision with total free trade in agriculture, we had settled for simply bringing agriculture more bodily into the WTO; and for tariffication of quantitative barriers rather than an actual reduction in agricultural support. That was progress. Acceptance of what we suggest in order to conclude Doha would also be. 

This article is an unabbreviated 2.000-word version of the article that was published in The Wall Street Journal, July 6-7 by Jagdish Bhagwati, Senior Fellow at the Council on Foreign Relations, and Arvind Panagairiya, Professor of Ecoomics at Columbia University.

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