The negotiations to map out the next round of global trade liberalization have been put on hold—once again.
Last week, in the German town of Potsdam, deliberations among the G4 (the US, the European Union, Brazil and India), collapsed acrimoniously. The G4 cover almost the entire gamut of global trade issues and the meeting among them was considered to be the first step towards hammering out a trade deal.
Now, any fresh impetus from another quarter is unlikely. A lot was at stake in Potsdam, especially for those who, like this newspaper, believe that the world economy needs more trade openness to sustain growth and poverty reduction. Officially, however, there are still a few weeks to go before the secretariat of the World Trade Organization (WTO) calls it quits.
The talks collapsed because the US refused to cut back its farm subsidies, while Brazil and India declined to concede significant tariff cuts on manufacturing imports. India also disappointed the US, in particular, by refusing to accept the desired cuts in tariffs on the import of farm products.
It is clear that this outcome was inevitable.
Trade negotiators erred fundamentally, getting into the meetings with unrealistic expectations. Since the launch of the Doha trade round in 2001, there have been substantive changes in global political economy. China has emerged as a key economic entity. And India’s emergence, powered by 9% plus growth, has reaffirmed that Asia is slowly emerging as the new economic nerve centre of the world.
Also, the past six years have witnessed a gradual erosion in the US’ ability to steward global summits, due largely to the botched Iraq war, a decelerating economy and the declining political fortunes of President George W. Bush.
In addition, member countries had to keep their domestic political constituencies in mind while striking a deal, forcing them to approach the discussions defensively.
A reduction in tariffs of manufactured products exposes developing countries to cheap imports from China. Similarly, drawing down farm subsidies exposes the US farmer, a strong political constituency, to cheaper imports from the European Union and a raft of developing countries.
Against this backdrop, it is not surprising that hopes for a multilateral trade deal, where the stakes were so high, have all but vanished. The downside will be a big blow to a freer global regime for trade in merchandise. The biggest sufferers, ironically, will be developing countries. Trade data released by WTO reveals that the 8% growth in global merchandise trade in 2006 was powered by a 30% growth in the share of the least developing economies—largely because of surges in oil prices and some primary commodities. It will also put on hold the massive overhaul of trade rules that would have otherwise reduced transaction costs substantially and, by extension, the retail cost of goods.
From India’s perspective, it is apparent that like other developing countries, it too will suffer on account of a more restrictive global trading regime, especially at a time when it has begun to realize its own economic potential. But this, in a way, is a boon. By playing spoilsport, India has bought itself some time—at least three years, by one estimate—to put its own house in order.
India should use the intervening period to begin sorting out the structural crisis in Indian agriculture. Successive regimes have bypassed the problem by refusing to accept its existence.
To its credit, the United Progressive Alliance (UPA) has so far made all the right noises. But it will require enormous political will, courage and significant fiscal resources to effect a turnaround. This is the moment for the UPA to write its legacy. It has to seize the moment.
Will it accept the challenge?
What will the collapse of the trade talks mean for India? Write to us at email@example.com