Many commentators and editorials in Indian newspapers have lamented, rued and regretted the stance of the government of India in World Trade Organization (WTO) negotiations and chided it. Bare Talk strongly believes that India is right to take the stance it has taken. Bare Talk is as appalled as any at the policy continuity of the new government from the previous regime. Commitment to the National Food Security Act and the budget deficit target of the previous government are but two examples. But, those are internal matters of India. Any commitment made in an international negotiation is a binding commitment. It cannot be renegotiated.
Anyone who has a basic understanding of option pricing will know that surrendering a policy option is like throwing away a deep out-of-the-money call option that is unexpired. It carries value. The policy optionality on what to do with India’s food security needs and how to go about meeting those needs should rest with the government of India. It is not to be negotiated away in a multilateral forum. If India is holding up the trade facilitation deal as a quid pro quo for getting its way on the food security matter, that is fine as far as negotiations go. China issued an ultimatum to Britain on its prime minister meeting the Dalai Lama. Britain meekly obliged. Trade policy as much as foreign policy is not about being liked but about growing a spine.
Trade matters a great deal for small, open economies but for large economies, it matters far less. Lesser international trade will hurt them but will not decapitate them. In any case, as Adair Turner has written in a recent column for Project Syndicate, global trade volumes have not only slowed down considerably in recent years but will continue to slow down for a variety of reasons, regardless of whether the Doha round is successfully concluded or not and the trade facilitation agreement is signed or not.
Western economies are still weighed down by debt accumulated before the crisis and after. Their economies are dominated more by services that are not easily tradable. Non-tradable sectors account for a rising share of employment and economic activity. Automation of manufacturing (3D printing) might move manufacturing back to the West without creating jobs. Consequently, the ranks of unemployed or employed with inadequate purchasing power might swell, rendering them unattractive as markets for developing countries. He is unambiguous: “further trade liberalization is bound to be of declining importance to economic growth.”
He correctly notes that progress in international trade negotiations is slow not because of rising trade protectionism but because the low-hanging fruits of trade liberalization have been plucked and that further progress requires complex trade-offs that are no longer offset by large potential benefits. India’s situation is a case in point. India is insisting upon change in the method of calculating the legally permissible subsidy. It cannot be based on prices that prevailed in 1986-88. That India has a badly designed and ultimately counterproductive grain procurement and distribution programme today is no reason to agree to the use of an outdated benchmark price to calculate the nation’s food subsidy. At a future date, even a well-designed food security programme might still fail to comply with the treaty obligation if the reference prices are not updated. The reluctance to do the same raises many unanswered questions on the intent behind keeping the reference price from nearly two decades ago.
Further, the numerical ceiling of the total food subsidy not exceeding 10% of the value of production (calculated at 1986-88 prices) needs to be reviewed. For example, as Professor Timothy Wise of Tufts University pointed out in his piece in December 2013 (Why the WTO needs a hypocrisy clause), the allowed levels of trade distorting support—the Aggregate Measure of Support (AMS)—for the US is about $19 billion. The figure is high because it was set in 1994 based on the then prevailing levels of high trade distorting support for agriculture in the US!
In a speech delivered at the African Development Bank in February 2009, Professor Ha-Joon Chang noted that “until the 17th century, Britain was a backward country dependent on raw wool exports to Low Countries (or what are the Netherlands and Belgium today), so it implemented various schemes to promote ‘import substitution’ in woollen manufacturing”. Based on the average tariff rates on manufactured products, the US was the world’s most protective nation “from about the 1830s until the Second World War except for Russia in the early 20th century”. It was only after the Second World War, with its industrial supremacy unchallenged, that the US liberalized its trade, just as Britain did in the nineteenth century.
Let us continue to strive for an original and smarter food security programme from this government but let us not allow that to blind us to the hypocrisy of the arguments made against India for its stance at the WTO negotiations.
V. Anantha Nageswaran is co-founder of Aavishkaar Venture Fund and Takshashila Institution.
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