Why the trade talks collapsed

Why the trade talks collapsed
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First Published: Tue, Jul 10 2007. 12 30 AM IST
Updated: Tue, Jul 10 2007. 12 30 AM IST
The WTO talks between the G-4 nations—Brazil, India, the US and the EU—have collapsed yet again. The only surprising twist was that US Trade Representative (USTR) Susan Schwab put the blame primarily on India and secondarily on Brazil.
In truth, the breakdown of the Doha Round in Potsdam, Germany, had less to do with India and Brazil’s protectionism than with the US’ paralyzing inability to respond to long-standing demands for the reduction of its (and the EU’s) agricultural subsidies. Until we confront this central fact, success will remain beyond our grasp.
The good news is that the Doha Round has already made substantial progress on other contentious issues, such as poor nations’ easier access to generic drugs and the least-developed countries’ virtually free-market access without duties and restrictions. With this, the endgame came down to the four “big players”: the US, the EU, Brazil and India.
In return for concessions it needed to make on agriculture, where its barriers and subsidies were huge, the EU wanted reciprocal concessions in manufactures and services. The US, with its strong farm lobby, could not permit meaningful reduction in its substantial subsidies simply in exchange for concessions in manufactures and services; it sought “sectoral reciprocity” in agriculture itself. It’s not hard to see why the situation was unacceptable to India and Brazil. At Potsdam, Schwab refused to offer any real concessions on farm subsidies, while insisting that the poorer countries offer more.
Schwab cannot ignore that it is politically impossible for India to persuade the public that its farmers, often at the margin of subsistence, should agree to competition from rich-country, heavily subsidized farmers. Further, India is hardly a protectionist spoiler refusing concessions on manufactures and services.
It is an unappreciated fact that India is now substantially open on manufactures. With some tariff peaks (as in the US and EU), its top applied (actual) tariff rate is 10%. Customs duty collection as a proportion of merchandise imports was down to 5% in the fiscal 2005-06. Tariff reductions since 1991 have helped imports expand at 29% annually (in current dollars) from 2002 to 2006, and the merchandise imports-to-GDP ratio has risen to 18% in 2005-06 from 10.7% in 2001-02.
Since 1991, India’s budget has driven unilateral trade liberalization—the finance minister used it to reduce tariffs again this year. Even as Doha was being negotiated, India’s top industrial tariff rate came down to 10% in 2007 from 38.5% in 2001.
The result has been a large gap between its bound tariffs and those actually applied for manufactures, which are lower. For instance, the simple average of the bound rates is 35%. Brazil exhibits a similar gap.
Yet, Schwab insists that India (and Brazil) cut these bound rates deeply enough to bring about substantial cuts in the far lower actual tariffs. As there are many unbound tariff items, India would have to cut its average (for all import categories) bound rates by an extraordinary 65% to even begin cutting its applied rates on the average. Brazil faces a similar situation. Unless the US moves to cut its actual farm subsidies drastically, India and Brazil’s actual industrial tariffs can’t move, nor can commerce minister Kamal Nath persuade his people to open agriculture to (heavily subsidized) US farm exports.
It is clear what the USTR should not do. Getting mad at India and Brazil is not going to work. Nor is it credible to scare other nations by saying that the US will not renew fast track and will go the bilateral route. The US most of all needs fast track (or “trade promotion authority”) to do even bilaterals, except in the case of simple “security-driven” Free Trade Agreements such as Jordan and Morocco. In the absence of fast track, all other nations will pursue bilaterals, but the US won’t be able to.
Instead of scapegoating and bluster, Schwab can help. Her problem is the lack of political support—the Democrats are salivating to take the White House; the Republicans are terrified they will lose it. Neither will risk the farm belt’s vote. There is one politically viable solution: Take the estimated $20 billion worth of these production-distorting subsidies and turn, for example, two-thirds into non-distorting ones —unlinked from production levels and given instead, for instance, to farmers for environmental purposes. That worked in far more protectionist Europe. Nath should then be able to pry open India’s agricultural market. But the expectations must be modest. The Congress-led government believes it won the election because the previous government neglected farmers and that trade liberalization will harm agriculture. These beliefs, both exaggerated and even erroneous, will take time to overturn.
Schwab needs to be patient, and perhaps accept that, while the Doha Round should conclude with significant reforms in US subsidies, India will return to the farm agenda in the next round. In the Uruguay Round, the poor countries settled for almost no changes in the level of US and EU agricultural protectionism. Now, the US needs to do the same with India. Doha is not the endgame.
(Edited excerpts from The Wall Street Journal Jagdish Bhagwati is professor of economics and law, and Arvind Panagariya is professor of Indian political economy at Columbia University. Comment at theirview@livemint.com)
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First Published: Tue, Jul 10 2007. 12 30 AM IST
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