The Diktats in the WTO

In examining the case of India, which is being pressured by major developed countries to "disinvoke" its BOP rights under GATT, the author attempts to portray the iniquitous position that India would be placed in if it removes all its import controls in 2-3 years, especially in the agriculture and textile sectors, while these countries continue to retain high tariffs in these sectors.

by Bhagirath Lal Das

THE proposals put forth by India in the WTO for a phased programme of eliminating its import restrictions have been rejected by major industrialized countries. Some of them have given indications that they would be raising a dispute in the WTO on this issue. Several developing countries, including Brazil, Egypt, Sri Lanka, Pakistan, Peru and Nigeria, supported the position of India, but the Balance of Payment (BOP) Committee of the WTO could not arrive at a consensus because of the tough opposing stand taken by some industrialized countries. Now the matter will be considered by a higher WTO body, the General Council, but the issue is unlikely to be resolved even there.

If any country raises a formal dispute in the WTO, a panel of experts will be formed to examine the issues. The findings of this panel could go either way. If it sustains the position of India, nothing more need be done. If however, its findings are against India, corrective actions will have to be taken by India. The time-frame in the dispute settlement process in the WTO is such that nearly thirty months' time may be available for full implementation of the recommendations of the panel after the formal initiation of the dispute settlement process.

This issue relates to the provision in GATT which enables a developing country to impose quantitative restrictions on imports if it faces balance of payment (BOP) problems. In fact, both developed and developing countries have this discretion under two different provisions of GATT. The developed countries are generally at such a stage of development that they do not need this dispensation, and as such they have given it up, though in the past several of them had been using this provision. Most of the developing countries, however, face BOP problems from time to time and they need the discretion to impose restrictions on imports. But over the last decade, major industrialized countries have prevailed upon a large number of developing countries to "disinvoke" this provision of GATT, meaning thereby that they commit not to use this provision. Intense pressures were mounted to ensure a disclaimer by developing countries of a legally permissible discretion. India is among a very few countries which have resisted the pressure so far. And now it is being caught in another net, viz., in the elucidation of the criteria as to whether or not it suffers from a BOP problem at present.

The IMF's conclusion

The IMF has said that India has US$22.5 billion in its reserves of foreign currency, which should take care of about six months' of imports, and on that basis it has concluded that India does not face any BOP problem. The developed countries have based their demands on this conclusion of the IMF. The case of India is such that adequacy of foreign exchange has to be judged by a country in the context of its development needs and programmes and not on the basis of historical trends of past imports. India's officials have further argued very rationally and forcefully in the WTO in Geneva that these reserves include even such components which are in their very nature extremely fragile, for example, short-term deposits and investment in the share market. In fact, these components can hardly be depended upon for financing lavish imports or for borrowing in the international markets.

After all, it is well known that these supposedly comfortable foreign exchange reserves of India have not yet motivated the international credit rating agencies to upgrade India's rating for foreign borrowing. It is ironical that India has been put to a double-edged handicap in the sense that its credit rating is low partly because of the uncertain nature of its reserves, and at the same time, it is being called upon to dismantle its import controls because of these reserves.

What is however, much more ironical is the hypocrisy of the major industrialized countries in making this demand on India. Let us suppose for a moment that India yields to their pressure and eliminates all its import restrictions in 2 to 3 years, that is, by the year 2000. Thereafter, let us see what would be the import restrictions in these very countries at that time in some important sectors like agriculture and textiles where they would like to see India eliminate its barriers on a priority basis.

North's agriculture and textile sectors

In agriculture, most of these countries have had a long tradition of import controls of various sorts. The Uruguay Round agreement has required them to dismantle all these barriers and convert them into equivalent tariffs (custom duties). Most of these countries have used this provision to convert their import controls into very high equivalent tariffs. For example, the tariffs in the US on sugar, peanuts and milk are respectively, 244%, 174% and 83%; in the European Union those on beef, wheat and sheep meat are respectively, 213%, 168% and 144%; in Japan, the tariffs on wheat, wheat and barley products are respectively, 388%, 352% and 361%; and in Canada, those on butter, cheese and eggs are respectively, 360%, 289% and 236%. These twelve country-product combinations are only some of the examples of high tariffs in the important industrialized countries in the agriculture sector.

The obligation on them is to reduce these tariffs by 36% by the year 2000. Hence, they will be having almost two-thirds of these tariff levels still left at that time. It is, of course, obvious that these tariffs are so high that any import is almost impossible, and to that extent they act as a near total ban on imports.

India did not convert its import restraints into equivalent tariffs at that time in the belief that it had the protection of the BOP provisions and it would continue to have these restraints. Now, if India succumbs to the pressures of these countries and eliminates its import controls in the agricultural sector within 2 to 3 years, the unimaginably iniquitous and irrational situation will be that India's markets will be totally free for import of the agricultural products in the year 2000, while the markets of major developed countries will continue to remain effectively protected in these product lines.

This gross inequity is compounded by the agreement on textiles, and further developments in that field. In this sector, major industrialized countries maintain comparatively high tariffs (nearly 15 to 25%) in relation to their average tariffs on industrial products (nearly 4 to 5%). But what is particularly unfair is that these countries have been maintaining high barriers to limit the imports from developing countries effectively under a special arrangement called the Multi-Fibre Arrangement (MFA), which was a special dispensation given to them in derogation of normal GATT rules and which continued for over 25 years. Though the MFA is now technically over, the restrictions continue.

The Uruguay Round agreement required the developed countries to bring 16% of their textile products under normal GATT rules by 1 January 1995 and another 17% by 1 January 1998. The choice of the specific products was left to them. In reality, what they did in 1995 was to choose only those items for inclusion in the normal rules which had not been put under restraint in the MFA. The apprehension is that a similar trick may be used also in 1998. The inclusion of a very long list of items in the agreement, both restricted and unrestricted, has enabled them to select the products in such a manner that they fulfil the commitment technically, and yet do not liberalize their imports at all. In reality it has been a big fraud.

India's spirit of compromise

Now, if India removes all its import restraints on textile products in 2 to 3 years, the result will be that its markets will be totally free for the import of textile products in the year 2000, whereas the markets of major developed countries will continue to remain severely protected in this sector at that time.

In this background it is extremely unfair to ask India to eliminate its import control measures in 2 to 3 years and not to agree to its proposal for a phased programme of doing so in 7 years. One may be right in suspecting that matters concerning more than trade are involved.

It will not be correct to yield to pressures; as the pressures never end. It will be almost impossible to please the major trading partners by the process of yielding to threats. India has shown enough flexibility in its position. Its initial proposal of a 9-year phase-out programme was itself very brave in the context of its domestic situation. In a spirit of compromise, it was prepared to reduce the period to 7 years. And finally, it appears that it might have perhaps thought of accommodating the trading partners by agreeing to a 5-year phase-out as a last attempt. But this spirit of compromise did not move the major industrialized countries.

If the matter is actually taken to the dispute settlement process, as it seems to have been threatened, this process should be gone through. Any liberalization should then be done only as an implementation of the possible recommendation of the panel; because any unilateral elimination of import control in that situation may not get counted towards the fulfilment of obligations of the dispute settlement decisions.

Further, it will be necessary for India to take a lead in the WTO to suggest an improvement in the working of the BOP provisions of GATT on two counts. First, the nature and composition of reserves and those of the flows of foreign exchange should be taken into account while examining whether a developing country has BOP problems. Second, the discretion to take direct import control measures should be restored. The requirement of first demonstrating the inadequacy of tariff- type measures to improve the BOP situation, which has been explicitly included in the Uruguay Round Understanding, should be removed.

Besides, it is necessary now to notice the actions of other countries, particularly the major trading partners, in not abiding by the rules of the WTO. For example, the WTO agreement makes it obligatory on countries to bring their national laws in conformity with the obligation in the WTO; and yet the US is continuing with the well known Article 301 in its statute which permits the government to take unilateral trade restrictive measures. Then in respect of the TRIPs agreement, a recent amendment in the US law says that US authorities may take retaliatory actions, even if a country has discharged its obligations under this agreement, if they consider that the interests of the US industry and trade are being adversely affected. Over and above, some experts believe that some provisions of the law on patents in the US are not in conformity with some basic WTO obligations. Considering the enthusiasm of the major industrialized countries in keeping a vigil on the developing countries' actions in relation to the WTO obligations, it is time that perceived violations of the obligations by these countries are brought to light openly in the WTO. This should not be done in a confrontational style, but mainly to highlight that the Pope should appear to follow the ten commandments.

(Third World Economics No.170, 1-15 October 1997)

(The author was formerly Secretary to the Government of India. Earlier, he was India's Ambassador and Permanent Representative to GATT. He was also formerly, director of International Trade Programmes at UNCTAD.The above article first appeared in the South-North Development Monitor)