FALSE PREMISES FOR A NEW ROUND

By Rammanohar Reddy, The Hindu

The following is an excellent analysis of the current WTO situation, including of the false premises of those who champion a broad-based new Round.  It also provides an explanation of the reasons the EU and others are advocating new issues like investment and competition.

False premises

By C. Rammanohar Reddy

MINISTERS FROM some 20 countries begin a two-day meeting in Singapore today in another attempt to launch a new round of negotiations at the World Trade Organisation. India will once again come under pressure to agree because it is the largest country still opposed to a new round unless certain pre-conditions such as a correction of the imbalances in existing WTO agreements are first met.

Unfortunately, the Government is not getting enough support at home. There is an influential body of opinion which argues that it is in India’s interests to support fresh WTO talks. This lobby does not reflect any economic interests but is an assortment of economists, media commentators and trade experts whose influence arises solely from its access to the print and electronic media and to the seminar halls of New Delhi. The case for India supporting a new round is based on three arguments, none of which is valid.

The first argument is that as the rest of the world moves ahead, it is time we abandoned our old mindset of resisting liberalisation at the WTO. This variant of “keeping up with the Jones” argument betrays an inadequate understanding of the dynamics of the WTO. Yes, the world has changed. But at the WTO it has changed in the opposite direction since the Uruguay Round (UR) of 1986-93. It is the influential Indian advocates of a new round who are trapped in the mindset of the past and not the Government which this time has a better understanding of the games at the WTO.

The WTO is an inter-governmental organisation; but it is the business interests in each country which drive its agenda. The Uruguay Round had such a wide-ranging agenda primarily because the multinationals of the U.S. and E.U. wanted it so. For example, the drug companies lobbied hard to put intellectual property rights on the agenda. And the service industries built up a powerful coalition to bring this sector into the GATT.

Compared to such lobbying in the 1980s, there is now little more than ritualistic campaigning by the global firms for a new round.  There are many reasons for this. First, the backlash against TRIPS has meant that companies which got what they wanted during the Uruguay Round are now worried that the issue may be re-opened. Second, the General Agreement on Services that emerged from the Uruguay Round was a messy kind of liberalisation which satisfied few multinationals in banking or telecom. These companies are no longer enthusiastic about the WTO process.

Third, the multinationals engaged in manufacturing were able to get average customs duties in the industrial countries reduced to nominal levels during the Uruguay Round. In the developing countries import tariffs remain high. But even these applied rates are substantially lower than the bound rates which were negotiated during the Uruguay Round, since the former were reduced unilaterally and outside the WTO process. A new round will also be about bound rates so the multinationals would prefer to wait for the fruits of unilateral tariff reduction. (A detailed discussion of the lack of business interests in a new round is provided in a paper, The Multilateral Trading System:

Quo Vadis written by three economists, Aaditya Mattoo, Pierre Sauve and Arvind Subramanian, who earlier worked in GATT/WTO and who offer innovative arguments about what is holding back the launch of a new round.)

So if global business interests are not very enthused about a new round, what can India gain from such talks since reciprocity underlies the WTO process? This leads to the second argument of the Indian advocates which is that since the Government is committed to a medium-term reduction of import tariffs it is better to link this up to the WTO process so that Indian exporters can obtain something in exchange. A variant is that the principle of WTO reciprocity will create domestic constituencies for trade liberalisation.

Neither argument is valid. As India has one of the highest bound tariffs at the WTO, the onus is on us to reduce these duties in any new negotiations. Our trading partners also know that they need not make any reciprocal offers because unilateral tariff reduction is underway. And there is little likelihood of domestic support for a new round because there will be no gainers who could ‘neutralise’ the losers.

There are really only two areas where Indian exporters could have an interest in faster WTO-driven liberalisation: textiles and movement of skilled workers. In both, zero success is a dead certainty.  Textile quotas in the U.S. and the E.U. are to go (if allowed to) in 2005. Given their political importance it is extremely unlikely that both powers will put faster quota elimination on the agenda. The political costs of allowing greater freedom for temporary migrants are even higher - which has only increased further with the racial profiling of Asians that has emerged in the U.S. after September 11. So the Indian advocates should be aware that domestic industry and services have little to look forward to in a new WTO round.

The third argument that is made is that if a new round is not launched at the WTO, the push towards regionalism will gain momentum which will be a disaster for India since it is not a member of any bloc of consequence. It is true that India has a larger stake than most in multilateralism, but this particular argument has little going for it. Regionalism will grow independent of what happens at the WTO since it reflects the failure of the system to deal with violation of the principle of non-discrimination. In the past, the biggest steps in regionalism have taken place in the middle of a GATT round. It was during the Uruguay Round that the formal decisions to convert the European Economic Community into the European Union were taken. Again, it was in that period that the North American Free Trade Agreement was drawn up. And it was also at that time that the Asia Pacific Economic Cooperation forum was created. So round or no round, regionalism will march ahead.

In sum, it is simply not in India’s economic interests to support a new WTO round. All this still leaves unanswered another question. If global businesses in manufacturing and services are not interested, who wants a new round of talks? The answer in brief is that the case for yet another round has been contrived by the bureaucracy of the E.U. Countries with an interest in agricultural exports are being compelled to support this agenda.  And the U.S., which runs with the hare of agricultural subsidies and hunts with the hound of farm exports, is supportive for its own reasons.

Before the ink had even dried on the Uruguay Round, the E.U. - the world’s biggest provider of farm subsidies - began to lobby for a “comprehensive” round. It realised that this was one way in which it could extract something in return for a likely reduction in farm support that could result from the mandated talks on agriculture that were to begin in 2000. This was why the European Commission’s bureaucracy in Brussels came up with the idea of WTO agreements on foreign investment and competition - which even the European multinational firms are not interested in because they have already got what they wanted through bilateral treaties and unilateral liberalisation in foreign markets.

Farm exporters such as Australia, Thailand and Argentina want a new round because they have realised that the mandated talks on agriculture will go nowhere without a larger agenda. And some countries such as Brazil hope to deflect the pressures from a Free Trade Agreement of the Americas with a WTO round.

So the WTO round that is now being talked about essentially has to do with agriculture. And India should be interested in one only if it thinks it has a lot to gain from farm liberalisation.  There are some who argue that India can become a major farm exporter if the subsidies in the developed countries are reduced.  However, this argument has always been more a question of faith than a demonstration based on an analysis of Indian agriculture.  And analysis has always been a scarce commodity in discussions on the WTO.

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