By Aniket Baksy

Edited by Sanchita Malhotra, Associate Editor, The Indian Economist

The Trade Facilitation Agreement, intended at simplifying rules and regulations for trade and reducing red tape at borders, has failed. Developed Nations are up in arms against India for opposing a deal whose potential benefits they have not hesitated to reiterate. Figures like a USD 1 Trillion addition to the global economy and 21 million new jobs[i] have been liberally thrown around by the media and by commentators who have vilified the Indian establishment for its obdurate stand[ii].

It is important to evaluate the prudence of this traditionally hardliner stance at the WTO. Over the years, India has gradually earned a reputation for being a tough negotiator at the WTO bargaining table[iii]. As a member of the G20 Developing Nations at the WTO, India has in the past allied with China and Brazil to block agreements on the Singapore Issues in 1996. In 2006, at the Doha round, the G6 group of countries, including India, failed to reach an agreement on agricultural tariffs and subsidies; the consequence was that India and other nations in the G-6 declared intentions to engage in bilateral liberalisation[iv]. The US has been blamed for being unwavering in its stand on agricultural commodities, which are heavily subsidised. India and Brazil were jointly responsible for the frustration of the G-4 Ministerial talks over Non-Agricultural Market Access. In 2008, the Doha Round talks failed completely over the issue of agricultural subsidies, with developing nations proclaiming the failure as an indication of the US’ declining ability to impose its will on the developing world[v].

Part of the reason why Bali, 2013 was so important is thus eminently clear- it was something everyone was about to agree to, the first membership-wide agreement in the 18-year old Organisation’s history. After so much gridlock, the WTO had at last managed to hammer out the Trade Facilitation Agreement (TFA), which would reportedly “make it easier and cheaper to move Goods around the world, by cutting red tape and improving customs procedures,” besides a host of additional benefits including reduced corruption.[vi] India’s concerns on the TFA and on protection of MSPs for its farmers were addressed in the form of a “Peace Clause”: an interim mechanism safeguarding food security in the short term, until a permanent solution could be hammered out.

The signing of the TFA in 2013 was hailed in India as a victory for the developing world. It was argued that the agreement would allow India to boost its exports while retaining the subsidies it provides as a social support for its Farmers. More importantly, India earned global leadership respect from the developing world for taking what seemed to be the first step towards levelling the rich-poor divide often noticed in dealings in the WTO[vii].

And now, the TFA has failed, due to what can only be described as irresponsible intransigence on India’s part.

Putting up an uncompromising attitude is, in general, a positive at a forum like the WTO, where only strength and prowess are respected. An uncompromising stand on what is perceived as national interest has led to India being taken more seriously- in a world where India stubbornly refuses[viii] to take up a leadership role on most issues[ix], it is unnaturally vocal in the WTO, and has emerged as a leader in promoting trade interests of developing nations owing to its new-found economic clout[x]. India is a key player in global trade[xi], and still represents one of the World’s largest untapped, and yet emerging, marketplaces. A trade deal without India is not meaningless, but is an eventuality that no one really fancies. After all, the sheer volume of the Indian market and its millions of consumers means that India needs to be taken seriously in any forum attempting to create a multilateral trade agreement.

Unfortunately, India has failed to live up to the responsibility it in effect earned in late 2013. By exercising its Veto right over the TFA, India has demonstrated that global trade and goodwill are meaningless to it, as compared to domestic compulsions. In itself, that’s no bad thing- after all, the WTO is no UN, dedicated to the promotion of welfare of its members. It’s a trade forum. India needs to push its national interest as vigorously as possible. In doing so, however, India seems finally to have crossed a line- and crossing this line will hurt its national interests.

A free and equal WTO is a dream that the entire developing world shares, but while awake, the developing world probably cares more about the tangible economic benefits a strong global economy can hold. India was a torchbearer for the aspirational developing world- the G-20 or G-33 groups of developing nations, for instance- and is now clearly a pariah in the international community. Developing Nations have already come out with statements claiming that they will no longer be able to trust any trade commitments made by India.

At the outset, India’s stand can be made to sound noble and high minded; indeed, Indian commentators and news reports have extensively justified the stand India has taken[xii]. The arguments for the Indian stand essentially run on the following lines: the TFA’s clause on Food stockpiles caps subsidies at 10% of the value of agricultural production based on 1986-88 prices, a figure that will be breached due to inflation and due to the enactment of the Food Security Act, 2013. The Food Security Act seeks to provide a solution to problems of malnourishment and entitlement failures in India’s political economy through subsidised grain disbursement. India’s demands essentially boil down to the idea that inflation must be accounted for when calculating subsidy limits, and that these limits should not infringe on its stockpiling of grains via the centralised procurement system underlying the Public Distribution System[xiii].

While the demands that the Indian Government is making are clearly driven by a political calculus[xiv], this excessive focus on the domestic economy to the exclusion of international relations is certain to get India into trouble. There are few enough nations supporting the hard-line stance India espouses- after decades of fighting, a deal at the WTO seemed ever so near, and promised so much. India has failed, this time around, to utilise any manner of PR to successfully pitch its stance to the WTO- allowing the Developed world, and many developing nations, to paint a demonised picture of the Indian State. In the eyes of this group, the entire argument for the Indian Government’s reluctance vanishes if one accounts for the Peace Clause inserted into the agreement at Bali in 2013: India’s subsidies are secure until a new deal can be hammered out on subsidy reduction. The deadline for this is in 2017, still three years away.

India’s argument that no progress has been made on this subsidy reduction agreement has thus been made out to sound remarkably like that of a toddler who refuses to drink his milk unless offered the cookie he was promised last night. The WTO has spent the past 7 months doing nothing but attempting to coordinate what is an incredibly complex agreement- the total impact of which is still incredibly uncertain. Coordinating across 153 nations, each with its own complex demography, history, political economy and political process is time consuming and difficult, not to mention outright frustrating[xv]. The broken deal thus leaves India in the image of a true party pooper, of the puritan who misses the wood for the trees and aims at lofty ideals while ignoring tangible realities.

India is justified in raising its voice regarding lack of progress- time and again, developing nations have held entire rounds of the WTO hostage with their demands. However, it is unjustified in rejecting the concessions that have been hammered out with much difficulty, and on which a consensus already existed and was agreed to by India as well at Bali. The TFA is something that can be passed now, and the existence of the Peace Clause should drive the signal home that Agricultural Subsidies are something on which debate may be deferred to a post-agreement world order characterised by freer trade. There is no reason to suggest that India’s concerns regarding agriculture are unjustified- 67 years after independence, agriculture still accounts for well over half the labour force and around a seventh of GDP[xvi]- but there is no reason to suggest that India needed to hold up a deal lauded as historic in order to protect this sector. While it is not unreasonable for India not to trust the WTO to progress on agricultural subsidies quickly, it is even more unreasonable for India to essentially demolish an agreement that has been nearly seven years in the making in the pursuit of what is being viewed as a technicality- at the cost of losing valuable soft diplomatic power.

India loses much more than it gains by its obstinacy. Indian foreign policy will be hampered severely- at a time when India is facing severe trust deficits with the US and with major regional powers and is attempting to build bridges, the blocking of the WTO deal sends out a “wrong signal”[xvii] to everyone regarding an avowedly pro-business Government at the Indian Centre. Modi’s pro-reform position will be hurt irreparably, especially on global fora. Relations with the US, already stretched by espionage and wire-tapping scandals, harassment of Indian diplomatic officials and the rejection of engagement with Narendra Modi which the US has only recently reviewed, are certain to be stretched much further, notwithstanding Modi’s September visit to the US. The loss of confidence in India’s trade negotiation team and with India’s trade policy position in general has been immense- developing nations have expressed their disappointment in no uncertain terms, with India being left only with three supporters, most of whom are international pariahs themselves. This is, in itself, unprecedented. In general, India’s stand at the WTO is broadly representative of the stand taken by the developing world- and hence manages to garner the support of Brazil, the African nations and, on occasion, even from China. However, now global powers are contemplating a deal where India will not be a part, excluding it from the trade sector. Japan, a nation whose economic partnership with India has recently received renewed vigour, is suddenly vocally denouncing India’s stand. While the threat of exclusion is clearly idle[xviii], the fact that it was ever even evinced as an idea reflects how much antipathy India has garnered in the process.

There is a moral basis to assigning the “first priority” to India’s poorest[xix], but this moral basis ignores the prudence of diplomacy- sometimes, compromises work. Indian farmers and the Indian poor need their subsidised food. The PDS and the massive procurement systems underlying it are social support systems whose impacts, though marred by corruption and inefficiency, are undeniable[xx]. However, the importance of this system must be seen in conjunction with the necessity of economic empowerment of a populace that seeks liberation from the low-productivity equilibrium promoted by subsistence on Government hand-outs. Modi’s government has made the beginnings of a transformation of the Indian economy into an Industrial power, wherein surplus agricultural labour can finally be transferred to an industrial sector with higher consequent wages[xxi]. The logical next step is to gain global leadership and goodwill by allowing the WTO to earn a victory, the consequent goodwill generated allowing for further agreements in the future. The benefits to the developed world from the TFA are massive, much greater than those to India, but this should hardly matter in India’s decision, which is to consider the (now factual) counterfactual: a no-deal scenario where India is ostracised and openly censured by the global community, and receives no benefits at all. India would’ve been the ancillary beneficiary of easier trade norms, and would have been able to extend its own competencies through competition and technology transfers accompanying trade.

For now, the damage has been done, and it has been severe. The World is likely to move ahead with bilateral and faction or bloc trading, with the Trans-Pacific Partnership and the TTIP likely to be big gainers from a WTO failure. India needs to ensure that by the September round, it either has a much larger support base for its claims, or it has a clearer idea of how to progress on ratifying the deal. Criticising developed powers for their past dominance is no argument for taking on their role as deal-breakers now; in fact, India should take it upon itself to ensure that more deals pass. India would not concede much by agreeing to the TFA[xxii]. Nonetheless, it must act responsibly and quickly to safeguard its geopolitical interests as a responsible future power.

[i] The Peterson Institute for International Economics estimated that the TFA could boost global output by up to USD 1 Trillion and create more than 21 million jobs, most of these in the developing world.

[ii] See any of a large number of news pieces highlighting the failure of the WTO talks. For example, http://in.reuters.com/article/2014/08/01/india-trade-wto-idINKBN0G02GV20140801

[iii] http://www.jnu.ac.in/SIS/CITD/DiscussionPapers/WTO.pdf

[iv] http://www.nationalaglawcenter.org/wp-content/uploads/assets/crs/RL32060.pdf

[v] http://www.nytimes.com/2008/07/30/business/worldbusiness/30trade.html?_r=1&

[vi] http://www.politico.com/story/2013/12/wto-edges-closer-to-deal-on-bali-package-100783.html

[vii] http://www.thehindu.com/news/national/indias-stand-prevails-in-bali/article5430252.ece

[viii] India’s core philosophy of Non-Alignment is an example of the fence-sitting it espouses in general on issues of global geopolitical importance. The nation has remained either essentially silent or has been non-committal on the ISIS issue, on the Ukraine crisis, on sanctions against Iran and also on the ongoing Israel-Gaza conflict (http://thediplomat.com/2014/07/why-is-india-silent-on-the-israeli-operation-in-gaza/).

[ix] http://www.thehindu.com/opinion/lead/india-is-not-a-global-power/article3505965.ece

[x] http://www.jnu.ac.in/SIS/CITD/DiscussionPapers/WTO.pdf

[xi] India accounts for 1.61% of exports, 2.63% of imports or merchandise trade and 3.32% exports, 3.08% imports of commercial services trade worldwide. (http://stat.wto.org/CountryProfile/WSDBCountryPFView.aspx?Language=E&Country=IN)

[xii] http://www.punemirror.in/columns/columnists/ajit-ranade/India-not-a-villain-at-WTO/articleshow/39433443.cms

[xiii] http://articles.economictimes.indiatimes.com/2014-08-01/news/52327807_1_wto-bali-trade-facilitation-roberto-azevedo

[xiv] See the previous article. A senior Government Official who was part of the deliberations told ET, “How can we cap MSP? What will I tell our poor farmers?”

[xv] When the Bali agreement was concluded in 2013, Robert Azevedo, the Director-General of the WTO, broke down in tears of emotion, declaring that the WTO had “finally delivered.” http://bdnews24.com/business/WTO/2013/12/07/wto-in-make-or-break-landmark-agreement

[xvi] Around 13% of India’s GDP came from Agriculture in FY 2012-13.

[xvii] http://timesofindia.indiatimes.com/india/Indias-refusal-to-sign-WTO-deal-a-wrong-signal-US-says/articleshow/39421416.cms?intenttarget=no&utm_source=TOI_AShow_OBWidget&utm_medium=Int_Ref&utm_campaign=TOI_AShow

[xviii] Note the New Zealand Minister’s commentary on this: “India is the second biggest country by population, a vital part of the world economy and will become even more important. The idea of excluding India is ridiculous.” http://www.samachar.com/India-stops-history-from-being-made-at-WTO-diplomats-express-shock-US-expresses-displeasure-to-Narendra-Modi-oibnM8jgaag.html

[xix] http://timesofindia.indiatimes.com/india/Understand-our-challenges-Modi-tells-US-on-Indias-WTO-veto/articleshow/39432791.cms

[xx] http://www.epw.in/special-articles/revival-public-distribution-system-evidence-and-explanations.html

[xxi] The Indian Government’s July 2014 Budget reflects an all-round perspective on creating an enabling environment for industrial growth. http://econafterhours.wordpress.com/2014/07/11/the-budget-and-no-more/

[xxii] It can be argued that the West would not concede much by agreeing to India’s demand for a new commission to fast-track the agricultural subsidy negotiation. However, western foreign policy is not under Indian policy control, and it is suboptimal for India to engage in behaviour reminiscent of a Prisoner’s Dilemma.

Aniket is a third-year student at St. Stephen’s College, Delhi and an Editor of the Economics Society. His inclinations extend to economic issues, and macro-level socio-economic policies and their possible impacts. He is a prolific reader, with tastes for popular science, economics and policy, science fiction and historical fiction. An inherent urge to argue and avid debating aside, his passions include Economics, Instrumental Hindustani Classical Music, Gastronomy, and writing.

Posted by The Indian Economist | For the Curious Mind