Thursday, August 28, 2003

WTO Negotiations: The role of Economics and Politics

The issues of interest to India in the context of the WTO negotiations can be apportioned into three broad categories. (a) Implementation issues, (b) Singapore issues (c) Market access. The focus of the current seminar is on the Market access issues. A number of developments have taken place at the WTO over the past week or two, such as the USA-EU joint proposal on Agriculture and the counter-proposal by India and other emerging economies, the paper on proposed modalities for non-agricultural market access and the Chairman’s draft Cancun ministerial text.
Let me start by making a few general remarks on the economics and politics of negotiations and touch on the two topics not covered by this seminar, before saying a few words on the topics of this seminar. Economic theory and empirical analysis as understood and accepted by academics in the USA, EU and other market economies, says that removal of controls, restrictions and obstacles to Imports will by and large lead to an increase in the welfare of both the importing and the exporting countries. Then why is it that each country ignores what its own academics are telling it with respect to policy reforms and focuses mostly on the import restrictions imposed by other countries on its export items (whether these are goods, services or factors)? The answer is politics. In every country, politics imposes a cost on the nation as a whole while benefiting some sub-set of individuals. The geopolitics of negotiations is motivated by a desire to transfer some of the national costs of policy distortions onto other countries, while retaining as much of the benefits for sub-groups within the country. A good example of this is the multi-fibre agreement (MFA).
One implication of this strategic approach to multilateral economic rules is that economic analysis must drive our (autonomous) reforms in the external sector irrespective of what happens (or does not happen) at WTO. That is, liberalisation is beneficial to the country and must continue independently at the pace and timing of our choice. Economic analysis also provides us with the true costs and benefits to our citizens, of specific policy changes. This forms the basis of our evaluation of what policy changes we should be willing to concede in the negotiations (those having a higher benefit to us in any case) and which changes we should resist conceding (those that have higher cost). The public position that we take at the negotiation need not however lay all this out publicly for other countries. In the tactics and strategy of negotiations, politics/geo-politics will inevitably play a substantial role.
Implementation Issues
There are three implementation issues of interest to the Indian government. These are special and differential treatment with respect to Anti-dumping, Geographical Indicators and Traditional knowledge and related issues of bio-piracy. We at ICRIER have been doing research on all three issues and Working papers on these issues can be found on our web site.
Singapore Issues
The four Singapore issues are, Transparency in Government Procurement, Competition Policy, Trade Facilitation and Foreign investment. From the economic perspective it is quite clear that Indian citizens will benefit, either as consumers, taxpayers or recipients of public services in India if there is enhanced competition and greater transparency in government procurement. In the case of ‘transparency in government procurement’, the interests of the government (no matter which party is in power) will differ from that of the public, the latter will gain from greater transparency while the former will loose. Similarly in the case of competition policy the interests of the monopoly (and oligopoly) producers, whether public or private sector, will be diametrically opposite of that of consumers. Greater competition and transparency are therefore clearly in the economic interests of the general public but can be thwarted by the political clout of vested interests. It does not however follow that allowing these two issue to be integrated into the WTO framework is of unalloyed benefit to us. It is quite consistent to argue for accelerated reforms on the one hand while taking a tough stand in the negotiations.
Since the eighties most of Asia to the East of us has successfully used the FDI-Export model to generate growth rates rarely seen before in history (the only exceptions being Japan and S. Korea). First the NICs (Singapore, Taiwan, Hong Kong), then the ASEAN 3 (Thailand, Malaysia and Indonesia) and most recently China and Vietnam have used FDI to accelerate their rate of growth of manufactured exports as well as the overall growth rate of the economy. At the beginning of a new century India is poised to receive and benefit from an influx of export oriented FDI if (I re-emphasise if) we recognise the advantages of FDI and modify some critical domestic policies to facilitate it. A recent ICRIER working paper shows how FDI-export linkage has started to work in India against all odds. Reduction in the transaction costs of trade and the removal of the remaining barriers to FDI is therefore in our own economic interests. This is something that we as a nation should do irrespective of what happens at the WTO. It does not follow, however, that bringing this issue into the WTO would add to our advantage in any way.
From the perspective of politics/geo-politics therefore, it is quite rational for India to concede to others on any of the Singapore issues if and only if we gain concessions and benefits in other areas. In other words we must use these as counters to bargain for what would not be available to us otherwise. It should be remembered however that these bargains are sometimes informal, on the sidelines of the formal negotiations or a meeting another capital.
Market Access
Non-agriculture Market Access
As you all know India has reduced its ‘peak’ tariff rate from about 150% in 1991-2 to 25% in 2003-4. As per the budget announcement of the Finance Minister in 2002-3 this should come down to 20% next year (2004-5). In addition two groups of non-agriculture items, automobiles and alcohol (liquor) have tariff rates exceeding this peak. Despite this reduction over a decade, our tariffs remain the highest in the world. In fact if we do not continue the process of reduction beyond 2004-5, our peak tariffs will be four times that of ASEAN. An inter-ministerial expert group that I chaired a few years ago, therefore recommended that the peak rates be brought down to 10% some time after 2004-5. We also recommended that the tariff on automobiles should not exceed two times the peak, and on alcohol three times the peak. A subsequent Working paper in the Planning Commission goes even further by recommending a peak tariff rate of 10% by 2006-7 (with automobile tariffs at 20%) and a uniform tariff rate of 5% by 2011-12.
Research at ICRIER has shown that the tariff rationalisation and reduction that has taken place since 1991-2 has improved the competitiveness of Indian Industry. One aspect of this is an increase in intra-industry trade across most sub-sectors of industry. Thus each sub-sector is giving up the production of some items and importing them while at the same time exporting more of the items that it is competitive in. This move towards specialisation and exploitation of comparative advantage has improved the competitiveness of Indian industry.
At ICRIER we are also doing research (funded by the ministry of Industry) to find out the potential effects of further tariff reductions on Indian manufacturing. Preliminary results show that even sharp tariff reduction to 10% or 5% has few adverse effects. Tariff reductions, along with resultant changes in exchange rates raise the net exports (exports – imports) in a majority of manufacturing sub-sectors and the overall net exports of the manufacturing sector. Not only is there little to fear from further tariff reductions, these reductions will prove beneficial to industry.
WTO Negotiations on Agriculture
Agriculture is an area where the economic arguments of rich countries are very weak (because of high subsidies) while those of poor countries are relatively strong. It is quite clear that many countries in the EU and to a lesser extent the USA are hostage to agriculture producers who constitute a small fraction of their population. On our side a large proportion of the population is dependent on agriculture, lives in rural areas, is very poor and less educated and has little access to up to date and relevant knowledge. This puts their lively hood and sometimes even their survival at risk from exogenous shocks. Over the last few years we have also raised the import duties on a number of agricultural products above the peak rate. These must in the interest of economic efficiency, eventually be brought down to the peak rate, with an intermediate step of two times the peak rate. In the meanwhile, we should carry out a thorough de-control and reform of the agriculture, agro-processing and food retail sectors (as detailed in a Planning commission working paper).
As far as the WTO negotiations are concerned, however, offence is the best form of defence. We should marshal the global NGOs to expose the hypocrisy of the rich countries vis-à-vis free trade and verbal concern for the poor (while giving subsidies to rich farmers that destroy poor agriculturists jobs).
WTO Negotiations on Services
The USA activated the GATS when it perceived that its comparative advantage was shifting from manufacturing to services. At that time the USA and other OECD countries opened up their service sector to cross-border imports (Mode 1), while we had some justification for taking a cautious approach to an area in which the rich countries appeared to have an increasing comparative advantage. More by accident than by design ur position has been completely transformed since then. At the beginning of the 21st century, India is poised to become the largest developing country exporter of Service in the World by the end of the decade. What is needed is a change in our mind set, by transiting from a defensive to an activist posture. We must lock-in ‘free trade in services’ under mode 1, against the emerging threat from the new protectionists in the rich countries, the ‘unions of white collar workers.’ This also requires that we be more forthcoming with respect to opening sectors in mode 1 where we have been excessively defensive. We must trade in greater access for FDI from the rich countries under mode 3 against clear and transparent rules for ‘temporary migration,’ of skilled and semi-skilled personnel from India to these countries under mode 4. The focus of the latter (mode 4) must be on facilitation of cross-border export of services under mode 4, not on the export of labour per say.
The request-offer mode that is currently in process may not however give much scope for progress from our new pro-active perspective, in either of these two areas. In that case we may have to explore a bilateral approach with USA and the EU.

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