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On the eve of the Group of 20 economically powerful countries’ meetings in Brisbane, Australia, starting Nov. 15, India extricated itself from a tricky impasse over a landmark global trade deal by negotiating an agreement with the United States Nov. 13.
This agreement reached at the eleventh-hour maintains the status quo for India’s food subsidy program because of which New Delhi had opted out of the major International Trade Facilitation Agreement it signed in December last year and walked out of in July jeopardizing the World Trade Organization’s effort to streamline the global customs regime. That new regime is expected to add $1 trillion to the world economy and bring millions of jobs to developing countries.
Not only was the agreement a victory for both the U.S. and India, but Modi may have avoided the danger of becoming isolated at the G-20 meetings as the man representing the country which (along with relatively inconsequential allies Cuba and Venezuela) jeopardized the first consequential global deal the WTO had reached in 20 years.
In effect the U.S. assured New Delhi that the four-year “peace clause” (ending in 2017) will protect it from being brought to court by many unhappy countries despite its agricultural subsidy program far overshooting WTO regulations in terms of its size and scope.
The announcement about the Nov. 13 agreement came in the midst of the Association of Southeast Asian Nations meeting in Myanmar giving a boost to Modi’s outreach to East Asian nations urging them to consider India a destination where he was out to change the trade and investment regime. Obama described Modi as “a man of action” during the ASEAN meetings.
News reports in India called the U.S.-India agreement a victory for Modi just by the fact that it ensured the status quo and allowed India to continue its enlarged food subsidy program. The very next day, the WTO announced it expected to get the Trade Facilitation Agreement through within a matter of two weeks because U.S. and India had overcome the impasse. Modi may become the cause célèbre at Brisbane.
While the clauses that govern these trade agreements are often arcane, the Nov. 13 agreement won India some relief even as it postponed a tricky issue by a few years down the road. President Obama promised to get other members of the WTO to agree not to take India to court over the level of agricultural subsidies doled out – for the time being but stressed that efforts to reach an agreement on subsidies must be intensified.
The Problem
The argument is all about the benchmark used to calculate the cost of food subsidies laid out in the 1986 Uruguay Round of the General Agreement on Tariffs and Trade that has survived to this day. The Uruguay Round set the food subsidy cost at a maximum of 10 percent of the value of production, but that 10 percent is based on the benchmark of mid-1980s food prices.
India wants the benchmark prices to allow for inflation. And for a few years, this agreement with the U.S. may allow it to use current food prices to calculate the 10 percent subsidy. It argues that two-thirds of its population which eats less than the minimum target laid down by the government, needs the food subsidies and needs them raised to realistic levels of today and not 1986. Last year the Indian government allocated $20 billion to the public food distribution system, Bloomberg News reported.
India reaped global opprobrium when the Modi government this July backed out of the TFA and along with small countries like Cuba and Venezuela, vetoed the landmark deal if the level of subsidies were not renegotiated upwards. Inheriting an agreement that had been signed by the previous government of Prime Minister Manmohan Singh, Modi’s veto on the TFA nevertheless put into doubt his stated goals of open trade and attracting foreign investment, according to experts News India Times spoke to.
The TFA was the first multilateral agreement to be concluded since the World Trade Organization’s inception 20 years ago. The Nov. 13 agreement spells out categorically that the Trade Facilitation Agreement “should be implemented without conditions,” according to the details provided by the U.S. Trade Representative’s office. And it promises India will not be hauled over the coals by World Trade Organization members over its food subsidies.
“The bilateral agreement makes clear that a mechanism under which WTO Members will not challenge such food security programs under WTO dispute settlement procedures will remain in place until a permanent solution regarding this issue has been agreed and adopted,” says the Obama-Modi agreement. Washington does however, require India and some pretty angry WTO members to “intensify” efforts to reach a settlement soon over the price of food subsidies.
Where Things Stand
“So we’re not going to hold up the TFA, but the same situation goes on,” Professor Jagdish Bhagwati, former advisor to the head of the General Agreement on Tariffs and Trade, the precursor to the WTO, and currently professor emeritus in Economics at Columbia University. “Nothing really has been won except a little relief,” Bhagwati said. “It will enable India to say at home that they’ve extended the process, and the government can raise the subsidies,” by basing the food costs at current prices rather than on 1980s food prices because Washington has basically guaranteed that no one in WTO will challenge them, he added.
During Modi’s September visit to Washington, Obama and he discussed the issue of trade facilitation and food security at length and intensive negotiations continued at the bureaucratic level, one from which India appears to have gained something. Washington is obviously confident that it can push through the bilateral says Ambassador Teresita Schaffer, former deputy assistant secretary of state in the State Department’s South Asia Bureau and head of the Center for Strategic and International’s South Asia program for many years. The main concession extracted by New Delhi is that Washington will persuade the European Union and its own government to settle for some half-way pricing of food subsidies, “something between the 1980s and now,” Bhagwati said.
Some countries including the United States saw a “dissonance” and could not square Prime Minister Modi’s commitment to “Looking East,” “Make in India” and scaling up the Gujarat Model, with backing out of TFA, Bhagwati said. “The Americans now see Modi needs business and investment and is a practical chap – so they want to cultivate him,” he added. India in turn can extract a concrete agreement on subsidy food prices, “not just agree to negotiate,” which would merely mean continuing the status quo. And Washington could exert pressure on the EU to readjust food subsidy prices, experts say.
In fact, even as American and Indian officials worked feverishly to ink the Nov. 13 deal, Modi met several East Asian leaders touting his open trade policy, Indo Asian News reported. Modi met his Thai and Malaysian counterparts, Prayut Chan-o-cha and Najib Tun Razak, as well as Sultan of Brunei Hassanal Bolkiah and Singapore Prime Minister Lee Hsien Loong in separate meetings, to sell his “Make in India campaign and discussed economic cooperation with them. In his speech at the ASEAN-India Summit “Modi said there will be major improvement in India’s trade policy and environment and his government would move ahead with connectivity projects with ASEAN “with speed”“ Indo Asian News Service reported. He also called for a review of the India-ASEAN Free Trade Agreement on goods to make it beneficial for all parties concerned.
Breakthrough
“The U.S. and India will benefit. The WTO and global trade will benefit,” Schaffer said about the U.S.-India deal carved out during the ASEAN summit – if the full membership of WTO agrees to the bilateral deal, something Washington appears to think is a given. As decision-making in the WTO is based on consensus among all members, the elements agreed between the United States and India will now be discussed with the full WTO membership in the interest at arriving at final and simultaneously-agreed decisions in the very near future, the U.S. Trade Representative’s office said in a release.
“On the basis of this breakthrough with India, we now look forward to working with all WTO Members and with Director-General Roberto Azevedo to reach a consensus that enables full implementation of all elements of the landmark Bali Package, including the Trade Facilitation Agreement,” USTR Michael Froman is quoted saying in a statement.
The Trade Facilitation Agreement is expected to streamline customs rules that could add $1 trillion to the world economy as well as 21 million jobs, 18 million of them in developing countries, Bloomberg News reported.