A few months ago, the most optimistic observers of international politics were not willing to hedge their bets on the Doha Development Round at the World Trade Organisation. The Doha Round negotiations have been stalled for more than a decade now — the West would like developing countries to remove import barriers while India, Brazil and China want the United States and the European Union to reduce the massive subsidies they provide to rich farmers. Neither side has conceded ground on its claims. But at the Bali Ministerial Conference this December, the U.S. will use a trump card to have its way with India and other emerging markets: our food security legislation. On the pretext of “allowing” India’s food security law to exist alongside its commitments to the WTO, the U.S. has wrested an in-principle agreement from New Delhi on the issue of “trade facilitation.” In other words, India has agreed to greater market access for western companies in order to ensure the survival of the Food Security Act.
Late last year, India’s Permanent Representative to the WTO in Geneva went on record to say “trade facilitation […] is nothing but import facilitation.” The overall gain for developing countries from such additional trade will be “next to nothing,” said Ambassador Jayant Dasgupta. He also acknowledged that the West had fallen back on its promise to help improve the export capability of emerging markets. The whole mantra of trade facilitation, Mr. Dasgupta went on to observe, was “[…] please open up [your markets]. Don’t ask for anything in return. It’s good for you.”
Yet, last week, Union Trade Minister Anand Sharma suggested “there should not be any confusion on trade facilitation because we are in favour (of the same).” What changed in the course of a year? The United Progressive Alliance, desperate to ensure that the Food Security Act does not fall foul of India’s commitments under the WTO Agreement on Agriculture (AoA), has curried favour with the Obama administration. The U.S. — which runs one of the largest domestic food aid programmes in the world — has steadfastly opposed plans by developing countries to provide food security to their poor. Now it is using the AoA to push its objectives under the “trade facilitation” agenda at Bali. During his recent visit, Prime Minister Manmohan Singh sought to extract an assurance from President Barack Obama that the U.S. would not oppose India’s food security scheme. Mr. Sharma’s remarks themselves came after WTO Director-General Roberto Azevedo casually observed that the Food Security Act may run into trouble with our AoA commitments.
Room for concern
But the government’s piecemeal attempt to resolve this issue bilaterally (with the U.S.) leaves much room for concern. For starters, the Obama administration is driving a hard bargain: there is no reason why the UPA should trade food security for market access, because India has a legitimate case under the AoA. Second, without an amendment to the AoA, any ad hoc solution is subject to the whims of U.S. foreign policy. The UPA seems content to see the food security scheme just through to 2014, in time for the election. Third, abandoning the case of the developing world to shore up its own food security law will reflect poorly on Indian diplomacy.
The proposal to categorise higher-than-normal procurement prices — for the purpose of ensuring food security — as a permitted agri-subsidy was mooted by the G33 last year. The G33 proposal was based on a simple premise: food security schemes needed massive quantities of grain and farmers had to be offered attractive prices if they were to sell their produce to governments. But the WTO Agreement on Agriculture unfairly casts such procurement prices as “trade-distorting.” The WTO imposes a cap on the price support that countries can provide for an agricultural product, known as the “Aggregate Measurement of Support (AMS).” Mathematically, AMS is the difference between the procurement price and a “fixed, external reference price” for a product, say rice, multiplied by its total domestic production.
The AMS rule is patently unfair because the “external reference price” is pegged to the 1986-88 levels. There is abundant literature to conclude that world food prices were low during the late 1980s on account of massive dumping of food grain by U.S. and European companies on foreign markets. It is farcical to expect developing countries — whose agricultural sectors were no doubt adversely affected by dumping — to base their support for farmers on such manipulated prices.
What’s more, market price support in itself is no effective marker of trade protectionism. Jacques Berthelot, a French agricultural economist, has highlighted how the U.S., the European Union and Japan simply slashed their procurement prices on paper during the 1990s without reducing any of the subsidies they grant to rich farmers. In defence, the West has facetiously argued that farm aid “decoupled” from production and instead contingent on a farmer’s maintaining her land in “good condition” is permitted under the AoA. India, on the other hand, has adhered to both the letter and spirit of the AoA, reducing its agri-tariffs progressively. In objecting to India’s food security legislation on account of higher procurement prices, the U.S. has made it clear that needy citizens in the West are more equal than others.
Since the AMS rule has found its way to the AoA, however, there is no alternative for the G33 but to negotiate its amendment. For India and other developing countries, the de minimis AMS is capped at 10 per cent of the total value of production. For the most part of the last two decades, as economist Munisamy Gopinath observes, India’s support prices for farmers has been lower than the external reference price. But with the advent of the food security legislation and a general rise in food prices (after adjusting for inflation), there is little doubt that India will breach this ceiling in 2012-13.
To prevent this situation, our WTO representatives have sought a modest “re-interpretation” of the AoA annex to peg the “external reference price” from the 1986-88 levels to current global prices. The other option, according to Ambassador Dasgupta, is “to have a deflator mechanism to compensate for excessive rates of inflation.” The G33’s original proposal still remains our best shot at ensuring food security. But the UPA government has instead opted for an “interim solution” —– an invocation of the AoA’s “Peace Clause” which entails requesting the West to desist from initiating legal proceedings against India. In other words, this politically tempered proposal is an admission that India’s food security law violates the WTO regulations.
It is unclear whether the ‘Peace Clause’ proposal is supported by all members of the G33. Since India has thrown its weight behind this rarely-invoked measure, the mood at the WTO, as one diplomat told Bridges Weekly , seems to be “that the only game in town for the G33 proposal is a peace clause.” New Delhi’s objective is clear: remove all hurdles that stand in the way of the Food Security Act for now. In its election rush, the government is sacrificing the sovereign right of India and the developing world to provide food to their needy on a sustainable basis. The U.S. has seized this vulnerability to extract concessions on the trade facilitation front. A Faustian bargain, if there ever was one.