Themes > Current Issues
15.06.2000
Who
Needs Free Trade
C.P.
Chandrasekhar
In the policy ethos generated
by the government's economic reform, voluntary choices are often presented
as inevitable actions. Nowhere is this more evident than in the area
of trade policy. Being a signatory to the WTO, it is argued, makes
hard decisions with regard to quantitative restrictions, tariffs and
state support in the form of implicit or explicit subs idies 'unavoidable'.
Consider the situation with regard to the agricultural sector which
is still a source of livelihood for a substantial number of Indians.
In the name of India's commitments to the WTO, almost all quantitative
restrictions on imports of raw and processed agricultural products
have been withdrawn at a time when world prices have been falling
quite sharply. If this is resulting in a collapse of incomes earned
by coconut growers, rubber producers and cereal-producing farmers,
that outcome is regarded as the inevitable price that India must pay
for being a part of the international community. It is also seen as
the quid pro quo for the opportunity to engage international markets
and benefit from international trade.
There are two issues ignored by those advancing such an argument. First, very often India's commitments have proved to be way beyond even what the international community expects. Take for example, India's zero tariff bindings on a range of agricultural commodities, including the case of an item like rice which is a major crop cultivated in the country. This had been done when India had recourse to quantitative restrictions, but clearly, no thought had gone into what India accepted as part of the Uruguay Round agreement in terms of the reduction of trade restrictions since at that point of time acceptance was presented as inevitable and unavoidable, and recourse was taken to the argument that quantitative controls could continue since there was a balance of payments problem. Simultaneously, however, Finance Ministry officials went about boasting that the balance of payments was healthy and thus evoked the demand from the US and other countries that India should dismantle quotas. Inevitably, India lost her case for maintaining quotas, and when the time for removing quantitative restrictions arrived, by which time international prices had fallen significantly, this commitment proved too much for even India's unthinking reformers to swallow. Fortunately for the government, India's trading partners, including the most powerful within and outside the WTO like the US and Europe, accepted this commitment as being 'excessive'. In the event, as part of the process of doing away the quantitative restrictions, the government renegotiated its tariff bindings, allowing it the freedom to raise tariffs to as much as 80 per cent from zero in the case of rice. Put simply, neither is what India accepted inevitable, nor is it sacrosanct once accepted.
The second issue that is ignored is the fact that even the strongest among the world's trading nations, which would be the ones to benefit the most from a free and liberal trade regime, are aware of the dangers of openness and the benefits of intervention. This is most visible in the agricultural arena, which is a site for intense conflict between the members of the OECD, the club of the world's richest nations. Brought into the mainstream of the multilateral trading agenda only during the Uruguay Round, this was an area where the least concessions were on offer from those trading blocs and nations like the EU and Japan, which had the most to give. In the event, a traditional and more 'labour intensive' sector proved to be one which threatened to completely derail WTO negotiations because of what the US considered the intransigence of the EU, Japan and some Southeast Asian countries. The bone of contention was the massive support being offered by many European countries to their agricultural sectors, which effectively closed their markets to exporters from elsewhere.
It is indeed true that finally even these countries accepted some of the rules with regard to agricultural trade that were formulated as part of the Uruguay Round. But they as well as the US, even while making a show of accepting WTO norms, shifted to emphasising forms of support which were WTO compatible because they ostensibly are non-distorting from a trade point of view. To facilitate that transition, policies of agricultural support were conveniently placed in 'boxes' labeled red, green and blue, with only those in the red box treated as WTO incompatible. The shift away from red to green and blue box policies has, of course, been combined with contentious trade barriers which have provided the staple for the activities of the WTO's Dispute Settlement Panel. According to a recently prepared analysis from the OECD Secretariat, the overall cost to consumers and tax payers of the agricultural policies of its member governments amounted to $361 million in 1999 or 1.4 per cent of GDP. Support to agricultural producers amounted to 40 per cent of the value of farm receipts.
The forms of intervention through which such support is provided include, in the main, production subsidies and trade barriers, which according to the Secretariat "distort production and trade, reduce economic efficiency and may damage the environment". And those benefiting from such support are not small or marginal farmers, but the most productive and profitable ones. The top 25 per cent of farms as measured by their annual sales values accounted for 90 per cent of the support provided by these governments.
What is remarkable is that even the commitment to agricultural policy reform in the form of reduced support and lower trade barriers is being given up. Between 1991 and 1997, the OECD Secretariat reports, as part of the run up to and the aftermath of the Uruguay Round, producer support fell from just above 40 per cent of farm receipts to 30 per cent. But over 1998 and 1999 when farm prices worldwide have been on the decline to just above half the 1995 peak in the case of oilseeds and wheat, the extent of support has risen sharply from 30 to 40 per cent, that is, to levels before the adjustment to a likely post-Uruguay world began. OECD governments clearly rate the need to protect their richest farmers from the adverse consequences of world-price volatility, way above their 'commitment' to a freer trade regime and a 'distortion-free' environment.
Even the OECD Secretariat admits that all of this does not bode well for the emerging and transition economies (ETEs), defined to include the transition economies in Central and Eastern Europe as well as large emerging economies such China, India, Brazil and Indonesia. In its view, "agricultural trade barriers, export subsidies, and domestic support in OECD countries have limited the potential benefits of free trade in agriculture for ETEs," where "agriculture is much more important in income and employment terms." Given this, even the most committed among those belonging to the free trade faith need to consider whether protection for their farmers through means that are either WTO compatible or incompatible, should be sacrificed at the altar of their beliefs, at a time when policies being pursued by their trading partners substantially curtail their access to potential markets.
The problem is that given the adoption of IMF-inspired fiscal regimes, developing country governments, such as in India, are voluntarily forsaking policies aimed at providing direct producer support or measures that indirectly sustain such policies by absorbing surpluses to feed an extensive public distribution system issuing food at subsidised prices to the consumer. This puts them in a self-imposed double bind. To begin with, they are not willing to imitate, rather than listen to, developed country governments when it comes to blatantly violating WTO commitments, and find heir markets flooded with surpluses from abroad. Secondly, they are not sharp-witted enough to drop their obsession with the size of the fiscal deficit at the expense of all else, even while the IMF itself praises the Southeast Asian governments currently engaged in pump-priming themselves out of the recession induced by the financial crises of 1997. This limits their ability to offer WTO-compatible support to their agricultural sectors.
In the event, developing-country governments end up opening doors to their own markets at a time when their access to developed country markets are being reduced, and denying their much-poorer farmers much-needed support even while the developed countries back their rich agriculturists. This can only be because the elite which currently governs in these contexts has much to gain by submitting to the duplicity of western governments, and is willing to sacrifice its farming community as part of the bargain.
One indicator of this attitude in the Indian context is the incompetent manner in which the present government is dealing with the mounting stocks of wheat which have accumulated because issue prices of food supplied through the PDS have more than doubled over the last two years and the spread and coverage of the PDS has not expanded enough. The result has been that instead of the food subsidy declining with the higher issue prices, they are showing signs of rising sharply because of increasing stockholding costs. This simple message, which somehow seems to have eluded the Finance Minister when he refused to roll back PDS price hikes, has now seemed to have struck home. The recent decision to resort to open market sales of wheat stocks in Punjab at a price linked to the economic cost of wheat procured from that state is in effect an effort to roll-back the prices at which the government will offload its stocks, although not to PDS consumers but only to traders and millers. Yet, the latter are reportedly not too willing to lift stocks even at prices substantially below PDS prices, unless export opportunities are opened up through export subsidies. The whole system appears to be geared to trying to run down stocks and incur subsidies but without benefit to domestic consumers. This is strange because while an expanded PDS would be perfectly WTO-compatible, export subsidies in any form would not. It would not be unexpected therefore, if soon after exports were allowed directly or indirectly from FCI stocks, the US or Europe would call for restrictions on the FCI's functioning or even demand that it dismantled. If so, not only would the PDS atrophy but so would the current system of minimum support prices. The gainers, while including domestic traders and millers close to the party currently in power, would be international trading giants like Cargill. The losers inevitably would be consumers and farmers. The war would have been lost by a series of own goals based on the fallacy that somehow all that is needed to reduce subsidies is to make things more expensive for the poor.
There are two issues ignored by those advancing such an argument. First, very often India's commitments have proved to be way beyond even what the international community expects. Take for example, India's zero tariff bindings on a range of agricultural commodities, including the case of an item like rice which is a major crop cultivated in the country. This had been done when India had recourse to quantitative restrictions, but clearly, no thought had gone into what India accepted as part of the Uruguay Round agreement in terms of the reduction of trade restrictions since at that point of time acceptance was presented as inevitable and unavoidable, and recourse was taken to the argument that quantitative controls could continue since there was a balance of payments problem. Simultaneously, however, Finance Ministry officials went about boasting that the balance of payments was healthy and thus evoked the demand from the US and other countries that India should dismantle quotas. Inevitably, India lost her case for maintaining quotas, and when the time for removing quantitative restrictions arrived, by which time international prices had fallen significantly, this commitment proved too much for even India's unthinking reformers to swallow. Fortunately for the government, India's trading partners, including the most powerful within and outside the WTO like the US and Europe, accepted this commitment as being 'excessive'. In the event, as part of the process of doing away the quantitative restrictions, the government renegotiated its tariff bindings, allowing it the freedom to raise tariffs to as much as 80 per cent from zero in the case of rice. Put simply, neither is what India accepted inevitable, nor is it sacrosanct once accepted.
The second issue that is ignored is the fact that even the strongest among the world's trading nations, which would be the ones to benefit the most from a free and liberal trade regime, are aware of the dangers of openness and the benefits of intervention. This is most visible in the agricultural arena, which is a site for intense conflict between the members of the OECD, the club of the world's richest nations. Brought into the mainstream of the multilateral trading agenda only during the Uruguay Round, this was an area where the least concessions were on offer from those trading blocs and nations like the EU and Japan, which had the most to give. In the event, a traditional and more 'labour intensive' sector proved to be one which threatened to completely derail WTO negotiations because of what the US considered the intransigence of the EU, Japan and some Southeast Asian countries. The bone of contention was the massive support being offered by many European countries to their agricultural sectors, which effectively closed their markets to exporters from elsewhere.
It is indeed true that finally even these countries accepted some of the rules with regard to agricultural trade that were formulated as part of the Uruguay Round. But they as well as the US, even while making a show of accepting WTO norms, shifted to emphasising forms of support which were WTO compatible because they ostensibly are non-distorting from a trade point of view. To facilitate that transition, policies of agricultural support were conveniently placed in 'boxes' labeled red, green and blue, with only those in the red box treated as WTO incompatible. The shift away from red to green and blue box policies has, of course, been combined with contentious trade barriers which have provided the staple for the activities of the WTO's Dispute Settlement Panel. According to a recently prepared analysis from the OECD Secretariat, the overall cost to consumers and tax payers of the agricultural policies of its member governments amounted to $361 million in 1999 or 1.4 per cent of GDP. Support to agricultural producers amounted to 40 per cent of the value of farm receipts.
The forms of intervention through which such support is provided include, in the main, production subsidies and trade barriers, which according to the Secretariat "distort production and trade, reduce economic efficiency and may damage the environment". And those benefiting from such support are not small or marginal farmers, but the most productive and profitable ones. The top 25 per cent of farms as measured by their annual sales values accounted for 90 per cent of the support provided by these governments.
What is remarkable is that even the commitment to agricultural policy reform in the form of reduced support and lower trade barriers is being given up. Between 1991 and 1997, the OECD Secretariat reports, as part of the run up to and the aftermath of the Uruguay Round, producer support fell from just above 40 per cent of farm receipts to 30 per cent. But over 1998 and 1999 when farm prices worldwide have been on the decline to just above half the 1995 peak in the case of oilseeds and wheat, the extent of support has risen sharply from 30 to 40 per cent, that is, to levels before the adjustment to a likely post-Uruguay world began. OECD governments clearly rate the need to protect their richest farmers from the adverse consequences of world-price volatility, way above their 'commitment' to a freer trade regime and a 'distortion-free' environment.
Even the OECD Secretariat admits that all of this does not bode well for the emerging and transition economies (ETEs), defined to include the transition economies in Central and Eastern Europe as well as large emerging economies such China, India, Brazil and Indonesia. In its view, "agricultural trade barriers, export subsidies, and domestic support in OECD countries have limited the potential benefits of free trade in agriculture for ETEs," where "agriculture is much more important in income and employment terms." Given this, even the most committed among those belonging to the free trade faith need to consider whether protection for their farmers through means that are either WTO compatible or incompatible, should be sacrificed at the altar of their beliefs, at a time when policies being pursued by their trading partners substantially curtail their access to potential markets.
The problem is that given the adoption of IMF-inspired fiscal regimes, developing country governments, such as in India, are voluntarily forsaking policies aimed at providing direct producer support or measures that indirectly sustain such policies by absorbing surpluses to feed an extensive public distribution system issuing food at subsidised prices to the consumer. This puts them in a self-imposed double bind. To begin with, they are not willing to imitate, rather than listen to, developed country governments when it comes to blatantly violating WTO commitments, and find heir markets flooded with surpluses from abroad. Secondly, they are not sharp-witted enough to drop their obsession with the size of the fiscal deficit at the expense of all else, even while the IMF itself praises the Southeast Asian governments currently engaged in pump-priming themselves out of the recession induced by the financial crises of 1997. This limits their ability to offer WTO-compatible support to their agricultural sectors.
In the event, developing-country governments end up opening doors to their own markets at a time when their access to developed country markets are being reduced, and denying their much-poorer farmers much-needed support even while the developed countries back their rich agriculturists. This can only be because the elite which currently governs in these contexts has much to gain by submitting to the duplicity of western governments, and is willing to sacrifice its farming community as part of the bargain.
One indicator of this attitude in the Indian context is the incompetent manner in which the present government is dealing with the mounting stocks of wheat which have accumulated because issue prices of food supplied through the PDS have more than doubled over the last two years and the spread and coverage of the PDS has not expanded enough. The result has been that instead of the food subsidy declining with the higher issue prices, they are showing signs of rising sharply because of increasing stockholding costs. This simple message, which somehow seems to have eluded the Finance Minister when he refused to roll back PDS price hikes, has now seemed to have struck home. The recent decision to resort to open market sales of wheat stocks in Punjab at a price linked to the economic cost of wheat procured from that state is in effect an effort to roll-back the prices at which the government will offload its stocks, although not to PDS consumers but only to traders and millers. Yet, the latter are reportedly not too willing to lift stocks even at prices substantially below PDS prices, unless export opportunities are opened up through export subsidies. The whole system appears to be geared to trying to run down stocks and incur subsidies but without benefit to domestic consumers. This is strange because while an expanded PDS would be perfectly WTO-compatible, export subsidies in any form would not. It would not be unexpected therefore, if soon after exports were allowed directly or indirectly from FCI stocks, the US or Europe would call for restrictions on the FCI's functioning or even demand that it dismantled. If so, not only would the PDS atrophy but so would the current system of minimum support prices. The gainers, while including domestic traders and millers close to the party currently in power, would be international trading giants like Cargill. The losers inevitably would be consumers and farmers. The war would have been lost by a series of own goals based on the fallacy that somehow all that is needed to reduce subsidies is to make things more expensive for the poor.
© MACROSCAN 2000