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India and the Geopolitics of Trade

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Pacific Money

India and the Geopolitics of Trade

New Delhi is backtracking on an agreement made in Bali just months ago. Why?

India and the Geopolitics of Trade
Credit: India farm via

Global value chains have become a dominant feature of the world economy. With production increasingly fragmented and often distributed across national boundaries, success in international trade depends as much on a country’s capacity to import as on its capacity to export. Any barriers (tariff or otherwise) on imports raise the cost of inputs (whether domestically procured or imported given import parity pricing) and thus act as a tax on a country’s exports. Since tariffs are generally already very low, non-tariff barriers remain the key obstacle to trade.

Among non-tariff barriers, border and customs procedures are the most trade-restrictive and usually form the core of multilateral negotiations on trade facilitation. The OECD estimates that every 1 percent reduction in trade transaction costs adds $40 billion to the world trade, with 65 percent of these gains accruing to developing countries. The International Chambers of Commerce (ICC) has estimated that reforming customs and border procedures will add $1 trillion to global trade and create 21 million jobs.

Yet, the July 31 deadline on trade facilitation passed without India agreeing to ratify it. India insisted that it would not sign on to the Agreement on Trade Facilitation (ATF) until all issues in the Bali package, including a permanent solution for public stockholding and food security, are taken as a single undertaking. Many in India believe that committing to the Bali package will take away the policy space needed to promote inclusive growth.

Moreover, others argue, the developed countries have a history of dilly dallying on the issues of concern to the developing countries and hence one can’t take former words on face value. While both points have some elements of truth, was it really the food security of the poor that explains India’s volte-face on trade facilitaion?

What’s Wrong with India’s Stand?

Para 4 (b) of Article 6 of the WTO’s Agreement on Agriculture (AOA) imposes a 10 percent (5 percent for developed countries) cap on both product and non-product specific subsidies given by developing countries. Eighty percent of India’s non-product subsidies that cover input subsidies on fertilizer, power and water are given to resource poor farmers, and hence would easily escape the WTO subsidy discipline.

Again, under the product specific subsidy, the 10 percent cap applies to “production” and not to “consumption” subsidies. Hence, WTO subsidy discipline will not place any limits on India’s ability to sell wheat or rice to its poor at prices well below their procurement costs.

WTO’s Agreement on Agriculture (AOA) defines a subsidy as the difference between the current minimum support price (MSP) and the International Reference Price (IRP), with the IRP to be the prices frozen in 1986-88. The 1986-88 prices for rice and wheat would be expected to be very low, but that’s the existing WTO rule that applies for the calculation of farm support.

If the MSP for wheat is $250/metric ton against a global price of $300/metric ton, India’s farmers would be negatively subsidized to the extent of $50/metric ton. However, if we take the IRP of 1986-88, which is $150/metric ton, then the subsidy would be of $100/metric ton. Thus, a 10 percent subsidy cap will limit India’s ability to adjust its minimum support prices (MSPs) for rice and wheat for public procurement and stockholding purposes.

On the other hand, India’s Food Security Act passed by the last UPA government promises subsidized food to roughly two-thirds of India’s 1.2 bilion population. This will further increase the need to maintain food stockpiles and also necessitate future hikes in MSPs for rice and wheat. That’s sure to breach the 10 percent subsidy cap and may explain India’s insistence on getting its food subsidy and procurement program exempted from WTO subsidy discipline.

Keeping in mind India’s sensitivity on farm subsidies, the Bali Ministerial Conference (Dec 2013) reached a compromise formula: the peace clause for brokering an ambitious agreement on trade facilitation. The peace clause provided a four-year relaxation on farm subsidy discipline for India (and other developing nations) until 2017, until a permanent settlement to the question of food program is negotiated. However, it has been rejected by the Modi government.

India’s Brinkmanship

Experts opine that this backtracking on something India agreed to just a few months previously will damage its reputation, at a time when Prime Minister Narendra Modi is trying hard to project India as a constructive global player in its engagement with the outside world. It has the potential to derail the process of multilateral trade liberalization and undermine the WTO’s ability to deliver in future, something that India of all countries can ill afford.

India’s intransigence will also give an excuse to developed nations (led by the U.S.) to expedite trans-regional trade pacts like the Trans-Pacific Partnership and the Transatlantic Trade and Investment Partnership with WTO plus rules on IPR, labor, environment and investment protection. These new rules, which are cleverly designed to promote the interests of multinationals, will create market access barriers for India’s exports of merchandise and services.

Leaving aside the reputational cost and derailment of multilateralism, it is pertinent to ask if this is all really about cheap food for the poor? Perhaps the right question is: Who benefits from India’s high MSPs for rice and wheat?

Policy of Appeasement

High support and procurement prices benefit farmers with surplus produce to sell. Obviously, landless farmers and workers, and farmers with small and uneconomic holdings (the majority of India’s poor) are not going to benefit from successive, unrestricted hikes in MSPs with or without the WTO subsidy discipline. In fact, high MSPs and inefficient procurement methods are encouraging food inflation and hurting the interests of the poor in India.

Why then is the Indian government so insistent on protecting its MSP-linked procurement and public stockholding programs? The only plausible answer seems to be the appeasement (even if not actually intended) of the farm lobby comprising of big farmers, traders and other intermediaries who have a vested interest in maintaining the existing arrangement.

This is not to argue that all is well in the developed countries. The farm sector gets massive government support and remains heavily protected in most major developed countries. The U.S. Agricultural Act of 2014 provides for a subsidy of $954.4 billion with an annual outlay of $20 billion for just five crops: wheat, rice, soy, corn and cotton. The U.S. has refused to remove its cotton subsidy despite losing a WTO dispute with Brazil. The EU provided a direct subsidy of 39 billion euro ($52 billion) in 2010. Japan is not far behind with its with annual farm support of more than $50 billion.

The peak import duties in the EU on dairy, fruit & vegetables, and sugar & confectionary stand at  605 percent, 156 percent, and 133 percent, respectively. Similary, the peak import duties in the U.S. on dairy, fruit & vegetables, and oilseeds are 95 percent, 132 percent, and 164 percent, respectively. Japan has peak import duties on dairy (692 percent), fruits & vegetables (337 percent), cereals (610 percent) and oilseeds (580 percent) that compare to India’s on dairy (60 percent), fruits & vegetables (100 percent), and cereals & oilseeds (100 percent). No political party either in India or elsewhere is prepared to antagonize the farm lobbies.

Developing World Realities

Still, India can’t justify to fail on trade facilitation. Over two thirds of India’s exports go to the developing and emerging nations. Most of these nations (India included) lag behind the developed countries when it comes to trade facilitation.

Successive World Bank Ease of Doing Business reports, which rank countries on their trade friendliness or ease of trading across borders, show that 23 out 46 G-33 countries fair badly with a rank of 100 and above. India’s rank fell to 132 in 2014. Poor trade facilitation impedes the integration of an economy into global production networks. India’s participation in the global value chain (GVC) is 36 percent, compared with 82 percent for Singapore, 68 percent for Malaysia, and 63 percent for South Korea. Successful implementation of the Agreement on Trade Facilitation would be in India’s long-term interest.

The Way Forward

Continuing with the existing arrangement on food procurement and distribution is bad economics and should be avoilded. At any rate, finding a permanent solution to the food security question would involve changing the AOA, which in turn would need parliamentary approval in many countries – quite a big ask.

Trade negotiation is a matter of give and take. India should not overindulge in brinkmanship on trade facilitation. One approach could entail working to revise the international reference price system that uses 1986-88 prices to a system of current prices. That, however, would not be worth the effort.

Rather, India should use the interim period given under the peace clause to restructure its “inefficient and leakage prone” food subsidy regime. Switching to direct cash transfers based on area and yield that are permitted under the AOA and widely practiced by developed countries would nicely serve the interests of India’s farmers and poor in a fiscally cost effective manner.

It would also strengthen multilateralism, a key objective of India’s foreign policy.

Ritesh Kumar Singh is a Corporate Economist. Prerna Sharma is the winner of Zee Business Best Market Analyst 2013 for Agri. Commodities. The views here are their own.