The Hindu Business Line : Correcting asymmetries in multilateral trade

IT IS NOT difficult to see that at the core of the World Trade Organisation's functioning, there is always a notion of conflict. Be it in agriculture, services, trade related intellectual property rights, investment or sanitary and phyto-sanitary measures; the breadth of disagreement (in terms, of market access, movement of natural persons or imposition of stringent standards on food and health) between developed and developing countries is glaring.

Such difference of opinion and intention is also visible in the case of subsidies. In fact, the issue of subsidies is so hidden and in-built in the cost, that it is sometimes given under a separate head, especially at country or government level. And the allocations of subsidies in various sectors have often led to trade distortions.

Certain forms of subsidies, such as production and export promotion, provided by various countries or governments give rise to trade distortions in international trade. To correct these distortions, the WTO is trying to impose a certain discipline by way of an Agreement on Subsidies and Countervailing Measures (ASCM).

The perception of developing countries towards the ASCM is that it has serious imbalances. They argue that the subsidies they get for industrialisation and social development have been included in the actionable or prohibited category, implying that they are liable to countervailing duties, while that used by developed countries belong to the non-actionable category and hence exemption from countervailing duties.

This asymmetrical handling of the issue seems unfair.

Even the extension of this asymmetrical dimension is visible when one analyses the issue of subsidy in the Agreement on Agriculture (AoA) and the ASCM.

Subsidies given to agricultural goods are governed in the WTO by the AoA, whereas subsidies for non-agricultural or industrial products come under the ASCM. There are significant differences in the way both agreements are dealt with. For instance, today, huge subsidies are given to the agricultural sectors in the US and the European Union (EU) and, as a result, trade restrictions and distortions are taking place, leading to the collapse of free and fair trade as espoused by WTO. The failure of Cancun Ministerial Conference, in 2003, should not be forgotten. But such subsidies remain outside the purview of the ASCM. Such biased treatment is only causing setbacks to the functioning of the WTO, in spite of the repeated requests by its Director-General, Mr Supachai Panitchpakdi, recently to iron out differences in the agreements.

Difference in treatment, especially by the US and the EU, towards these two agreements is not without reason.

The idea of giving the AoA flexibility and latitude, and making the ASCM stringent is to protect agriculture, a relatively uncompetitive sector in the developed countries. This is allowed by the WTO. Whereas, the developing countries are not allowed to strengthen or protect their uncompetitive sector — manufacturing — using subsidies.

This asymmetry is emphasised by some economists through their work as a fundamental problem prevalent with the multilateral trading system.

"A Development Round of Trade Negotiations?" (Stiglitz and Charlton, 2004), a report prepared for Commonwealth Secretariat, states that the new trade rules and domestic disciplines introduced in the WTO reflect the needs and priorities of developed countries, and not that of developing countries.

They argue that many of these rules constrain the policy options of developing countries and, in some cases, prohibit use of instruments, which were used by developed countries at comparable stages of their development.

Similar views have also been expressed by Mr Ha-Joon Chang in Kicking away the ladder? Policies and institutions for economic development in historical perspective, London, Anthem Press, 2002.

He argues that developed countries, including the US and the UK, have largely used industrial policies and the so-called `bad' trade policies, such as, infant industry protection and export subsidies, during the initial stages of their development, and now the WTO rules are preventing developing countries from using such practices in their catch-up period.

Mr Chang describes this peculiar situation as an attempt to "kick away the ladder", that they used to climb to the top.

To correct this asymmetry, developing countries argue that `state interventions' are indispensable, and especially so, for small and vulnerable economies as their exports are labour-intensive and produced by small and medium enterprises, whose industry base is much less advanced than their counterparts in the developed countries. They feel that these subsidies can strengthen their industrial sector and help them diversify their exports, thereby becoming active participators in world trade.

On the other hand, measures taken by developed countries to remove trade distortions, such as the imposition of disciplines in the form of countervailing duties or even mere threat of such measures are seriously upsetting the functioning of industrial sectors in developing countries by leading to a fall in production, large unemployment, decline in incomes and increase in poverty.

Besides, the high cost of capital, low level of infrastructure development, inadequate integration and organisation of the economy and poorly developed networks are major impediments for developing and least developed countries (LDC) to compete in the global market.

These impediments are adding to the transaction cost of exports, making them uncompetitive in world markets. Such compulsions make the role of the government in developing countries and LDCs even more critical. It must play a positive and proactive role for facilitating removal of current impediments and help the domestic industry become globally competitive.

Negotiations are on under the Doha Development Agenda. This is the timedeveloping countries to try and rectify the fundamental differences and discrepancies in the WTO's approach towards agricultural and industrial subsidies.

(The author is with the Indian Institute of Foreign Trade. Views expressed are personal.)

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