The Hindu Business Line : Has WTO lost its meaning?

The bottomline is that countries should follow unilateral trade policies suited to their own domestic needs but within the framework of the changing international trade environment

The collapse of the Doha Round negotiations in Geneva has raised questions about the World Trade Organisation, and its efficacy. One main reason for this is the recent proliferation of regional trading agreements (RTAs). Though many countries — especially Mexico, thanks to NAFTA (North American free trade agreement) and European Union members — have gained from RTAs, these are highly discriminatory and flout WTO norms. Such inequitable agreements have been possible mainly because of weak and ambiguous provisions, such as Article 24 of GATT and Article V of GATS.

Powerful trade blocs

World trade is increasingly getting confined to two-three major blocs, vesting, in the process, immense political and economic power in them. For example, nearly 60 per cent of the EU trade is intra-regional and RTAs constitute nearly 40 per cent total global trade. This has put tremendous pressure on many developing countries that are being excluded from preferential access to the markets of these major trading blocs. It appears that neo-protectionism is the order of the day.

This is true in the case of India too, which is not a member of any major trading bloc except the South Asian Free Trade Area (SAFTA) and the recently-concluded FTA with Thailand and CECA (comprehensive economic cooperation agreement) with Singapore. Not belonging to a significant trade bloc is likely to result in trade diversion for India. Textiles is a case in point. At present, more than half of the US' textile imports are from Mexico, a NAFTA member. Several studies have shown that Mexico has gained at the cost of other developing countries and because of Nafta's the stringent rules of origin.

Keeping this in view, India is negotiating to gain an entry into ASEAN (Association of South-East Asian Nations) besides concluding FTAs with a few countries. It is essential that the WTO rules governing RTAs are strengthened. Else, as is evident from the recent collapse of talks in Geneva, the WTO may become redundant. As it is RTAs have derailed the WTO's multilateral approach and affected developing countries that are not part of any strong RTA. RTAs go against the basic WTO principle of most favoured nation, the WTO's future largely depends on how effectively they are disciplined.

Balance of power

Another factor that questions the efficacy of the WTO is the domination of the US and the EU in negotiations, with little concern for the problems and needs of the developing world. One major issue of disagreement is the reduction of tariffs. The Doha Ministerial Declaration had stated that the negotiations should particularly aim at reducing or eliminating tariff peaks, high tariffs and tariff escalations, especially on products of export interest to developing countries, and that product coverage should be exhaustive without excluding any sector. In reality, rich nations erect significant trade barriers and levy high tariffs on the export products of developing countries, such as textiles and clothing, leather and footwear, fish and fish products and agriculture. The levels of developed country protection in these sectors are 10 times higher than the average on other merchandise.

Developed country tariffs on imports from developing nations are four times as high as that from OECD. And non-tariff barriers, in the form of food safety and technical/other standards, have further affected the exports from the developing world, including India. This rigid attitude of the developed world is the main reason for developing countries refusing to lower their own trade barriers, seriously affecting, thereby, their reform process.

The continuing deadlock

Further, the WTO received another blow when talks among six major members broke down on July 23. Ministers from Australia, Brazil, the EU, India, Japan and the US had met in Geneva to try to follow up on instructions from the St Petersburg G-8 summit. The Geneva meeting was "lengthy and detailed ... but at its conclusion, it remained clear that the gaps remain too wide," Mr Lamy told the full WTO membership.

The US, though protectionist for short-term interests, has made it clear that it is committed to freer trade by calling for abolition of all tariffs worldwide by 2015. However, the same cannot be said of the EU, which is quite committed to a common agricultural policy and continues to hugely subsidise its farm sector and unwilling to make any concessions. The EU provides 90 per cent of the global export subsidies. But over the years, it has very conveniently shifted the export subsidies to be part of domestic support. The absence of any significant breakthrough on the agriculture front puts a serious question mark on the progress of other negotiations. This is where the real problem lies.

Also putting the talks in jeopardy is the deadline set by the US Congress — the US President will not have unfettered negotiating authority after July 2007. Most trade experts believe that if a tentative deal cannot be agreed to in the next few months, there will not be time to complete the details and gain approval in the US.

Reviving the Round

Analysts and the key countries are divided on how to revive the trade round. One possibility is to reduce ambitions in order to complete the trade round in time. Underlying the trade deadlock is the problem of who will actually gain from the planned trade liberalisation. Recent research by the World Bank suggests that the gains from opening up agricultural trade would accrue mainly to a few of the better-off developing countries such as Brazil, Thailand and Argentina. Many of the poorest countries would gain little, and fear that rapid market opening could undermine the livelihoods of their poor farmers.

In this backdrop, the importance of re-starting the talks and negotiations at the earliest can hardly be over-emphasised. One, it is going to determine the future role of the WTO as a facilitator of a multilateral trading regime. And, two, it will also determine the role of developing countries in world trade.

Popular yet

In spite of the all the furore over the success and future role of the WTO, it has no doubt gained in popularity over the years. The number of countries waiting to seek accession and become members corroborates this. The WTO Annual Report 2005 indicates that its total membership stands at 149 and a further 20 plus countries, most of which are LDCs, are negotiating accession. The report further says that elimination of barriers to merchandise trade in both industrialised and developing countries could result in welfare gains of $250-620 billion annually. A more rapid growth associated with a reduction in global protection could reduce the number of people living in poverty by as much as 13 per cent by 2015. This proves that trade liberalisation and poverty reduction go hand in hand. Therefore, for small and poor countries the WTO is the way to pursue economic development through enhanced trade liberalisation.

In the current situation, the bottomline is that countries should follow unilateral trade policies suited to their own domestic needs but within the framework of the changing international trade environment.

(The author is a Senior Economist with National Council of Applied Economic Research, New Delhi. Feedback can be sent to e-mail: gnataraj@ncaer.org)