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India's multi-faceted WTO refusal

- August 5, 2014

A laborer carries saplings to plant in a paddy field on the outskirts of the western Indian city of Ahmedabad July 10, 2014. As food inflation nears 10 percent, the new government of Prime Minister Narendra Modi faces accusations that it is doing no better at reining in prices than the Nehru-Gandhi dynasty’s Congress party, which suffered its worst election defeat in May. Determined to avoid a repeat of the inflation scourge that contributed to the Congress’ downfall, Modi is taking aim at the Agriculture Produce Marketing Committee (APMC) Act. Picture taken July 10, 2014. REUTERS/Amit Dave
The following is a guest post from political scientist J.P. Singh of George Mason University.
Claiming lack of progress on food security measures, India refused to meet the July 31 deadline for adopting the World Trade Organization’s trade facilitation agreement (TFA). This deal, mostly on customs duties, was struck in Bali in December 2013 among trade ministers, and may have increased global output by $1 trillion. As the WTO works through consensus, India’s refusal blocked the adoption of the Bali agreement.
At the Bali meeting, trade ministers agreed to the TFA, while they opted to conduct further research on food security to find a permanent solution by 2017 to address India’s concerns.  The new Indian government led by Prime Minister Narendra Modi reported dissatisfaction with the progress on food security issues at the WTO.
India’s demurral was met with harsh critiques from trade officials across the world.   Diplomats in Geneva noted that this may further dampen the WTO’s languishing Doha Round of trade negotiations, which began in November 2001.  The U.S. response was cautious, however, though it called India’s stance confusing.
There are three likely explanations for India’s position: domestic politics, lack of trust in international institutions, and a continuation of the type of moralizing in world affairs for which India is quite famous.
From the perspective of global negotiations, an analysis of the three explanations highlights India’s TFA refusal as a credible negotiation strategy aligned with the country’s national or domestic interest.
1. Domestic Politics
Food security is an important concern for India where 450 million people survive daily on less than $1.25 per day.  Thousands of small farmers commit suicide because of unsold food grains. India has long argued for the value of subsidies for food stockpiles to be above 10 percent of a country’s total food production allowed by the World Trade Organization.
Indian Finance Minister Arun Jaitley said on Aug. 2 that the issue of food security is “paramount” for India’s small farmers.  Therefore, India’s stance may speak to latent political pressure from 450 million poor Indians, nearly 50 percent more than the entire population of the United States.
2. Lack of Trust in International Institutions
Issues of concern to the developing world do not move fast at the WTO, and the developed world often does not stick to its promises.  Instead of waiting for 2017, India may have decided to catch the lack of progress on food security issues early and did not honor the previous government’s commitment in Bali.
Since the foundation of GATT, the U.S. and Western Europe have manipulated the developing world on most trade measures.  They have made lofty promises while creating imperial preferences for cheap products from the developing world in the 1950s, instituted quotas on manufactured imports like textiles that would have increased jobs and growth since the 1960s, provided tariff-free access in exchange for quantitative restrictions since the 1970s, ignored or side-stepped dispute settlements that went against their interests since the 1990s, enforced draconian provisions on intellectual property in this century, and hardly made any progress on the “Doha Development Agenda” that was launched in 2001.
India’s lack of trust in WTO processes does not, however, explain the timing or the intensity of India’s refusal, or the vigorous ways in which it has participated in WTO negotiations in the last 25 years.  India took a firm stance on TFA adoption.  The history of Global North-South negotiations, therefore, only provides a context for analyzing India’s position but it does not explain the specifics of Indian refusal to adopt the TFA.
3. Moralizing
India often claims that when the developing world plays by international trade rules, it gets little in return.  When countries like India do not play, they are usually called ‘hardline’ and ‘obstreperous’.   Therefore, India often says no, and trumpets its position as moral and ethical.  Plus, the opportunity cost of saying yes is low.
India’s commerce minister Nirmala Sitharaman’s told the Financial Times in mid-July “our cause is never heard…. Our co-operation over and over again just makes us look as if we are not being assertive enough.”  The developing world, as the economist TN Srinivasan once wrote in the context of marginal preferential gains for its exports, should stop accepting crumbs from the rich man’s table.
However, Indian moralizing in the past came in the context of saying no to the global market economy.  Indian morality was linked to its material interests in a government-led import substitution industrialization strategy (keep exports out, manufacture substitutes in India instead).  Therefore, an India that said no may have gained a costly reputation as a moralizing force, but the ‘domestic’ benefits of saying no were high.
It is hard to link India’s position on TFA as mere moralizing, unhinged of material roots.  In the case of the TFA, India is saying no to a deal at the WTO, at the same time as the government opens it further to foreign investments.  Narendra Modi’s Hindu-right BJP government was elected on a pro-business and growth agenda. It has an absolute majority in the Indian Parliament to deliver on its electoral promises.  Its first Union (Federal) Budget presented to the Parliament catered to domestic and international business interests.
Credible Commitments in Negotiations
Narendra Modi told Secretary of State John Kerry in New Delhi last Friday that he looked forward to his U.S. trip in September.  He linked food security to trade liberalization measures.  For a politician elected on a conservative pro-market platform, the hold of domestic politics from India’s 450 million poor is remarkable but understandable.
The Modi government is new and its stance on the trade facilitation agreement may seem confusing at face value.   The government is mostly inclined toward a pro-business agenda, and has raised limits on foreign direct investment in many sectors, such as defense, that the previous government was unable to do.  However, the Modi government’s first two months in power also demonstrates a continuation of the previous government’s pro-poor policies.  This sort of politics happens in democracies.
India’s refusal on the TFA was not received well in the trade community.  There are, therefore, reputation costs to be paid.  However, a country the size of India can afford these costs, especially when its economy on the whole is inclined toward global markets.
Modi seems to have set a September deadline for the U.S. government to understand India’s domestic dilemma on food security, and move forward on trade issues.  Through investments, India is already offering the ‘reciprocity’ – in exchange for food security measures — that the U.S. government and businesses might seek.  In doing so, India has weakened its hand through (unilateral) market liberalization, but arguably also strengthened its credibility on pursuing and aligning a domestic agenda on food security with the country’s position on international trade.