History Repeating Itself at WTO

An imbalance has emerged in the new attempt to reach an agreement in the Doha round of talks of the World Trade Organisation. If a repeat of the Cancun collapse of 2003 is to be avoided, then the proposals to drastically cut industrial tariffs in the developing countries have to be modified.

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Unfolding Dynamic In many ways, the conversation between the two, representing diverse interests, typifies the unfolding dynamic in the Doha negotiations. No one bothers any more to claim that there is a “development dimension” to the Doha round, as was used to sell the WTO liberalisation agenda six years ago. If anything, a round launched to correct the historical distortions caused by farm subsidies in global agriculture as well as to remove the inequities in the trade body’s rules has degenerated into a set of pure mercantilist market access negotiations. Though every country has to give and take in multilateral trade negotiations, the rules of the grand bargain have been dramatically altered since last year. And the credit for this transformation must surely go to the Cartesian socialist, Pascal Lamy, who took over as the WTO’s director general in September 2005.

It is a common refrain these days that “those who forget history are bound to repeat it”. Is Lamy, in his current capacity, recreating another Cancun?

The WTO’s Cancun ministerial meeting collapsed like a house of cards in 2003 and investment, trade and competition, transparency in government procurement, and trade facilitation. Despite innumerable warnings from the developing countries that they would not agree to the Singapore issues, the EU and its then trade commissioner Pascal Lamy chose to turn a deaf ear. Brussels was supremely confident at Cancun that it could break the unity among developing countries with its carrot and stick policy. When that did not happen, in a panic reaction, the EU trade commissioner started withdrawing one Singapore issue after another from the menu. But it was too late, the developing countries had already walked out. Of course, Lamy was then forced to characterise the WTO as a “medieval organisation”.

It is important that the memories of Cancun are kept alive, otherwise a similar outcome may be relived all over again. Already, there are deep divisions on what ought to be the parameters (modalities) for cutting down industrial tariffs. The horizontal divide on NAMA involving over 100 developing countries on the one side, and the industrialised countries led by the US and US has not come in a day. Nor was the opposition to the draft modalities tabled by the chair of the NAMA negotiations, Canada’s ambassador to the WTO, Don Stephenson, fanned by the so-called “mischievous” developing countries like India, Brazil, South Africa or Argentina. The reason why there is such fierce opposition to the NAMA parameters is not difficult to fathom.

Inequity in Industrial Tariffs If anything, the opposition to the draft NAMA modalities has come because they contained proposals that were echoed by the US and the EU at the failed Potsdam meeting earlier this year between the US, the EU, Brazil and India. Underlying the figures on tariff reduction in those proposals was the rationale that in return for the commitments in agriculture that the two biggest players plus other protectionist countries in the industrialised world

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made, the developing countries would have to pay much more in the form of huge cuts in their industrial tariffs. Notwithstanding that such a bargain went against paragraph 24 of the WTO’s 2005 Hong Kong ministerial declaration that built a proportional linkage between agriculture and NAMA and the development dimension of the Doha round, Lamy (who also heads the WTO trade negotiations committee) and the NAMA chair refuse to see the writing on the wall.

It is this change in the dynamic of the Doha trade negotiations that needs to be captured at this juncture when Bush and the current EU trade commissioner, Peter Mandelson, want to conclude the round with the assistance of the WTO chief. Previously, the Brazilian president Lula da Silva was also party to such a dynamic until he realised that Brazil would have to pay huge political and economic costs in its domestic market and also in MERCOSUR (the regional grouping of Argentina, Brazil, Paraguay and Uruguay). Manmohan Singh seems inclined to help Bush but he must realise the costs of such assistance will be a nuclear cauldron of a different kind.

After July 2006 Collapse After the suspension of the Doha trade negotiations in July 2006 by the WTO chief, a move that was primarily devised to help the US administration tide over its difficulties because of the domestic congressional elections later that year, there was a sharp change in the relations between the US and the EU. Until then, the two were at each other over the trade-offs in agriculture. EU’s Mandelson, who was once described as the Prince of Darkness by The Economist, had at that time pushed the US to the wall on the subject of cutting down its domestic farm subsidies, one area in which the EU had started reforming since its Common Agriculture Policy of 2003. It is a different story that the reform might not be sweeping as pointed by the Organisation for Economic Cooperation and Development (OECD) in its latest report, but at least it moved in the direction of modest changes.

US Subsidies On the other hand, the US was disinclined to make comparable changes in its domestic subsidies because of the role played by

special interest groups, especially the domestic commodity lobbies. It is worth remembering that as far back as the 1989 mid-term review of the Uruguay round in Montreal, the US had actually circulated a proposal calling for the elimination of both export subsidies and trade-distorting domestic subsidies. Subsequently, there was a huge increase in the value of US domestic farm subsidies. Although its effective farm subsidies last year were around $ 11 billion, Washington is least prepared to give up the huge headroom it currently enjoys in its last subsidy commitments in the Uruguay round. It is against this backdrop the US trade representative ambas sador Susan Schwab chose to walk out from the July 2006 meeting of the six trade ministers from the US, the EU, Brazil, India, Australia and Japan on the ground that there was not enough on the plate in market access in agriculture. Immediately, there were recriminations between Washington and Brussels accusing each other of being the villain of the piece. The US also hit out at India along with the EU for creating “black holes” through special products and the special safeguard mechanism that would undermine market-opening opportunities.

Pascal Lamy, who assiduously focused all his energies on the G-4 the US, the EU, Brazil and India) and the G-6 (the US, the EU, Brazil, India, Australia and Japan) meetings instead of concentrating on a truly multilateral process, then chose to suspend the negotiations, a move that was likened by a venerable Geneva-based trade diplomat to the suspension of the English parliament by the monarch Charles II in 1679.

Following a rapprochement between Washington and Brussels, developments took a different turn in late 2006. The trans-Atlantic trade partners started working aggressively towards a common zone of their concerns that took care of their core trade interests. It was also a phase in which a large majority of the WTO members had little clue as to what was being agreed among these two dominant players. It was characterised as movement in “concentric circles” involving first two players (the US and the EU), subsequently three players (the US, the EU and Brazil), then four players (the US, the EU, Brazil and India), and then the G-6.

Temporary Regrouping What was, however, interesting about this post-July 2006 phase of negotiations was the coming together of the US, the EU and Brazil on a range of issues. It became a game among just three with India, the fourth player, merely sticking to its defensive interests in agriculture. In a series of meetings that took place in different international capitals between these four members, it became difficult to know what each member was saying to the other because the meetings were based on a one-on-one-meeting-framework. But there were several aspects to the unfolding dynamic of these negotiations. First, the US and the EU more or less reached a common threshold on what each was prepared to do in agriculture. Second, they decided to pool all their resources to put up a common front on NAMA. Third, Brazil was a party to this common understanding. Fourth, Brazil was ready to play the game with the two on the belief that its interests in agriculture would be sufficiently addressed. And fifth, Brazil had decided it would also go as far as possible in agreeing to steep commitments in the NAMA. Though India played ball with the three, it remained somewhat sceptical about the emerging consensus between them. India’s strategy of wanting to be the part of the club but also wanted to remain with the developing countries and thus appeared like running with the hare and hunting with the hounds.

On a parallel track, the multilateral route too started evolving in bits and pieces. The chair for agricultural negotiations Crawford Falconer, New Zealand’s ambassador to the WTO, who is a firm believer in a multilateral-driven process as against the high-level ministerial meetings, set the bell ringing through his so-called “fireside chat” meetings with over two dozen trade envoys on all major issues in the three pillars – market access, trade-distorting domestic support and export competition – of the Doha agri culture package. He was soon followed by the NAMA chair Don Stephenson through his small group meetings called the NAMA caucus. The chair for the COMMENTARY

Doha services negotiations Fernando De Mateo of Mexico also kick-started the talks through a process called the Enchilada meetings.

Small Meetings Though the multilateral work took place in fits and starts, Pascal Lamy continued to place more importance on the G-4 meetings. He would invariably tell trade envoys of the small countries from Africa and elsewhere that they should put pressure on the G-4 to reach an agreement and “your issues will all be sorted out once the G-4 is able to reach an agreement”. At the same time, he was also writing letters to India and other countries asking them how justified they were in seeking enhanced flexibilities for special products and why they should provide real market access for industrial products. While preaching to the meek without fail, Lamy would turn a blind eye to the happenings in Washington, Paris and Brussels. For example, during his visits to third world capitals he constantly exhorts the country he was visiting to deliver in the Doha round. But in his visits to Washington, he is always publicly silent on the volume of US subsidies to agriculture.

Meanwhile, the G-4 meetings moved from one capital to another in search of that elusive convergence. The final climax came at a meeting in the Potsdam, Germany, earlier this year when the talks collapsed because of unbridgeable differences over NAMA between the US and the EU on one side, and Brazil and India on the other. At issue was whether the two developing countries would agree to a coefficient of between 18 and 20 in the Swiss formula in industrial tariffs, which would have resulted in deep cuts to their bound tariffs to a level around their current applied tariffs. In the face of rising opposition from its domestic industry as well as emerging fissures within the MERCOSUR regional free trade agreement involving Brazil, Argentina, Paraguay and Uruguay, the Brazilian government developed cold feet on the extreme demands from the US-EU camp. India, which had been maintaining a distance from the three, chose to walk out with Brazil at Potsdam. The US and the EU promptly put all the blame on Brazil and India for not being ready to show flexibility in NAMA while claiming that they themselves were willing to move in agriculture.

With the demise of the G-4 grouping in June, which was Lamy’s main hope for concluding the Doha trade negotiations, the focus then shifted to Geneva. All negotiating bodies commenced work, with the chairmen of the agriculture and NAMA groups tabling their draft modalities.

Agriculture Draft The draft modalities on agriculture suggested ranges. “Some of those narrow ranges or target numbers or technical draft text will be very painful, for sure”, said Falconer. “But that pain will be required to get agreement”, he said, arguing that “I have done my level best to ensure that at least that pain is spread in a reasonably balanced way within the terms of the framework”.

The underlying rationale in the draft modalities in agriculture, claimed several negotiators, is to force the US to pay in trade-distorting domestic subsidies, the EU and the G-10 defensive coalition of farm importing countries to provide more market access and the developing countries, especially the G-33 coalition seeking flexibilities for special products, to avail of “proportional” two-third commitments in a tiered formula as well as have room for special products.

In domestic support, the US is required to undertake a reduction commitment of “[66-73] per cent”, which would bring the subsidies down to a range between $ 13 and $ 16.4 billion a year. In fact, the figures suggested by the chair are based on what was discussed in the G-4 meetings. Until now the US has maintained that it can go down to $ 17 billion though it privately indicated to the EU that it could even consider a level of $ 15 billion provided there was an ambitious market access package for farm products. The range for the EU is for a cut of “[7585] per cent”, which would reduce its overall trade-distorting domestic support (OTDS) to euro 27.6 billion from euro

110.3 billion. There are several other aspects relating to the cuts in the domestic support which point in the direction of some modest changes in the global farm subsidy regimes.

As regards market access, the draft modalities accepted the G-20 coalition (led by Brazil, India and South Africa) thresholds in a tiered formula to cut tariffs for farm products. The modalities called for a cut between “[66-73] per cent” in the top band of tariffs above 75 per cent; “[62-65] per cent” cut for the tariffs between 50 and 75 per cent; “[55-60] per cent” cut for tariffs between 20 and 50 per cent; and [48-52] per cent” cut for tariffs between 0 and 20 per cent. For developing countries, the draft proposed higher thresholds and reduced cuts ranging from 47 per cent in the top band, 41.5 per cent in the second band, 38 per cent in the third band, and 33 per cent in the lowest band. The chair’s proposals work out to an average cut of about 40 per cent but Falconer said categorically “the maximum average reduction in bound duties any developing country member shall be required to undertake as a result of application of this formula is [36][40] per cent. There was a general tone of appreciation for the chair’s draft from almost all countries saying it is a balanced package that provides a basis to continue with further work. But the US rejected the chair’s proposal on how to cut the cotton subsidies saying it would not accept as steep a cut as that suggested in the modalities.

Spanner in the Wheel However, it is now the draft modalities on NAMA that have put the spanner in the Doha wheel. The main problem with the NAMA draft – unlike agriculture which has large parts of it unresolved – is it presented the final picture of tariff cuts without having the foggiest idea of what is going to be the outcome in agriculture. The chair of the NAMA group, Stephenson, says poetically that his aim is to “start with the end in mind” by addressing the water between the applied and bound tariffs in developing countries. He said the formula would bring down bound tariffs to below 3 per cent on average in industrialised countries with tariff peaks below 10 per cent for the sensitive products, while the developing country bound tariffs would come down to below 12 per cent with a handful above 15 per cent. Reducing the “overhang” in the developing country schedules is an important element, he

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said. The modalities suggested a coefficient in square brackets of between 8 and 9 for industrialised countries and 19 and 23 for developing countries. At the failed G-4 ministerial meeting in Potsdam, theUS and the EU demanded a coefficient of 18 for developing countries, which was rejected by Brazil and India on the ground that it would alter the balance in the Doha round negotiations.

Without rejecting the draft modalities on NAMA, over 100 countries have said they will move only if the “fundamental flaws” in the draft are removed. So far, there are no signs that the chair or the WTO director general are making an honest effort to address those flaws. But pressure is now being exerted by Bush and Mandelson on poor countries to fall in line or pay a price. Small wonder that Bush complained to Manmohan Singh about the Indian negotiators. But Manmohan Singh must realise that there is nothing for him to show to his software or other services constituencies because the US and the EU have refused to make substantial offers in mode 4 (enabling temporary migration) or mode 1 or mode 2 of the services negotiations, and also on the Convention on Biodiversity. India is going to pay both in agriculture and NAMA without any commensurate returns in a so-called development round.

Why the Indian Anxiety? Also there is no need for the Indian prime minister to rush because the US administration is not in a position to get approval for its expired fast track authority. If anything, it wants to first collect all the goodies from the poor countries to convince its US Congress that it is worth signing the Doha deal. And Pascal Lamy is hoping that the world leaders will come to his rescue while in the day-to-day negotiations there is little change in the positions for an early conclusion of the Doha round.

There are umpteen unresolved issues in the Doha round: converting specific and compound tariffs in agriculture to ad valorem duties, treatment of sensitive products or special products, the demand by the US to continue with a peace clause and by the EU and the G-10 defensive group to have a special safeguard in the market access pillar, and so on. Then there are other issues like geographical indications, disclosure norms for the genetic material and so on. In fact, the Doha round may drag on for months to come, a prospect Lamy does not want to acknowledge in public.

Time is running out for the architect of the Cancun I to avoid another catastrophic result in the Doha trade negotiations in his present avatar as the WTO director general. If Lamy is committed to a balanced outcome, he has a great opportunity to correct the gross imbalance in the draft NAMA modalities by presenting figures in the revised draft that are proportional to the outcome in agriculture as well as in consonance with the overall mandate for a balanced outcome with a “development dimension”. Therefore, the acid test for the WTO chief is going to be when the revised draft modalities in agriculture and NAMA are presented in the next fortnight. If Lamy succeeds in hammering out a balanced package, the other issues can be sorted out. A leader must not buckle under pressure because of opposition from the powerful. History will judge a leader not by what he did to satisfy the mighty few but whether he stood by the majority.