World Trade Agreement and India | Economics

The final draft of the World Trade Agreement consists of 500 pages. It includes 40 separate agreements. There are some new additions to agreements such as intellectual property rights, trade in services, agriculture, textiles and clothing, trade related investment, rules on dumping, governments procurements etc.

The controversies had been raging earlier related to various proposals included in the Dunkel Draft Text. Some aspects of these proposals had even some political fall-out in India. The uproar over the Dunkel Draft had not yet subsided, when the conclusion of December 1993 agreement at the Uruguay Round brought to the fore the controversy whether this agreement was beneficial or not for India. There were serious differences of views on this crucial matter.

No doubt, some aspects of the agreement are likely to have some serious adverse repercussions but a closer scrutiny of different aspects of the agreement indicate that India, may have net gains from it and need not be swamped by despair.

The assessment of the final agreement is made on the basis of the following main aspects:

1. Reduction in Tariffs:

Under the final agreement, the developed countries are committed to lower tariff barriers by 36 percent over six years. The developing countries, on the other hand, are required to cut tariffs by 24 percent over the next 10 years. The reduction of the overall tariff level from 5 percent to about 3 percent is likely to bring about an accelerated growth of world economy and international trade.

It is obvious that the developed countries, having a 71 percent share in merchandise export, will be the main beneficiaries of the opening up of the markets. India having a less that 1 percent share in merchandise export can expect only very limited gains. In this connection, it is estimated that the annual increase in exports from India may be of an order of about 1 billion dollars.

2. Quantitative Restrictions on Imports:

As regards quotas and other non-tariff restrictions upon international trade, the final agreement provides for their conversion into tariffs which are subject to specified cuts. As the less developed countries like India rely much upon the quantitative restrictions on trade for affording protection to the domestic industries, the fears are expressed that dismantling of quantitative restrictions on imports will slow industrial growth and undermine the programmes of import-substitution.

Although India has already embarked upon the economic reforms including the reduction of tariffs and non-tariff trade barriers, yet the final agreement is not likely to hustle India into any large scale dismantling of the structure of the quantitative trade restrictions. This agreement permits the countries, faced with serious balance of payments deficit, to retain these barriers.

In this regard the certification has to be done by the IMF. The BOP position of a country, seeking to continue with the quantitative restrictions, will be reviewed every two years to examine whether the concessions should continue or not. For the present, India is confronted with the BOP problems. Therefore, it can retain those trade barriers. Subsequently, as its BOP position gets improved, it will be obliged to do away with such restraints upon trade.

3. Trade in Services:

The final agreement covered for the first time the trade in services.

It is concerned with four types of services:

(a) Services supplied from the territory of one party to the other;

(b) Services supplied in the territory of one party to the consumers of another party such as tourism,

(c) Services provided through the presence of service-supplying entities of one party in the territory of another, such as banking; and

(d) Services provided by nationals of one country in the territory of another, such as consultancy services or construction projects. It is assumed that India would be benefitted by the cross-border movement of skill-intensive services i.e., the export of skilled manpower.

In the Uruguay Round, the developed countries were reluctant to yield ground on the cross-border trade of services and capital flows. The developing countries like India were more concerned with securing access for their skilled manpower to the markets of advanced countries. The commitment from advanced countries in this respect is not categorical.

The Agreement includes a quite thin commitment in this respect. Although in some quarters, there are high expectations that India will earn at least 1.2 billion dollars in remittances, which may raise even upto 5 billion dollars in the next four years. These estimates seem to be over-optimistic and exaggerated. There are two principal reasons because of which such gains from export of skilled manpower may not get materialized.

First, the advanced countries are not inclined to relax their immigration laws and visa regulations. Secondly, the formation of the regional economic groupings like the European Union, NAFTA and ASEAN are not likely to permit large scale movement of labour from the countries outside the regional economic groupings.

Whatever gains from trade in services will accrue, a large part of them will become available from trade in services with the other less developed countries rather than the advanced countries. India must also remain prepared to make payments for the flow of such services from the advanced countries. The opening up of banking and insurance sectors by the advanced countries is likely to cause, on the opposite, loss to this country.

4. Textiles and Clothing:

In respect of textiles and clothing, the final agreement provided for the phasing out of the Multi-Fibre Agreement (MFA) within a period of 10 years starting from 1995. The Multi-Fibre Agreement has been regulating the textile trade through fixing quotas for exporting countries. In the negotiations prior to agreement, the United States had been insisting upon the extension of the phasing out of MFA over a longer period of 15 years. India adopted the position that the bulk of the phasing out should be in the early years of transition, instead of the latter years.

Although India’s proposal was not accepted, the United States proposal too was rejected. India and other textile exporting countries are likely to gain from the phasing out of MFA and opening up of markets for the textile exporters. India can, however, be benefitted from the agreement concerning textiles provided it can lower costs and become an efficient exporter of textiles.

No doubt, there are larger export prospects in this area due to the opening up of markets consequent upon the phasing out of MFA. the fact of increased and intense competition for enlarging share in the potential additional exports from the other low-cost textile manufacturing less developed countries like South Korea, Singapore, Pakistan and the Latin American countries cannot be overlooked.

5. Agricultural Subsidies:

A major gain for India and other developing countries from the final agreement is in the sphere of agricultural subsidies. There was widespread alarm among our countrymen on account of reduction of subsidies on agricultural products.

They were afraid that any stipulation to remove or reduce subsidies would undermine the programme of self-sufficiency in agricultural production; adversely affect the public distribution system; escalate costs and prices of farm products; and erode seriously the prospects of exports of the farm products.

There was an inability to distinguish between subsidies that contributed to surplus production as in the European community, and the subsidies which were aimed at allowing to the poor an access to food and strengthening the food security of developing countries. Thanks, to India’s interpretation being accepted that the Final agreement incorporated this distinction related to subsidies.

The domestic supports to agriculture or subsidies were put by the WTO into three boxes the amber box, the green box and the blue box. The amber box subsidies are those that are supposed to distort trade and must be reduced. The green box subsidies are such subsidies that have minimal distortion of trade and these can continue without limit.

The blue box subsidies specify all the exemptions to the general rule that all subsidies limited to production must be reduced. The blue box measures are the measures meant to limit production in the developed countries.

The agreement specified that the export subsidies to the farmers would have to be cut by 20 percent by the developed countries and by 13.3 percent by developing countries over the next six years. The cuts on subsidies would be applicable, if subsidies exceeded 10 percent of the value of output. This stipulation did not apply in the case of India because the existing level of subsidy in India ranged between 5 and 6 percent only, much below the prescribed limit of 10 percent.

In addition, some exemptions were allowed to the less developed countries like India, which had a per capita income below 1000 dollars per annum. These countries were also not required to phase out the subsidies. Moreover, the agreement permitted the grant of subsidies on both manufactured and farm products for the disadvantaged regions.

So for the present, India should not be worried on this account. The fear is however expressed that the increase in procurement prices will push the food subsidies above the limit of 10 percent in the next few years and brings India in the purview of the GATT regulations. The government needs to see that subsidies are kept under check through proper fiscal discipline.

6. Public Distribution System:

The fears were earlier expressed that the WTO regulations on subsidies would have adverse effect on the public distribution system in India. The final agreement at the culmination of Uruguay Round discounted such fears. The public distribution system (PDS) involves consumer subsidies. The WTO is primarily concerned with those subsidies which result in trade distortion.

These mainly include the export subsidies and, to a lesser extent, the producer subsidies. The consumer subsidies are essentially a domestic matter and outside the purview of WTO. Therefore, the food procurements, stocking and distribution will not be adversely affected on account of this agreement.

7. Compulsory Imports:

The final agreement stipulated that the trading parties including the developing countries like India should permit greater market access to the foreign exporters. In the first year of operation of this agreement, they should import agriculture commodities to the extent of 2 percent of domestic consumption. This proportion should raise upto 3.33 percent at the end of six years. This provision was supposed to impinge upon the self-sufficiency programme on food front.

However, this provision would not apply for the present to India because the agreement permits exemption from this clause to such developing countries as were faced with the balance of payments difficulties. Subsequent upon the improvement of BOP situation, India would be subject to this regulation.

8. Export Prospects:

The opening up of the markets of the GATT countries on account of the provision of compulsory import to the order of upto 3.33 percent of the domestic consumption will create opportunities for exporting agricultural products to the developed countries. The less developed countries like India have relatively lower production costs compared with the advanced countries.

In addition, higher subsidy levels in developed countries will call for large subsidy cuts by them in absolute terms relatively to subsidy cuts in the developing countries. The resultant greater rise in costs and prices of farm and other products than in case of India, will allow the latter more opportunities to enlarge her exports to the developed world. If Indian producers and government can seize such opportunities, the country may be able to expand its exports.

The WTO agreement is a step forward in meeting the long standing demand of the Southern nations for greater access to the markets of the developed countries. There is a real possibility that the developed countries will seek to reduce the farm exports from the less developed countries through a greater resort to the non-tariff barriers that fall outside the purview of the Uruguay Round agreement. They may enforce the health regulations or restrict exports on the pretext of environmental concern. Some of the developed countries have already started employing these tactics.

9. Trade Related Intellectual Property Rights (TRIPS):

The most controversial and negative feature of the Uruguay Round agreement has been the clause concerning the Trade Related Intellectual Property Rights (TRIPS). The agreement on TRIPS covers- (a) Copyright and related rights, (b) Trade mark, (c) Patents, (d) Industrial designs, (e) Geographical indications, (f) Layout designs of integrated circuits and (g) Undisclosed information including trade secrets.

This clause has been included on account of persistent demand from the USA and some other industrialised countries. The final agreement accepted the product patent instead of process patent for chemical and pharmaceuticals. In addition, the agreement covered living organisms including animals, plants and plant genes for the purpose of patenting.

The Indian apprehensions on account of TRIPS were about the escalation of prices of drugs, emergence of foreign monopolies in the drugs and chemical industries and restraints upon the farmers to make use of seeds produced by themselves and consequent disturbing implications for seed multiplication and distribution. It is of course true that the institution of TRIPS in the agreement will make it incumbent for India to make substantial payment of royalties and place severe constraint upon the indigenous research and development effort.

Some of the fears expressed by critics of TRIPS were clearly not well-founded. As regards the possibility of rise in drug prices, it was counter-argued, had that been the case, 116 countries other than India, would not have permitted product patents. In this connection, it was also contended that the prices of 25 main drugs were likely to rise and there would be no across-the-board rise in prices of chemicals and pharmaceutical products.

India was not required to adhere to product patents immediately. It had a grace period of 10 years to amend the Indian Patents Act, 1970 to bring it in conformity with the provisions of December, 1993 agreement. The product patent provision of the WTO, therefore, applied immediately only to new patents rather than the old patents.

As regards the fear that TRIPS would lead to emergence of monopolies and consequent exploitation of consumers, it was argued that the system of product patents was already in use in the West but it had not resulted in monopolies. On the same logic, there should not be such a development even in India consequent upon the adoption of product patent system by it.

In Western countries, the foreign monopolies had not exploited the consumers. India has to scrutinize the factors that prevent exploitation of consumers by the MNC’s in drug industry in those countries and create similar conditions in this country to protect the interests of consumers.

In respect of patenting of seeds and genetic materials, there was a strong and indignant reaction in India. Grim scenarios had been drawn up time and again by the politicians about the farmers losing suddenly their right to use their own seeds as well as their right to exchange them with other farmers. The fear was expressed that patenting of genes and plant varieties would make the genetic resources as the private property of the MNC’s belonging to the developed countries.

As the important link between food supply and seeds production by farmers would get snapped, the control of production and sale would shift to the plant breeder companies. That would lead to highly devastating consequences for Indian agriculture. There was apprehension that the high costs of genetically engineered seeds and other patented farm inputs like bio-fertilizers and bio-pesticides would eliminate the small and marginal farmers and turn agriculture into a capital- intensive industry.

The Indian agriculture could achieve self-sufficiency in food grains in the last few decades partly on account of a highly integrated inter-farmer network for the distribution of seeds. Apart from this, the country would be required to pay royalties on seeds on which Plant Breeders Rights (PBR) were obtained. The recognition of the intellectual property rights on seeds and genetic materials of the developed countries would also have adverse repercussion on the National and State Seed Corporations and several other seed supplying companies.

The picture in this regard is not as bleak as had been made out by some of the critics of the agreement. In fact there was no prohibition of the production of seeds by the farmers themselves and their local inter-farmer exchanges. The agreement simply attempted to regulate the commercial aspect of seed exchange. The payment of royalty would have to be made only if seed or plant varieties are genetically superior to and are more productive than the indigenous varieties.

The agreement, in fact, did not seek to patent seeds but requires the member countries of the WTO, including India, to adopt their own sui-generis system of protection of plant varieties or the Plant Breeders Rights (PBR) but any such system should be in conformity with the international norms. The problem is not exclusively of India but of the whole under­developed world.

A collective common strategy needs to be adopted by them to get negative aspects related to the patenting of genes and plant varieties removed in the forthcoming trade meetings. A grace period of 10 year is available before TRIPS regulations become operative.

Much fear about naturally occurring genetic material was unfounded. The world is nowhere near a consensus on this highly contentious issue and the Uruguay Round agreement definitely does not either permit this or ask countries to do so even though it found mention in the Dunkel proposals.

The TRIPS in the field of agriculture can be practical only if it is applied to agro-business and not farmers. Any regulation applied to farmers scattered over the whole under-developed world will become redundant as that will be difficult to be enforced.

If any attempt is made to enforce legislation regulating production, reuse and distribution of seeds, fertilisers etc., and the cost of enforcement will be too prohibitive even for any international organisation to bear. No local government will be willing to bear huge cost of enforcing TRIPS regulations directly applicable to farmers. Therefore, farmers should not get unduly alarmed by this provision.

Some dilution in TRIPS provisions is likely to come when these are put in practice. TRIPS definitely have serious adverse implications for India but these will hurt the dominant trading countries much more than India. India alone can’t do much about it for the present. It should wait and watch patiently as there are many catches in between.

10. Trade Related Investment Measures (TRIMS):

The agreement concluded at the end of Uruguay Round stipulates that there would be no discrimination against the foreign investors in the application of economic policies by the member countries of WTO. No restraints would be placed by capital-importing countries in respect of sphere of investment, equity participation, and remittance of profits and repatriation of capital. The contracting parties of the agreement on TRIMS cannot apply any trade restriction on investment that is inconsistent with the WTO rules.

The following types of measures are considered inconsistent:

(1) Local content requirement, i.e. the member countries will not specify the use of local input in the manufacture of a product.

(2) Trade balancing requirement, i.e., the member countries will not make the specification about imports not exceeding a certain proportion of exports.

(3) Requirement related to the balancing of trade and foreign exchange.

(4) Domestic sales requirement, i.e., the member countries will not make specification about the sale of certain proportion of output by foreign investors locally.

According to World Trade Agreement, the member countries would notify all WTO inconsistent TRIMS and phase them out within a specified period. The industrial, developing and least developed countries were required to phase out WTO-inconsistent measures within two, five and seven years respectively. This period could be extended for the developing and the least developed countries, in case they were faced with some special difficulties in doing away with those restrictions.

The stipulation related to foreign investment may have adverse effect on the developing nations as the foreign capital is likely to be misdirected towards the low-priority consumer goods industries and extractive industries rather than capital goods industries.

11. Separation of Agreements Concerning Goods, Services and TRIPS:

India’s original position at the Uruguay Round of negotiations in 1987 was that services and TRIPS should not be brought under GATT ambit whereas the developed countries had been exerting pressure to include them in the GATT agreement since 1980. India had to accept the inclusion of services and TRIPS.

However, it could secure an important amendment that the agreement related to goods, services and TRIPS should be kept separate. So under the new agreement, there can be no cross-retaliation across sectors, namely goods, services and TRIPS, unless all avenues for retaliation within a specific area were exhausted. This has been duly certified under the dispute settlement mechanism of the WTO.

12. Settlement of Disputes:

The World Trade Agreement made provision for the settlement of trade disputes among the member countries and to protect them from unilateral action by a member country. The dispute arises when a member country finds that the actions of certain fellow members are volatile of the rules of WTO. The procedure involves consultation among the member countries, mediation and finally arbitration within a prescribed time frame.

The ruling of the WTO is binding on the members unless there is consensus among all the member countries to reject it. On April 26, 2004, a landmark ruling was given by the WTO on a complaint from Brazil against the payment of $ 4 billion subsidy by the USA to cotton producers in that country.

The WTO declared this subsidy against WTO rules. This ruling was likely to have significant implications for production and exports of textiles from India and firm up the international price of cotton. The US trade officials plan to make an appeal against this ruling.

13. Anti-Dumping Measures:

The WTO Agreement permitted the member countries to adopt anti-dumping measures in case the actions of some other countries result in material injury to the domestic industry. The aggrieved country has to establish clearly that the dumping has been taking place, to calculate the extent of dumping and to show that it has been causing material injury to it.

If the margin of dumping is insignificantly small (less than 2 percent of the export price) or the volume of import is insignificantly small (less than 3 percent of the total import of the product), provided that total imports from such countries do not account for over 7 percent of total imports, the anti-dumping action is not applicable.

It was also specified that the anti-dumping duty should not exceed the margin of dumping. In case the exporting country concerned gives an undertaking to revise the price for removing dumping or its injurious effect, the anti-dumping action may be suspended or terminated.

In 2014, till June end, both India and the USA initiated equal number of anti-dumping investigations. Out of 690 cases initiated by India, duty was imposed in 535 cases. The maximum number of investigations was faced by the imports from China. Out of 166 cases against the imports from that country, duty was imposed in 134 cases.

14. Prospects for Industrial Expansion:

Despite the fact that reduction in tariff and TRIPS would place some impediments in the growth of certain industries in India, the picture is not altogether bleak. The new agreement provided opportunities for the enlargement of agricultural exports and consequent development, diversification of production and technical transformation of agriculture.

In addition, India may also find prospects for expanding domestic production in food processing, computer software, dairy, meat products, eggs and poultry, textiles, auto-ancillaries, sugar, shipping, aqua-culture and marine products. Only important thing in this regard is that India should strive to increase the competitiveness of its products in foreign markets through cost reduction, good quality, increased productivity and technological innovations.

The critics of the agreement have conjured up a grim and bleak picture for India. It is of course true that the developed countries held the centre stage at Uruguay Round of negotiations and the clauses of the agreement have been tailored to suit primarily their interests. But everything is not lost for the less developed countries like India.

There is some silver lining in that most of the restraints will apply after some grace period and the agreement opens up prospects of enlarging exports provided India would be able to lower cost structure and raise the level of industrial efficiency through the absorption of cost-efficient indigenous or imported technology.

The developing countries continue to suffer under the clauses of final agreement right from the beginning. Meanwhile a dangerous move was initiated by some developed countries to get incorporated in the Final Act to be signed at the ministerial conference scheduled to be held in Marrakesh in April 1994 the “extraneous non-trade” issues to the detriment of the developing countries.

They were seeking alteration in the Final Act signed on December 15, 1993 to allow them to raise artificial trade barriers based on human rights, environment and child-labour issues. Such an amendment will enable the developed countries to resort to unilateral regulatory measures against exports from developing countries and undermine the authority of the World Trade Organisation (WTO).

The less developed countries should unitedly and resolutely oppose such sinister moves lest they will be exploited through unilateral trade black-mail by the developed countries. If the former fail, they will witness more frequent use of the provisions like Super 301 and Special 301 of the omnibus U.S. Trade Act against the less developed world.