WTO and India

JAN 20

Mains   > International relations   >   International Institutions   >   WTO

WHY IN NEWS?

  • India recently filed an appeal with the Appellate Body of the World Trade Organization (WTO) disputing a verdict by the WTO’s dispute settlement panel on sugar subsidies.
  • The WTO’s dispute settlement panel had ruled that India, by subsidising sugar producers, was breaking rules framed under the General Agreement on Tariffs and Trade (GATT) which govern international trade.

MORE ABOUT THE NEWS

  • In 2019, Australia, Brazil, and Guatemala complained against India at the WTO arguing that subsidies offered by the Indian government to sugar producers were against the rules governing international trade.
  • They argued that these subsidies, which include both domestic subsidies as well as export subsidies, exceed the limits imposed by WTO trade rules.
  • According to WTO rules, subsidies cannot exceed 10% of the total value of sugar production.
  • These countries believe that subsidies offered by India have led to increased production of sugar and caused the price of sugar to drop significantly in the global market.
  • After two years, the WTO ruled that India’s sugar policy was favouring domestic producers through subsidies to the detriment of foreign producers.
  • The panel recommended that India withdraws its alleged prohibited subsidies under the Production Assistance, the Buffer Stock, and the Marketing and Transportation Schemes within 120 days from the adoption of this report.
  • India has stated that the WTO’s dispute panel ruling has made certain “erroneous” findings about domestic schemes to support sugarcane producers and exports and the findings of the panel are completely “unacceptable” to it.

ABOUT WTO:

  • The World Trade Organization (WTO) is the only global international organization dealing with the rules of trade between nations.
  • The WTO provides a forum for negotiating agreements aimed at reducing obstacles to international trade and ensuring a level playing field for all, thus contributing to economic growth and development.
  • The WTO also provides a legal and institutional framework for the implementation and monitoring of these agreements, as well as for settling disputes arising from their interpretation and application.

HISTORY:

  • With the end of World War II, plans were laid to create a third institution, ‘The International Trade Organisation (ITO)’, to handle the trade side of international economic cooperation, joining the two “Bretton Woods” institutions, the World Bank and the International Monetary Fund.
  • The aim was to create the ITO at a UN Conference on Trade and Employment in Havana, Cuba in 1947.
  • Meanwhile, 23 countries began talks to reduce and bind customs tariffs. So the new General Agreement on Tariffs and Trade (GATT) was born, with 23 founding member.
  • From 1948 to 1994, the GATT provided the rules for much of world trade. However, it was a provisional agreement and organization.
  • The Havana conference began soon after GATT was signed. The ITO Charter was finally agreed, but was never ratified due to opposition from US Congress.
  • As the GATT was provisional with a limited field of action, member countries were convinced that a new effort to reinforce and extend the multilateral system should be attempted. That effort resulted in the Uruguay Round, the Marrakesh Declaration, and the creation of the WTO.
  • Uruguay Rounds (1986-1994):
    • The seeds of the Uruguay Round were sown in 1982 at a ministerial meeting of GATT members in Geneva.
    • It is the biggest negotiating mandate on trade ever agreed. It extended into several new areas, such as services and intellectual property, and reformed trade in the sensitive sectors of agriculture and textiles.
    • The Final Act concluding the Uruguay Round and officially establishing the WTO regime was signed 15 April 1994, during the ministerial meeting at Marrakesh, Morocco, and hence is known as the Marrakesh Agreement.
    • The WTO replaced GATT as an international organization, but the General Agreement still exists as the WTO’s umbrella treaty for trade in goods.

FOUNDATIONAL PRINCIPLES:

  • Non-discrimination:
    • A country should not discriminate between its trading partners and it should not discriminate between its own and foreign products, services or nationals. It has two major components:
    • (1) Most Favoured Nation (MFN):
      • Under the WTO agreements, countries cannot normally discriminate between their trading partners.
      • If they grant some country a special favor (such as a lower customs duty rate for one of their products), then they’ll have to do the same for all other WTO members.
    • (2) National Treatment policy:
      • Domestic and foreign goods, services and IP rights must be treated equally once they’ve entered the market.
  • Openness:
    • Lowering trade barriers is one of the most obvious ways of encouraging trade.
    • This barrier includes customs duties (or tariffs) and measures such as import bans or quotas that restrict quantities selectively.
  • Predictability and transparency:
    • Foreign companies, investors and governments should be confident that trade barriers should not be raised arbitrarily.
    • With stability and predictability, investment is encouraged, jobs are created and consumers can fully enjoy the benefits of competition — choice and lower prices.
  • More competitive:
    • Discouraging ‘unfair’ practices, such as export subsidies and dumping products at below cost to gain market share
    • WTO rules try to establish what is fair or unfair, and how governments can respond, in particular by charging additional import duties calculated to compensate for damage caused by unfair trade.
  • More beneficial for less developed countries:
    • Giving them more time to adjust, greater flexibility and special privileges; over three-quarters of WTO members are developing countries and countries in transition to market economies.
    • The WTO agreements give them transition periods to adjust to the more unfamiliar and, perhaps, difficult WTO provisions.
  • Protect the environment:
    • The WTO’s agreements permit members to take measures to protect not only the environment but also public health, animal health and plant health.
    • However, these measures must be applied in the same way to both national and foreign businesses.
    • In other words, members must not use environmental protection measures as a means of disguising protectionist policies.

FUNCTIONS OF WTO:

  • Trade negotiations:
    • The WTO agreements cover goods, services and intellectual property.
    • They spell out the principles of liberalization, and the permitted exceptions.
    • They include individual countries’ commitments to lower customs tariffs and other trade barriers, and to open and keep open services markets.
    • They set procedures for settling disputes. These agreements are renegotiated from time to time and new agreements can be added to the package.
  • Implementation and monitoring:
    • Various WTO councils and committees seek to ensure that WTO agreements and requirements are being followed and implemented.
    • All WTO members must undergo periodic scrutiny of their trade policies and practices, each review containing reports by the country concerned and the WTO Secretariat.
  • Dispute settlement:
    • Countries bring disputes to the WTO if they think their rights under the agreements are being infringed.
    • Judgements by specially appointed independent experts are based on interpretations of the agreements and individual countries’ commitments.
  • Building trade capacity:
    • WTO agreements contain special provision for developing countries, including longer time periods to implement agreements and commitments, measures to increase their trading opportunities, and support to help them build their trade capacity.
    • The WTO organizes hundreds of technical cooperation missions to developing countries annually.
    • It also holds numerous courses each year in Geneva for government officials. Aid for Trade aims to help developing countries develop the skills and infrastructure needed to expand their trade.
  • Outreach:
    • The WTO maintains regular dialogue with non-governmental organizations, parliamentarians, other international organizations, the media and the general public on various aspects of the WTO and the ongoing Doha negotiations, with the aim of enhancing cooperation and increasing awareness of WTO activities.

 

STRUCTURE:

  • Council for Trade in Goods:
    • Forum for discussing issues and decisions which may ultimately require the attention of the General Council and for putting issues in a broader context of the rules and disciplines that apply to trade in goods.
    • There are 12 committees under the jurisdiction of the Goods Council each with a specific task. All members of the WTO participate in the committees.
    • The body has its own chairman and only 10 members.
  • Council for Trade in Services:
    • Responsible for overseeing the functioning of the General Agreement on Trade in Services (GATS)
  • Council for Trade-Related Aspects of Intellectual Property Rights
    • Monitors implementation of the TRIPS Agreement, provides a forum in which WTO Members can consult on intellectual property matters, and carries out the specific responsibilities assigned to the Council in the TRIPS Agreement.
  • Trade Negotiations Committee:
    • The Trade Negotiations Committee (TNC) is the committee that deals with the current trade talks round. The chair is WTO's director-general.
    • Presently, the committee was tasked with the Doha Development Round.
  • The Secretariat
    • It employs over 600 staff and its experts assist WTO members on a daily basis to ensure that negotiations progress smoothly and that the rules of international trade are correctly applied and enforced.
  • Voting
    • Decisions are taken through consensus but voting on matters is also possible.

MAJOR AGREEMENTS:

  • General Agreement on Tariffs and Trade (GATT)
    • It is a legal agreement between many countries, whose overall purpose was to promote international trade by reducing or eliminating trade barriers such as tariffs or quotas.
    • It was signed by 23 nations in 1947. It remained in effect until 1995, when the World Trade Organization (WTO) was established after agreement by 123 nations in Marrakesh in 1994, as part of the Uruguay Round Agreements.
    • The WTO is the successor to the GATT, and the original GATT text (GATT 1947) is still in effect under the WTO framework, subject to the modifications of GATT 1994.
    • The GATT, and its successor the WTO, have succeeded in reducing tariffs. The average tariff levels for the major GATT participants were about 22% in 1947, but were 5% after the Uruguay Round in 1999.
  • General Agreement on Trade in Services (GATS):
    • The GATS covers a wide range of service industries such as financial services, transport and shipping, communications, construction, and distribution.
    • The definition of services trade under the GATS is four-pronged, depending on the territorial presence of the supplier and the consumer at the time of the transaction:
      • Mode 1 (Cross border supply): to cover services flows from the territory of one Member into that of another Member.
      • Mode 2 (Consumption abroad): situations where a service consumer moves into another Member’s territory to obtain a service. Eg: Tourism
      • Mode 3 (Commercial presence): a service supplier of one Member establishes a territorial presence, including through ownership or lease of premises, in another Member’s territory to provide a service. Eg: A Hotel chain
      • Mode 4 (Presence of natural person): Consists of persons (Eg: Helath professionals) of one Member entering the territory of another Member to supply a service.
  • Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS):
    • TRIPS is most comprehensive multilateral agreement on intellectual property
    • The Agreement sets out the minimum standards of protection to be provided by each Member and certain general principles applicable to all IPR enforcement procedures.
    • The TRIPS Agreement is based on the main conventions of the World Intellectual Property Organization (WIPO).
    • Most of the provisions of these conventions are incorporated into the TRIPS.
    • The areas of intellectual property that it covers are:
      • Copyright and related rights (i.e. the rights of performers, producers of sound recordings and broadcasting organizations)
      • Trademarks including service marks
      • Geographical indications including appellations of origin
      • Industrial designs
      • Patents including the protection of new varieties of plants
      • Layout-designs of integrated circuits
      • Undisclosed information including trade secrets and test data.
  • Agreement on Trade-Related Investment Measures (TRIMs):
    • They are the rules that are applicable to the domestic regulations a country applies to foreign investors, often as part of an industrial policy.
    • Investment measures are those steps used traditionally against foreign investment by host countries, such as domestic content requirement and domestic sales requirements.
    • According to the TRIMs provision, countries should not adopt the investment measures which restrict and distort trade.
  • Agreement on the Application of Sanitary and Phytosanitary Measures (SPS):
    • It concerns the application of food safety and animal and plant health regulations.
    • It allows countries to set their own standards, but the regulations must be based on science. They should be applied only to the extent necessary to protect human, animal or plant life or health.
    • They should not arbitrarily or unjustifiably discriminate between countries where identical or similar conditions prevail.
    • Member countries are encouraged to use international standards, guidelines and recommendations where they exist.
    • The agreement still allows countries to use different standards and different methods of inspecting products.
    • They can also set higher standards based on appropriate assessment of risks so long as the approach is consistent, not arbitrary.
  • Agreement on Agriculture (AoA):
    • The agreement focuses on elimination of the so-called ‘trade distorting’ agricultural subsidies.
    • The Agreement on Agriculture has three pillars:
      • Domestic Support: It includes the classification of agricultural subsidies into ‘boxes’ depending on their effects on production and trade
      • Market Access: Market access refers to the reduction of tariff and replacement of non-tariff barriers with tariff barriers.
      • Export subsidies: The Agriculture Agreement prohibits export subsidies on agricultural products unless the subsidies are specified in a member’s lists of commitments.

 

De-Minimis provision:

  • It is the minimal amounts of domestic support that are allowed even though they distort trade.
  • Under this provision developed countries are allowed to maintain trade distorting subsidies or ‘Amber box’ subsidies to level of 5% of total value of agricultural output. For developing countries this figure was 10%.

 

Subsidy Boxes:

  • In WTO terminology, subsidies in general are identified by “boxes” which are given the colours of traffic lights.
  • Green box: Green box subsidies must not distort trade, or at most cause minimal distortion. They have to be government-funded and must not involve price support.
  • Amber box: Nearly all domestic support measures considered to distort production and trade (with some exceptions) fall into the amber box. These include measures to support prices, or subsidies directly related to production quantities.
  • Blue box: Any support that would normally be in the amber box is placed in the blue box if the support also requires farmers to limit production. At present there are no limits on spending on blue box subsidies. In the current negotiations, some countries want to keep the blue box as it is, because they see it as a crucial means of moving away from distorting amber box subsidies without causing too much hardship.

 

     
  • Agreement on Subsidies and Countervailing Measures:
    • It provides a definition of the term “subsidy”. The definition contains three basic elements:
      • (i) A financial contribution
      • (ii) By a government or any public body within the territory of a Member
      • (iii) Which confers a benefit. All three of these elements must be satisfied in order for a subsidy to exist.

DOHA ROUND OF WTO:

  • Also known semi-officially as the Doha Development Agenda, the Doha Round is the latest round of trade negotiations among the WTO membership.
  • The Round was officially launched at the WTO’s Fourth Ministerial Conference in Doha, Qatar, in November 2001.
  • Its aim is to achieve major reform of the international trading system through the introduction of lower trade barriers and revised trade rules.
  • The work programme covers about 20 areas of trade, such as reduction of subsidies in Agriculture, access to patented medicines and Special and Differential Treatment.
  • Ministerial Conference (MC9) in Bali, Indonesia (2013):
    • Trade Facilitation Agreement (TFA) was reached, a significant achievement, since the creation of the WTO.
    • It aims to speed up customs procedures and make trade easier, faster, and cheaper.
    • The talks also reached an interim agreement (a peace clause) on “public stockholding” continuing exceptions that allow developing countries to stockpile agricultural products to protect against food shortages.

 

IS THE WTO RELEVANT?

  • NO:
    • Does not reflect the changing global order:
      • The WTO is often perceived as a forum more favorable to the developed world.
      • This is evident from the domination of USA and European Union in the Doha trade negotiations.
      • However, developing countries like China and India are major stakeholders in modern day trade and commerce, which has not been fully reflected in the WTO.
    • Delays in reaching agreements:
      • Since the establishment of the WTO, only a few multilateral trade negotiations have been concluded.
      • As the decisions in WTO are taken unanimously, long years are spend on reaching a general consensus.
      • For instance, the Doha rounds have been going on for over 16 years, yet it has not been finalized. 
    • Rise of BTAs and trade blocs:
      • The explosion of Bilateral Trade Agreements, (usually referred to as the ‘spaghetti bowl of trade agreements’), outside the ambit of the WTO and trade blocs like BRICS, ASIAN, G8 etc are making trade relations stronger.
      • These BTAs and trade blocs are reducing the importance of WTO.
    • Weak Dispute Resolution mechanism:
      • The WTO dispute settlement process is going through a crisis.
      • In the recent past, several WTO rulings have gone against the US. These have led the US officials to claim that the US is being victimised and the WTO rules are violating its national sovereignty.
      • As retaliation to its perceived victimisation, the US is blocking appointment of members in the WTO Appellate Body since the past few years.
      • Due to lack of new appointments, at the end of 2019 the body will be left with only 1 member, thus rendering it dysfunctional.
    • Skepticism towards multilateralism:
      • Right wing governments in major economies, who seek trade protectionism, have openly denounced the WTO and are pushing ahead with protectionist measures.
      • They have violated WTO rules by raising tariffs, which has triggered a global trade war.
      • If major trading countries continue to undermine the role of WTO, it may become a serious setback for an organisation which is struggling to remain relevant in a changed global trade scenario.
    • Several unresolved issues:
      • So far members have not been able to reach a consensus on vital issues like agricultural subsidies, food security, banning subsidies for illegal fishing, intellectual property rights, and trade in services among others.
  • YES:
    • To ensure rule based global trade:
      • The world today is more interconnected than ever.
      • Hence, there is a need for proper legislations and dispute resolution mechanisms at the global level to ensure smooth trade.
      • WTO is a good platform to reduce barriers and solve trade disputes peacefully and rationally.
      • Its existence has prevented trade wars till now and made international trade smoother.
    • Common platform for all nations:
      • The WTO offers a common platform for all countries, be it developed, developing, Small Island Developing States or least developed, to address their demands and concerns and settle disputes amicably.
      • This is vital to ensure peaceful trade and commerce across the world and avoid instances of neo-colonialism and exploitations.
    • To boost global economic growth:
      • The world has only started to recover from the 2008 economic slowdown. The global economic prospects is further affected by Covid pandemic.
      • At this point, an organisation as inclusive as the WTO is essential to encourage trade between nations and thereby boost global the economy.
    • To ensure equitable development:
      • The WTO offers special treatment to the developing countries and least developed countries, in the form of longer time frameworks, softer tariff cuts, procedural advantages in disputes and technical assistance from the WTO.
      • The peace clause in the Doha rounds is an example in this regard. This treatment is vital for these Countries to develop their internal markets and join the global trade environment with ease.
    • To promote sustainable development:
      • The WTO’s agreements permit members to take measures to protect not only the environment but also public health, animal health and plant health.
      • In a climate uncertain future, these provisions can play a critical role in the promotion of unsustainable global trade.

INDIA AND WTO:

  • India has been a member of the WTO since its inception in 1995.
  • India is one of the prominent members of WTO and is largely seen as leader of developing and under-developed world.
  • However, on several aspects, India has outstanding concerns.
  • Concerns related to Agriculture:
    • India (along with a few other developing countries) has and continues to have objections on issues like agriculture especially subsidies in the context of food security etc. and trade facilitation.
    • According to the WTO’s Agreement on Agriculture, the Minimum Support Price (MSP) would have to be calculated on the basis of price of food grains in 1986-88 and the total subsidy would have to be below 10 per cent of the total value of production. India has strongly disputed this formula because the current prices are much higher and hence the total MSP given as subsidy would also be higher.
    • Also, countries like India and China have opposed the huge production related price distorting subsidies given by the developed countries like the US and the EU to their farmers.
    • In the case of fisheries also, India do not wish to eliminate fisheries subsidies on ‘illegal fishing’ because of the livelihood of large number of fishermen is involved.
  • Investment/Trade Facilitation:
    • India has its own model investment code which does not allow multinational companies to take the government to international courts before it has sought recourse through the domestic dispute settlement bodies for a period of at least five years.
    • This is because, in the past, the Government of India has been taken to international arbitration courts on multiple occasions.
  • Freeing e-commerce:
    • India has objected to freeing of e-commerce as it feels that the country’s digital penetration is not yet adequate.
    • India also feels that Micro, Small and Medium Enterprises (MSMEs) will not be able to compete with countries with deeper internet penetration who can gain better access to international markets.
  • Reforms in WTO:
    • India has maintained that it is committed to work along with other countries to reform the WTO in order to ensure that it continues to be an engine for global trade.
    • India recently co-sponsored a proposal with the European Union and other members on reform of the dispute settlement mechanism.
    • The United States had recently proposed a reform of the World Trade Organization that would slash the number of countries that are eligible for “special and differential treatment”
    • This has been resisted by China, India and other countries. Also, New Delhi is against changing the consensus-driven character of the multilateral trade body.

 

INDIA’S RECENT INITIATIVE FOR REFORMING THE WTO:

  • India recently drew up a proposal aimed at reforming the dispute settlement mechanism, rule-making and transparency requirements.
  • The joint proposal by India, South Africa, and seven other countries for reforming the World Trade Organization comes in the face of existential threats to the survival of multilateral trading system.
  • The joint proposal, based on a concept paper prepared by India, called for the immediate resolution of the impasse at the highest adjudicating body for global trade disputes.
  • It calls for prohibiting unilateral trade measures. It asked for “development-centric" reforms that would strengthen the 164-member trade body.
  • India has been asking for a resolution of the appellate body issue because it feels that this is central to the very essence of WTO and unless addressed, the WTO might well turn into a ‘discussion body’.
  • A proposal proposed by EU, co- sponsored by India and several other countries addresses issues of timelines, the appointment process of the appellate body members, their tenure and other conditions, so that the body and the mechanism work more efficiently.

 

WAY FORWARD

  • More space for negotiation
    • If the WTO as an institution and all the principles that it stands for is to survive and move ahead, there is no scope for rigidity on the part of any country or group of countries.
    • Negotiations, even if cumbersome, painstaking and incremental, would be the only solution.
  • Resolve crisis in Appellate Body
    • Immediate priority in WTO reforms should be to resolve the ongoing impasse in the Appellate Body to address the unilateral measures as these pose serious existential challenges for the organisation.
  • India should join hands with like-minded developing countries
    • India should join hands with like-minded developing countries such as South Africa and China to reduce the hegemony of individual nations in the forum and in pushing for favorable reforms.
  • Balanced approach
    • While working in finalizing the Doha rounds, India should strike balance between protecting her national interests and paving the way for liberalization.
  • Accelerate India’s efforts for bilateral trade negotiations
    • Instead of surrendering to sectorial lobbies, policy-makers need to take long-term strategic view of trade negotiations.
    • Hence, if the WTO system continues to face uncertainties, India should accelerate its efforts for bilateral trade negotiations with major trading partners.

 

CONCLUSION

  • Despite all its weaknesses, the WTO has been a major factor in pushing global trade forward. It has helped in reducing trade barriers and creating a mechanism for peacefully resolving disputes. Hence its survival is essential for a better global trade environment.

 

PRACTICE QUESTION:

Q.  The time has come for the emerging economies and the developing world to have a greater say in how to shape multilateralism and its institutions. In this regard, discuss the role of India in reforming the World Trade Organisation?

Mains: Questions are expected on relevance and role of WTO in the current global scenario, India’s role in WTO, need for reforming WTO etc.

Prelims: Questions can be asked on various terms and agreements like - GATS, TRIPS, Phytosanitary measures, Most Favoured Nation, de-Minimus provisions and subsidy boxes.

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