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Putting the Trade Facilitation Agreement Back on Track after India’s Obstruction

by and Gary Clyde Hufbauer | August 5th, 2014 | 02:12 pm
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India has blocked the implementation of the Trade Facilitation Agreement (TFA) approved by all members of the World Trade Organization (WTO) last December, drawing understandable condemnation from around the world. Bluntly put, with its action on July 31, India is holding the TFA hostage in return for the renegotiation of the Bali accord reached at a ministerial meeting in December 2013. New Delhi’s objective is to permanently exempt Indian food security subsidies from WTO review. Delaying the development-oriented TFA is bad enough, but India’s action also has derailed efforts to revive broader multilateral trade negotiations.

Ironically, India is worse off with this result because it loses the pathway to negotiate a safe harbor for its food security subsidies and other objectives it was seeking in the Doha Round. There is still time to recoup the losses to both the TFA and the WTO system when trade ambassadors return to Geneva in September. We offer a few ideas on what could be done to put the WTO efforts back on track.

The Bali Package

In December 2013, at their ninth ministerial conference held in Bali, Indonesia, WTO members adopted decisions on important areas of the long-stalled Doha Round of multilateral trade negotiations. The decisions called for

  • reform of agricultural policies, including public stockholding for food security purposes, rules for administering tariff-rate quotas, cotton, and disciplines on export subsidies;
  • preferences for the least-developed countries (LDCs); and
  • completion and adoption of the Trade Facilitation Agreement (TFA).

WTO trade ministers noted that these decisions were “an important stepping stone towards the completion of the Doha Round” and committed to prepare, in 2014, a post–Bali WTO work program to reengage and advance the Doha Round talks.

TFA was the largest component of the Bali package and was only agreed at the eleventh hour. The ministers established a preparatory committee to “draw up a Protocol of Amendment (the “Protocol”) to insert the Agreement into Annex 1A of the WTO Agreement.” Under this procedure, the Protocol had to be approved by a consensus of WTO members, meaning that any objections can prevent it from being implemented. At Bali, however, it was assumed that the Protocol would be approved by the WTO General Council “no later than July 31, 2014″ because all the trade ministers in attendance accepted the package of Bali decisions.

TFA in a Nutshell

TFA is a complex document, with tiers of obligations—more severe for developed countries, considerably less severe for developing countries. But the commitments all have a single purpose: to slash red tape and corruption at sea ports and cargo airports and thereby dramatically reduce the time and expense for merchandise to enter and leave a country.

TFA does not require developing country members to fully implement the agreement upon entry into force. Instead they were encouraged to notify, by July 31, 2014, those commitments that they would implement at the start, those that would be implemented after a transitional period, and those that would be undertaken only after “the acquisition of implementation capacity” (categories A, B, and C, respectively). These commitments were supposed to be annexed to the TFA and the Protocol adopted by the General Council in July.

The failure of WTO members to do so puts the entire TFA in limbo. More troubling, as WTO Director General Roberto Azevedo pointedly observed, the failure to follow through with the Bali agreement will have significant consequences that will likely have “an impact on all areas of our work” (Azevedo 2014).

The TFA impasse has put the future of multilateral trade negotiations at risk. What country would commit to new WTO agreements at a future ministerial meeting if any one member could later renege and block their implementation? India (accompanied by Bolivia, Cuba, and Venezuela) has not only blocked the entry into force of TFA. At least for the time being, it has derailed the revival of the Doha Round negotiations and hopes of promoting new rules to discipline farm subsidies deployed by rich countries and to protect food security programs in poorer countries.

What Went Wrong?

     
  Table 1 India’s food stocks, July 2014  
 
 
    Stocks Annual Consumption (2013)  
 
 
  Rice 21.2 96.0  
  Wheat 39.8 85.0  
 
 
  Note: Includes all stores with state agencies and the Food Corporation of India. Consumption data refers to marketing year 2012–13.  
  Source: Food Corporation of India, US Food and Drug Administration.  
     

In essence, TFA has been held hostage to Indian demands that its food stockpiling and distribution program be permanently sheltered from the WTO subsidy rules. No one objects to using national funds to subsidize consumption. In the case of India, the program is designed to overpay domestic farmers for grain (principally rice and wheat) that is then stored for future distribution to the poor. Indian officials worry that unless the subsidy commitments are revised, the large amount of subsidies provided to local Indian farmers could contravene obligations undertaken in previous multilateral negotiations leading to a potential challenge in a WTO dispute proceeding. In addition, India at times has overstocked its food storehouses and reduced inventories by dumping surplus grain on world markets, causing a decline in grain prices, much as Europeans used to do before the farm reforms of the past two decades. Indian food security subsidies could thus be considered farm export subsidies, which are subject to much stronger disciplines under WTO rules.

Tables 1 and 2 illustrate the dimensions of the problem. Table 1 relates recent rice and wheat stockpiles to Indian domestic consumption. The stockpiles represent a large fraction of annual consumption. Table 2 shows Indian imports and exports of cereals and a few other agricultural commodities in recent years. Rice and wheat exports vastly exceed imports.

     
  Table 2 India’s food trade (millions of US dollars)  
 
 
    2011 2012 2013  
   


 
    Exports Imports Exports Imports Exports Imports  
 
 
  Meat 2,687 1 3,147 2 4,770 2  
  Fish 3,212 112 3,282 68 4,616 33  
  Cereals 5,371 13 8,729 19 10,862 20  
  Vegetables 1,009 1,865 858 2,281 1,386 2,305  
  Fruits 1,449 2,092 1,390 1,857 1,671 2,133  
 
 
  Source: World Bank, World Integrated Trade Solution (WITS) database.  
     

Indian negotiators have sought to revamp India’s subsidy obligations throughout the Doha Round. They seek to raise the maximum limits of farm support disbursements and to permanently exempt food security plans from those calculations, by counting food stockpile payments as “Green Box” subsidies. In Bali, India refused to allow the TFA to go forward until other WTO members agreed to exempt India’s food subsidy programs from litigation for four years, until 2017. During that “peace clause” period, WTO members would develop permanent rules to address food security policies. In July 2014, however, India intensified its demands, insisting that a permanent subsidy exemption had to be agreed more quickly. Almost all other WTO members refused to renegotiate the Bali pact, and that brought WTO talks to a halt at the end of July. Azevedo has urged Geneva diplomats to return to their capitals and talk to government officials “at the highest possible level.”

What Can Be Done?

The WTO is now at grave risk. The loss of confidence in using the WTO forum for multilateral trade negotiations will inevitably undermine, over a period of years, the credibility of its highly-valued dispute settlement system and its role as the respected monitor of trade policies of member countries. The systemic cost of blocking TFA is substantial. Sadly, as Azevedo noted, “if the system fails to function properly, then the smallest nations will be the biggest losers.” So what can be done?

The immediate cost of delaying TFA implementation will be substantial. Over the course of a decade, full implementation by all WTO members could slash sea port and air cargo red tape, substantially reduce corruption, and deliver the $1 trillion benefits and the 21 million jobs per our estimates in Payoff from the World Trade Agenda [pdf] (Hufbauer and Schott 2013). Zaki (2013) calculated a similar magnitude. Subsequent to our estimates, the World Economic Forum, Bain & Company, and the World Bank (2013) published a detailed logistical analysis that arrived at even larger benefits, but contingent on dramatic infrastructure upgrading that was not contemplated in TFA. Most benefits accrue to developing countries, but the size of benefits depends on the speed and extent of TFA implementation.

Given these substantial benefits, if India and the other naysayers do not relent, the next best outcome would be a plurilateral TFA, binding only WTO members that become signatories. With the assent of three-quarters of WTO members, the plurilateral TFA could become a WTO agreement, serviced by the secretariat and subject to the dispute settlement system. Without that assent, the plurilateral TFA would be a stand-alone agreement and to function properly would need its own secretariat and dispute settlement system.

     
  Table 3 India’s bound tariff rates
(simple average, percent)
 
 
 
    Bound rate Applied rate  
   
 
  Meat 105.4 32.0  
  Fish Unbound 30.0  
  Cereals 86.2 30.5  
  Vegetables 101.8 30.4  
  Fruits 97.3 35.2  
 
 
  Note: A product or tariff line is "unbound" if the country has not made any binding commitment on it in the WTO.  
  Source: World Trade Organization, Tariff Analysis Online.  
     

By far, the superior alternative for the world trading system would be a multilateral TFA. This might still be achieved if India and other members would accept a compromise package. Here is one possibility:

  • Two additional years for the “peace clause,” lasting until 2019 rather than 2017. This would allow more time to hammer out a food security agreement, and India could continue its current subsidy and stockpiling policies for an additional two years without fear of WTO litigation.
  • As a side concession, India would lower its very high “bound” tariffs on agricultural imports, averaging about 100 percent, to the applied levels, averaging about 30 percent (see table 3). This concession would not increase access by foreign suppliers, but it would give greater assurance that access will not be suddenly denied by an escalation of applied rates.

Such an approach would supplement the deal reached in Bali. It would require India to reduce its ability to impose new protection on grain imports above the high tariffs already in place in return for the additional period of relief from WTO litigation. We hope this option is not needed because both India and the WTO would be better off by faithfully implementing the Bali accord, which should be done when WTO talks reconvene in September 2014.

References

Azevedo, Roberto. 2014. Statement at the Trade Negotiating Committee meeting. July 31. Geneva: World Trade Organization.

Hufbauer, Gary Clyde, and Jeffrey J. Schott. 2013. Payoff from the World Trade Agenda [pdf]. Report to the ICC Research Foundation. Washington: Peterson Institute for International Economics.

World Economic Forum, Bain & Company, and the World Bank. 2013. Enabling Trade: Valuing Growth Opportunities. Geneva: World Economic Forum.

Zaki, Chahir. 2013. An Empirical Assessment of the Trade Facilitation Initiative: Econometric Evidence and Global Economic Effects. World Trade Review 13, Issue 1 (January): 103–130.