From India's perspective it would be most crucial during the Doha negotiations to protect the interests of its farmers, even at the cost of foregoing benefits that might have otherwise been made in services and NAMA negotiations
India’s economic scenario
After growing at the so-called ‘Hindu Rate’ of growth of 3.5%, India’s Gross Domestic Product (GDP) growth accelerated to 5.6% in the 1980s and averaged an unprecedented 6% in the period 1992-93 to 2003-04. The growth rate in 2005-06 was 8.4%, and expectations are that India will be able to achieve a 10% rate of growth in the immediate future.
In terms of the sectoral shift in GDP, the share of agriculture fell from 58% to 25% between 1950 and 2001, while that of industry increased from 15% to 26%, and the share of services increased from 27% to 49%. The service sector accounted for almost 54% of the country’s GDP in 2005-06.
India’s export of services has displayed one of the fastest growth rates in the world -- that is, over 17% per annum in the 1990s (when the world average was 5.6%). Service exports showed significant buoyancy during 2004-05, doubling from US$ 25 billion to US$ 51 billion. They now account for 39% of India’s total exports.
The service sector boom in India in the post-Uruguay Round period shows that India has a competitive advantage in several services sectors. However, employment in services has not increased in proportion to the rising share in GDP and trade in India, unlike the situation in the rest of the world. In 1999-2000, services contributed around 24% of employment in India, in contrast to 30% in middle-income countries, 70% in Singapore and around 35% in Thailand. This is perhaps the main reason why trade and economic growth in India has been seen as “jobless”.
Trade already accounts for more than 30% of India’s GDP, an increase of almost 10 percentage points since 2002. Therefore, the final outcome of the WTO negotiations would be an important determinant of overall economic growth in India.
A major constraint facing the country is the persistence of infrastructure deficits: lack of reliable power supply which dampens growth impulses in different sectors of the economy, as well as inefficient and high cost of infrastructure such as roads, railways, airports, seaports and electricity.
According to various estimates, in view of its needs, India is currently spending a miniscule amount on infrastructure. In contrast, China spends seven times as much as India in absolute terms.
India’s negotiating stand at the WTO should be viewed within this context. This article does not question the rationale for India’s continued engagement at the WTO. Instead, it seeks to explain developments in three areas of negotiation: agriculture, Non-Agricultural Market Access (NAMA) and services. It also attempts to capture India’s negotiating position on these issues, highlighting significant shifts on specific issues wherever these have occurred.
Doha negotiations: Agriculture, NAMA and services
In November 2001, following up on the Doha Ministerial Declaration, WTO members launched an ambitious Work Programme covering negotiations on agriculture, Non-Agriculture Market Access (NAMA), services, dispute settlement, antidumping duties, subsidies, etc. In addition, intense work was envisaged in new areas of investment, competition policy, transparency in government procurement and trade facilitation, with the objective of initiating negotiations in 2003. In the Doha Ministerial Declaration, WTO members expressed their resolve to find appropriate solutions to the implementation-related concerns raised by developing countries. These concerns emerged out of the problems encountered by developing countries in the implementation of agreements finalised during the Uruguay Round.
When launched, the Doha Round of trade negotiations was scheduled to be completed by January 1, 2005. However, like the preceding Uruguay Round, the Doha Round has encountered many roadblocks, and progress has been slow. Unable to bridge the gap between differing positions on agriculture and what are known as the “Singapore issues” (investment, competition, transparency in government procurement, and trade facilitation), the Cancun Ministerial Meeting, held in 2003, ended without any results on the issues on the negotiating table. However, some of the contentious issues were settled in the July Framework Agreement of 2004.
Expectations from the Hong Kong Ministerial meeting, held in December 2005, were scaled down in advance of the meeting. Decisions on most of the contentious and substantive issues were postponed until 2006. These included decisions on the formula, specific numbers and timeframe (commonly referred to as modalities) for reduction in agricultural subsidies, and agricultural and non-agricultural tariffs. Despite major players in the WTO negotiations meeting at regular intervals, consensus on the modalities continues to be elusive. Since July 24, 2006, WTO negotiations have gone into suspension mode.
Under GATT, agriculture was subject to ‘soft’ disciplines compared to industrial products. In 1955, the United States obtained a permanent waiver from substantial obligations in agriculture. The European Union implemented an elaborate system of protection for its farmers through huge subsidies. This resulted in severe distortions in the production and trade of agricultural products. Some degree of discipline in agriculture was introduced through the Uruguay Round Agreement on Agriculture. When the Doha Round was launched, it was expected that a significant reduction, if not full elimination of the distortions, would be achieved in the negotiations. These hopes may be belied.
Opinion on the utility and effectiveness of the WTO as a forum for negotiating rules on agricultural tariffs and subsidies is split. According to one view, in most developing countries agriculture is not so much a matter of commerce as one of livelihood. It may, therefore, not be appropriate to treat it on a par with industrial goods. Accordingly, disciplines on agriculture should not be included in trade agreements at the WTO. However, a contrary view also exists which perceives WTO negotiations as the only available vehicle for seeking a reduction in developed-country subsidies, which have significantly distorted global trade and agricultural production.
Of all the issues being negotiated under the ongoing Doha Work Programme, none would have deeper implications for the vast multitude of poor around the world than the negotiations on agriculture. Agricultural development represents a convergence of the main objectives of economic policy in developing countries: growth, stability and poverty alleviation. As trade can interact with these objectives in complex ways, the results of the agriculture negotiations could crucially determine the extent of policy flexibility available to developing countries to pursue these goals in a manner consistent with WTO obligations.
Agriculture negotiations: Progress achieved
Negotiations towards an Agreement on Agriculture are being undertaken on what are called three pillars -- domestic support, market access, and export competition. With respect to each of these pillars, different developing countries have differing interests, often conflicting in nature. The July Framework and the Hong Kong Ministerial Declaration leave open a wide range of options within each pillar of the agriculture negotiations, which provide both risk and opportunity for developing countries. This has brought a considerable degree of complexity to the negotiations. Different country groups have been formed, based on commonality of interests on specific issues, the most important among them being the G20 and the G33. India is a member of both these groups.
It is generally accepted that the agricultural subsidies provided by developed countries not only restrict the access of developing-country exports, but have also depressed world food prices. Subsidised exports by developed countries also pose a threat to food and livelihood security in developing countries by depressing domestic market prices. Reduction of agricultural subsidies by developed countries is, therefore, a crucial goal that is being pursued by developing countries.
The July Framework distinguishes between two broad categories of domestic support. Trade-distorting support and non-trade-distorting support (that is, support with no or minimal impact on trade and production).
Trade-distorting support is made up of various components. The July Framework foresees a substantial reduction of overall trade-distorting support, as well as each component of such support. The framework further states that there will be a strong element of harmonisation of trade-distorting support among developed members because higher levels of permitted trade-distorting support are required to be subject to deeper cuts.
It has been estimated that under the existing WTO regime, the EU and the US have the flexibility to provide $ 100 billion and $ 48.22 billion, respectively, of trade-distorting support. The actual level of trade-distorting subsidy provided by them is less than the ceiling under the WTO. During negotiations in July 2006, the US offered to reduce the ceiling on its overall trade-distorting support by 53%, from $ 48.22 billion to $ 22.5 billion. Developing countries had proposed a limit of $ 10.5 billion.
The US offer must also be seen in light of the fact that its actual level of trade-distorting subsidies in 2005 was about $ 19.7 billion, and in some previous years substantially less than that. As the existing level of trade-distorting subsidies is below $ 22.5 billion, the 53% reduction in ceiling would have resulted in only ‘paper reduction’, without any actual cut on the ground. In fact, the US would have the space to increase trade-distorting subsidies from $ 19.7 billion to the ceiling of $ 22.5 billion.
This has been a matter of considerable disappointment for developing countries like India and other G20 members, particularly because the US is seeking effective tariff reduction from developing countries in exchange for paper reduction in its subsidies.
The on-going agriculture negotiations also provide an opportunity for review and clarification of criteria of ‘green box subsidies’ -- the so-called non-trade-distorting subsidies -- with a view to ensuring that these subsidies have no, or at most minimal, trade-distorting effects, or effects on production. Under the Uruguay Round commitments, countries can provide green box subsidies without any ceiling, provided these subsidies have no trade- or production-distorting effects.
It has been estimated that, under the green box category, almost US$ 90 billion subsidies are provided by the US, the EU and Japan. There are considerable theoretical arguments and a certain amount of empirical evidence that establish that green box subsidies significantly enhance production through different economic effects. In short, green box subsidies provided by developed countries are adversely affecting the interests of farmers in developing countries. While the Doha Round negotiations do not envisage any reduction commitment or ceiling on green box subsidies, proposals have been made by G20 countries to limit such payments to farmers with low levels of income, landholding and production. This might indirectly prevent big farmers and agri-business from receiving handouts under green box.
A point that bears highlighting is that even if the most ambitious proposal of reducing trade-distorting domestic support is agreed upon -- which appears to be an unlikely outcome -- it would still provide considerable leeway to developed countries to grant billions of dollars of farm support. Further, the absence of strict disciplines on green box could undermine gains that may be achieved through a reduced ceiling on trade-distorting subsidies. This should be a matter of concern for developing countries.
Developed countries have consistently demanded that developing countries, including India, reduce their agricultural tariffs. However, it is widely understood that tariff liberalisation by developing countries could have severe consequences -- such as large-scale unemployment, poverty and hunger -- unless they are accompanied by a substantial reduction in, if not removal of, developed-country farm subsidies.
It was agreed in the 2004 July Framework, and further elaborated in the 2005 Hong Kong Declaration, that developing countries would have the right to self-designate certain products as Special Products (SPs). SPs would be subject to flexible tariff reduction. Self-designation of SPs is required to be guided by indicators based on criteria such as food security, livelihood and rural development concerns. While most developing countries have favoured broad coverage of products under SPs, some developed countries have suggested that SPs be restricted to not more than five products. The latter proposal would severely undermine the ability of developing countries to protect the livelihood of their farmers against a surge in cheap and subsidised imports from developed countries.
It is sometimes argued that, in order to address food shortages in India, the country should not be averse to reducing agricultural tariffs during the WTO negotiations. This argument is fallacious, as India can apply low customs duty to facilitate food imports while continuing to keep high bound rates on agricultural products.
The export competition pillar includes various forms of direct and indirect export subsidies, export credits, export insurance, food aid, etc. The most significant development in the export competition pillar has been the decision at the Hong Kong Ministerial meeting to eliminate export subsidies by 2013. However, the actual impact of the elimination of export subsidies may be rather limited, given the fact that the amount of these subsidies -- less than $ 10 billion per year -- is significantly less than the amount of domestic support.
Agriculture negotiations: India’s stand
The agricultural sector is India’s most vulnerable sector. With the livelihood of around 650 million people in the country being dependent on agriculture, India’s interests in the negotiations on agriculture are mainly defensive. India’s offensive interests lie in reducing the heavy subsidisation in developed countries.
India’s interests in agriculture have always been dictated by the need to safeguard millions of small farmers who operate the majority of farm holdings in the countryside. Agriculture determines the very social fabric of India and is more a way of life and means of livelihood than a question of commerce. Further, India has 25 agro-climatic zones that, on the one hand, provide diversity to crop cultivation and, on the other, make crop rotation within a farm extremely difficult. Given these complexities in agriculture, India has essentially defensive interests in agriculture. India’s bound rates and applied agricultural tariffs are among the highest in the world.
Further, the government has considerable flexibility to increase customs duties on most agriculture products, as there is a substantial gap between the existing bound rates and applied customs duty. To illustrate, the bound rate on some edible oils is 300%, but the applied customs duty is 100%. Thus, the government has the flexibility to raise customs duty on some edible oils. However, in respect of certain products like olive oil, the bound rate and applied customs duty are the same -- 45% -- leaving almost no flexibility for raising customs duty, even if the need were to arise in the future.
Keeping its agrarian crisis in view, India had made a strong pitch for according adequate tariff protection to certain products by designating them special products. The products within agriculture regarding which India is extra sensitive with respect to trade liberalisation -- due to their potential for huge employment-generation and livelihood concerns -- include cereals, edible oils and oilseeds and dairy products. Other agricultural products produced by small farmers and, therefore, sensitive for India are spices, ginger, cane sugar, etc. These need to be protected against deep tariff reduction.
As part of G33, India has strongly supported the need for developing countries to have a Special Safeguard Mechanism (SSM) which would allow them to impose additional tariffs when faced with cheap imports or when there is a surge in imports. However, developed countries and some developing countries have sought to impose extremely restrictive requirements for invoking SSM, which would render this instrument ineffective.
As far as agriculture is concerned, overall there does not appear to have been any major shift in India’s negotiating stand. It has firmly resisted making deep tariff cuts on agricultural products. At the same time, it is aggressively pushing developed countries to reduce their farm support. However, as part of the G20 it has diluted its stand on green box and blue box (subsidies provided for limiting production) subsidies. At the Cancun Ministerial meeting in 2003, the G20 had sought a cap on green box subsidies and rejected any expansion of blue box subsidies. However, by the time the 2004 July Framework was concluded both these demands appear to have been abandoned. India also does not seem to have made any headway in obtaining the right to apply quantitative restrictions on agricultural imports, a demand repeatedly made by stakeholders such as farmers’ organisations and NGOs.
While India’s negotiating strategy has been defensive, in general, there are several products in which it may have an export interest. These include cereals, meat, dairy products, some horticultural products and sugar, which may see a growth in export opportunities with reductions in tariff. India’s negotiating strategy should also be cognizant of the export opportunity that may be unleashed in the processed food sector, which has seen significant growth over the past few years. It is here that the decision at Hong Kong to eliminate export subsidies by 2013 assumes importance.
Non-Agricultural Market Access(NAMA)
In GATT/WTO, the term ‘tariff’ is used to refer to a customs duty levied at the time a product is imported into the territory of any country. Tariffs generally have three functions: (i) to provide revenue to the government; (ii) to protect the domestic product from competition with the imported product, as the latter becomes more costly because of the tariff; and (iii) to function as an instrument of development policy in discouraging non-priority imports (such as luxury goods), while encouraging priority imports like capital goods and industrial intermediates. As the imported product becomes more expensive with the levy of a tariff than it would be without it, tariffs have a restraining effect on imports.
GATT/WTO requires member countries to bind their tariffs at mutually negotiated rates with a commitment that the applied customs duty in a member’s territory will not exceed the negotiated level, which is referred to as the bound level. When a country undertakes the obligation to ‘bind’ tariff on a product, it cannot raise the tariff on that product beyond the ‘bound’ level. It may, however, apply a lower tariff at its own discretion. If a country has not ‘bound’ the tariff on a particular product, it is free to put any level of tariff on it. The bound levels for a country are included in that country’s tariff schedule, which is kept in the WTO as a record.
The negotiations on industrial tariffs are mainly on two issues: how to reduce tariffs by working out a formula for tariff reduction, and what percentage of products will be covered by tariff binding (commitment on binding coverage -- that is, the obligation not to raise tariffs beyond committed bound levels on a range of products that are not currently covered by binding).
Under GATT/WTO, there are different approaches to commitments on tariff reduction. The least onerous approach for tariff reduction is to reduce the average tariff, with low reduction on products requiring high tariff protection and higher reduction on products not requiring special protection. A more onerous approach is to reduce tariffs on each tariff line on the basis of a linear formula, under which tariffs are proportionately cut by a fixed percentage. The most onerous method for taking action on tariff reduction commitments is through a non-linear formula under which higher tariffs are cut more than lower tariffs. To illustrate, a product with an initial tariff of 70% will face a higher cut than another product with an initial tariff set at 40%. The extent of tariff cuts under a non-linear formula depends on the value of the coefficient. One commonly used non-linear formula is the so-called Swiss Formula (see below).
Under GATT negotiations, developing countries were not required to reduce tariffs on a product-by-product basis. Under the Uruguay Round commitments, they were required to undertake tariff cuts in the least onerous manner -– through average tariff reductions.
NAMA negotiations: Doha and beyond
Paragraph 16 of the Doha Declaration, which is on NAMA, has the following four elements:
- Reduction/elimination of tariffs, including tariff peaks, high tariffs and tariff escalation, as well as non-tariff barriers, in particular on products of export interest to developing countries.
- Comprehensive product coverage without any a priori exclusions.
- Special needs and interests of developing countries and Least Developed Countries (LDCs) to be taken fully into account.
- Less than full reciprocity by developing countries and LDCs in reduction of tariffs.
Certain features of the Doha mandate on NAMA bear highlighting. First, the Doha Declaration did not specify whether tariff reduction should be undertaken on the basis of average tariff cuts or line-by-line formula-based cuts. Thus, the possibility existed for developing countries to seek tariff reduction through the least onerous method of average tariff reduction. Second, although the coverage of products for tariff reduction would be comprehensive without a priori exclusions, the possibility exists for keeping certain tariff lines outside the scope of tariff reduction. Third, the mandate provides for the special needs and interests of developing countries to be fully taken into account in the negotiations. Fourth, under the concept of ‘less than full reciprocity,’ developed countries could be expected to undertake deep tariff cuts without commensurate concessions from developing countries.
These four features of the Doha mandate would suggest that the interests of developing countries would be protected during NAMA negotiations. However, subsequent developments do not indicate that the negotiations are proceeding in a direction that would address the main concerns of developing countries like India.
In the July Framework it was recognised that the formula approach is key to reducing tariffs. It was specified that countries would continue to work on a non-linear formula, to be applied on a line-by-line basis. Certain flexibilities for addressing the concerns of developing countries were also envisaged in the July Framework. As far as NAMA negotiations are concerned, the crucial point is that the July Framework should be viewed only as providing initial elements for further work, and should not be treated as having been accepted.
At the Hong Kong Ministerial meeting of the WTO in 2005, it was decided that NAMA tariff reductions would be undertaken through what is known as the Swiss Formula. Expressed mathematically, the Swiss Formula is as follows:
t1 = (a X t0) / (a+t0), where t1 = new reduced tariff after application of the Swiss Formula; t0 = original tariff on which the Swiss Formula is applied; a = coefficient which determines how steep the tariff cuts will be: the lower the coefficient, the larger the cuts.
NAMA negotiations: India’s stand
From India’s submissions on NAMA to the WTO, it would appear that India’s negotiating position has evolved considerably and changed significantly from its initial approach to tariff reduction and its earlier stand on how unbound tariff lines should be treated for purposes of tariff reduction.
India’s initial approach to NAMA negotiations is contained in its submissions TN/MA/W/10 (dated October 22, 2002) and TN/MA/W/10/ Add 1 (dated January 8, 2003). From the outset, India does not appear to have supported the least onerous approach to tariff reduction through average tariff cuts. Instead, it favoured the relatively more onerous approach of a simple percentage cut on each product. In April 2005, even this approach was abandoned in favour of a still more onerous formula -- the non-linear ABI (Argentina-Brazil-India) Formula, which is a variation of the Swiss Formula. Thus, India’s approach has evolved from seeking a less tedious approach to tariff cuts to proposing and accepting tariff cuts based on the Swiss Formula, which would result in significant tariff reductions.
As far as unbound tariff lines are concerned, India’s initial negotiating stand was that developing countries should have the flexibility not to bind certain tariff lines still considered domestically sensitive or strategically important. However, in a joint submission by Argentina, Brazil and India, TN/MA/W/54 (dated April 15, 2005), India has clearly stated that, “increasing the binding coverage to 100% is a desirable objective of this Round”. This is another instance of a significant shift in India’s negotiating stand between October 2002 and April 2005.
In general, no country can be expected to adhere to its initial negotiating stand during the course of trade negotiations. The process of negotiations involves trade-offs, with countries conceding ground on certain issues in order to secure gains in other areas. It would, therefore, be useful to assess what gains developing countries, including India, have made in the NAMA negotiations.
The Doha mandate provided for the reduction or elimination of tariff and non-tariff barriers on products of export interest to developing countries. This would have been an issue of particular interest to India as its exports in competitive sectors like apparel, leather and footwear, etc, face significant tariff barriers in developed-country markets. So far no proposal has been made, either by India or any other developing country, seeking reduction or elimination of tariffs on products of interest to developing countries. While tariff reduction through the Swiss Formula would cut into developed-country tariffs, particularly tariff peaks on apparel, footwear, etc, in the absence of product-specific proposals, developing countries would lose an opportunity to seek deeper cuts on products of export interest to them.
The Doha mandate provided for developing countries to make less than fully reciprocal commitments. This is likely to be reflected through developing countries retaining the option to keep a certain percentage of products outside the scope of tariff reduction, or subjecting them to less than formula cuts. While the exact percentage of these tariff lines remains to be agreed upon, this should provide a certain amount of breathing space to India for protecting sensitive products from the adverse impacts of tariff reduction.
In one of its initial negotiating submissions (TN/MA/W/10/Add 1 dated January 8, 2003), India proposed that developing countries must get credit for autonomously binding their tariffs after the Uruguay Round. Credit for autonomous liberalisation can be obtained in the form of less onerous tariff reduction commitments. As India has bound a large number of tariff lines autonomously, after the Uruguay Round, it stands to gain significantly if agreement is reached on the methodology for getting credit. It is, therefore, surprising that India made a proposal on this issue only in June 2006, more than three years after having suggested the idea. As India’s proposal was made rather late, it does not appear to have been discussed at the WTO so far.
In its submission TN/MA/W/10 (dated October 22, 2002), India emphasised the significance it attaches to the removal of Non-Tariff Barriers (NTBs), particularly on products of export interest to developing countries. However, progress achieved so far in this matter does not hold out any promise for the removal of these barriers in the near future. In the Hong Kong Ministerial Declaration, the ministers have only taken note of the work done for “the identification, categorisation and examination of notified NTBs” and have recognised “the need for specific negotiating proposals,” which should be submitted as quickly as possible. There is, thus, no deadline even for the submission of proposals, let alone for the elimination of NTBs. Clearly, from India’s perspective, one of its important objectives -- the removal of NTBs -- has not seen the progress it might have desired.
It is clear that the main and substantial gain made by India so far in the NAMA negotiations relates to having the flexibility to protect certain sensitive products by keeping them outside the scope of the applicable tariff reduction formula.
Implications for India of NAMA negotiations
Empirical evidence suggests that the integration of a country into the global economy provides both benefits and challenges for consumers, business and the government. In a scenario where India’s economy no longer faces a foreign exchange shortage, it would be crucial for the country to leverage NAMA negotiations in order to generate employment through the expansion of trade. Given the relatively high level of NAMA bound tariffs in India, compared to developed countries, tariff reduction through the non-linear Swiss Formula would require India to make deeper tariff cuts than developed countries. In other words, the extent of percentage points by which India would be required to reduce its bound tariffs would far exceed the corresponding number for developed countries. Herein lies the imbalance in the possible outcome of NAMA negotiations for India. Domestically, one possible way of mitigating the adverse effects of tariff reduction could be by designing appropriate safety nets for sectors likely to be adversely affected by reduced tariffs.
As commitments on bound tariffs are almost irreversible, deep cuts in bound tariffs would make it difficult for India to use tariff protection as a tool for industrial policy in the future. In other words, India may not be able to protect some sectors of its domestic industry through appropriate levels of customs duty, even if there is a surge in imports of low-priced manufactured goods.
Given the employment potential of some of the informal sectors, including fish, natural rubber, etc, it is important for India to seek import protection in these areas. At the same time, India should not ignore the possibility of enhanced exports generating additional employment in other sectors.
Based on simulations undertaken, it is clear that the outcome of tariff reduction would not be trade-neutral or universally beneficial for different sectors. Labour utilisation for both skilled and unskilled labour falls in nine out of the 28 sectors, particularly in raw materials-based sectors, metals and auto components. However, there could be significant gains in output and labour use for textiles and apparel. As these gains are likely to accrue over a broad initial base, tariff liberalisation in this sector under NAMA could provide an overall balance for the country. For India, any sectoral initiative to reduce tariffs to zero in selected sectors would be meaningful only if developed countries agree to zero tariffs in the textiles and clothing sector.
Unlike many developing and developed countries, India is not a member of many regional/free trade agreements. Thus, India’s exports become uncompetitive to the extent of margin of preference enjoyed by its competitors in the domestic market of preference-granting countries. This disadvantage would be addressed after NAMA tariffs come down.
While India has defensive interests in agriculture and NAMA, in services it can afford to be on the offensive, given the edge that it has in most areas in this sector over other countries, both developed and developing.
India’s offensive interests in services
From India’s point of view, services present a different picture from agriculture and industrial tariffs. As an emerging global power in IT and business services, the country is, in fact, a demander in the WTO talks on services as it seeks more liberal commitments on the part of its trading partners for cross-border supply of services, including the movement of ‘natural persons’ (human beings) to developed countries, or what is termed as Mode 4 for the supply of services. With respect to Mode 2, which requires consumption of services abroad, India has an offensive interest.
In sharp contrast, the interest of the EU and the US is more in Mode 3 of supply, which requires the establishment of a commercial presence in developing countries. Accordingly, requests for more liberal policies on foreign direct investment in sectors like insurance have been received. These developed countries are lukewarm to demands for a more liberal regime for the movement of natural persons.
Unlike many developing countries, India has taken offensive positions in this area as it has export interests in information technology (Mode 1). The country also seeks greater access to the EU and the US in terms of the movement of natural persons, or what is termed as Mode 4 in cross-border supply of services. Lack of movement in Mode 4 due to opposition by the US and the EU may affect India’s ability to offer much in other modes of services.
India would also like to see issues like economic needs test, portability of health insurance and other such barriers in services removed. As far as delivery of services through commercial presence (Mode 3) is concerned, there is an increasing trend of Indian companies acquiring assets and opening businesses in foreign markets in sectors such as pharmaceuticals, IT, non-conventional energy, etc. This is further evidenced by the increase in Outward Foreign Direct Investment (OFDI) from $ 2.4 billion in 2004-05 to $ 6 billion in 2005-06. India may, therefore, have some interest in seeking liberalisation in Mode 3, although it may need to strike a balance with domestic sensitivities in financial services.
India has received many pluri-lateral requests for the opening of a number of services. However, while the demanders have high ambitions in terms of the market access they want, they are not willing to open up their own economies to the same degree, particularly in Mode 4. While the EU is fully committed to the pluri-lateral process, the US continues to indicate the high importance it gives to the bilateral request-offer. In fact, India has threatened to withdraw its offers if better offers, which may enhance India’s services exports, are not forthcoming from its trading partners. Mutual recognition of degrees, allowing portability of medical insurance, reducing barriers to movement of professionals, etc, are some of the areas of interest to India.
An important issue relating to the delivery of services and liberalisation is domestic regulatory reforms. Appropriate domestic regulations are necessary to prevent market failure as well as to address issues like quality control, accreditation and equivalence, effective registration and certification systems, revenue sharing, etc, for protecting and informing consumers. In addition, regulatory frameworks can also advance transparency. Any market access commitments that India might make during the ongoing negotiations must be preceded by an effective regulatory framework. The hiatus in the negotiations could be utilised for putting into place appropriate regulatory regimes in different service sectors.
Some experts are of the view that under the Uruguay Round commitments, developed countries already have a liberal trade regime in Mode 1 (which covers Business Processing Outsourcing or BPOs) with regard to some of the service sectors of interest to India. Further research needs to done to assess the extent of autonomous liberalisation undertaken by developed countries, which can be locked in during the negotiations, and consequent gains that can accrue to India. Further, even in the absence of additional liberalisation, India’s service exports would continue to grow in view of its cost advantage and demography. India could also explore the possibility of finalising mutual recognition agreements with the main importers of services, so that differences in national regulatory systems do not act as barriers to its exports.
From India’s perspective it would be most crucial during the Doha negotiations to protect the interests of its farmers, even at the cost of foregoing benefits that might have otherwise been made in services and NAMA negotiations.
As far as agriculture negotiations are concerned, the playing field may be tilted further against India if it is required to undertake deep tariff cuts without any concurrent elimination of farm subsidies by developed countries. Even the most ambitious proposal would permit the US and the EU to together provide trade-distorting subsidies to the extent of $ 30 billion. Further, without strengthened disciplines on green box, developed countries may be in a position to increase subsidies under this category beyond the present levels of $ 90 billion. Such high levels of farm subsidies in developed countries, accompanied with deep tariff reductions in India, could severely threaten the livelihood of India’s farmers as well as the food security of its people. There is no requirement for India to reduce bound rates to address the current food shortage.
As far as NAMA is concerned, without a steep reduction in tariffs in the textiles and clothing sector in developed countries, India may not stand to gain significantly. In respect of services, India would need to balance the incremental gains that might accrue to it from liberalisation in developed-country markets with the adverse consequences of making commitments to liberalise sensitive sectors. As India’s existing regime in some service sectors (like telecom) is more liberal than its existing commitments at the WTO, it could seek to leverage this by binding its existing regime, provided it obtains commensurate reciprocal concessions.
(Abhijit Das is Senior Trade Officer, UNCTAD India Programme)
nfoChange News & Features, December 2006