GS Notes

6. Economics Notes 15

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Elaborate Notes

Reduction in Export Subsidies

The World Trade Organization’s (WTO) Agreement on Agriculture (AoA), which came into force in 1995 following the Uruguay Round (1986-1994), established a framework for reforming trade in agriculture. One of its three main pillars is the reduction of export subsidies.

  • Definition and Impact: Export subsidies are payments or other forms of support provided by governments to domestic producers that are contingent on the export of their goods. This allows them to sell their agricultural products in foreign markets at prices below their cost of production, a practice that undercuts producers in importing countries, particularly in Least Developed Countries (LDCs) and developing nations. This artificially depresses global prices and creates unfair competition, hindering the agricultural development of poorer nations.
  • Commitments under AoA: The AoA mandated specific reduction commitments.
    • Developed Countries: Required to reduce the value of their export subsidies by 36% and the volume of subsidized exports by 21% over a six-year implementation period (1995-2000).
    • Developing Countries: Granted more lenient terms, with a requirement to reduce the value of subsidies by 24% and the volume by 14% over a ten-year period (1995-2004). LDCs were exempt from these reduction commitments.
  • Case Study: India’s Sugar Subsidies:
    • Context: In 2019, a surplus in sugarcane production led to an oversupply of sugar in the Indian market, causing a sharp fall in prices. This rendered sugar mills unprofitable, making it difficult for them to pay farmers the legally mandated Fair and Remunerative Price (FRP). The FRP is a government-determined price that mills must pay to sugarcane farmers, established under the Sugarcane (Control) Order, 1966.
    • Government Intervention: To alleviate the crisis and clear the excess stock, the Indian government introduced a scheme of export subsidies for sugar.
    • WTO Dispute: Brazil, along with Australia and Guatemala, filed a dispute against India at the WTO, arguing that these subsidies were inconsistent with India’s obligations under the AoA, as they exceeded the de minimis levels allowed for developing countries.
    • India’s Defence: India contended that its measures were not direct export subsidies but were designed to cover marketing costs, internal transport, and freight charges, which it argued were permissible under WTO rules for developing countries for a certain period.
    • Ruling: In 2021, the WTO dispute settlement panel ruled against India, stating that its sugar subsidies violated international trade rules.
  • Countervailing Duties (CVD): To counter the effect of foreign export subsidies, importing countries can impose a Countervailing Duty (CVD), also known as an additional customs duty. This is a specific type of tariff levied to offset the subsidy provided by the exporting country’s government. This is distinct from an Anti-dumping duty, which is imposed when a foreign company exports a product at a price lower than its domestic market price.

The WTO’s Dispute Settlement Mechanism

The WTO’s dispute settlement system is a central element of the multilateral trading system.

  • Dispute Settlement Body (DSB): The General Council of the WTO convenes as the Dispute Settlement Body to manage trade disputes. When a complaint is filed, the DSB establishes a Dispute Settlement Panel of experts to hear the case and issue a report (judgment).
  • Appellate Body: If a country is dissatisfied with the Panel’s ruling, it can appeal to the Appellate Body. This is a standing body of seven independent, high-ranking legal experts with a four-year term, with the possibility of one reappointment. It can uphold, modify, or reverse the legal findings of the Panel.
  • Crisis in the Appellate Body: Since 2017, the United States has systematically blocked the appointment and reappointment of judges to the Appellate Body. The U.S. cited concerns about judicial overreach and procedural issues. By December 2019, the body no longer had the quorum of three members required to hear appeals, rendering it non-functional. This has significantly weakened the WTO’s ability to enforce its rules and settle disputes, creating a major crisis in the multilateral trading system.

Improved Market Access

The second pillar of the Agreement on Agriculture focuses on improving market access for agricultural products.

  • Tariffication: The AoA required member countries to convert all non-tariff barriers (NTBs)—such as quotas, import licensing, and variable levies—into equivalent tariffs. This process, known as tariffication, was intended to make trade barriers more transparent and predictable.
  • Tariff Reduction: After converting NTBs to tariffs, countries were obligated to progressively reduce these tariffs.
    • Developed Countries: Required to reduce their agricultural tariffs by an average of 36% over six years, with a minimum reduction of 15% for each individual tariff line.
    • Developing Countries: Required to reduce tariffs by an average of 24% over ten years, with a minimum reduction of 10% for each tariff line.

Structure of the WTO

  • Ministerial Conference: This is the highest decision-making authority in the WTO. It comprises trade ministers from all member countries and must meet at least once every two years. It can make decisions on any matter under the multilateral trade agreements. The first Ministerial Conference was held in Singapore in 1996.
  • General Council: Based in Geneva, the General Council is composed of ambassadors from all member governments. It acts on behalf of the Ministerial Conference in the intervals between its meetings. The General Council also convenes as the Dispute Settlement Body (DSB) and the Trade Policy Review Body (TPRB).
  • Trade Policy Review Body (TPRB): The TPRB oversees the Trade Policy Review Mechanism (TPRM), a process designed to enhance the transparency of members’ trade policies. It periodically reviews the trade policies and practices of all WTO members.

Key Ministerial Conferences and Agendas

  • Singapore Ministerial Conference (1996):

    • This conference introduced the “Singapore Issues,” a set of four topics pushed by developed countries for inclusion in WTO negotiations:
      1. Trade and Investment: Rules to ease restrictions on foreign direct investment.
      2. Trade Facilitation: Streamlining customs procedures to reduce red tape (e.g., single-window clearances, digitalization).
      3. Transparency in Government Procurement: Opening government contracts to foreign bidders based on principles of non-discrimination.
      4. Trade and Competition Policy: Establishing multilateral rules to ensure fair competition.
    • Developing countries, including India, strongly resisted these issues, arguing they were not ready and that these topics impinged on their domestic policy space.
    • Green Room Mechanism: This refers to an informal and often non-transparent negotiation process involving a small group of influential member countries (usually developed nations and a few major developing ones) to reach a consensus, which is then presented to the wider membership. It has been criticized for being exclusionary.

  • Doha Ministerial Conference (2001):

    • Launched the Doha Development Agenda (DDA) or the “Doha Round,” with the explicit aim of placing the needs of developing countries at the heart of the negotiations.
    • Key Pillars of the DDA:
      • Agriculture: The most contentious area. Developing countries sought substantial reductions in trade-distorting domestic support (subsidies) by developed nations, particularly the US and EU. The concepts of Special Products (products vital for food security and rural development in developing countries, to be exempt from tariff cuts) and Special Safeguard Mechanisms (SSM) were introduced.
      • Non-Agricultural Market Access (NAMA): Negotiations aimed at reducing tariffs on industrial goods, fuels, and fish, which constitute the majority of world trade.
      • TRIPS and Public Health: The Doha Declaration on the TRIPS Agreement and Public Health affirmed that the TRIPS agreement should not prevent members from taking measures to protect public health. It clarified flexibilities like compulsory licensing, which allows a government to authorize the production of a patented product without the consent of the patent holder in a public health emergency.
      • Implementation Issues: Developing countries highlighted their difficulties in implementing the complex Uruguay Round agreements due to a lack of technical and financial capacity.
      • Special and Differentiated Treatment (S&DT): Provisions that give developing countries special rights and allow them more time to implement agreements. The debate was on making these provisions more precise, effective, and operational.
    • India’s Stance: India strongly advocated for SSM to protect its farmers, a permanent solution for public stockholding for food security, and the expansion of Geographical Indication (GI) protection to products like Basmati rice.

  • Bali Ministerial Conference (2013):

    • This conference achieved a significant breakthrough after years of stalemate in the Doha Round.
    • Key Outcomes:
      1. Trade Facilitation Agreement (TFA): The first multilateral agreement since the WTO’s creation, aimed at simplifying customs procedures.
      2. Peace Clause: A temporary agreement that protected developing countries like India from being challenged at the WTO if their subsidies for public stockholding programs (like India’s MSP-based food procurement) breached the prescribed limits under the AoA. This was an interim solution pending a permanent one.
      3. LDC Package: A commitment to provide Duty-Free, Quota-Free (DFQF) market access for products from LDCs.

  • Nairobi Ministerial Conference (2015):

    • Key Outcomes and Debates:
      1. Export Subsidies: A landmark decision was made to eliminate agricultural export subsidies. Developed countries committed to immediate elimination, while developing countries were given until 2019-2023 for some specific subsidies.
      2. Public Stockholding and SSM: No permanent solution was reached on public stockholding, and discussions on the SSM for developing countries remained inconclusive, causing disappointment for India and the G33 coalition of developing countries.
      3. Emergence of “New Issues”: Developed countries pushed to introduce new topics like e-commerce, investment facilitation, labour standards, and environmental standards into the WTO agenda, arguing that the Doha Round was outdated.
      4. India’s Stand: India strongly opposed the introduction of these “new issues,” arguing that the unresolved DDA mandates must be concluded first. India maintained that issues like labour and environment should be dealt with in specialized bodies like the International Labour Organization (ILO) and UNFCCC, not the WTO. India also pushed for the inclusion of movement of natural persons (Mode 4 of GATS) as a key issue, which would benefit its skilled professionals.

The Debate: Is the WTO Biased?

This is a central question in international political economy.

  • Arguments for Bias (Negative Aspects for Developing Countries):
    • Asymmetry in Agreements: Agreements like TRIPS (Trade-Related Aspects of Intellectual Property Rights) are seen as favouring developed countries by enforcing a strong product patent regime, benefiting their pharmaceutical and technology companies.
    • Subsidy Imbalances: The AoA framework has been criticized for allowing developed countries to continue massive domestic support through “Green Box” subsidies (considered non-trade-distorting), while capping the “Amber Box” subsidies (trade-distorting) on which developing countries like India rely (e.g., MSP).
    • Stalled Doha Agenda: The failure to conclude the DDA, which was meant to be a “development round,” is seen as a betrayal of the promises made to developing countries.
    • New Issues: The push by developed nations to introduce new issues is viewed as an attempt to shift the goalposts and impose new obligations on developing countries while avoiding their own commitments under the DDA.
    • Crippled Dispute Settlement: The paralyzing of the Appellate Body by the US disproportionately affects developing countries, which rely on the rule-based system to challenge the trade practices of more powerful nations.
    • Theoretical Underpinnings: The Prebisch-Singer hypothesis (developed by Raúl Prebisch and Hans Singer in the 1950s) posits that the terms of trade for developing countries that export primary commodities tend to decline over time relative to the manufactured goods they import from developed countries. Critics argue the WTO framework perpetuates this structural inequality.
  • Counter-Arguments (Positive Aspects and Nuances):
    • Special and Differentiated Treatment (S&DT): The WTO framework explicitly includes provisions for S&DT, giving developing countries longer implementation periods and more flexibility.
    • TRIPS Flexibilities: The TRIPS agreement includes important flexibilities like compulsory licensing and parallel importation, which were reinforced by the Doha Declaration on Public Health.
    • Consensus-Based Decision-Making: The principle of “one country, one vote” and the requirement for consensus give every member, regardless of size, a potential veto, preventing the most powerful countries from unilaterally imposing their will.
    • Tangible Gains for LDCs: The Agreement on Textiles and Clothing (ATC), which phased out the protectionist Multi-Fibre Arrangement (MFA) by 2005, significantly benefited textile-exporting developing countries like Bangladesh and Vietnam. The DFQF market access initiative is another such example.
    • Peace Clause: The Bali Peace Clause provided India with crucial policy space to continue its food security programs without facing legal challenges at the WTO.
    • Specific Wins: Recent agreements, such as the temporary waiver on COVID-19 vaccine patents (2022) and the Agreement on Fisheries Subsidies (2022) which includes exemptions for small-scale fishers in developing countries, show that the system can deliver outcomes sensitive to development concerns.

Prelims Pointers

  • Agreement on Agriculture (AoA): A key outcome of the Uruguay Round, established in 1995.
  • AoA Pillars: 1. Domestic Support, 2. Market Access, 3. Export Subsidies.
  • Export Subsidy Reduction Targets (Original AoA):
    • Developed Countries: 36% by value or 21% by volume in 6 years.
    • Developing Countries: 24% by value or 14% by volume in 10 years.
  • Fair and Remunerative Price (FRP): Legally mandated price for sugarcane in India, under the Sugarcane (Control) Order, 1966.
  • WTO Dispute Settlement Body (DSB): Composed of all WTO members (the General Council in a special session). It establishes panels and adopts reports.
  • Appellate Body: Standing body of 7 members, with a 4-year term. It hears appeals from panel reports. It has been non-functional since December 2019 due to the US blocking appointments.
  • Tariffication: The process of converting non-tariff barriers (like quotas) into equivalent tariffs.
  • First WTO Ministerial Conference: Singapore, 1996.
  • Singapore Issues: 1. Investment, 2. Competition Policy, 3. Transparency in Government Procurement, 4. Trade Facilitation.
  • Doha Development Agenda (DDA): Launched at the 4th Ministerial Conference in Doha, Qatar, in 2001.
  • Special Products (SP): Agricultural products important for food security in developing nations, eligible for flexible treatment.
  • Special Safeguard Mechanism (SSM): A proposed tool for developing countries to impose temporary tariffs to counter import surges.
  • Non-Agricultural Market Access (NAMA): Refers to all products not covered by the AoA, mainly industrial goods.
  • TRIPS Flexibilities: Include compulsory licensing and parallel importation, affirmed in the Doha Declaration on TRIPS and Public Health.
  • Bali Ministerial Conference (2013): Key outcomes were the Trade Facilitation Agreement (TFA) and the “Peace Clause” on public stockholding.
  • Nairobi Ministerial Conference (2015): Achieved a decision to eliminate agricultural export subsidies.
  • Duty-Free, Quota-Free (DFQF): A scheme to provide market access for products from Least Developed Countries (LDCs).
  • Prebisch-Singer Hypothesis: Argues that the price of primary commodities declines over the long term relative to manufactured goods.
  • Multi-Fibre Arrangement (MFA): An agreement (1974-2004) that imposed quotas on textile and garment exports from developing countries to developed ones. It was replaced by the Agreement on Textiles and Clothing (ATC).

Mains Insights

Is the WTO biased in favour of developed nations, and is it losing its relevance?

The question of the WTO’s bias and relevance is a complex one, with strong arguments on both sides. An effective analysis requires examining the structural framework, key agreements, and the evolving geopolitical context.

1. Arguments for WTO’s bias towards Developed Nations:

  • Structural Asymmetry in Agreements:
    • Agreement on Agriculture (AoA): The classification of subsidies into “boxes” (Amber, Blue, Green) is inherently skewed. Developed countries were able to shift their massive subsidies into the non-trade-distorting “Green Box” (e.g., direct income support, environmental payments), which has no spending limits. Developing countries, lacking such financial capacity, rely on price support like India’s MSP, which falls into the trade-distorting “Amber Box” and is subject to strict limits. This perpetuates a non-level playing field.
    • TRIPS Agreement: By institutionalizing a global intellectual property regime based on product patents, TRIPS primarily serves the interests of technology and pharmaceutical corporations in the developed world. While flexibilities exist, they are often difficult to implement due to political pressure from developed nations.
  • Stalled Development Agenda: The failure to conclude the Doha Development Agenda (DDA) after more than two decades is the most compelling evidence of a lack of commitment from developed countries. Key development-centric issues like a permanent solution for public stockholding and a functional Special Safeguard Mechanism (SSM) remain unresolved.
  • Shifting Goalposts: Developed nations, having secured their interests in the Uruguay Round, are now pushing “new issues” (e-commerce, environment, labour). This is seen as a tactic to evade their pending DDA commitments and impose new, costly regulatory standards on developing countries, potentially creating new forms of protectionism (e.g., carbon border taxes).
  • Weaponization of Dispute Settlement: The crippling of the Appellate Body by the U.S. demonstrates how a powerful member can undermine the core “rules-based” function of the WTO when its rulings are perceived as unfavourable. This erodes the primary value proposition of the WTO for smaller economies—a forum where rules, not power, adjudicate disputes.

2. Counter-perspectives: WTO as a necessary, if imperfect, institution:

  • Rule of Law over Rule of Power: Despite its flaws, the WTO provides a predictable, rules-based framework for international trade. Without it, global trade would likely devolve into a system of bilateral power politics, where developing countries would have even less leverage against economic giants.
  • Empowerment through Consensus and Alliances: The consensus-based decision-making model allows developing countries to form coalitions (e.g., G33, G20 developing country bloc) to block unfavourable proposals and advocate for their collective interests. India has effectively used this to protect its interests in agriculture and food security.
  • Tangible Benefits and Flexibilities:
    • The phase-out of the Multi-Fibre Arrangement (MFA) under the Agreement on Textiles and Clothing led to a boom in exports for countries like Bangladesh and Vietnam, driving economic growth.
    • The Peace Clause secured at Bali provided India with crucial breathing room for its food security program.
    • The recent Agreement on Fisheries Subsidies, which India helped shape, includes vital S&DT provisions to protect its small and artisanal fishers.
  • The Alternative is Worse: Replacing the WTO is not a viable option in the current geopolitical climate. The alternative would likely be a fragmented world of competing trade blocs and unilateral protectionist measures, leading to greater instability and economic uncertainty, which would harm developing countries the most.

Conclusion/Way Forward:

The WTO is not inherently biased in its design, but its operation and the outcomes of its negotiations have often reflected the greater bargaining power of developed nations. It is currently facing an existential crisis due to the defunct Appellate Body and the stalemate of the DDA. However, it is not obsolete. The path forward lies not in dismantling it but in comprehensive reform:

  1. Restoring the Dispute Settlement System: This is the top priority to re-establish the WTO’s credibility.
  2. Concluding the Doha Agenda: A meaningful conclusion focusing on the original development mandate is necessary to rebuild trust.
  3. Reforming Subsidy Rules: The rules on agricultural subsidies must be re-evaluated to address the inherent imbalances between the Green Box and the Amber Box.
  4. A Balanced Approach to New Issues: Any discussion on new issues must proceed by consensus and be accompanied by concrete S&DT provisions and capacity-building support for developing countries.

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