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WTO: Why Potsdam Failed

The Potsdam meeting of the G-4 has failed, throwing the Doha round of the World Trade Organisation into a crisis. The EU and the US got together, arrived at a mutual rapprochement in agriculture, and united to press Brazil and India very hard on non-agricultural market access. The developing countries are going to benefit very little or nothing from the "lowered ambition" of the EU and the US in agriculture. In the final analysis, it seems that the US and EU on the one hand and Brazil and India on the other have very different and contrasting notions of what promotes development.

Commentary

WTO: Why Potsdam Failed

The Potsdam meeting of the G-4 has failed, throwing the Doha round of the World Trade Organisation into a crisis. The EU and the US got together, arrived at a mutual rapprochement in agriculture, and united to press Brazil and India very hard on non-agricultural market access. The developing countries are going to benefit very little or nothing from the “lowered ambition” of the EU and the US in agriculture. In the final analysis, it seems that the US and EU on the one hand and Brazil and India on the other have very different and contrasting notions of

what promotes development.

MARTIN KHOR

T
he Doha negotiations at the World Trade Organisation (WTO) has been thrown into a crisis after the spectacular failure of a meeting of trade ministers of four important membercountries – the United States, the European Union, Brazil and India, known as the G-4. An emergency informal meeting at the WTO’s Trade Negotiations Committee on June 22 decided that the talks would from now be centred on all 150 member-countries of the WTO and no longer on a few key member-countries. It appears that the G-4 process, which has been taking place for three years, sometimes including Japan and Australia in a G-6 process, is now dead. However, while the talks will return to the multilateral venue of the WTO, few believe the endof July deadline for concluding interim agreements (or “modalities”) on trade in agriculture and industrial products will now be met.

“If four WTO members cannot agree by themselves after two years, how can 150 members agree in six weeks?” asked a diplomat during the WTO’s June 22 meeting. Meeting the July deadline is seen as necessary for the entire Doha talks to conclude at the end of this year. If that does not happen, the negotiations may be put on hold for two years because the United States, the world’s biggest trading nation, will be preoccupied with its presidential elections. It would also then be unlikely that the US president’s fast track authority for trade deals (which expires at the end of June) would be renewed.

The G-4 ministers’ meeting, held in Potsdam, Germany, was supposed to be the last big effort to salvage the troubled Doha round, launched in Doha in 2001. The round collapsed mid-way because of irreconcilable differences between the US and the EU on the one hand, and Brazil and India on the other. The break-up was acrimonious, with each side blaming the other. Brazil’s foreign minister, Celso Amorim told the media in Geneva on June 22 that the US and EU had agreed among themselves to lower the commitments that each would undertake in agriculture, and then insisted that the developing countries take on high commitments to steeply reduce their industrial tariffs. It was an unfair equation that India and Brazil could not accept. “As usual, as it has always been, what they (the US and EU) agreed, they consider is the agreement”, said Amorim. The US trade representative, Susan Schwab, at another briefing in Geneva, blamed India and Brazil for having “extremely rigid positions” on many issues and being “unwilling to negotiate”. The EU trade commissioner, Peter Mandelson also blamed India and Brazil.

The way the Potsdam talks broke down and the subsequent blame game has cast a long shadow over the whole WTO process. The vast majority of developing countries was in any case left out of the G-4 process and last week an alliance called the G-90+ issued their own development declaration that they would not be rushed into a deal crafted by a few. “Getting the content right is more important than meeting deadlines”, they declared. The alliance comprises the African group, the least developed countries group, and the Africa, Caribbean and Pacific (ACP) group, as well as Bolivia and Venezuela. The WTO director general, Pascal Lamy urged membercountries to take “urgent action to restore confidence that these negotiations will be finished successfully”. But Indian and Brazilian diplomats said privately that it would take several days for the effects of the G-4 failure to wear off and for confidence to be rebuilt before the talks resume seriously.

The G-4 chose Potsdam as the venue of their talks. This is a small German town famous for hosting the meeting of the Allied victors to plan the post-second world war order, after the surrender of Germany. Perhaps they thought the new Potsdam meeting would signal the start of a new WTO order. But it was not to be. Potsdam may instead come to symbolise the unravelling of the Doha round, unless some miracle happens in the next few weeks.

In the immediate aftermath of the collapse of the G-4 talks in Potsdam, some interesting conclusions can be drawn about what happened and why.

EU, US Absolved Each Other

Firstly, the configuration in relations between the four (the US, EU, Brazil and India) changed. The EU and US got together, arrived at a rapprochement among them in agriculture, and united to press the two developing countries very hard on non-agricultural market access (NAMA). Before, the EU had been pushing the US to reduce overall trade distorting support (OTDS) while the US pushed the EU to cut its agricultural tariffs by more. At Potsdam, the US offered $17 billion as its cap for OTDS (which is above the $15 billion the EU had asked for and the $12 billion demanded by the G-20). The EU offered an average tariff cut of 50 per cent in farm tariffs (below the 54 per cent demanded by the G-20

Economic and Political Weekly June 30, 2007 and far below the 60 per cent demanded by the US).

The EU and US were amenable to a mutual “lowering of ambition”, or “forgiving each other’s sins”. And then they combined to be tough on India and Brazil on NAMA and on India on special products. In their statements, the EU and US have claimed how “flexible” both of them had been, and how inflexible Brazil and India had been. In the blame game now going on, the two developed countries have thus attempted to throw the burden of the collapse of talks onto the two developing countries – even as Susan Schwab, the US trade representative, insisted that “this is not a North-South breakdown” and Peter Mandelson, the EU trade commissioner said: “This is not a North-South showdown”.

A different view came from Celso Amorim at his Potsdam press conference after the talks collapsed: “In a way, we are having a Cancun II in which two developed countries have found a common level of comfort for themselves by lowering ambition in developed countries’ agricultural market access and by lowering ambitions in OTDS – yet keeping high ambitions in NAMA and special products and other areas. We came to a conclusion we are pursuing a decline – not a Development Round”. He was referring to the deal on agriculture made by the US and EU just before the WTO’s Cancun Ministerial Conference of September 2003. That deal shocked Brazil (which had before that been working with the US and the Cairns Group to press the EU on its tariffs) and India (which thought it could work with the EU to get the WTO to accept a more lenient approach to tariff cuts). It may be recalled that towards the closing stages of the Uruguay round too, the EU and US had got together in their Blair House accord on agriculture to forgive each other’s sins, and continued their united approach to get developing countries to give up their resistance to introducing new agreements in services and intellectual property into the WTO. But in the run-up to Cancun, the EU-US get-together, in their joint paper on agriculture in August 2003, prompted India and Brazil to overcome their differences and take not only a common position in agriculture but also form the G-20.

Little to Benefit

The second conclusion is that with the US-EU rapprochement, the developing countries are going to benefit very little or nothing from the “lowered ambition” of the giants in agriculture. The heart of the Doha programme was supposed to be to complete the unfinished agenda, and do away with (or at least substantially reduce) the trade-distorting effects of the developed countries’ subsidies. At Potsdam, the US for the first time gave a new offer for the allowed OTDS, since its October 2005 offer of $23 billion (which had been unacceptable to all, partly because its applied OTDS was $19.7 billion in 2005). But the $17 billion it mentioned was still grossly inadequate in the view of Brazil and India, and quite rightly so. Kamal Nath, the Indian commerce minister, told the media that the applied OTDS of the US was only $10.8 billion in 2006. He

Economic and Political Weekly June 30, 2007

remarked: “And the offer is $17 billion, which is more than 50 per cent of the current applied level. There is no equity; there is no logic in this. We can’t correct the flaws.”

The US after the talks collapsed tried to justify its $17 billion offer. US agriculture secretary, Mike Johanns told the media: “This was a real cut, this is going to cause pain, it is going to cause a change in how we do farm policy, that it was less support”. Schwab said that if the OTDS level the US was offering had been applied in the last nine years, it would have led to cuts in five to seven of those years. “Most of the years we would have seen real cuts. The US has shown extensive flexibility.”

What the USTR said is only partially true. In five recent years the United States’ applied OTDS level was above $17 billion (1999, 2000, 2001, 2004 and 2005). But she forgot to mention that at the start of the implementation period of the Uruguay round, the OTDS level was far, far below

– at $7 billion.

The agriculture domestic support simulations paper (JOB(06)/151, May 22, 2006) prepared by Canada shows that the applied OTDS of the US was $7.7 billion in 1995, $7.1 billion in 1996, and $7 billion in 1997. It then shot to $15.1billion in 1998, $24.3 billion in 1999, $24.1 billion in 2000, $14.9 billion in 2000, $10.2 billion in 2003, $18.6 billion in 2004 and $19.7 billion in 2005. Thus, an offer of a cap at $17 billion does not reflect a decrease, especially when compared to the 1995-1997 levels of a decade ago, and also allows for a large amount of “water” if the 2006 level was $10.8 billion.

In any case, as the Indian commerce minister has correctly stated on several occasions, and repeated at his Potsdam press conference, domestic subsidies in agriculture are structural flaws that should not be permitted at all, similar to industrial subsidies (which are banned in the WTO). “Correcting flaws and distortions have no exchange rates”, said Kamal Nath. What he meant was that the US and EU should remove their domestic subsidies and do so without asking anything in return, since these are structural flaws. They cannot be placed in an equation of asking developing countries to “give”.

Pressures to Open Markets

The third conclusion is that the US and EU are now wrongly portraying the G-4 collapse as the fault of the two “inflexible” developing countries that are not willing to give anything in return for their own generous offers. Actually, the EU and US offers are anything but generous. They had already claimed to have liberalised agriculture in the Uruguay round, in exchange for which they had exacted from developing countries the entry of services and trade-related aspects of intellectual property rights (TRIPS) into the WTO system. The developing countries found that the claim of agricultural liberalisation was a bluff because of the many loopholes in the agreement on agriculture that allowed domestic subsidies not only to continue but also increase.

Key loopholes remain, so that even if the allowed OTDS of both parties go below their present applied levels, they can have recourse to the so-called “nontrade distorting” subsidies in the Green Box, without limit. “In effect, the EU and US are offering nothing, and for their offer of zero they are trying to extract blood from the developing countries in NAMA and services as well as in agriculture market access”, said Chakravarthi Raghavan, editor emeritus of the South-North Development Monitor (SUNS) and a long-time analyst of WTO developments. Developing countries, he said, have paid a price thrice over, once at Punta del Este in launching the Uruguay round, the second time at Marrakesh in taking upfront new commitments (in TRIPS, Services, and a range of new GATT disciplines) in return for promise of the developed world of a change in direction in agriculture, in a long-term process of bringing that trade into GATT disciplines, and again at Doha for further negotiations on services, NAMA, etc. Now they are asked to pay a price for the fourth time!

At Potsdam, the EU and US insisted that India and Brazil agree to a coefficient of 18 in the Swiss formula in NAMA. For countries with an average industrial tariff rate of 30 per cent, this would imply an average cut of 60-70 per cent in their industrial tariffs. The developed countries have given to themselves a coefficient of 10, which implies an average cut of only 28 per cent for the EU. Compare the demands made of the developing countries also to the 50 per cent average cut that the EU offered in agriculture in Potsdam.

In asking a question of the EC trade commissioner, Peter Mandelson, a journalist pointed to this double standard of the EU position (that developing countries should cut in NAMA by over 60 per cent through a coefficient of 18 while the EU was offering to cut by only 50 per cent in agriculture). Mandelson replied: “You are confusing percentage cuts. It’s a completely different concept in numbers and tariff cuts. What we were asking developing countries to do is not unreasonable.” This reply shows that the developed countries want the agriculture talks to be conducted in terms of percentage cuts, which are easily understood by all, while conducting NAMA negotiations in terms of a Swiss formula and coefficients, a very un-transparent and complicated system (chosen by the developed countries), which disguises the fact that the coefficients they are demanding developing countries to undertake imply very deep cuts, far deeper than what the developed countries are willing to undertake themselves, especially in NAMA but also in agriculture.

Clash of Paradigms

Finally, a conclusion can also be drawn that the US and EU on one hand and Brazil and India on the other were operating under two different and contrasting paradigms, which eventually led to the collapse of the G-4 talks and perhaps of the G-4 itself. Top US officials kept insisting on “new trade flows” as the main aim and measure of the success of the Doha negotiations. By this they meant that the developing countries have to commit to cuts in their bound duties that go below their present applied rates. What the US and EU want is expanded market access in the developing countries for their firms in agriculture, industry and services. But this cannot be equated with development or reflect the expectations of a development round. Many recent studies have shown, and many developing countries believe, that excessive import liberalisation leads to anti-development consequences, such as de-industrialisation (the closure of local industrial and services enterprises) and the loss of livelihoods and revenues of farmers, as cheaper imports overwhelm the local economic units.

The USTR, Susan Schwab, tried to resolve this clear contradiction between her “new trade flows” demand, and the development goal. She told the media in Potsdam that “the bottom line is that trade agreements should generate new trade and lift people out of poverty, [but] unfortunately what we have here today was not going to generate new trade”. Karan Bhatia,

Economic and Political Weekly June 30, 2007 the deputy USTR, told the BBC: “The US and EU were ready to make concessions but not India and Brazil. The key US demand is new trade flows. But they were not willing to give that.” And Peter Mandelson said: “We were not able to get commercially meaningful changes to the tariffs of the emerging economies as a reasonable return on what we are paying into the Round”.

There are many flaws in the US and EU argument. Firstly, cutting tariffs in developing countries cannot be said to produce development – though this can produce more market access for developed countries’ companies. Secondly, as Kamal Nath said at his Potsdam press conference, a development round implies new trade flows for developing countries into the markets of the developed countries and not the other way round. Nath said: “Development content clearly specifies who are the givers and takers in this development round. Now (with the demands of the rich countries), the givers become the takers and the takers have become the givers.” And thirdly, the insistence that developing countries have to cut tariffs below their present applied rates ignores the fact that many developing countries, including India and Brazil, have already liberalised autonomously and significantly in recent years, so that many of their applied tariffs are significantly below the bound rates.

In the WTO, it is recognised that “credit” should be given to countries that undertake such autonomous liberalisation. In fact these countries have already been creating “new trade flows” by lowering their applied tariffs. But instead of crediting or even appreciating these countries’ actions, the EU and US demand is seeking to penalise them by discounting that they have already liberalised autonomously and by demanding that there now be cuts to the bound rates that must go below the applied rates. These countries are now being penalised because if they had not autonomously liberalised, their applied rates would not be so low today, and they would not face the pressure to cut the bound rates to below the already lowered applied levels.

The analysis above leads to the conclusion that the developed countries were never interested in the development of the developing countries when they launched the Doha Work Programme in 2001. They had to call it the Doha Development Agenda and later, the development round to entice the developing countries to join in the launch of a new round. Now, the developing countries are calling the bluff of the developed countries and asking that the outcome of the round really have a development content. But in answer, the US and EU are saying that they want “new trade flows” from developing countries in order for their offers in agriculture to stand. And their agriculture offers are nothing to get excited about, and insome important respects, even really nothing.

The USTR has had to resort to saying that “new trade flows” (read significant cuts to applied rates of developing countries) is what lifts poor countries out of poverty. But the poor countries think otherwise, which is why the great majority of them have defensive interests in the negotiations, and are fighting to limit the degree of liberalisation they have to undertake.

In the end, it is this clash of perceptions of what promotes development and what is anti-development in the proposals of this “development round” that has led to this new crisis and impasse in the Doha talks.

EPW

Email: mkhor@igc.org

Economic and Political Weekly June 30, 2007

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