Countdown to Cancun

At Montreal, on July 27, a four-year-old girl traces an anti-globalisation slogan with her finger prior to a march to protest against the WTO meetings. - CHRISTINNE MUSCHI/REUTERS

The WTO Ministerial Conference at Cancun could mark the demise of multilateralism if the United States persists with its approach of picking trade partners on the basis of their political quiescence.

THE economist Jagdish Bhagwati, who has perhaps the most pristine attitude towards free trade in both the theoretical and practical dimensions, sees a threat to the forthcoming Ministerial Conference of the World Trade Organisation (WTO) at Cancun, Mexico, in the sheer accessibility of the venue. A new round of multilateral trade negotiations, he recalls, was due to be launched at the Seattle Ministerial Conference in 1999. But with the main participants coming to the bargaining table with little preparation, and anti-globalisation protests choking the streets of Seattle, the conference broke up in disarray. A sense of purpose was restored at the WTO's Doha gathering of 2001. But Cancun could well see history repeat itself, not as Doha but as Seattle, he warns. "For anti-globalisers who found the pre-modern sheikhdom of Doha distant, and who were intimidated by the security concerns post-9/11, Cancun poses a real opportunity to relive Seattle... Cancun is as accessible as Seattle was... and a great welcome awaits the demonstrators."

Viewed in this perspective, Cancun may offer an opportunity to test how far the passionate protests that the WTO invariably attracts really influence its deliberations. It was unclear at Seattle that the public mood was the decisive constraint to agreement, rather than deep divergences in perception between member-countries.

As Bhagwati has conceded, the main participants - notably the United States and the European Union - will arrive at Cancun unprepared for a final deal. A measure of progress has been achieved in the contentious area of agricultural trade. Late-June, the E.U. agreed to a long-term reform of its Common Agricultural Policy (CAP) that will reduce the subsidies that artificially inflate production and depress prices. And even if the U.S., shortly after the Doha conference, perversely raised aggregate farm subsidies, it has in principle agreed to a reduction of that component which might have a bearing on exports.

With all this, there are significant barriers to a final agreement. The U.S., for instance, provides most of its subsidies in the form of income support to farm families, decoupled from actual production levels. The E.U. proposes, as part of its agreed process of CAP reform, to move increasingly towards this form of payment. WTO orthodoxy holds that this form of subsidy - called "Green Box" payment in the technical jargon - is not trade distorting. In contrast, the production-linked subsidy, referred to as the "Blue Box" payment, is deemed a violation of free market rules.

The practical reality is that export prices are set by large exporters. And the U.S., which is among the largest agricultural exporters, is able to nudge global prices downwards because its farmers are protected against income losses by large federal subsidies. The E.U., in accepting that a gradual migration towards "Green Box" payments may be desirable, is also insisting that other forms of market leverage that the U.S. exerts - notably through export credits - be strictly disciplined. It is holding out for a reduction in "export credits and the quantity of exports of an agricultural product on which such export credits may be provided", in the same proportion that may be established for export subsidies. In particular, it has focussed on cereals, oilseeds and edible oils, breeding cattle and cotton, as sectors where such disciplines must be introduced.

Agricultural trade could potentially be a "deal-breaker" at Cancun. This may not be a very adverse outcome for developing countries if the current bargain on offer - summarised in a draft circulated by Stuart Harbinson, chair of the WTO's Committee on Agriculture - is any indication. In the central issue of market access for agriculture, the Harbinson text calls for tariff reductions in four bands for developing countries and three bands for developed countries. The reductions are calculated in relation to the "bound" tariffs, that is, the maximum rates specified in each member-country's schedule of commitments to the WTO, rather than the actual "applied" rates. Depending on the existing levels of protection in developing countries, the Harbinson text calls for an average cut of between 25 and 40 per cent, subject to minimum cuts in each tariff line of between 15 and 30 per cent. Developed countries would be required to make average reductions of between 40 and 60 per cent, subject to minimum reductions of between 25 and 45 per cent.

Two strong viewpoints have emerged in opposition to these proposals. A group of 75 countries including India, the E.U. members and Japan, favour the conservative approach of the Uruguay Round of trade negotiations, which required developing countries to make tariff cuts of 24 per cent over 10 years, while imposing a slightly higher obligation of 36 per cent on developed countries. The U.S., in contrast, has called for the adoption of the "Swiss formula", which reduces high tariffs with higher cuts than low tariffs. The Swiss formula is a simple mathematical equation that gives different outcomes depending upon the "coefficient" used. The U.S., for instance, has urged a coefficient of 25, which could convert an existing tariff of, say 100 per cent, to 20 per cent, and an existing tariff of 50 per cent to 16.6 per cent. Another formulation has been urged by the Cairns group of countries - which includes Australia, Brazil, New Zealand and Argentina among others - to provide tariff outcomes of 33 per cent and 25 per cent in these two illustrative initial conditions. Crucially, both the U.S. and the Cairns group have been suggesting that tariff reductions be computed in relation to applied rather than bound tariffs.

Despite its keenness to see a rapid phasing out of farm support and export subsidies in the developed countries, India cannot quite sign on with the Cairns group of countries, because it needs to maintain high levels of tariffs on agricultural imports. R. Gopalan, the Joint Secretary in the Commerce Ministry charged with WTO negotiations in several crucial areas, puts it bluntly: India's basic interest is in the protection of domestic agricultural production through minimal market access concessions and commitments. And even if this compulsion is qualified by the need to obtain markets for products of export interest, the balance of interests lies in favour of protecting domestic production - both because exportable surpluses are not considerable and because of the large numbers that depend on agriculture for their livelihoods.

India, among other developing countries, had argued for a countervailing mechanism to correct the structural imbalance in agricultural trade. This mechanism would enable a revision of import tariffs in proportion to the subsidies handed out by developed countries on their exports. This proposal, however, has not found a place in the Harbinson text. With tariff reductions being tied in closely with two other elements in the negotiations on agriculture - domestic support and export subsidies - there is little likelihood of the knot being unravelled before Cancun. Whether the Ministerial Conference itself will succeed in this regard in a substantive sense remains an area of considerable uncertainty.

India has a great deal at stake in the negotiations on industrial tariffs. The proposals currently before the member-countries focus on both a reduction in existing tariffs and in increasing the number of products where tariffs are bound. India currently has bindings on 60 per cent of its industrial products and would be obliged under the proposals, currently under consideration, to increase this figure to 95 per cent. And in a situation that could win general acceptance, India's average bound customs duty could be brought down to the range of 28 per cent.

Neither of these outcomes is really deemed adverse by Indian negotiators. The key constraint here would be the obligation to maintain a duty-free import regime in certain product lines. With its diversified industrial base and a measure of backward integration achieved in sectors such as automobiles, this could be a difficult condition for India.

The inclemency of the global economic environment is likely to exert an overarching influence over the individual negotiations at Cancun. The U.S. in particular, is yet to pull itself out of the recession that officially began in the first quarter of 2001. And it has often been compelled to adopt measures of protection for domestic industry that have flown in the face of existing WTO rules. In March 2002, for instance, the U.S. government sharply raised import duties on a range of steel products, inviting sharp rebukes from the E.U. and the East Asian countries. These increases were partially reversed within two months, but the E.U. took the issue to the WTO Dispute Settlement Board and won a favourable verdict early this year. The U.S. is yet to indicate that it is in the mood to give in and accommodate the WTO ruling.

The E.U. has also won the right to impose a record quantum of sanctions against the U.S. over certain tax concessions the latter gives exporters. And as recently as May, the U.S. with the explicit endorsement of Canada and Argentina, took the E.U. to the Dispute Settlement Board over the restrictions it places on the marketing of genetically modified foods.

Perhaps the most conspicuous achievement of Doha was the declaration which resolved to soften the rigours of the WTO agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) and render it more amenable to deal with public health concerns. But after the ringing declaration that nothing in the TRIPS agreement "shall" restrain any member-country from taking measures appropriate to its public health needs, there has been little progress in framing specific rules. The U.S. has brought to the table a proposal which restricts the latitude available under the new deal to limited time-frames and specific diseases - each of which would have to be legislated for by member-nations. This has been rejected out of hand by other members. If the U.S. is to give ground, it should do so at the mini-Ministerial meeting in Montreal which will precede the Cancun session. If that opportunity is missed, then the ambience at Cancun could be considerably less favourable for a general agreement.

Matters are not helped by U.S. obduracy on "anti-dumping" rules, which are frequently invoked by the administration and Congress as contingent measures of protection for domestic industry. Neither has the drift in recent years towards increasing bilateralism sat well with other members of the WTO. The U.S. recently concluded free trade agreements with Singapore and Chile. Negotiations are now under way with Bahrain, Morocco and Australia. At a recent meeting with the Australian Prime Minister John Howard at his Texas ranch, U.S. President George Bush arbitrarily advanced the date for concluding a deal from end-2004 to end-2003. At the same time, New Zealand has been fobbed off as not deserving of such a privilege. And negotiations with Egypt were terminated when it declined to join the U.S. in petitioning against E.U. restrictions on biotechnology products.

The Washington publication, Inside U.S. Trade, quoted a top trade official suggesting in the tense days before the war against Iraq, that the Bush administration has "a long memory". What this points to is the increasing politicisation of trade, irrespective of its supposed economic or welfare benefits. And the list of countries that the U.S. has chosen for fast track negotiations on free trade, is again a dead giveaway. If this approach of picking trading partners on the basis of their political quiescence is to persist for much longer, than Cancun could well turn out to be a way-station in the demise of multilateralism.