May 6, 1994

GATT and its portents

Print edition : February 06, 2015

June 6, 1982: Neoliberal allies U.S. President Ronald Reagan and British Prime Minister Margaret Thatcher at the Palace of Versailles, France. Photo: AP

New Delhi, April 5, 1994: Police lathicharging protesters at a rally organised by the Left parties against the Dunkel draft. Photo: THE HINDU ARCHIVES

April 15, 1994: At the signing of the Uruguay Round Final Act in Marrakesh in Morocco. The Uruguay Round preceded the setting up of the WTO.

Arthur Dunkel, GATT Director General.

EVEN as 115 Trade Ministers, comfortable in the solidarity of an exclusive club, toasted one another on April 15 in Marrakesh, just off the Mediterranean coast of Morocco, the emotions on display on the streets in various parts of the world showed that their triumph was partial, and perhaps illusory. In New Delhi, the day was observed as a “black day”. Just prior to this, two successive days in the national capital had witnessed mammoth mobilisations to protest against the General Agreement on Tariffs and Trade (GATT).

But April 5 was different. The gathering of 250,000 people in New Delhi on April 5 was not in itself an exceptional event —larger congregations have been witnessed. What was different was the reaction of the Central government. After first having decreed a ban on any gathering on the strategically located Boat Club grounds, the government proceeded to use force to disperse marchers in the remote Red Fort and Rajghat areas. Passions ran high, and as teargas and batons were liberally used, a number of demonstrators suffered grievous injuries.

A few days later, the Left parties, which had sponsored the gathering of April 5, announced they would launch a mass civil disobedience movement to protest the entire gamut of economic policies of the P.V. Narasimha Rao government. Accession to GATT, they pointed out, was only the latest in a series of shameful surrenders to the dictates of external powers. This would prove ruinous for the country's ability to frame policies in accordance with its own interests, and impair the livelihood of millions. The terrain of battle is not confined to agitational politics. The past weeks have seen a spirited legal challenge being mounted. The most significant of these have come from the non-Congress-ruled States of Tamil Nadu, Orissa and West Bengal. Rajasthan and Bihar have also made clear their intention to seek impleadment in the petition filed by Tamil Nadu in the Supreme Court.

In their essence, all three petitions filed so far— two in the Supreme Court and one in the Calcutta High Court — are similar. The core of the issue is the jurisdiction of the Central government in a federal polity. Under the Seventh Schedule of the Constitution, health, agriculture and industry are subjects within the exclusive jurisdiction of the States. Accession to the new treaty would mean, however, that the Central government would be undertaking the obligation to introduce far-reaching legislation in these areas. This enjoys a limited constitutional sanction under Article 253, which gives the Central government the power to legislate on a State subject in order to bring into force an international treaty. But the petitioners argue that the present case involves an encroachment into State jurisdictions that attacks the basic structure of the Constitution. Though the Central government enjoys the power to amend the Constitution, it is a well-established judicial principle dating from as early as 1973 that the Centre cannot tamper with its basic structure.

The petitions repeatedly emphasise that the States had been asking for a conference of Chief Ministers, and a thorough debate on all facets of the GATT negotiations, before the Central government took any decision on accession to the treaty. In October 1992, West Bengal Chief Minister Jyoti Basu wrote to the Prime Minister. “In the overall interests of the country,” he said, “I feel that the States must be consulted formally and their views obtained before a final decision (on GATT) is taken.” In November 1993, his counterpart from Rajasthan, Bhairon Singh Shekhawat, wrote a letter expressing a similar view. This was followed by letters in January and March 1994 by Tamil Nadu Chief Minister Jayalalitha. And all the while, Biju Patnaik of Orissa had been hammering home the same point in an extended correspondence with the Central government.

The petitioners have sought a judicial direction to the Government of India that it should consult the States, provide them full information, and obtain their consent before signing the Final Act of the Uruguay Round of GATT negotiations. They have sought a declaration holding unconstitutional the entire negotiations conducted by the Central government. They have urged that no commitments be undertaken under GATT that would impair the States' powers to legislate on matters reserved for their jurisdiction under the Constitution. Effectively, therefore, the GATT Final Act would have no applicability in subjects under the State and the Concurrent lists of the Seventh Schedule of the Constitution.

The fallout of GATT could be pervasive. The potential to rewrite legal and constitutional systems worldwide was built into the agenda of the Uruguay Round, as it was scripted by the U.S. as far back as 1986. It did not anticipate, perhaps, that its invasive trade diplomacy could lead to a quite contrary effect — to the rules being rewritten in a manner that would multiply the potential sources of resistance to its hegemonic designs. That would spell, not the catastrophic collapse of world trade that apologists for GATT never cease to warn of, but possibly the graduation towards a genuinely multilateral trading system with multiple centres of economic power. GATT could become a victim of the success of the Uruguay Round. From the standpoint of the developing countries, that would be a consummation greatly to be desired.

GATT has always been the most obscure of the three multilateral bodies created in the wake of the Bretton Woods conference in 1945. Unlike the World Bank and the International Monetary Fund, which had substantial I funds at their disposal and clearly defined goals, GATT was no more than a loose framework of rules. The effort to provide these rules with some teeth had been unsuccessful. A multilateral trade organisation was mooted as far back as 1948, to put into effect the rules embodied in GATT. But the concept failed to clear the hurdle of member- states' apprehensions of a dilution of their sovereignty.

GATT subsequently became a talking shop where elaborate principles of free trade were enunciated, only to be violated in practice. It succeeded over six rounds of multilateral trade negotiations in reducing tariff levels across the globe from an average level of 40 per cent in the early 1950s, to less than 10 per cent by the early 1980s. But this supposed success only concealed the larger failure of GATT—that even while the industrialised countries chose to preach the virtues of free trade, their practice was often the very antithesis; that even while tariffs came down, a host of non-tariff barriers to trade, such as the notorious quota system in the textiles business and the “voluntary export restraints” and “orderly marketing arrangements” in other industries as diverse as steel, semiconductors and automobiles, were defeating the underlying purposes.

GATT began as an instrument of convenience for the U.S., and it has continued to be that. When called upon at various stages to deal with the proliferation of non-tariff barriers (NTBs) to trade, GATT found itself ill-equipped for the task. Its procedures were glacial, its framework of rules was befuddlingly complex, and its juridical will non-existent.

The Tokyo Round of Multilateral Trade Negotiations, held between 1973 and 1979, was an effort to deal with the proliferation of NTBs. Demands for protection were gaining ground. The Bretton Woods system of fixed exchange rates, which had provided- an orderly, if somewhat biased, framework for the growth of global trade since the Second World War, collapsed in 1972. And the oil shock of 1973 wrought enormous short-term damage on the balance of payments of most industrialised countries. The Tokyo Round represented a holding operation to check the drift towards protectionism. Its agenda was modest, and its results were mixed.

The return to power of the economic conservatives in the late-1970s and early-1980s — Margaret Thatcher in the United Kingdom, Ronald Reagan in the U.S. and Helmut Kohl in (then) West Germany — transformed the global trade agenda quite independently of GATT. In particular, large increases in consumer spending in the U.S. pushed up world economic activity and trade, while simultaneously throwing the country's balance of payments on merchandise account into disarray. The U.S. lived in the comfortable illusion that its deficit on trade would be more than made good by “invisible” receipts — such as fees on know-how exports, dividends on overseas investments, and royalties on the use of American trademarks which were rapidly becoming synonymous with new lifestyles.

That hope was reduced to a shambles by about 1986, when the U.S. slipped into deficit on the “invisible” account too — an event which marked the commencement of a new American agenda for world trade. The cardinal feature of American trade diplomacy since the 1980s has been an aggressive effort to put the onus of adjustment on other countries.

The World Bank summed up the situation in its World Development Report for 1987: unless the international payments imbalances, and in particular the vast current account deficit of the U.S., were reduced, it argued, the stimulus for growth in the world economy would prove unsustainable. If the U.S. were to reduce its absorption of goods, the resultant loss of demand could pull down economic activity across the world. This would hence have to be offset by other countries increasing their demand levels, if necessary through fiscal stimuli. With commendable transparency of purpose, but little regard for the irreversibility of the U.S. economic decline, the World Bank went on to say that for a semblance of order to be restored to the world economy, the U.S. needed to re-emerge as its largest capital exporter.

Predictably, the Uruguay Round of GATT negotiations began in 1986 under U.S. prodding, with an agenda that had been scripted entirely by that country. And the new schedule for GATT included every area in which the U.S. perceived itself to have an advantage—notably, financial services, telecommunications and transportation, technology flows and agriculture. In 1988, the Reagan administration armed itself with the omnibus Trade and Competitiveness Act. This too followed a well-established pattern. The U.S. has invariably pressed for a fresh round of GATT negotiations shortly before or after amending its own trade legislation. The implication, clearly, is that global trade rules should be infinitely flexible, and respond quickly to internal compulsions in the U.S.

The U.S. Trade Act of 1988 instituted the infamous Section 301, which authorised unilateral action against any country deemed to be following unfair trade practices. In 1989, the U.S. began naming countries for trade retaliatory action under Section 301. That year, eight countries were named under the Special 301 sub-section, for inadequate standards of protection of intellectual property. India figured in this list. At the same time, a list of three nations was drawn up under the Super 301 clause — which covered the more serious transgressions of free trade rules, such as trade and investment restrictions. India figured in that list too.

The U.S. case was that India merited action under Super 301, since it imposed unreasonable restraints on the entry of American capital. In particular, the irritants it identified were the public sector monopoly of the insurance industry, the stipulations of minimum local content and the imposition of a minimum export obligation on foreign joint ventures within Indian territory. The Indian government then denounced the U.S. move as irrational and unwarranted, and publicly vowed never to budge.

In 1991 came the second salvo. Though India was spared the draconian Super 301 clause then, its standards of patent protection — especially in drugs and pharmaceuticals — were still found wanting. From being on a “watch list” under the Special 301 clause, India was moved in 1991 to a “priority list” for imminent trade retaliation.

By July 1991, the Narasimha Rao government had, in a virtual stampede, introduced the most far-reaching changes in industrial and trade policy since Independence. U.S. concerns over the investment environment for overseas capital in India were substantively addressed in these. The threat of action under Super 301 was allowed to recede. But Special 301 remained a potential weapon of trade retaliation against India.

In 1992 came the first act of reprisal. India's exports of drugs to the U.S. were taken off the list of items covered by the Generalised System of Preferences (GSP). The GSP is a bilateral concession given by the U.S. government. Removal from this system meant Indian exports in the designated area would be ineligible for duty-free treatment in the U.S. market. And to underline that the case was far from closed with this action, the U.S. Government named India once again in 1993 on a “priority list” of unfair traders.

India continued to make brave noises in public through all this. But in the closed conclaves of GATT, it was back-pedalling furiously. In 1986, India along with 10 other nations including Brazil, Nigeria and Egypt, had opposed the U.S. attempt to broaden the scope of GATT to take in the new areas of services and intellectual property protection. Compromise was reached in the case of services by agreeing to discuss the subject outside the framework of GATT. But on intellectual property rights, little ground was yielded.

The situation changed dramatically in 1989, when the Rajiv Gandhi government, with Dinesh Singh as Commerce Minister, agreed for the first time that the new areas would be brought within the framework of GATT. Every succeeding year since then has seen a further weakening of India's bargaining strength — not the least because of the rapid escalation of the country's external debt in the Rajiv Gandhi years — and a further concession to U.S. dictates, as voiced through its proxies in the World Bank, the IMF and GATT.

India’s main concerns about the Dunkel Draft were in the areas of patents and agriculture. The country was expected to yield ground on these fronts, in return for a few concessions in textiles trade. The Final Act of the Uruguay Round has laid down a schedule for the dismantling of the quota system in the global textiles business. This falls well short of India's requirements — as also of various other developing countries with substantial textile interests. The term used in the obscure GATT vocabulary is “back-loading” — industrialised countries have committed themselves to a very marginal scaling down of quotas in the early years of the Uruguay Round's application. The reciprocal commitments will entail, among other things, an amendment to the Indian Patents Act, 1970. The denial of product patents in food, drugs and agricultural chemicals is a characteristic feature of Indian legislation. To provide an adequate incentive for the development of alternative methods of making a particular product, India has been granting only process patents in these areas since 1970. Under the new GATT rules, the patent- holder would enjoy exclusive marketing rights for a particular product. Anybody else seeking to manufacture and sell the product would have to es- tablish that there has been no violation of the patent-holder's right. This effectively reverses the burden of proof, and could possibly curtail research activities.

To check any possible intrusion of monopoly elements, the Indian patents law contains a strong “compulsory licensing” clause. This is a means of inducing a patent-holder to manufacture the product he holds the rights to, and not seek to capitalise on his legal monopoly by, charging exorbitant prices. Where the public interest is involved, the authorities in India would be entitled to penalise defaulting patent holders by granting licences for the manufacture of the patented product to those capable and willing to do so. The new GATT regime makes the compulsory licensing clauses so restrictive as to eliminate it virtually as an element of public policy.

Where agriculture is concerned, the official claim in India is that the new GATT rules would substantially improve India's chances of gaining a foothold in the world market. There is an unwarranted element of optimism in this prognostication. First, exportable agricultural surpluses do not really exist in the country. And secondly, the commitments made by the industrialised countries in the sphere of agricultural subsidies reduction remain largely unquantified.

Emotions run the strongest in the sphere of intellectual property rights in seeds. The Final Act of GATT obliges all contracting parties to introduce a sui generis system of protection for plant varieties, which could in the strongest case be akin to a patent, and in the weakest, to the sort of plant breeder rights enshrined in the International Union for Protection of New Plant Varieties (UPOV) Convention. India has chosen the relatively weak regime of intellectual property rights enshrined in the UPOV Convention. But the GATT rules provide ample opportunity for the stronger system of protection to prevail over the weaker one in the event of a conflict between the two..

In the run-up to the ministerial conference at Marrakesh, the U.S. and the European Union gave ample indication of a new set of considerations that they would inscribe into world trade rules. Just as services, intellectual property rights and agriculture were brought into the GATT agenda, there could be an effort to write in human rights, labour conditions, and environmental protection. Countries with a poor record in these spheres could be deemed to enjoy an undue advantage in world trade, warranting the imposition of punitive tariffs on their products.

In a throwback to its role in the 1980s, India led the resistance to the intrusion of these new elements into the GATT agenda. It enjoyed partial success. Human rights and labour conditions were taken off the ambit of the new World Trade Organisation (WTO), which will supplant the GATT Secretariat with wide-ranging powers of rule enforcement. But environmental sustainability was smuggled into the preamble to the establishment of the WTO.

India’s vulnerabilities are acute. Once it embarked upon a programme of accelerated economic liberalisation in 1991, it has seen no way of reversing, far less halting, the process.

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