Let’s be more flexible at Bali

Success in a globalised world depends not only on a country’s capacity to export, but also on how efficiently it can import inputs and intermediates. Given an increasingly fragmented production process that is often spread beyond national boundaries, barriers (tariff or non-tariff) on imports raise the cost of inputs, in effect acting as a tax on a country’s exports.

This is irrespective of whether goods are domestically procured or imported, in view of import parity pricing. When tariffs are already very low because of unilateral, bilateral and multilateral liberalisation, non-tariff barriers remain the key obstacle to trade.

Again, among non-tariff barriers, border and customs procedures are the most trade restrictive. These form the core of the negotiations on trade facilitation at the ongoing Ninth WTO Ministerial at Bali (December 3-6). The other two issues are agriculture and development.

An OECD study estimates that the potential cost reduction in merchandise trade from all the trade facilitation measures could be as high as 15 per cent for low-income countries, 13-16 per cent for lower and upper middle-income countries, and 10 per cent for OECD countries. It concludes that, ‘harmonising and simplifying documentation formalities, streamlining border procedures and automating trade processes’ could be the most beneficial areas of reform in developing countries.

The Peterson Institute of International Economics estimates that if WTO members agree to take binding commitments on trade facilitation, it will add $1,043 billion to global trade and $960 billion to the world GDP. Yet, many developing countries, India in particular, are not receptive to the WTO Trade Facilitation agreement.

Key concerns There is a feeling in India (and many other developing countries) that the WTO Agreement on Trade Facilitation is in reality a pact on export facilitation pushed by developed countries to further open up Indian markets for imports.

Further, developing countries such as India are unilaterally implementing border and customs reforms. They do not see the need for a binding obligation, or any limits being put on their policy making space.

Trade negotiation is a matter of give and take. Yet, India and other developing countries do not see much benefit coming their way, given the US disinterest in multilateral trade negotiation.

The US is openly pushing regional trade pacts such as TPP (Trans Pacific Partnership) and TTIP (Trans Atlantic Trade and Investment Partnership). India is not a party to these pacts, but it will have to face tariff and other disadvantages, such as yarn forward rule under TPP. The US reluctance to reduce its farm subsidies, especially those on cotton, is not helping the matter either.

However, the most contentious issue at the Bali Ministerial remains the domestic food security programmes of G-33 countries. India, the most vocal among G-33 countries, is seeking a waiver from WTO subsidy discipline in lieu of agreeing to proposals on trade facilitation. Protecting its public procurement programme from WTO discipline remains a predominant electoral issue for the current UPA government in 2014.

Indian realities In reality, the reform of border customs and border procedures in India is not happening at the requisite pace --- except for constitution of a few task forces on trade transaction cost and a half-hearted attempt at implementation.

Successive reports of World Bank’s Ease of Doing Business , which also ranks countries on their ease of trading across borders, show that 23 out of 46 G-33 countries fare badly, with a rank 100 and below.

A higher rank reflects poor performance on ease of trading across borders i.e. a poor trade facilitation regime. India’s rank fell to 132 in 2014 from 129 in 2013.

Poor trade facilitation impedes the integration of an economy into global production networks. India’s participation in the global value chain (GVC) is 36 per cent vis-à-vis 82 per cent for Singapore, 68 per cent for Malaysia and 63 per cent for South Korea. Thus, a binding commitment on trade facilitation seems desirable to help India integrate with global production networks.

Roughly 65 per cent of EU and 50 per cent of NAFTA region trade (US, Canada and Mexico) is intra-regional. Failure of Bali ministerial will further move trade of EU and the US away from MFN (most favoured nation) or multilateral routes to preferential routes --- through trade pacts such as TPP and TTIP with their WTO plus trade rules.

The preferential or regional route is also available to India, but can India survive an FTA with its largest trading partner, China, in view of its infrastructural limitations vis-à-vis China? In the absence of trade-friendly border and customs regulations, India will continue to have more imports than exports as have been its experiences with FTAs such as India-ASEAN. Implementation of preferential trade agreements, i.e. preferring PTA members to non-PTA members, often involves cumbersome administrative requirements that add to the trade transaction cost.

India must work towards a broad-based multi-lateral trade facilitation agreement under the WTO framework that will serve India’s long-term commercial interests.

The way forward Trade in agri commodities in India remains highly distorted because of competitive hikes in minimum support prices of cereals, bad targeting of input subsidies and faulty legislation such as the APMC Acts. The result — demand supply mismatch, food inflation and post harvest losses of farm produce. Indefinite extension of the peace clause will keep trade in agri commodities distorted in addition to food inflation, and will make the country’s macro-economic management difficult.

Therefore, India needs to be flexible and work towards the successful conclusion of the Bali Ministerial. It should reconsider its stubbornness at Bali on food security.

Agreeing to the compromise formula or the peace clause that exempts its food subsidy programme from WTO subsidy discipline for four years would be a positive step. In this interim period, India should attempt to bring its domestic food legislation in line with WTO rules.

That would be a tough call, but post Bali it can strengthen the hands of the new WTO DG and exert moral pressure on developed countries to bring their farm subsidies down. Developed nations also need to be a bit flexible and take a binding commitment on providing technical assistance to poor countries to help them implement trade facilitation. That will help clinch the modest Bali package of Doha deal.

(The author is Group Economist of a corporate house. Views are personal.)