1. Prologue
  2. WTO: Structure and functions
  3. Tariff and Non-Tariff Barriers to Trade
  4. WTO agreements
  5. Agreement on Agriculture (AoA)
    1. Green. Blue and Amber subsidies
    2. Amber box: De Minimus limits
  6. What is Bali summit and Peace clause?
  7. What is Trade Facilitation Agreement?
  8. Why Modi opposed Trade Facilitation Agreement

Prologue

Consider this a “Fork” of the Economic Survey chapter 9 on Agriculture and food production.

WTO: Structure and functions

Q. Write a note on origin, structure and functions of WTO? 200 words
1944: Bretton Woods summit leads to birth of three institutions

Institution KEY IDEA
World bank Cheap loans for development projects in third world
IMF Balance of payment and Exchange rates
GATT
  • To reduce barriers to international trade.
  • Bretton Woods wanted to setup an international trade organization (ITO) but USA did not ratify.
  • Thus, GATT was born as a stopgap arrangement.
  • General Agreement on Tariffs and Trade.
  • GATT’s Uruguay round of talks => Marrakesh Treaty’94=> World trade organization (WTO) born in 1995, India founding member.

WTO organization chart

WTO structure
MinisterialConference
  • Supreme Decision Making body
  • 160 members, Latest member Yemen (Capital: Sanaa)
  • Meets once every two years,
  • deliberates on trade agreements
  • Appoints Director general
GeneralCouncil
  • day to day Decision Making body
  • Meets regularly at Geneva.
  • implements decision of ministerial conferences
  • Has Representative from each member state.

has two bodies, with separate chairmen

  1. Dispute settlement body
  2. Trade policy review body
  • Below general council, there are Committees on individual agreements and annexes- Anti dumping, Subsidies & countervailing measures (SCM) etc.
DirectorGeneral
  • Roberto Azevêdo
  • Appointed by ministerial conference
  • Has four years term.
  • heads the Secretariat at Geneva

WTO Functions

  1. Ensure the developing countries benefit from world trade, especially the least Developed countries.
  2. Reduce barriers to international trade – both tariff barriers and non-tariff barriers.
  3. Get the members Enter into multilateral trade agreements to achieve above objectives.
  4. Provide forum for negotiation and dispute settlement for the members, if the agreements are violated.
  5. Cooperate with UN, World and IMF for a global economic policy that improves livelihood, protects environment and promotes sustainable Development.

Tariff and Non-Tariff Barriers to Trade

All countries want to protect domestic industries and prevent entry of foreign players.  So, they create two types of barriers to International trade:

Tariff Barrier If US President Obama imposes 56% custom duty on Indian Cars.
Non-Tariff Barrier If Obama tries to restrict entry of Indian cars without imposing heavy taxes on Indian cars, for example

  1. Subsidies: Giving free electricity to Detroit car manufacturers. OR If American residents buy American made cars, Obama administration will pay 50% of your vehicle insurance premium, and so on.
  2. Public Procurement: Making rule that only American companies can fillup tender for new sarkaari cars.
  3. Other obstacles like not giving custom clearance quickly. Putting “quota” on each exporter country and so on.
  • World Trade organization (WTO) aims to reduce such tariff and non-tariff barriers to international trade.
  • But what if China starts manufacturing cheap cars with poor breaks, bad steering and carcinogenic paint. Can Obama ban such dangerous foreign products? Does WTO permit that?
  • Yes, WTO made two special agreements for “safety”:
Non-food products Technical Barriers to Trade Agreement (TBT)
Food Products
  • Sanitary and Phytosanitary Measures Agreement (SPS)
  • EU had banned Indian Alphonso under this provision.

WTO agreements

Gist of the WTO bali summit article

Gist of the whole controversy surrounding India, WTO and TFA

Q. Write a note on WTO agreements 200 words

Five categories of agreements (or 6, depending on which book you refer!)

T1: Goods

  1. General Agreement on Tariffs and Trade (GATT)
  2. Agreements on
    1. Agriculture
    2. Textile
    3. Antidumping
  3. Safety / quality checks related
    1. Sanitary and phytosanitary agreement  (SPS)
    2. Technical barriers to trade (TBT)
  4. Trade related investment measures (TRIMS)
  5. Subsidies and countervailing measures (SCM)

T2: Services

  • General Agreement on Trade in Services (GATS)
  • To ensure that services’ import/export enjoys the same principles of free and fair trade, just like the trade in goods.

T3: IPR

  • Trade related intellectual property rights (TRIPS)
  • Protects seven categories of IPR viz.
  1. copyrights
  2. patents
  3. trademarks
  4. Geographical indicators
  1. industrial designs
  2. integrated circuit layout-designs
  3. Trade secrets

T4: Dispute settlement

  • to enforce the trade agreements and commitments made by individual member country
  • once a complaint is filed,  first, the parties are allowed to sort the issue through mutual consultation
  • If that fails, formal adjudication by an expert panel.
T5: Policy review T6: plurilateral agreements
Periodically, WTO carries out audit/inspection/review of the trade policy of member states and gives them constructive feedback. Not signed by all countries:

  1. Civil aircrafts
  2. government procurement
  3. Dairy Products
  4. Bovine meat

~204 words

WTO has many other agreements but hard to memorize and fit into a 200 word answer anyways.

For exams in 2014-17, the important agreement is AoA. (Because it’ll stay in news due to 10% food subsidy issue)

Agreement on Agriculture (AoA)

Agreement on Agriculture De-minimus subsidies

WTO’s Agreement on agriculture (AoA) has three pillars
Pillar What they want from member states?
1.Market access reduce import duties
2.export competition reduce export subsidies
3.domestic support reduce Amber box subsides

AoA classifies subsidies into two parts:

DOMESTIC SUBSIDY EXPORT SUBSIDIES
mostly by third world to keep help farmers and keep vote bank happy mostly by first world, to keep their MNC-corporatized farmer lobby happy.
to increase food production, food security to capture “Foreign market” by flooding their cheaper products
India doesn’t give much “export” subsidies to farmers- except a select horticulture and floriculture Items
AoA further classifies them into 3 parts

  1. GREEN
  2. BLUE
  3. AMBER (WTO wants to reduce these subsidies)
 AoA wants members to reduce export subsides

  • developed countries: cut by 36%
  • Developing: by 24%
  • Least developed: not applicable.

Green blue and Amber subsidies

  • Just like traffic signal has three colors: green (GO), orange (caution) and red (STOP).
  • Similarly, WTO classifies DOMESTIC AGRICULTURE subsides into three categories: green (GO), blue and amber (reduce).
  • There is no “RED” box meaning WTO doesn’t wish to completely STOP subsides, because it is impractical anyways!
Box subsidies
GREEN
  • Subsidies that don’t disrupt trade balance OR
  • Only cause minimum damage to trade balance.
  • E.g. agriculture research-development, extension services, farmer training programs, pest-disease control program, flood/drought relief money paid to farmers etc.
  • WTO Limit: nothing. Governments can give as much as they want.
BLUE
  • Amber type Subsidies that aim to limit production.
  • Subsidies that don’t increase with production. For example subsidies linked with acreage or number of animals.
  • Very few countries use blue box- Iceland, Norway, Slovenia etc.
  • WTO limit: Nothing.
AMBER
  • Subsidies that disturb trade balance like, subsidies on fertilizers, seeds, power and irrigation.
  • They distort trade balance because they encourage excessive production,therefore given country’s product becomes cheaper than others, in the international market.
  • WTO limits: yes- explained below

Amber box: De Minimus limits

Q. Explain De-Minimus limits in WTO’s agreement on agriculture. Why is India opposed to it? (200 words)

  • Under WTO’s agreement on agriculture (AoA), domestic-subsidies are classified into three groups: Green, Blue and Amber.
  • Amber box subsidies create trade distortion because they encourage excessive production e.g. fertilizers, seeds, electricity and irrigation subsidies.
  • Therefore, WTO wants to limit the amber box subsidies.
  • De Minimus is the Minimal amounts of Amber box subsides permitted by WTO, even though they distort trade.
  • De minimus limits are calculated on the agriculture production of the given member state in 1986-88.
Country De-Minimus: Amber box subsides quota
Developed 5% of agriculture production in 1986-88
Developing 10%
Least developed Exempted.**

** Besides if they’re L.D.C=> they’ve no “AUKAAT” to give truckload of subsidies anyways.

Why is India opposed?

Food n Fertilizer Subsidy India Budget 2014

India fears it’ll have to cut down its food subsidy to comply with WTO’s De-minimus level

  1. In 1986: USA agriculture production was far ahead of India. So, their 5% De-minimus quota will be far bigger than our 10% quota (in absolute figures).
  2. Input costs have skyrocketed in these decades. But, De-minimus doesn’t consider inflation factor.
  3. So, if India has to limit its (Amber box) agro. subsides to a non-inflation adjusted 86’s production, we cannot continue the MSP to farmers or food security to poors.
  4. These subsidized foodgrains are meant for feeding the poors only, they do not distort international trade.

~190 words

India’s subsidy Expenditure in Crores (Rs.)
Subsidy component RE-2013 BE-2014
Food 92000 115000
Petroleum 85480 63427
Fertilizer 67971 72970

Ranking 2013: Food > Petroleum > Fertilizer

Ranking 2014: Food > Fertilizer > Petroleum

What is Bali summit and Peace clause?

Q. What is hell is “Bali Package” and “Peace clause”? (200 words)

  • December 2013: 9th WTO ministerial conference held at Bali, Indonesia
  • “Bali Package” is the collection of three prime outcomes of this summit.
Trade facilitation agreement
  • To cut down the red tape in customs clearance
LDC exports
  • Exporters from Least developing countries, will get Duty free, quota free (DFQF) access to markets in foreign countries.
food stockholding
  • this lead to peace clause, explained below
  • as per the original Agreement on agriculture (AoA), the developed and developing countries have to keep their Amber box subsidies within De-minimus level i.e. 5% and 10% of their agriculture production in 1986-88 respectively.
  • India opposed this base year and limits, because it’d make impossible to implement the food security programs for the poor and MSP for the farmers.
  • Therefore, as a measure of temporary relief, Bali summit enacted a “peace clause” for the AoA

Salient features of Peace Clause

  • No member, can drag any developing country to Dispute settlement mechanism of WTO.
  • for violation of De-minimus limits in AoA
  • Provided that the said developing country
  1. is paying subsidies for staple foodcrops
    • for public stockholding program
    • For food security purpose.
  2. is providing annual information of its food security Program to WTO.
  3. Permanent solution will be taken no later than 11th ministerial conference i.e. at December 2017.

~215 words.

What is Trade Facilitation Agreement?

WTO Trade Facilitation Agreement TFA

Manniram is happy knowing that Modi has refused to sign TFA!

Q. Write a note on the salient features of Trade facilitation agreement (200 words)

ORIGIN 9th WTO ministerial conference held at Bali, Indonesia in 2013
AIM reduce red tapes and bureaucratic hassles in customs clearance

Under TFA, Every member:

  1. Will have to publish a detailed list of procedure for import-export, fees, inspection rules, penalties etc.
  2. Minimize the proof documents and clearance required for customs clearance.
  3. Make all the information available on INTERNET to foreign traders, governments and interested parties
  4. Provide electronic payment of fees, duties, taxes.
  5. Setup a single window mechanism to help trader submits all documents at a single point- preferably online.
  6. Trader should be notified immediately, If goods are detained at customs.
  7. Provide faster customs clearance to perishable goods (Fruits, veggies, flowers).
  8. Member must not ask foreign traders to compulsorily route their applications/fees via local customs brokers/middlemen.
  9. Give Advance ruling, as and where applicable. (Recall advance ruling provision on taxes, under Budget-2014.)

Least developed countries

They’ll get financial and technical help to comply with above rules.

New Bodies under TFA
LEVEL body to implement Trade facilitation agreement
NATIONAL
  • Every nation will have to setup a Committee on Trade Facilitation.
  • it’ll implement this agreement and coordination with the international body
INTERNATIONAL
  • WTO will setup a Committee on Trade Facilitation
  • all members can participate
  • It’ll will provide dispute settlement for violation of any provisions under this agreement.
  • will elect its separate chairman
  • Will meet at least once every year, review agreement every four years.

Benefits of TFA:

A simplified customs clearance mechanism will boost international trade, and thereby it will

will increase in global GDP $1 trillion (~Rs 60 lakh crore)
will create more jobs 21 million

 

Deadlines under TFA
deadline to sign TFA 2014, July, 31stBut India refused.
Agreement becomes effective from 2015

~280 words. But in exam, all points can’t recalled so it’ll automatically “FIT” the 200 words limit!

Why Modi opposed Trade Facilitation Agreement

Q. Why has India refused to sign Trade Facilitation agreement? (200 words)

  • WTO’s Trade Facilitation agreement (TFA) aims reduce the redtape and bureaucratic hassles in customs clearance and thereby facilitate international trade.
  • But, TFA maintains that it doesn’t “diminish” the rights and obligations of members under other agreements of WTO.
  • For example, under the Agreement on Agriculture (AoA) if a developing country is giving Amber box subsidies beyond 10% of its national agriculture production (base year 1986), THEN other members will be justified in putting trade sanction or WTO-complaint against the said country.
  • 2013: In Bali Summit, the then UPA Government agreed to sign TFA, after WTO “Peace clause”, which gave temporary exemption to developing countries from 10% de-minimus provision until 2017.
  • 2014: Change of regime,

Modi Government has refused to sign TFA before deadline (31st July 2014), because:

  1. Once India has signed TFA, the developed countries may stonewall her demands for a rational change in base year and ceiling limits on agro. Subsidies.
  2. Then India will have to cut down agro. Subsidies in MSP and food security programs, else they’ll put sanctions on us, soon as Peace-clause “temporary” deadline is over in 2017!
  3. And yet, we’ll have to keep giving them easy customs clearance because we signed the TFA!

Therefore, Government has decided to use TFA signature as a “Bargaining Chip” for a permanent solution of food subsidies issue.

~220 words