Behave Like a Grown-Up

India may end up gaining by losing the WTO case on export subsidies

On the one hand, US President Donald Trump says the World Trade Organisation (WTO) does not provide a level playing field, and so threatens unilateral trade barriers. India fears he will abandon the rulesbased framework of the WTO, which has served the world well for decades.

On the other hand, the US has just sought to use that very WTO framework against India. Trump has dragged India to the WTO dispute mechanism for failing to abolish wide-ranging export subsidies forbidden by WTO rules. India’s defence is rather weak, and its chances of winning the case are not high.

Sop Bar on Growth Highway

After World War 2, the US promoted multilateral free trade through seven rounds of mutual tariff cuts in the General Agreement on Tariffs and Trade (Gatt), the predecessor of WTO. Developing countries got mostly a free pass on tariff cuts because they were poor, had a small share of global trade, and were outside the Soviet bloc in the Cold War.

This ‘special and differential’ treatment for developing countries complemented foreign aid. The West viewed developing countries as objects of charity, meriting non-reciprocal concessions. These concessions were to be phased out as poor countries grew richer, and moved towards developedcountry status.

This scenario changed dramaticallyin the 1990s with the end of the Cold War, and emergence of economic muscle and competitiveness in developing countries. Some developing countries — above all, China — began to look like economic threats rather than objects of charity to the West. In the Uruguay Round of Gatt, which led to the creation of WTO, more reciprocity was demanded from even the poorest countries, especially in patents and copyright.

US economic dominance eroded in the 2000s, and even more in the 2010s. WTO became deadlocked on most issues. Its rules mandated unanimity in decisions, which were difficult to engineer, and gave a veto to any obstructionist (India was a major culprit). Disillusioned, the US switched focus to bilateral trade deals where it had more bargaining power.

Trump blames wage stagnation in the US on unfair trading practices of China and other countries. He has announced protectionist measures that have, rightly, been condemned in India and elsewhere.

Trump is on stronger ground in complaining that developing countries have excessive advantages through ‘special and differential’ WTO rules, and should graduate out of these much faster. Referring to Brics (Brazil-Russia-India-China-South Africa), US Trade Representative Robert Lighthizer complained that five of the six richest countries in the world were seeking concessions on the basis of self-proclaimed development status.

India is now the third-largest economy in the world in purchasing power parity (PPP) terms. It has liberalised its trade, but it continues to give a wide range of modest export subsidies. Indeed, every export sector in India keeps demanding a better package of incentives.

The US has pointed out that, under WTO rules, countries that exceed a per-capita income threshold of $1,000 for three years in a row should end export subsidies to any sector having over 3.25% of global exports. By International Monetary Fund reckoning, India crossed this threshold in 2015. Yet, it continues to give subsidies.

Who Moved My Protein Shake?

India’s commerce minister Suresh Prabhu says that when WTO enacted this rule, countries already above the threshold were given eight years to adjust. So, he argues, India, too, should be given eight years of grace. But the rules do not actually provide for such a grace period. In the old days, the US was willing to wink at many Third World subsidies. Those days are over. In its new mood, the US no longer views developing countries as objects of charity.

Growing up has consequences. India takes pride in having become the third-largest economy. But higher status implies moving from being a taker to a giver. That is politically inconvenient in a democracy where all parties keep making crazy competitive subsidy promises. But it is no less inconvenient for Western democracies. Political parties need to accept that global rules are good for all, even if they prove inconvenient when confronting certain vote banks.

Prabhu recently said that some countries had exceeded the $1,000 per capita limit but were not being subjected to any regulation. “So, it should not single out India because we are growing,” he added. Alas, that is an argument for subjecting all other errant countries to the WTO rule, not for exempting India.

Ironically, if the US wins the case, it may help persuade Trump that the WTO has fair rules that he, too, should abide by. Keeping the US in WTO is a worthy aim.

India needs to accept that subsidies are not the way to promote exports. Indian exports are uncompetitive and high-cost thanks to land made expensive by acquisition laws, interest rates made high by populist schemes that stoke deficits and inflation, labour rates made high by labour laws, industrial power tariffs kept high to subsidise farmers, and freight rates kept high to subsidise passengers. If India loses the WTO cases, politicians might finally agree to reform these high-cost policies that hit exports.

What do you think?