India defies the WTO – but at a cost to its poor

If India truly wants to tackle poverty and hunger - it needs the WTO

Image credit: Getty

Indian Prime Minister Narendra Modi recently delivered an extraordinary, wide-ranging address in celebration of India’s 68th Independence Day. The Prime Minister spoke passionately of the importance of fundamental government reform and deep social change, and stressed that eradicating poverty was “the need of the hour.” He invited greater foreign investment and participation in India’s economy and emphasized that India must take a bold new approach to global markets—noting that “India cannot decide its future by remaining isolated and sitting alone in a corner.”

Policymakers may be tempted to agree with those praising India’s stance against the WTO. The reality, however, is that those actions may ultimately prove self-defeating to the very goals that India seeks.
Only last month, however, India chose isolation over global engagement when it blocked implementation of the new Trade Facilitation Agreement under the World Trade Organization (WTO). This agreement, which was initially approved last year by the WTO’s 160 members, was designed to promote economic growth and trade by reducing red tape at the border. It is projected to add as much as $1 trillion in global economic activity and new jobs, much of which would be in developing countries.

India, however, refused to agree to the deal unless it also got a separate agreement allowing it more freedom to stockpile food and subsidize food production without those subsidies being subject to WTO challenges. Joining India in opposition were Bolivia, Cuba, and Venezuela.

India’s gambit at the WTO has the potential to cause significant damage to global trade—potentially scuttling a win-win trade facilitation deal and leading many nations to question whether the WTO’s consensus-based model for trade negotiations can still work. While some believe that India’s stance has increased its leverage at the WTO on food security, India is likely to be the biggest loser if it continues to advance a strategy that isolates itself from its WTO partners.

1. India would be a major beneficiary of the WTO trade facilitation agreement.

India’s new leaders recognize that, for India to grow and reduce poverty, it must lower business costs and “facilitate trade.” This will require reforming a trading system that the World Bank ranks 132nd globally, including a bureaucratic customs process that lacks transparency, and imposes significant delays and high costs and fees. Customs reforms like those included in the Trade Facilitation Agreement (including reduced paperwork and greater automation) can be of particular benefit to developing countries like India, reducing their trading costs by up to 15 percent and increasing their domestic competitiveness, export performance, customs collections, and foreign direct investment. These improvements also support reform in the broader economy and, ultimately, promote growth and reduce poverty.

Because implementing these reforms can be expensive for developing countries, the WTO launched an initiative to provide financial support to countries that require it. India can hardly expect this important aid, however, if it continues to play the skunk at the trade facilitation party.

2. A go-it-alone approach to food policy and trade will put India’s food security at greater risk.

India is home to one in four malnourished people worldwide, and is 16th on the Global Hunger Index. To address chronic hunger and malnutrition, India’s government last year enacted an unprecedented $20 billion program that provides over 800 million people with a legal right to receive 5 kilograms or more of highly subsidized food grains each month.

There is wide global support for India’s extraordinary commitment to combating hunger. But there are also serious questions about the means that India employs to provide food security, including concerns that India’s efforts to insulate itself from international trade ultimately make it less food secure. India’s go-it-alone food security strategy relies on massive subsidies for farmers, significant barriers on food imports, and government controls on food exports. These policies have led to a glut in the production of grains like rice and wheat and to rotting stocks in India’s warehouses. At the same time, bureaucracy, theft, and corruption means huge quantities of grain (estimated in 2005 at almost 60 percent) never reach poor Indians.

And, as recognized in the WTO’s interim agreement on food security, policies like India’s food subsidies and export bans can potentially put the food security of other countries at serious risk. Subsidized food, for example, can potentially be dumped at low costs in foreign markets, driving out local farmers and leading to price spikes when supplies tighten. And export bans—especially by multiple countries—can limit global supplies and significantly raise global prices. It’s estimated, for example, that 45 percent of the spike in global rice prices in 2006-08 was the result of trade restrictions.

India has done vital work in elevating the importance of food security in the context of global trade rules. But to achieve meaningful progress in trade and food security­­—and to protect itself from trade challenges—India must continue to work with other countries to gain their support, to address their concerns, and to press for global reforms. This task will be considerably more difficult if India blocks progress on the broader WTO agenda.

3. India needs the WTO to succeed or risks exclusion from global trade deals.

After over a dozen years of difficult negotiations on the WTO’s development agenda, many countries would see the ultimate failure of the current negotiations as the final straw for the WTO as a forum for trade negotiation.

Many of these countries may ultimately decide to abandon the WTO’s traditional consensus approach and proceed with deals on issues like trade facilitation without India. Other countries might give up on broader negotiations altogether and concentrate on regional trade arrangements like the Trans-Pacific Partnership and the Transatlantic-Trade and Investment Partnership, neither of which include India.

As these countries adopt preferential arrangements among themselves, India would increasingly find itself isolated globally, facing comparatively higher trade barriers and fewer opportunities to tap into global growth.

India has a veto in WTO trade negotiations, which require a consensus of all WTO members. But if India overplays its hand and effectively ends talks at the WTO, it will find that it may have far less leverage in other forums to obtain aid for trade facilitation or advance its legitimate food security concerns.

In his Independence Day address, Prime Minister Modi stressed that India must move ahead “on the basis of strong consensus” and emphasized that good governance and development were the only two tracks to take India forward.

Much the same can be said of the WTO’s current trade package. India would significantly benefit the world­—and, especially, itself—by charting a path to return from its self-imposed exile at the WTO.

When Prime Minister Modi visits Washington next month, some policymakers may be tempted to agree with those praising him for his stance against the WTO. The reality, however, is that Modi’s actions may ultimately prove self-defeating to the very goals that he seeks.