CUTS Institute for Regulation & Competition

1. CUTS Institute for Regulation & Competition Strengthening Skills in Commercial and Economic Diplomacy Training Programme for civil servants and Executives (CDS.06) 18-21 August 2008, Jaipur Session 4: India and the Multilateral Trading System – From Uruguay Round to Doha Round August 19, 2008 B.K.Zutshi

2. Outline of the Presentation • Introduction: • MTS-Brief history • Conditions that led to the Round • Position of MTS at the time • India’s Domestic Political Economy Context of the time • Preparatory Process for the UR • Punta del Este Mandate • India’s Preparations for and Participation in the Preparatory and negotiating phases • UR Negotiations : A Brief Account • An assessment of the UR Results • Built-in UR Agenda for Future Negotiations • Concluding Remarks 2 B K Zutshi

3. 3 Introduction: MTS: Brief History THE ORIGIN - GATT 1947 • Established through negotiation under the UN Conference on Trade and Employment (Havana) as the “third” of the Bretton Woods “institutions” for conduct of international relations • General Agreement on Tariffs and Trade, 1947 • Entered into force: 1 January 1948 • Terminated: 31 December 1995, but substance incorporated in GATT 1994 • “Provisional” set of rules, since Havana Charter for the International Trade Organization never entered into force, as the Charter was rejected by the US Congress • “Original” 23 contracting parties, including India, agreed on tariff reductions B K Zutshi

4. 4 Introduction: MTS: Brief History …Contd. B K Zutshi

5. 5 Conditions that led to the UR • Shift in competitive advantage in favour of some developing countries in manufacturers • Technological developments in telecommunications and computing, resulting in much greater tradability of services • Dominance of and competitive advantage of developed countries in services • Increasing importance of IPRs for developed countries as dominant innovators and creators of intellectual property necessary for retaining the competitive advantage • Perceived limited scope of liberalization through tariff cuts on account of relatively low tariffs among OECD countries B K Zutshi

6. 6 Conditions that led to the UR… Contd. • Fragmentation of the multilateral trading system • Near total exclusion of agriculture from the system through “waivers” since the 1950s • Reverse discrimination through the Multi-Fibre Arrangement, solely against developing countries export • Non-binding nature of Tokyo Round Codes on subsidies and dumping in their application to developing countries • The so called Free Rider problem B K Zutshi

7. 7 Conditions that led to the UR… Contd. • Fragmentation of the multilateral trading system …Contd. • Tariff peaks and tariff escalation against goods of export interest to developing countries (Footwear, leather goods, textile and clothing) • Arbitrary application of antidumping and countervailing duties • A vast arsenal of grey-area measure like the so called voluntary export restraints, orderly marketing arrangements. • Increasing resort to unilateral measures by the US under its prolific family of section 301 legislation (Super 301, Special 301 etc.) B K Zutshi

8. 8 Position of the MTS at the time • The GATT at the time was languishing and divorced from the real-world issues of the global market place • Some commentators believed that the GATT had become largely irrelevant and was in danger of a total collapse • Members had different sets of rights and obligations • There was urgent need for rejuvenating and reinventing the system to bring it closer to the ground realities • However perceptions differed among contracting parties about the issues that needed to be addressed B K Zutshi

9. 9 India’s Domestic Political Economy Context • India’s Economic and Trade policy Framework during the Preparatory and Negotiating phases of the UR • Import substitution model of development • A high cost, centrally planned economy, in which state decided who would produce what, where and in what quantity • “Commanding Heights” of the economy under state control • Structural rigidities, low rates of growth • QRs under the balance of payments provisions of the GATT and High tariff walls B K Zutshi

10. 10 India’s Domestic Political Economy Context … Contd. • India’s Economic and Trade policy Framework during the Preparatory and Negotiating phases of the UR …Contd. • Export Production was treated as separate from domestic production • After the first spurt of industrialization (1950s and early 1960s), technological obsolescence had set in by the end of 1960s • A conservative management of the external trade and financial sectors B K Zutshi

11. 11 India’s Domestic Political Economy Context … Contd. • India’s Economic and Trade policy Framework during the Preparatory and Negotiating phases of the UR …Contd. • Reforms • India embarked on an economic reforms programme in 1991. • Between 1980 and 1991 there were tentative and sporadic attempts at reform. • By and large the policy framework had remained unchanged since it was laid down in Pandit Nehru’s time • In spite of some internal debate on reforms during Rajeev Gandhi’s Government, nothing much could be done because of vested interests and ideological predilections B K Zutshi

12. 12 India’s Domestic Political Economy Context … Contd. • India’s Economic and Trade policy Framework during the Preparatory and Negotiating phases of the UR …Contd. • Reforms …Contd. • That policy frame had a conservative approach to external commercial borrowings • Rajeev Gandhi’s Government liberalized external commercial borrowings for investment through the public sector. • This resulted in the deterioration of the already fragile foreign exchange position to the point of imminent default by India in 1991 • India had to physically pledge its gold reserves abroad to avoid a default B K Zutshi

13. 13 India’s Domestic Political Economy Context … Contd. • India’s Economic and Trade policy Framework during the Preparatory and Negotiating phases of the UR …Contd. • Reforms …Contd. • This directly resulted in India undertaking economic and trade reforms under the stewardship of the present Prime Minister who was then Finance Minister in Mr. Narasimha Rao’s government • Being reluctant participants in the negotiations and given the prevailing policy framework, Indian negotiators had little flexibility. B K Zutshi

14. 14 India’s Domestic Political Economy Context … Contd. • India’s Economic and Trade policy Framework during the Preparatory and Negotiating phases of the UR …Contd.. • Reforms…Contd. • By the time the round concluded in December 1993, the reform process was still at initial stages, coping with the FE crisis through import contraction by a more rigorous regime of QRs • Some flexibility was available in tariff reductions as India had embarked on this reform by then B K Zutshi

15. 15 India’s Domestic Political Economy Context … Contd. • India’s Interests and Concerns following from the Policy Frame…Contd. • Broadly speaking, India’s interests lay in improving market access in its areas of export interest, by seeking reduction of tariff and non-tariff barriers in the relevant sectors • India’s principal objective in this regard was the abrogation of the MFA and the integration of the textile and clothing sector into the GATT. • Defensive stance in agriculture because of food security, livelihood and employment concerns of largely subsistence farming B K Zutshi

16. 16 India’s Domestic Political Economy Context … Contd. • India’s Interests and Concerns following from the Policy Frame ..Contd. • Protection of a weak and inefficient service sector, particularly in infrastructure services like banking, insurance, telecommunications and other utilities • Defensive posture in IPR’s for a variety of reasons, including the then domestic legislation on the subject. B K Zutshi

17. 17 India’s Domestic Political Economy Context … Contd. • India’s Interests and Concerns following from the Policy Frame…Contd. • Strengthening S&D Provisions • Interest in systemic Issues • Preserving policy space for domestic decision-making to craft its own path of development • Ideological opposition to liberalization in general and trade liberalization in particular for historical reasons B K Zutshi

18. 18 Preparatory process for the UR • US took the initiative, with the support of other OECD countries, to seek to include services in the MTS • The 1982 Ministerial Conference considered the issue, but there was no consensus on the proposal to carry out a study on services’ trade, even without any commitment on its inclusion in the MTS • However the US and other OECD countries persisted with the proposal to have another round of negotiations with a broad agenda. The persistence finally resulted in the establishment of a preparatory process for a new round B K Zutshi

19. 19 Preparatory process for the UR…Contd. • Developing countries, in particular efficient agricultural producers wanted agriculture to be integrated into the MTS; so did the US; EU not in favour • India, Pakistan and a few other developing countries were interested in the integration of the textile and clothing trade into the MTS • Developing countries were also interested in improving market access in other goods of export interest to them like tropical products B K Zutshi

20. 20 Preparatory process for the UR …Contd. • Developed countries priority, besides opening markets in other countries, was for inclusion of international trade in services in the MTS and for discplines on international trade in counterfeit goods. • The prep process was dominated by a long controversial debate on tradability of services • One of the issues in this debate was the application of trade rules to investment in services, because regulation and the market place required establishment in the host country as a condition for doing business. • Investment had never been recognized as “trade” under the GATT B K Zutshi

21. 21 Preparatory process for the UR …Contd. • Issues in Contention • The most contentious issue was the inclusion of services in the negotiating mandate • TRIPS was not contentious during the prep process but became so during the negotiations when the mandate was interpreted by the developed countries to include norms and standards of IPRs • Developing countries took the view that GATT was not the appropriate forum for setting standards in IPRs • Reform and liberalization of the agriculture sector for eventual integration into the MTS B K Zutshi

22. 22 Punta del Este Mandate • The ministerial declaration of 20 September 1986 from Punta del Este launched the round • Two part mandate • Part I covered negotiations on trade in goods subjects • Tariffs • Non-tariff measures • Tropical Products • Natural Resource based products • Textile and Clothing • Agriculture • GATT article B K Zutshi

23. 23 Punta del Este Mandate … Contd. • Two part mandate… Contd. • Part I covered negotiations on trade in goods, subjects …Contd. • Tokyo round codes • Anti-dumping • Subsidies • Dispute settlement • TRIPS, including trade in counterfeit goods • TRIMS and • Functioning of the GATT system • Part I was a single undertaking, meant to ensure that all the above negotiating subjects would be covered. Single undertaking assumed a somewhat expanded meaning in the final outcome B K Zutshi

24. 24 Punta del Este Mandate … Contd. • Part II of the mandate was negotiations on trade in services. The separation was meant to put the negotiations on the services on a separate legal track, but would receive the same administrative support from the GATT secretariat, • This was the constitutional charter of the round and was the result of a difficult compromise that protected the positions and dominant interests of the developed and developing countries • North-South Dimension pervaded all the negotiations, although the term itself was rarely used B K Zutshi

25. 25 Punta del Este Mandate … Contd. • The overall mandate in Part I and the mandate for each subject of negotiations was balanced in the sense that each mandate preserved the essential interests of the two major groups • This was true also of the mandate for services negotiations, which also left open the issue of the international implementation of the results of the services negotiations. • Developing countries’ had reservations about GATT being entrusted with this responsibility. (The issue lost its relevance in the last phase of the negotiations once it was decided to set up the WTO). B K Zutshi

26. 26 Punta del Este Mandate … Contd. • The mandate was seen as a grand bargain between North and South, under which developed countries were to: • start the process of reform and liberalization in agriculture and its eventual integration into the MTS • phase out the MFA and bring the textile and clothing sector under the main framework of GATT • provide enhanced market access to developing countries in areas of export interest to them, through reduction in tariffs and removal of non-tariff barriers • clean up the system by removing grey area measures like voluntary export restraints etc. B K Zutshi

27. 27 Punta del Este Mandate … Contd. • In return developing countries would agree to disciplines: • in the new area of services • to avoid adverse trade effects of trade related investment measures, like performance requirements of local content and export obligations • in trade related aspects of intellectual property rights including trade in counterfeit goods. B K Zutshi

28. 28 Punta del Este Mandate … Contd. • In return Contd. • The TRIPS mandate became controversial during the negotiations about norms and standards of IPRs being an issue within the remit of GATT • The issue was resolved in the April 1989 meeting, along with three other issues - agriculture, textiles and general safegaurds - which had remained unresolved at the Montréal mid-term review meeting of December 1988 B K Zutshi

29. 29 India’s Preparations for and Participation in the Preparatory and negotiating phases • National Preparation and consultation processes in India in the Preparatory Phase • India a reluctant participant in international engagement on trade issues? • No tradition of stakeholder consultations, not even with the state governments, who had substantial stakes in subjects like agriculture • Hardly any informed public debate on issues under negotiations. • Singular absence of any inputs from academic circles and think tanks. B K Zutshi

30. 30 India’s Preparations for and Participation in the Preparatory and negotiating phases…Contd. • National Preparation and consultation processes in India in the Preparatory Phase…Contd. • Inter-departmental and inter-agency Consultation through normal consultative processes of the GOI • Inter-departmental and Inter-agency turf battles • For stakeholders outside the central government, including state governments, the processes were non-transparent B K Zutshi

31. 31 India’s Preparations for and Participation in the Preparatory and negotiating phases…Contd. • National Preparation and consultation processes in India in the Preparatory Phase…Contd. • Given India’s economic and trade policy framework at the time, discussed earlier, authorities were not at all keen for any such consultation for fear of further politicizing the issues • National preparation and consultation process in India during the Negotiating Phase • Hardly any change from the position in this regard during the preparatory phase • In fact there was minimal participation at the political level in the negotiations B K Zutshi

32. 32 India’s Preparations for and Participation in the Preparatory and Negotiating phases • Multilateral Consultations, Coordination and Coalition Building in the Prep Phase • India played a leading role • Chaired the “Informal Group of Developing Countries” until after the mid-term review • Set up the coalition known as the Group of Ten, comprising Brazil, Cuba, Egypt, India, Nicaragua, Nigeria, Tanzania and Yugoslavia • Perceptions about the functioning and effectiveness of • The Informal Group of the Developing Countries • The Group of Ten B K Zutshi

33. 33 India’s Preparations for and Participation in the Preparatory and Negotiating phases…Contd. • National preparation and consultation process in India during the Negotiating Phase • Hardly any change from the position in this regard during the preparatory phase • In fact there was minimal participation at the political level in the negotiations B K Zutshi

34. 34 India’s Preparations for and Participation in the Preparatory and Negotiating phases…Contd. • Multilateral Consultations, Coordination and Coalition Building in the UR negotiations • India played an important role • Informal Group of developing countries • Played an effective and a critical role in preventing consensus in • The Montréal mid-term meeting of Dec.1988; and • Brussels Dec.1990 meeting, which was to conclude the Round B K Zutshi

35. 35 India’s Preparations for and Participation in the Preparatory and Negotiating phases…Contd. • Multilateral Consultations, Coordination and Coalition Building in the UR negotiations…Contd. • Cairns Group on agriculture, comprising of members from both developed and developing countries • Other issue-based coalitions like the one on TRIMS B K Zutshi

36. 36 UR Negotiations: A Brief Account • Negotiating structure • For Part I of the mandate, a Negotiating Group for each of the 14 subjects, chaired by serving and former ambassadors • The subject matter groups to report to the Negotiating Group on Goods, Chairperson: DG in his official capacity • For Part II, the Negotiating Group on Services, under the chairmanship of an ambassador • Both Groups to report to the Trade Negotiating Committee under the chairmanship of the DG in his personal capacity B K Zutshi

37. 37 • Milestones • Sep 86 - Punta del Este: launch • Dec 88 - Montreal: ministerial mid-term review • Apr 89 - Geneva: mid-term review completed • Dec 90 - Brussels: “closing” ministerial meeting ends in deadlock • Dec 91 - Geneva: first draft of Final Act completed UR negotiations: A Brief Account …Contd. B K Zutshi

38. 38 UR negotiations: A Brief Account …Contd. • Milestones …Contd. • Nov 92 - Washington: US and EC achieve “Blair House” breakthrough on agriculture • Jul 93 - Tokyo: Quad achieve market access breakthrough at G7 summit • Dec 93 - Geneva: Most negotiations end (some market access talks remained) • Apr 94 - Marrakech: Agreements signed • Jan 95 - Geneva: WTO created, agreements take effect B K Zutshi

39. 39 UR negotiations: A Brief Account …Contd. • Marrakech Agreement: Its Distinguishing Features from the GATT • Unlike GATT, WTO an Institution. • Third Leg of the International Economic Order Conceived at Bretton Woods. • Much Larger Coverage by Inclusion of Services and TRIPS. • A Forum for Continuous Negotiations. • Trade Policy Review Mechanism (TPRM). B K Zutshi

40. 40 UR negotiations: A Brief Account …Contd. • Marrakech Agreement: Its Distinguishing Features from the GATT…Contd. • Single Undertaking: • Intended for Part I of the mandate to ensure an outcome in each negotiating subject, restore integrity to the MTS and prevent its fragmentation in future • The notion assumed much greater importance and a deeper meaning in the context of setting up of the WTO • A common Dispute Settlement and Enforcement Mechanism - With Possibilities for Cross-retaliations, Subject to some Disciplines. B K Zutshi

41. 41 An assessment of the UR Results • General • No ex ante indicators for judging the outcome • Post facto assessment by individual participants. • Econometric assessment under partial equilibrium modeling showing great gains somewhat suspect.. Conclusions depend on initial assumptions B K Zutshi

42. 42 An assessment of the UR Results…Contd. • General …Contd. • Nevertheless the following can be said • The outcome significantly strengthened the MTS in a variety of ways like addressing areas and sectors where the absence of international consensus and workable rules had resulted in mounting trade tensions undermining confidence in the system e.g. safeguards, subsidies, antidumping duties, agriculture and textile & clothing, IPRs, use of unilateral measures by big trading entities like the S.301 measures under the US trade legislation B K Zutshi

43. 43 An assessment of the UR Results…Contd. • General …Contd. • Nevertheless the following can be said …Contd. • Significant tariff cuts and marked increase in tariff bindings • Both elements above enhanced market access and made it secure, transparent and predictable • Extension of Multilateral discipline to services, TRIPS • Multilateral rights and obligations of all countries increased to broadly comparable levels • Institutional underpinning of MTS greatly enhanced by the setting up of the WTO • An improved dispute settlement mechanism B K Zutshi

44. 44 An assessment of the UR Results…Contd. • General • On the downside • High costs of implementation for Developing countries • Flawed implementation of market access commitments in agriculture and Textiles • Continuation of tariff peaks and tariff escalation in products of export interest to developing countries • Intrusive nature of obligations impinging on Members domestic policy making domain B K Zutshi

45. 45 An assessment of the UR Results…Contd. • From India’s Perspective • In Agriculture • No reduction commitments on domestic support • Domestic support way below de minimus levels for developing countries • No tariffication obligation, only ceiling bindings at high safe levels, precluding any possibility of imports of subsidized agricultural products. • No minimum import commitments • All support schemes in the sector both of the Central Government and State Governments covered by the Green Box • No export subsidy reduction commitments but possibility of providing internal transport subsidy and marketing support B K Zutshi

46. 46 An assessment of the UR Results…Contd. • From India’s Perspective….Contd. • In Textiles • complete phase out of MFA in ten years • Phase out back loaded • TRIPS • The most controversial part of the outcome for India • Obligation to grant product patents in pharmaceuticals and agro chemicals • A ten-year Phase in period for grant of product patents in parallel with the phase out of the MFA • Grant of exclusive marketing rights for five years or until patents rights become available in respect of patents filed after January 1, 1995 • Non-authorized use (compulsory licensing) provisions on certain conditions without providing for grounds or reasons for such use B K Zutshi

47. 47 An assessment of the UR Results…Contd. • From India’s Perspective….Cont • Services • GATS the most development friendly agreement to have come out of the UR • Bottom up approach to scheduling commitments • Market Access and National Treatment commitments negotiated obligations unlike in the case of GATT • The notion of progressivity of commitments • Parity between factor movements of capital and labour - modes 3 and 4 B K Zutshi

48. 48 An assessment of the UR Results…Contd. • From India’s Perspective….Contd. • Services • Actual commitments by all members under all four modes rather modest, (except in telecoms and to a lesser extent in financial services) but particularly so under mode 4,i.e. movement of natural persons as service providers • Since then considerable autonomous liberalization by developing countries, including India • India has emerged a major exporter in software and other IT-enabled and knowledge-based services • India’s has been the fastest growing services exports in the last decade B K Zutshi

49. 49 Built-in Agenda for Future Negotiations from the UR • Scattered throughout the various WTO agreements there were commitments for future negotiations, some time bound in the matter of their initiation • Two such areas were services and agriculture. In services the next round of liberalization negotiations was to start from Jan 2000 and for agriculture from Jan 2001 • There was also a commitment to study the trade and environment interface • Negotiations in these areas were initiated according to the committed time schedules, but got subsumed in the wider Doha Round negotiations and are now a part of that ongoing Round. This will be taken up in the next part of this session B K Zutshi

50. 50 Built-in Agenda for Future Negotiations from the UR…Contd. • Scattered throughout ….bound Contd. • Flawed Implementation of the UR Agreements on Agriculture and Textiles • Agriculture Agreement • Expectations and the Reality • Textile Agreement • The phase out scheme • Back loading of the phase out programme • Other Implementation issues B K Zutshi