The Breakdown of the Doha Round

(The following post has been contributed by Mihir Naniwadekar)

Trade talks at the WTO over the Doha Round (now in its seventh year) broke down late last month in Geneva after intense negotiations failed to resolve a deadlock between India and China on the one hand and the US and EU on the other. This short note will look at the differences which led to the breakdown, and the implications of the failure to reach consensus.

Differences arose on the second day of the talks on the issue of capping of farm subsidies granted by the US to its farmers. Developing nations insisted that the US cap its annual subsidies at a level much lesser that what the US agreed to. The US insisted that the annual subsidy cap could be no lesser than US$ 15 billion. This limit was far more than it actually spent last year, but less than it spent in four of the last seven years, when prices of farm products were noticeably lower. Developing countries refused to accept that the US was making any genuine concession. They pointed out that the figure of US $ 15 billion proposed by the US was quite excessive; and the fact that in some years a larger subsidy had been granted could not in itself make an excessive figure justifiable.

Attempts at reaching a consensus were also defied by the issue of a ‘special safeguards mechanism’ designed to protect small farmers in developing countries by allowing such countries to impose a tariff on imports of certain agricultural products if the level of imports surged beyond a particular level. There was disagreement on the threshold level of imports at which the tariffs would kick in, with the United States arguing that the threshold level was too low; and India wanting to reduce it further.

The American and Indian delegations traded allegations blaming each other for the failure of the talks, with the US trade representative alleging that India was the only country at the negotiating table which was absolutely inflexible. Indian Commerce Minister Mr. Kamal Nath in turn stated that the United States was promoting commercial interests of large farmers and agri-business corporations at the cost of the livelihoods of subsistence farmers. China strongly supported the Indian line, with EU Trade Commissioner Peter Mendelson preferring to blame a ‘collective failure’. Other than the purely political fallout of the breakdown of negotiations, two issues merit discussion. First, what are the implications of a failure to reach a consensus on the tricky question of farm subsidies? Secondly, from the point of view of India, what is the significance of the failure to conclude the negotiations successfully?

An Economic Times editorial points out that the failure to reach an agreement on farm trade reforms gives developing countries which are also agricultural exporters (such as Brazil) a new incentive to challenge US farm programmes as being in violation of international trade rules. Successful challenges could force the United States to make cuts in its farm subsidy programmes without developing countries opening their markets in return. In this context, it is worth noting that the US recently (in June) lost a WTO appeal against Brazil on the issue of subsidies for cotton farmers, and also faces cases in several other sectors in which the farm subsidies are being challenged. Thus, it is possible that the failure of negotiations could hurt US interests without allowing the US a free entry into developing markets in return. Of course, this prediction is far from being a certainty, and is perhaps more easily achievable by consensus rather than contest. Also of note is the fact that the US failed to “buy up” several developing nations by offering sops, with developing countries remaining united.

From the perspective of India specifically, it is arguable that the insistence on a low threshold for triggering the tariff mechanism is out of tune with economic realities. Presently, India is witnessing extremely high levels of inflation (with the figures crossing the 12% mark last week) driven by increasing oil and food prices. There might be an arguable case for welcoming a surge in imports. Also, perhaps by refusing to compromise on the issue of the special safeguards mechanism, India threw away a chance to get the developed world to firmly commit to a cap on farm subsidies, which is essential for India if its farmers are to export their products profitably instead of accepting low prices in cases of surplus production. On the other hand, one might take the view that “no agreement is better than a bad agreement”; and India is not really losing out on as much as it would have under an unfavorable agreement. Whichever view one prefers, one thing is clear – the greatest loss would be for India to be disallowed from using special safety mechanisms without a tangible benefit in the form of a cap on developed country farm subsidies. Several interesting perspectives on the breakdown of the Doha round are found in the Economic Times and the Financial Times.