World Trade Organization - Understanding its Implications for India


By

Dr. G Bharathi
Asst.Professor, Economics Area
Aurora PG College
Chikadpally, Hyderabad-500 020
E-mail:
bharathishan@rediffmail.com
 


Introduction:

The World Trade Organization is a Multi-lateral organization which facilitates the free flow of goods and services across the world and encourages fair trade among nations. The result is that the global income increases due to increased trade and there is supposed to be overall enhancement in the prosperity levels of the member nations. To put it in brief WTO encourages a multi-lateral trading system within its member countries.

Origin and Evolution of WTO: - GATT to Uruguay

WTO is of a very recent origin, it came into formal existence on January 1st 1995. As an organization it has vast powers and functions than what its predecessor GATT (General Agreement on Tariffs and Trade) had, the objectives and goals of both being broadly the same. GATT came into existence in the year 1948, after long negotiations to form an organization called ITO immediately after the Second World War did not materialize. The ITO was supposed to be the third international organization in the "Golden Triangle" that was supposed to come into existence, the first two being IMF and World Bank.

To begin with 23 countries became founding GATT members (officially, "contracting parties"). GATT remained the only multilateral instrument governing international trade from 1948 until the WTO was established in 1995. There were several controversies on whether the GATT had actually contributed to enhancement of world trade and did it serve its purpose of a multi-lateral trading organization. The liberalization of international trade during GATT era in its true sense was always debatable. However, it is very clear that over the period of 47 years of its existence, GATT was successful in initiating a process of tariff cutting in several groups of manufactured goods. Moreover the signatories in the GATT increased from 23 to more than 100 in a short span, ratifying the fact that being in the system was proved and considered more beneficial than not being in it.

On the other front, the internal and domestic economic problems and fluctuations made some economies to go back to increase the levels of protection and increase trade barriers to enable faster domestic growth and recovery. The problem was not just a deteriorating trade policy environment, but some other serious issues. GATT negotiations did not include services and agricultural trade in its gamut. As the world trade grew in size, the share of services trade along with that of merchandise started to increase leading to the insufficiency of the GATT principles to cover the expanding aspects of ever evolving global trade. As a result, these loopholes were taken as advantage by many trading countries, resulting in a lopsided development of world trade. These and other factors convinced GATT members that a new effort to reinforce and extend the multilateral system should be attempted. That effort resulted in the Uruguay Round, the Marrakesh Declaration, and the creation of the WTO.

WTO - Some Basic Facts:

Location:   Geneva, Switzerland
Established:   1 January 1995
Created by :   Uruguay Round negotiations (1986-94)
Membership:   148 countries (as of April 2005)
Budget:    155 million Swiss francs for 2003
Secretariat staff: 560
Head :    Director-General, Supachai Panitchpakdi

What are its Objectives and Functions?

The overriding objective of the World Trade Organization is to help trade flow smoothly, freely, fairly and predictably; to meet its objective WTO performs the following functions

  • Administering W.T.O Trade Agreements.
  • Acting as a Forum for trade negotiations.
  • Settling and Handling Trade disputes
  • Monitoring  and reviewing national trade policies,
  • Assisting the member in trade policies through technical assistance and training programmes
  • Technical assistance and training for developing countries. 
  • Co-operation with other International Organization

What are its Principles?

The agreements of WTO cover everything from trade in goods, services and agricultural products, these agreements are quite complex to understand, however all these agreements are based on some simple principles;

  • Non-Discrimination
  • This is a very simple principle which advocates that every member country must treat all its trading partners equally without any discrimination, meaning that if it offers any special concession to one trading partner, such concessions need to be extended to its other trading partners as well in entirety. This principle effectively gets translated into "MFN" or the Most Favored Nation. However, this principle is relaxed in certain exceptional cases, such as if country X has entered into a regional trade agreement with another country Y, then the concessions extended to Y country need not be extended to other non-members of the agreement. Besides these developing countries facing Balance of Payment problems also get concessions, and if a country can prove unfair trade it can retain its power to discriminate.

    The Non-discrimination principle is also translated as a principle that would ensure "National Treatment" to all the goods, services or the intellectual property that enters any other countries national borders.

  • Reciprocity
  • This Principle reflects that any concession extended by one country to another need to be reciprocated with an equal concession such that there is not a big difference in the countries Payments situation. This was further relaxed for developing countries facing severe Balance of Payments crisis. This principle along with the first principle would actually result in more and more liberalization of the world trade as any country relaxing its trade barriers need to extend it to all other members and this would be reciprocated. Thus progressive liberalization of the world trade was aimed at by WTO.

  • Transparency
  • The multilateral trading system is an attempt by governments to make the business environment stable and predictable. Thus this principle ensured that there is lots of transparency in the domestic trade policies of member countries. Moreover, the member countries are required to sequentially phase out the non-tariff barriers and progressively reduce the tariff barriers through negotiations.

Thus, these principles were primarily to serve the purpose of freer and fair trade and also to encourage competitive environment in the global market. This was further supposed to enhance development and Economic reforms in the developing countries over a period of time in a phased manner.

What are the Major Agreements in WTO?

There are several agreements which are agreed upon by member countries in the last round of negotiations under GATT, The Uruguay round (1986-94), which resulted in the formation of WTO The complete set runs to some 30,000 pages consisting of about 60 agreements and separate commitments (called schedules) made by individual members in specific areas such as lower customs duty rates and services market-opening.

The main agreements cover vast areas from tariff reduction on specific manufactured goods and services; other agreements deal with trade in Textiles, Agriculture, Services; some other agreements talk about trade in Intellectual Property, cross-border Investments, anti-dumping duties, CVD's, Safeguards, and finally there are few agreements that aim to reduce the Non-Tariff Barriers that hinder trade between countries. Let us now discuss the decision making process followed to reach consensus for these agreements at WTO, the organizational structure and then in detail look at the impact of these agreements on the member countries with specific reference to India.

The Decision Making Process and Organizational Structure of WTO

Decisions are made by all the members together what we can term as by consensus. A majority vote is also possible but it has never been used in the WTO, and was extremely rare under the WTO's predecessor, GATT. After the decision by individual countries, the WTO's agreements have been ratified in all members' parliaments. The structure of WTO is shown in Figure 1. The WTO's top level decision-making body is the Ministerial Conference which meets at least once every two years. The Fifth WTO Ministerial Conference was held in Cancún, Mexico from 10 to 14 September 2003. Below this is the General Council (normally ambassadors and heads of delegation in Geneva, but sometimes officials sent from members' capitals) which meets several times a year in the Geneva headquarters. The General Council also meets as the Trade Policy Review Body and the Dispute Settlement Body. At the next level, the Goods Council, Services Council and Intellectual Property (TRIPS) Council report to the General Council. Numerous specialized committees, working groups and working parties deal with the individual agreements and other areas such as the environment, development, membership applications and regional trade agreements.

The WTO has nearly 148 members, accounting for over 97% of world trade; there are many other countries who are planning to become the members.



How Does the Agreements affect the Member Countries?

The World Trade organization was established with an objective of enhancing the free and fair trade, improve growth rate of world trade by encouraging members to reduce trade barriers and to increase the overall prosperity in the global economies. As given in the official document of WTO following are the ten ways in which the organization affects the world Trade and its member countries.

1. The system helps promote peace
2. Disputes are handled constructively
3. Rules make life easier for all
4. Freer trade cuts the costs of living
5. It provides more choice of products and qualities
6. Trade raises incomes
7. Trade stimulates economic growth
8. The basic principles make life more efficient
9. Governments are shielded from lobbying
10. The system encourages good government

However, there are several groups that are against this multi-lateral organization, and they continuously propagate against the agreements considering them as being dis-advantageous to the developing countries and several other sectors in the economy. Following are some of the general aspects of disagreements on the principles and existence of WTO.

1. The WTO dictates policy
2. The WTO is for free trade at any cost
3. Commercial interests take priority over development …
4.  It takes over the environment aspects to give concessions to some countries for raising barriers.
5. Some issues which are continuously raised in the ministerial for discussions but never discussed are over health and safety
6. The WTO destroys jobs, worsens poverty
7. Small countries are powerless in the WTO
8. The WTO is the tool of powerful lobbies
9. Weaker countries are forced to join the WTO
10. The WTO is undemocratic

How Does it Affect India?

India is a founder member of World Trade Organization, and also treated as the part of developing countries group for accessing the concessions granted by the organization. As a result, there are several implications for India for the various agreements that are signed under WTO. Let us understand each agreement in general, what it means and its implications for India in specific.

1. India was a signatory of the General Agreement on Tariffs & Trade (GATT), and as a part of the commitment had to change several laws and policies; the major changes that were incorporated were as a follows

  • Reduction of peak and average tariffs on manufactured products
  • Commitments to phase out the quantitative restrictions over a period as these were considered non-transparent measure in any countries policy structure.

The result of this agreement as mentioned earlier was limited as, GATT was only an agreement and there was no enforcing agency to strictly implement the clauses and punish the country which breaks the clauses. Thus the impact was partial. However, with WTO coming into effect, the competition from imports for the domestic firms has increased. WTO had the deadline till 2005, for the domestic policy was supposed to phase out the QR's; for those countries which face severe balance of payments problems special concession period was given. Thus it is very clear that only those firms that have competitive advantage would be able to survive in the long run, and those firms which are weak would fade into history in the process.

2. Trade Related Investment Measures (TRIMS)

The agreement relates to investments originating from one country to another. The agreement prohibits the host country to discriminate the investment from abroad with domestic investment, which implies that it favours national treatment of foreign investment. Besides this, there are several other clauses of the agreement totaling to 5 in this segment, one agreement requires investment to be freely allowed within domestic borders without any maximum cap on it. Another restricts to impose any kind of export obligation or import cap on the investment. Another requires that there should not be any domestic content requirement on foreign firms operating and manufacturing in other countries.

These agreements have a direct impact on our Trade, Investment and foreign exchange policy, domestic annual budgetary proposals and also on the industrial policy.

Implementation process for the above requires proper preparation by the industries and policy makers, as sudden change may result in loss of revenue and decline of foreign exchange for the government and economy, and it may result in decline of market share and profitability of businesses, decline in employment opportunities and over all decline in growth.

3. Trade Related Intellectual Property Rights (TRIPS)

An intellectual property right refers to any creation of human mind which gets legal recognition and protection such that the creator of the intangible is protected from illegal use of his creation. This agreement includes several categories of property such as Patents, Copyrights, Trademarks, Geographical indications, Designs, Industrial circuits and Trade secrets.

Since the law for these intangibles vastly varied between countries, goods and services traded between countries which incorporated these intangibles faced severe risk of infringement. Therefore the agreement stipulated some basic uniformity of law among all trading partners. This required suitable amendment in the domestic IPR laws of each country. Since this process is not a simple one, a time period of 10 years was given to the developing countries.

As a result, in India there was a requirement to change the patents act, Trade and merchandise mark act and the copyright right act. Besides these main laws, other related laws also required changes.

The main impact of this is on industries such as pharma and bio-technology, because now with the law in place, it is not possible to reverse engineer the existing drugs and formulas, change the process and produce the same product. Now new investment in fresh research is required. This is quite a burden for small industries and there is a possibility that they are thrown out of business due to competition.

Besides these, the technology transfer from abroad is expected to become costly and difficult.

Strict implementation of law is very important in India, otherwise there could be disastrous affect on the revenue of industries which invest millions of rupees in Research and development if their products get infringed.

4. Agreement on Agriculture (AOA): The Agriculture happens to be one of the most protected sectors in all the countries without any exceptions, and therefore an agreement on the agricultural issues have always been evading and debated strongly by all the countries involved in trade in agriculture.

The agreement on agreement deals with market access, Export subsidies and government subsidies. Broadly, as of now the requirement is to open up the markets in specific products in market access and incase of subsidies, it is to go for tarrification and phase it out eventually or reduce it to bound limits. The immediate impact of the agreement would be on the policy makers to scrutinize all the items under subsidy, QRs and tariffs. However, the calculation of AMS reveals that the subsidy given to Indian farmers are much below the acceptable levels and therefore need not be changed. Looking from other perspective, the reduction of tariffs and subsidy in export and import items would open up competition and give a better access to Indian products abroad. However, the concern is on the competitiveness and sustainability that the Indian farmer would be able to prove in the long run once the markets open up. Thus there is a requirement to change policy support to meet the changing needs of Indian agriculture to gear it up for future.

5. Agreement on Sanitary and psyto-sanitary measures (SPM): this agreement refers to restricting exports of a country if they do not comply with the international standards of germs/bacteria etc… if the country suspects that allowing of such products inside the country would result in spread of disease and pest, then there is every right given to the authorities to block the imports.

Indian standards in this area are already mentioned and therefore there is no need to change the law, but the problem is that of strictly implementing the laws. There is an urgent need to educate the exporters regarding the changing scenario and standards at the international arena, and look at the possible consequence and losses to be incurred if the stipulations are not followed. Therefore, to meet the standards certain operational changes are required in the industries such as food processing, marine food and other packed food that is being currently exported from India.

6. Multi-Fiber Agreement (MFA): This agreement is dismantled with effect from 1 January 2005. The result was removal of QR on the textile imports in several European countries. As a consequence a huge textile market is opened up for developing countries textile industry as well as for other countries that have competitive advantage in this area. The immediate impact is on the garment and textile manufacturers and exporters. However, it still needs to be seen whether the industry is able and ready to take advantage of the large markets. This requires quite an amount of modernization, standardization, cost efficiency, and customization and frequent up gradation of designs to meet the changing need of global customers. The dismantling of QR also mean more competition to Indian textile exporters and therefore, it becomes imperative to enhance the competitiveness in niche areas.

Besides these major agreements there are several other agreements such as agreement on Market Access , which propagates free market access to products and reduction of tariff and non-tariff barriers; agreement to have Safeguard Measures if there is an import surge and it is liable to affect the domestic industries in the transition economies. These measures can include imposing QR for a certain period and also imposing tariffs on the concerned products. There are other agreements that call for direct reduction of S ubsidies on Exports, which are not permissible, and phasing it out over a period of time. Besides these there are other Counter-Veiling Duties (CVD) that are permitted to be used in certain conditions. These are supposed to have an impact positive if they help the industries and negative if they reduce the cost competitiveness.

The trading countries are allowed to impose an Anti-Dumping Duty (ADD) against imported products if the charge of Dumping is claimed against them. The requirement is to prove that the product is being sold at a price, which results in material injury to the domestic industries. There are several cases in which the duty is imposed but it still remains to be proven by the Dispute settlement tribunal in case the other trading party opposes the duty imposed as "unfair". However, the proposal always should come from the representatives of the industries affected; this may result in a problem, as small industries voice may remain unheard in the process.

Certain Other Unresolved Issues:

There are several clauses in each of the above agreements; where there has been no consensus arrived. Besides that there are several other cases where there is no consensus on the entire agreement itself, which means that these are still in their conceptual and drafting stages.

Some of such agreements are on Labour Standards and core social clauses, which intend to impose a labour standard and certain norm against exploitation of labour by the organization where they work. Such standards are likely to result in banning of certain items exports to developed world causing severe damage to industries such as Carpet manufacturing, crackers, leather, handicrafts and sports goods.

There is another agreement, which is still under discussion by member countries; this is on Trade and Environment. Some countries wish to impose restrictions on trade on environmental grounds. The agreement revolves around protecting global environment by enforcing standards on production and consumption. The ranges of clauses are from production, packaging to transportation of the goods as specified by norms. The main impact of this clause would be on industries such as seafood, food processing and drugs and chemical manufacturing. There would also be a overall impact on the export business as the rules related to packaging would be very stringent.

Another agreement where the consensus is yet to be reached is on Trade and Investment. The main objective of this agreement is to enable a free operating environment for foreign investment in host countries such that there is minimum interference and equal rights. There would be a direct impact on the foreign investment policy and trade policy of the government with a long-term impact on balance of payment and foreign exchange position of the country. This agreement would affect almost all industries and services without an exception. However the specific impact is expected on auto components and small retailers.

Trade and Competition is another agreement on which the discussions are going on to reach a consensus. The main aim of this is to stop the business practices that distort competition in any way and to curb monopolistic growth in trade. The agreement would have an impact on the MRTP act, which needs to be replaced by the new competition law, the process for which has already started. These changes would result in a more competitive environment and it would also be a deterrent for big business houses if they wish to expand further in the same area. Thus, the formation of cartels and mergers and acquisitions would be restricted to a great extent.

Transparency in Procurements made by the Government is one such clause where it is being debated to a large extent. This is particularly of concern to developing countries as the role played by the government in a countries development is much higher than what it is in other developed countries. This would have a serious impact on the way the government and other public sector units approach the domestic procurement. This would imply that no special preference would be given to the domestic suppliers and they also need to compete on a price basis for getting orders from domestic government. This clearly can mean that many government suppliers may lose out in competition with efficient and low cost foreign suppliers.

Major Conclusions

The Indian economy has experienced a major transformation during the decade of the 1990s. Apart from the impact of various unilateral economic reforms undertaken since 1991, the economy also had to reorient itself to the changing multilateral trade discipline within the newly written GATT/WTO framework. The unilateral trade policy measures have encompassed exchange-rate policy, foreign investment, external borrowing, import licensing, custom tariffs, and export subsidies. The multilateral aspect of India's WTO commitments is regarding trade in goods and services, trade-related investment measures, and intellectual property rights.

After analyzes of the economic effects on India and other major trading countries/regions of the Uruguay Round (UR) trade liberalization and the liberalization that might be undertaken in a new WTO negotiating round. India's welfare gain is expected to be 1.1% ($4.7 billion over its 2005 GDP) when the UR scenarios get fully implemented. The additional welfare gain is an estimated 2.7% ($11.4 billion) when the assumed future WTO round of multilateral trade liberalization is achieved.

It is expected that Resources would be allocated in India to the labor-intensive sectors such as textiles, clothing, leather and leather products, and food, beverages, and tobacco. These sectors would also experience growth in output and exports. Real returns to both labor and capital would increase in the economy. However as mentioned above in the analysis of each agreement there is a serious and urgent need to re-look the strategies followed by individual firms in the changing context of increasing competition and opened markets. As said time and again there is no reversal of agreements, so what is required is to make internal policy changes at macro, meso and micro level to suit the changed external environment. 

References:

1. Brooks Douglas H., Emma Xiaoqin Fan, and Lea R. Sumulong, (2003), "Foreign Direct Investment: Trends, TRIMs and WTO Negotiations", Asian Development Review, Vol. 20, No. 1, 2003, Asian Development Bank, pp. 1-33.
2. Dunkley Graham, (2000), The Free Trade Adventure: The WTO, the Uruguay and Globalism—A Critique, Zed Books, London.
3. Head Keith and John Ries, (2004), "Regionalism within Multilateralism: The WTO Trade Policy Review of Canada", The World Economy, Vol. 27, No. 9, September, pp. 1377-1400.
4. Matsushita Mitsuo, (2004) "Governance of International Trade under WTO Agreements—Relationships between WTO Agreements and Other Trade Agreements", Journal of World Trade, Volume 38, Number 2, April, pp. 183-211.
5. Myneni, (2005) World Trade Organization, India Law House, New Delhi.
6. Nagesh Kumar, (2001), "WTO Regime, Host Country Policies and Global Patterns of MNE Activity: Recent Quantitative Studies and India's Strategic Response", Economic and Political Weekly, Vol. 46, Nos. 6-12, January.
7. Nath Kamal, (2004), "WTO Framework A Major Victory", The Hindu Business Line, 2 August.
8. Rao, MB.,2003),World Trade Organization and India, Vikas Publishing House, New Delhi.
9. www.wto.org
10. www.indiainfoline.com
11. www.cii.org
 


Dr. G Bharathi
Asst.Professor, Economics Area
Aurora PG College
Chikadpally, Hyderabad-500 020
E-mail:
bharathishan@rediffmail.com
 

Source: E-mail October 4, 2005

  

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