New WTO Agreement: Crucial Step for Global Trade

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Rich and poor nations struck a crucial deal to re-launch global trade talks and slash billions of dollars in farm subsidies, open industrial markets and boost global growth. The World Trade Organization’s 147 member countries will start negotiations from September 2004 to work out an agreed formula along with time line for scaling down agriculture tariffs, subsidies and all distorting trade support. It is claimed that the WTO new agreement/ round could help lift more than half a billion people out of poverty and trigger growth by injecting billions of dollars into the world economy. Most of the African countries, won some concessions from the United States of America on cotton issue, could live with the new WTO deal. According to Brazilian Foreign Minister it offered a combination of trade liberalization and social justice.

The accord, which restores the World Trade Organisation’s [WTO] credibility by putting its troubled Doha Round back on track, is hailed as historic and a giant step towards brighter future global trade by many developing countries. But it is assessed that it is first right but also “small” step and difficult negotiations will have to be conducted over the next two years to flesh out the details on agriculture, industrial products, services, and a number of other trade issues. It is obvious that developing country unity and common stance has, by and large, continued to hold and that has forced the developed countries, mainly the United States of America and the members of the European Union countries to climb down from their pervious inflexible positions. The surest sign of change from the past is that the 2004 Geneva accord is far more accommodating of developing country interests than the proposals placed on the table at Cancun.

In the latest meeting of WTO at Geneva the European Union and the United States of America have agreed to remove agricultural export subsidies and to reduce other farm subsidies in a deal that rescues the Doha round of world trade talks. The framework agreement covers five areas including agriculture, non-agricultural market access, trade facilitation, development issues and services. It has been agreed to move towards a fairer and more market-oriented trading system in the three known areas including export subsidies, domestic support and market access. For export subsidies, it has been agreed that those would be eliminated in a phased manner by a certain date to be negotiated in the post-July negotiations. The developing and developed nations have agreed to sign formal agreement on WTO at ministerial level conference to be held in Hong Kong in December 2005.

The agricultural exports subsidies issue was one of the key elements in the last meetings of demonstration-scarred Seattle, Cancun, Mexico and Doha. To remove the huge rich-country farm subsidies, which act as a drag on economic growth in poor countries, were to be top of the agenda of Doha but due to conflicting socio-economic realties and domestic compulsions the USA and EU were not ready to eliminate agricultural exports subsidies. Had negotiators meeting at the World Trade Organisation’s headquarters in Geneva last week failed to come to an agreement, it might, at worst, have spelled the end of multilateral talks for several years.

The essence of the agreement is that rich countries will either eliminate or reduce a whole raft of agricultural subsidies. This is significant because agriculture is typically a big part of developing countries’ economies, but they often have trouble competing with produce from rich countries because of those countries’ export subsidies. The gains of recent WTO agreement are most understandable in agriculture, the most controversial subject. The developed countries which hand out an estimated $350 billion of farm subsidies every year, have now agreed to eliminate export subsidies which use to hold down global prices, reduce a variety of domestic subsidies which give their farmers an unfair advantage, and make disproportionate cuts in high import tariffs which keep out exports from poor countries. In the past poor countries also find it hard to compete in the home markets of rich countries because of domestic subsidies.

Salient Features of Agreement

The draft framework agreed by members of the World Trade Organisation at Geneva sets out principles for a legally binding treaty to liberalize international trade.

  • Rich countries have promised to get rid of all their export subsidies at a date yet to be fixed.
  • Subsidy caps to be reduced by 20% in first year of agreement
  • Production subsidies are to be strictly limited. 5% cap on subsidies which limit production.
  • There are to be new formulae for tariff cutting in order to reduce the highest tariffs most quickly. Export subsidies to be eliminated
  • Export credit guarantees with repayment periods longer than 180 days – to be eliminated.
  • Work towards eliminating trade-distorting practices in food aid and state-run export boards
  • Progress is promised on the vexed issue of cotton. Cotton industry issues to be tackled separately within negotiations
  • Developing countries to be given longer to implement tariff reduction
  • Least-developed countries to be exempt from tariff reduction, but must substantially increase level of binding commitments regarding future cuts.

The details of the framework agreement suggest that the rich countries are now prepared to pay a price to ensure access to the markets of the bigger, more attractive developing nations, and that price is the freeing-up of their own agricultural markets. Meanwhile, the poorest countries, in being relieved of many tariff-cutting obligations, have opted out of the process. So, though the Doha round is back on track, the WTO has, in effect, split into two tiers: one for those countries that are fully engaged in the round, and one for those that are little more than bystanders.

WTO New Agreement and Pakistan

Commerce Minister Humayun Akhtar Khan said the WTO Geneva framework agreement would certainly help to boost Pakistan’s exports, particularly in the agriculture sector, through elimination of export subsidies on farm products. It is estimated that, Pakistan would earn $2 to 3 billion per annum from the export of milk products only. Cotton farmers would gain an estimated $300 million per annum, if the subsidies on cotton are fully eliminated by the rich countries who are spending around $1 billion per day on subsidies to their farmers. All Pakistan Cloth Exporters Association [Apcea] is happy on the elimination of farm subsidies on cotton by industrialised countries as also textile quota phase-out would usher in vast opportunities for Pakistan textile exports in the new global trade regime. It is common perception in the country that the developing nations are now in an advantageous position to press further to negotiate on lowering barriers to international commerce, particularly the tariff barriers, and enhanced market access to rich consumer markets of developed countries.

Pakistan can also secure $200 million and $100 million per annum in export of rice and sugar, respectively, due to elimination of subsidies and opening up of markets under the WTO regime. The post-2004 scenario would help Pakistan capture more share in the international market, like many other developing countries, when subsidies would be non-existent for developed nations, in particular the European Union

The developing countries will also have to lower their tariffs but as far as Pakistan is concerned. Pakistan would not be obliged to do any cuts because of the following reasons: The cuts would apply from bound levels. Our bound tariffs are 100 to 150 per cent. On the other hand, our applied tariffs except edible oils are less than 25 per cent. Thus any cuts would not affect our applied tariffs.

The agreement makes clear that the poorest countries will not be forced to contribute to market opening in any area, including services. The EU, the United States and countries such as Japan and Switzerland set greater access to markets for industrial goods in developing countries as the price for farm subsidy cuts.

The majority of the farmer organizations in the country have satisfied the agreement reached between the rich West and the poor developing countries on the issue of farm subsidies under WTO umbrella. According to them the decision will help make farm products of the country competitive in the international market. It is estimated that both the major cash crops of cotton and rice, citrus, mango, dates will be major beneficiaries of the WTO new agreement. It is predicted that value-added goods would also be benefited. Each cow in Europe is getting two-dollar subsidy, about a double the daily income of a big chunk of Pakistani population living below poverty line. Kissan Board Pakistan, has also welcomed the agreement between the West and developing countries on the subsidies issue.

WTO Deal Draws Mixed Response In Asia

Asian business and lobby groups welcomed WTO new deal by rich and poor nations to move forward on slashing farm subsidies and opening industrial markets but warned the devil was in the details. Business people/groups in Australia, Japan, India and New Zealand generally praised progress made by the World Trade Organisation [WTO] in setting guidelines for the Doha round that had been in doubt since talks collapsed in Mexico a year ago. The flexibility on customs duties is something India fought hard for and can justly be satisfied with. But the New Zealand Forest Industries Council seemed to sum up the mood of the region when it said a lot more detail needed to be worked out. Australia is one of the world’s largest agriculture exporters along with New Zealand and stakes are very high in the days to come. Australia has long pressed the European Union and the United States to roll back subsidies and give them greater access. The EU, in turn, accuses Australia of claiming to be a free trade champion while using strict quarantine laws to bar imports.

Australia and the United States signed a bilateral free trade deal in February, but the pact angered Australia’s farm industry after it only gained reductions on beef exports over 18 years and a small increase in the dairy product exports duty free quota. New Zealand’s Fonterra Co-operative Group, the world’s largest exporter of dairy products, expressed disappointment at the lack of detail on market access but said the elimination of export subsidies was a substantial outcome. The Confederation of Indian Industry [CII], a top industry lobby group, said the framework agreement would provide the much-needed boost the sagging Doha round needed.

US Cotton Industry

America’s $3 billion-plus of annual subsidies to its 25,000 cotton farmers is a big bone of contention for future international world trade. The Africans had been lobbying to have cotton removed from the general talks and dealt with separately. They failed in this, but the agreement states that the issue will be dealt with ambitiously, expeditiously and specifically. The immediate impact of the deal will be limited. According to National Cotton Council of America [NCC] the US cotton industry was a prime target of developing countries, showed a muted reaction. The NCC would need to look at the implications of the agreement. The US cotton industry has come under fire particularly from Brazil and West Africa nations for the large subsidies it receives which they claim distort the world cotton market. It is estimated that US cotton program has had little impact on world prices. China and Brazil have substantially raised cotton output compared to 2001, while the US has seen a fall in output. Cotton has had crucial issue for to African countries, which has been sorted out in the recent WTO new deal at Geneva. According to the majority of the exports/ producers of US cotton the new WTO deal is treated as scream bloody murder.

Flaws

There are, of course, caveats, ambiguities, and uncertainties. The rich countries will have the freedom to control imports of so-called `sensitive products’, an escape clause that can neutralize the impact of tariff cuts. The commitments to reduce subsidies are sufficiently vague for Washington and Brussels to be able to continue with their massive support programmes.

And neither timeframe nor numbers have been inscribed in the agreement, leaving the crucial details to be settled in future talks. Moreover, the agreement has loopholes and exclusions that could end up undermining the benefits of the Doha round. America, for example, has managed to exclude its “countercyclical” payments to farmers made when prices are depressed from the definition of agricultural production subsidies. Japan may even try to exclude rice, which is protected by a 490% tariff, from any final deal. Too much of this, and the Doha round would be rendered pointless. And many poor countries will be exempt from requirements to lower tariffs. While some of those countries see this as a coup that will “protect” their industry for longer, in practice it means their consumers will have to pay more for their goods.

Services, another important item on the agenda, are a silent controversy waiting to erupt. The developed countries have not given up on demands that the developing countries should open their health, education, and many other social services to foreign suppliers. There is much work to be done before the Doha round lives. That most of these members fall into one of three blocks with their own agendas the rich world, the big developing countries such as India and Brazil and the mass of very poor countries does not help.

CONCLUSION

It is first right step toward future global trade. Concrete efforts are made to make it workable. Let us hope that future will bring equal socio-economic benefits for all of us. The exporters of Pakistan should realize the need of the hour and work very hard to garb all the potential benefits for recent WTO agreement at Geneva.

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