Introduction:
The General Agreement on Tariff and Trade (GATT) accord signed by the 125 member countries including India on April 15, 1994 is a historical event in the world trade.
There has been a lot of debate on these proposals with respect to their implications for the Indian Economy, Now it has come into effect from January 1995, we need to reshape our production and trade practices to reap the maximum benefit out of it and to uplift the economy to new heights.
Main Provisions:
This accord aims at substantial progressive reduction in support and protection so as to prevent restrictions and distortions in the world market.
It includes establishment of world Trade Organisation (WTO), and a number of other proposals relating particularly to agriculture such as:
1. Tariff and non-turiff barriers on trade of agricultural produce are to be lowered by 36% in 6 years in developed countries, by 24% in 10 years in underdeveloped countries while the least developed countries are not required to reduce such tariffs. The direct export subsidies are also to be reduced at the same rate.
2. The aggregate measurement of domestic support to agriculture is to be limited to a maximum of 5% in developed and 10% of the value of production of individual product in developing countries. The ‘Green box’ policies having minimal impact on trade such as research, pest and disease control, infrastructure, food security, training services, extension and advisory services inspection services marketing and promotional services, environmental programmes etc., are excluded from the domestic support.
3. The application of sanitary and phyto-sanitary measures necessary to protect human, animal and plant life and health are to be followed as per international specifications.
4. Taking into account the trade, development and financial needs of developing countries, investment across international frontier will be facilitated, Thus a committee on Trade Related Investment Measures (TRIMs) is to be established for this purpose.
5. It provides right to the contracting parties to apply anti-dumping measures if such dumped commodities cause injury to the domestic industry.
6. So as to facilitate the trade, uniform standard of packing, marketing, labelling etc. are to be provided.
7. The scope of patent rights to be extended to plants and animals. The objectives is to promote technical innovations, transfer and disseminate the technology for the mutual benefit of producers and users.
8. Compulsory imports by 3% of the domestic requirement of agricultural commodities is to be made except for poor nations having problems of balance of payments. This limit will go up to 5% in 5 years.
9. The textiles are left out of free trade. The existing restrictions on exporting countries is to be phased out in 10 years i.e. by 16% in 3 years, 17% in next 4 years 18% in next 3 years and remaining 49% at the final year.
10. Even in the services sector comprising banking, insurance, media, tourism transport etc. are also brought under its purview and the transnational corporations (TNCs) are to be given national treatment.
An Appraisal:
It is important to examine as to whether we stand to gain by way of this treaty. If yes, how and by how much? The GATT estimate regarding the impact of this agreement are Thai the World Trade would increase by $ 745 billion by the year 2005.
The largest increase is estimated in the areas of textiles (60%), agriculture, forestry and fishery (20%) and processed foods (19%). India is contributing 0.5-1.0% to the total world trade. Therefore, it is estimated that our extra gain would be about $ 2.7 billion per year.
Some possible impact of this agreement on the Indian economy with special emphasis on agriculture are discussed below:
The main objectives of lowering the tariffs and expand subsidies and other related measures to boost the international trade is justified by the theory of comparative advantage. There is likelihood of specialisation of different countries in the production process. Thus the global resources will be utilized in more appropriate manner.
The occupations like agriculture which are more or less a way of life in developing countries will have to have commercial grounds. The entire process of competitive spirit in the trade would increase efficiency in the production units. The developed countries are capital based while the developing countries are labour based. The comparative advantage would depend upon the relative prices and efficiency of these factors.
During the last 3 years a number of economic reforms have already been carried out in our country. The new economic policies include liberalization of trade, phasing out of subsidies and privatization of economic units. Already we have been on the path similar to what has been suggested in the agreement. Even otherwise swimming along the water current would be much easier than against it.
Subsidies:
The aggregate measurement of support is to be brought at the level of less than 10% by the developing countries. While the estimates made in this regard have already shown that Indian agriculture has a support of much less than this level. The subsidies available on fertilizers, irrigation electricity, credit, pesticides etc. together accounted for 3% to 6% of total cost of production in different commodities during 1986-88 period.
However, the developed countries are supposed to lower such ‘subsidies to a level of 5% or less. According to an estimate, Japan gives a subsidy of 72.5%, EEC at 37% and USA at 26%. Therefore, they will have to bring down subsidies drastically making our agricultural products much more competitive in the world trade.
Calculations according to GATT methodology show that the non- product specific agricultural subsidy worked out to about Rs. 4582 crores, while the level of product specific subsidies calculated during the base period worked out to be Rs. 24442 crores, the world prices being higher than national prices. This means that at current subsidy level, the govt. can increase subsidy by a further Rs. 19860 crores.
The subsidy provided to low income and resources poor farmers it to be left out from these calculations. In India about 70% of farmers fall in this category. Moreover, a number of other facilities common only called as ‘green box’ policies are also not to be considered while working out the subsidies.
The operation of public distribution system is not to be effected. On agricultural tariff the developing countries have the flexibility of indicating maximum ceiling bindings. India has indicated 100% on primary products, 150% on processed products and 300% on edible oils. Other precautions taken under the agreement are various antidumping measures.
Trade Related Investment Measures (TRIMS):
Investment is sine-quo-non for the development of an economy. Most of the developing countries are capital starved and thus have high marginal productivity of this scarce resource. The scope of investment under trade related investment measures (TRIMS) provided in the draft can help to boost up the development process.
The priority areas are to be identified and specified by the Govt. for making such investments. Thus, it prohibits the investment measures that are inconsistent in the national interest. The developing countries have been given time of 5 years period to phase out the inconsistent TRIMs. The agreement does not impose any obligation to provide access to all or any particular sectors for foreign investments.
Trade Related Intellectual Property Rights (TRIPs):
It provides norms for copyrights, trademarks, geographical indications, designs, patents etc. A number of international agreements on most of these rights already exist. On patents, the basic obligation is that of product and process patent in all areas including agriculture. On plant varieties there is a provision of protection by parents or by sui generis system. India has opted for sui generis system which is being developed taking into account the national requirements.
Though it is still in the process but the common feeling of charging high price of seed of new varieties of plants and breeds of animals by the multinational corporations (MNCs) is being taken care of. There would be none to thrust new technology upon farmers.
They are free to multiply exchange and sell the produce but not commercially as seed. The buyers of technology need to examine thoroughly the added cost and added return by way of new technology before taking such decisions.
Textiles:
The trade in textiles is to gain competitive spirit in a phased manner over a period of 10 year. At present, about two third of India’s export of textiles is to USA and EU under quota system. Thus, phasing out of quota will definitely make Indian products more competitive.
The liberalisation of textile trade of India with these countries has also been phased. In the first phase fibre, yarn and industrial fabrics; in second phase fabrics and in the third phase made up items and garments are to be placed under open Generalized License (OGL). Since textiles use raw material such as cotton, silk, wool, jute fibres, the producers of these materials (farmers) are likely to realize higher prices for their products.
Social Clause:
An after-thought of developed countries was to introduce ‘social clause’ in GATT treaty. This clause aimed at nullifying the price advantage enjoyed by the developing countries like India due to low labour cost. Such goods thus would be subject to import duties by the developed economies.
As a result of this:
(a) The developing countries forfeit, the competitive edge over advanced countries.
(b) The multinational firms interested to make investment in developing countries may find it unattractive as a result of this clause.
(c) The migration of labour to advanced countries may be checked resulting in still higher rate of unemployment and misery of developing economies.
(d) The child labour which forms an important part of working population in some specialized enterprises like carpet industry is supposed to be taken out causing severe effect on such industries.
This clause has yet been kept out of the agreement and India has opposed it along with most of other developing nations.
The Negative Effects:
The critics put forth their view point that a large chunk (nearly two third) of our population is dependent on agricultural sector. For the developing economy, a steady shift in population from agriculture to secondary and tertiary sectors is of vital importance.
As a result of this change, the small holdings may not find suitable place in the agricultural sector. While the other sectors may not be able to absorb such population.
This may result in large scale unemployment, poverty, inequality and now purchasing power of the entire economy if adequate safeguards are not taken, The example of China is quoted as its closed economy without much trade with the rest of the world has progressed on all fronts including agriculture. However, China is curious to become member of WTO.
Yet some possible effects of this agreement may be:
1. The gain due to possible increased volume of trade and change on price situation would be in proportion to the potentially available natural resources and the ultimate tradeable surplus of the country. The net gain as a result of increased exports may be overweighed by the increased value of imports since ours is an economy with negative balance of trade. Also the economic gap between advanced and developing countries may widen further.
2. The product quality improvement is a must to come at par with the International standards. Therefore the clause relating to sanitary and phytosanltary measures is likely to be exploited against our interest it happened during the outbreak of plaque and malaria in 1994 causing serious impact on India’s exports other the dishonesty, corruption and favouritism need to be rooted out in this connection which seems to be difficult task in the short run.
3. The multinational companies are bound to exploit the research and the natural resources of the developing countries to get maximum in the short run without bothering for even the environment of the country. Therefore, the developing nations should set the priority areas much in advance before such companies are given green signal for investment. Even after their entry in priority areas they try to enter in soft market areas of the country.
4. The effect of the agreement is to bring in specialisation rather than diversification of occupations in the economy. The specialisation in crop enterprises may be disastrous in situation of natural calamities, This may be aggravated further by specialisation in specific crop varieties.
5. The social factors which have been an attraction for the people towards developing countries may also receive a setback. The social norms, taboos, values custom etc. are likely to be translated into economic parameters causing a decline in the overall social welfare.
Task ahead:
The production pattern of the farm sector is likely to become more price sensitive since the international and national prices are likely to be highly variable.
Thus, we require:
1. Monitoring of international prices, production, crop forecasts, etc. and to apprise the producers and concerned organisations of such information so that they can plan the production and marketing decisions accordingly. Similarly consumers’ preference surveys in potential markets of the world would go a long way in boosting the exports.
2. To encourage the farmers organisations to export their produce preferably by value addition through processing storage and proper packing, could be very helpful.
3. The breeders along with supporting discipline need to examine the suitability of new farm technology patented outside the country and possibility of sale of their own innovations outside.
4. The trade infrastructure for delicate handling, suitable storage, speedy transportation, export credit facilities etc. need to be enhanced.
5. Since multinational companies are likely to come up with patented technologies, the institutional research will face a real challenge requiring strengthening institutional research.
6. The quality improvements to meet the requirements of the foreign consumers is essential.
The WTO which would substitute GATT with one year (i.e. 1995) of their co-existence, is an opportunity for us on one hand while it is a great challenge on the other hand. How do we face it in this situation is a real test of our capability.
World Trade Organization and its Implications for Indian Agriculture:
The Agreement on Agriculture as a part of Multilateral Trade Negotiations was signed by the member countries in April 1994, at Marrakesh, Morocco came in force in January, 1995. It had the basic objective of minimizing the use of natural resources in the world by having fair market oriented trading system among different countries through substantial progressive reduction in agricultural support and protection.
The spirit of the agreement was to develop the poor countries which have wider agriculture base and thus reduce economic gap on the globe. Such agreement on agriculture was expected to have far reaching implications for different economies of the world as well as well as for different regions of the country. It is high time to review the effects realized and visualized for different types of economies particularly India.
Therefore, here an attempt has been made to view that what are the major clauses of this agreement. In respect of each one, where do we stand or what has been our performance since it was affected and how do we adjust ourselves to the new world scenario?
The agreement incorporates three broad areas of commitments from member states namely:
i. Market access i.e. the disciplines on import restraints and tariffs.
ii. Domestic support, i.e. subsidies by Governments to domestic producers: and
iii. Export subsidies
1. Market Access Commitment:
It aims at substantial progressive reduction in protection to agricultural sector so as to prevent restrictions and distortions in the world trade. The overall tariff (by converting non-tariff barriers such as quota, permit system licensing system and special safeguards into tariff barriers) is to be lowered by 36% in 6 years (1995- 2000) in developed countries, by 24% in 10 years (1995-2004) in developing countries with a minimum cut of 15% per product line respectively.
The least developed countries are not required to reduce such tariffs. The minimum access tariff quota was to be established at reduced tariff rates for the products when minimum access was less than 3% of domestic consumption in the base period of 1986-88 which was to be gradually increased to 5%. The import of 3% of food by a country like India measures about 6 mt. while for the countries (generally developed) with less population would not mean much drain on foreign exchange.
In India, different types of custom duties such as basic custom duty, additional custom duty, special additional duty including surcharge on agricultural commodities are significantly less than that of corresponding agreed final bound rate showing thereby that India has immediately reduced the tariff rates substantially India is bound to phase out quantitative restrictions upto April 2001 on all commodities except for 632 commodities for reasons related to security, religion etc. Out of 673 major agricultural commodities out tariff rates are for lower than the specified ones except in 8 commodities.
Rice, milk and milk products and various other agriculture commodities are highly protected in advanced countries like Japan, USA, EU, and Canada etc. while in India tariff walls are very low. For example in Japan 700% protection is on rice and 557% on milk products.
Canada has 213% and 313% tariffs on milk products with < 1.5% fat and >1.5% fat respectively. Therefore, either the tariff rates of other countries should also be lowered so that we can have access to the potential markets or we should raise out tariff walls as well and protect our economy for dumping. India is bound for agriculture tariff at 100% for primary agricultural products, 150% for processed agro-products and 300% for edible oils with a few exceptions for the period of agreement.
2. Domestic Support:
The aggregate measure of domestic support (AMS) to agriculture termed a “amber box” is to be limited to a maximum of 5% in developed and 10% of the value of production of individual product in developing countries.
The AMS (also called Amber Box) includes both non-product specific subsidies (subsidies on water, electricity, credit, fertilizers, seeds, pesticides, farm machinery etc.) and product specific subsidies worked out on the basis of domestic price minus international price of the product.
If the AMS exceeds the prescribed limit (base 1986- 90), the country is committed to reduce domestic support by 13.3% in case of developing countries over 10 years and by 20% in case of developed countries in 6 years. There are three categories of support measures that are not subject to reduction under the Agreement.
These three categories of exempt support measures are:
(a) “Green Box” Measures:
Which have a minimum impact on trade.
These include the following types of assistance:
(i) Government assistance on general Services like research, pest and disease control, training, extension, and advisory services.
(ii) public holding for food semrity purposes,
(iii) domestic food aid.
(iv) direct payment to producers, such as, governmental financial participation in income insurance and safety nets, relief from natural disasters, and payments under environmental assistance programmes.
(v) de-coupled income support,
(vi) Government financial participation in income insurance and income safety-net programmes.
(vii) payments (made either directly or by way of government financial participation in crop insurance schemes) for relief from natural disasters.
(viii) structural adjustment assistance provided through producer retirement programmes; resource retirement programmes; and investment aids,
(ix) payment under environmental programmes,
(x) payments under regional assistance prograrmmes,
(b) “Blue Box” Measures:
Representing direct payments under production limiting programme.
These are relevant from the point of view of developed countries alone
(c) Special and Differential Treatment for developing countries:
(i) investment subsidies which are generally available to agriculture in developing countries, and
(ii) agricultural input services generally available to ‘low income and resource poor producers’ in developing countries.
3. Export Subsidies:
The export subsidies were subjected to reduction commitment. The direct export subsidies are to be reduced by 36% in developed countries and quantity of subsidized export is to be lowered by 21 %. The developing countries are to reduce export subsidies by 24% and the quality of subsidized export by 14% within 10 years. It includes internal transport cost of marketing, export promotion etc.
The export subsidies not included here are export credit, export credit guarantee or insurance. The agreement on Agriculture allows only 25 countries to provide export subsidies. The export subsidies in case of wheat by USA, EU, Canada, Turkey and Hungry was 95%.
The rice subsidy was 100% in case of Indonesia,. Uruguay, EU, USA and Cambodia, in case of sugar and dairy products. EU was the major user of export subsidies. Even if the export-subsidies are reduced by 36%, it still would be enormous to make others compete with these countries.
The agriculture surplus states like Punjab and Haryana are in dire need of infrastructure for export which is part of green box policies but the Govt., due to financial constraints is unable to provide.
Above all, the food security being the basic issue, minimum support price has to be provided to encourage producers and even the mandi charges and other taxes are levied on the exporters apart from normal marketing costs of storage, transportation etc. rather than providing them export subsidies. How can they compete with developed world? Therefore, India should support the view that export subsidies be eliminated.
4. Trade Related Intellectual Property Rights (TRIPs):
It provides norms for copyrights, trademarks, geographical indications, designs patents etc. A number of international agreements on most of these rights already exist.
On patents, the basic obligation is that of product and process patent in all areas including agriculture. On plant varieties, there is a provision of protection by patents or by sui generis system India has opted for sui generis system which is being developed taking into account the national requirements.
Though it is still in the process but the common feeling of charging eight price of seed of new varieties of plants and breeds of animals by the multinational corporations. (MNCs) is being taken care of. there would be none to thrust new technology upon farmers. They are free to multiply, exchange and sell the produce but cannot commercially sell as seed.
The buyers of technology need to examine thoroughly the added cost and added return by way of new technology before taking such decisions. We are still in the process to give final shape to legislation pertaining to patenting in agriculture even after 5 years of signing the agreement.
5. Social Clause:
An after-thought of developed countries was to introduce ‘social clause’ in GATT treaty. This clause aimed at nullifying the price advantage enjoyed by the developing countries like India due new labour cost. Such goods thus would be subject to import duties by the developed economies.
As a restate of this:
(a) The developing countries forfeit the competitive edge over advanced countries.
(b) The multinational firms interested to make investment in developing countries may find it unattractive as a result of this clause.
(c) The migration of labour to advanced countries may be checked resulting in still higher rate of unemployment and misery of developing economies.
(d) The child labour which forms an important part of working population in some specialized enterprises like carpet industry is supposed to be taken out causing severe effect on such industries.
The clause has yet been kept out of the agreement and India has opposed it along with most of other developing nations.