TWN Info Service on WTO and Trade Issues (June 07/21)

26 June 2007

Clash of positions and paradigms that led to G4 collapse

Many conclusions can be drawn from the collapse of the G4 talks in Potsdam on 21 June.  First, the configuration between the 4 members had changed, with EU and US reaching an understanding with each other. 

Second, the developing countries were going to get little or no benefit. Third, the developed countries were pressing India and Brazil to open wide  their markets to industrial products by cutting their tariffs very steeply, at rates far higher than what the EU and US were themselves willing to do.

And finally the talks failed because of a clash of paradigms of what the Round is all about.  The US and EU wanted "new trade flows" into developing countries.  The developing countries insisted this is not the aim of the Development Round.

Below is an analysis of the G4 Potsdam talks.  It was published in the SUNS on 25 June.

With best regards
Martin Khor

Clash of positions and paradigms that led to G4 collapse

By Martin Khor, Geneva, 22 June 2007

In the immediate aftermath of the collapse of the G4 talks in Potsdam, some interesting conclusions can be drawn about what happened and why.

Firstly, the configuration in relations between the four (the US, EU, Brazil and India) changed. The US and EU got together, had a rapprochement between themselves in agriculture, and united to press the two developing countries very hard on NAMA.

Before, the EU had been pushing the US to reduce overall trade distorting support (OTDS) while the US pushed the EU to cut its agricultural tariffs by more.

At Potsdam, the US offered $17 billion as its cap for OTDS (which is above the $15 billion the EU had asked for and the $12 billion demanded by the G20). The EU offered an average tariff cut of 50% in farm tariffs (below the 54% demanded by the G20 and far below the 60% demanded by the US).

The EU and US were amenable to each other's "lowering of ambition", or to "forgive each other's sins." And then they combined to be tough on India and Brazil on NAMA and on India on special products.

In their statements, the EU and US have claimed how "flexible" both of them had been, and how inflexible Brazil and India had been. In the blame game now going on, the two developed countries have thus attempted to throw the burden of the collapse of talks onto the two developing countries - even as Susan Schwab, the US Trade Representative, insisted that "this is not a North-South breakdown" and Peter Mandelson, the EU Trade Commissioner said "This is not a North-South showdown."

A different view came from Brazilian Foreign Minister Celso Amorim at his Potsdam press conference after the talks collapsed: "In a way, we are having a Cancun II in which two developed countries have found a common level of comfort for themselves by lowering ambition in developed countries' agricultural market access and by lowering ambitions in OTDS - yet keeping high ambitions in NAMA and special products and other areas. We came to a conclusion we are pursuing a decline - not a Development Round."

Amorim was referring to the deal on agriculture made by the US and EU just before the WTO's Cancun Ministerial Conference of September 2003. That deal shocked Brazil (which had before that been working with the US and the Cairns Group to press the EU on its tariffs) and India (which thought it could work with the EU to get the WTO to accept a more lenient approach to tariff cuts).

Towards the closing stages of the Uruguay Round too, the EU and US had got together in their Blair House accord on agriculture to forgive each other's sins, and continued their united approach to get developing countries to give up their resistance to introducing new agreements in services and intellectual property into the WTO.

The EU-US get-together, in their joint paper on agriculture in August 2003, prompted India and Brazil to overcome their differences and take not only a common position in agriculture but also form the G20.

The second conclusion is that with the US-EU rapprochement, the developing countries are going to benefit very little or nothing from the "lowered ambition" of the giants in agriculture.

The heart of the Doha programme was supposed to be to complete the unfinished agenda, and do away with (or at least substantially reduce) the trade-distorting effects of the developed countries' subsidies.

At Potsdam, the US for the first time gave a new offer for the allowed OTDS, since its October 2005 offer of $23 billion (which had been unacceptable to all, partly because its applied OTDS was $19.7 billion in 2005).

But the $17 billion it mentioned at Potsdam was still grossly inadequate in the view of Brazil and India, and quite rightly so. Mr. Kamal Nath, the Indian Commerce Minister, told the media that the applied OTDS of the US was only $10.8 billion in 2006. He remarked: "And the offer is $17 billion, which is more than 50% of the current applied level. There is no equity, there is no logic in this. We can't correct the flaws."

The US after the talks collapsed tried to justify its $17 billion offer. US Agriculture Secretary Mike Johanns told the media: "This was a real cut, this is going to cause pain, it is going to cause a change in how we do farm policy, that it was less support."

Schwab said that if the OTDS level the US was offering had been applied in the last nine years, it would have led to cuts in 5 to 7 of those years. "Most of the years we would have seen real cuts. The US has shown extensive flexibility."

What the USTR said is only partially true. In 5 recent years the United States' applied OTDS level was above $17 billion (1999, 2000, 2001, 2004 and 2005). But she forgot to mention that at the start of the implementation period of the Uruguay Round, the OTDS level was far, far below - at $7 billion.

The agriculture domestic support simulations paper (JOB(06)/151 dated 22 May 2006) prepared by Canada shows that the applied OTDS of the US was $7.7 bil in 1995, $7.1 bil in 1996, and $7 bil in 1997. It then shot to $15.1 bil in 1998, $24.3bil in 1999, $24.1 bil in 2000, $14.9 bil in 2000, $10.2 bil in 2003, $18.6 bil in 2004 and $19.7 bil in 2005.

Thus, an offer of a cap at $17 bil does not reflect a decrease especially when compared to the 1995-1997 levels of a decade ago, and also allows for a large amount of "water" if the 2006 level was $10.8 bil.

In any case, as the Indian Minister has correctly stated several times, and repeated at his Potsdam press conference, domestic subsidies in agriculture are structural flaws which should not be permitted at all, similar to industrial subsidies (which are banned in the WTO).

"The flaws have no exchange rates," said Kamal Nath. "Correcting flaws and distortions have no exchange rates."

What he meant was that the US and EU should remove their domestic subsidies and do so without asking anything in return, since these are structural flaws. They cannot be placed in an equation of asking developing countries to "give."

This is the third conclusion, that the US and EU are now wrongly portraying the G4 collapse as the fault of two inflexible developing countries that are not willing to give anything in return for their own generous offers.

Firstly, the EU and US offers are anything but generous. They had already claimed to have liberalised agriculture in the Uruguay Round, in exchange for which they had exacted from developing countries the entry of services and TRIPS into the WTO system.

The developing countries found that the claim of agricultural liberalisation was bluff because of the many loopholes in the Agreement on Agriculture that allowed domestic subsidies not only to continue but also increase.

Key loopholes remain, so that even if the allowed OTDS of both parties go below their present applied levels, they can have recourse to the so-called "non trade distorting" subsidies in the Green Box, without limit.

"In effect, the EU and US are offering nothing, and for their offer of zero they are trying to extract blood from the developing countries in NAMA and services as well as in agriculture market access," said Chakravarthi Raghavan, a long-time analyst of WTO developments.

Developing countries, he said, have paid a price thrice over, once at Punta del Este in launching the Uruguay Round, the second time at Marrakesh in taking upfront new commitments (in TRIPS, Services, and a range of new GATT disciplines) in return for promise of the developed world of a change in direction in agriculture, in a long-term process of bringing that trade into GATT disciplines, and again at Doha for further negotiations on services, Nama etc. Now they are asked to pay a price for the fourth time!

At Potsdam, the EU and US insisted that India and Brazil agree to a coefficient of 18 in the Swiss formula in NAMA. For countries with an average industrial tariff rate of 30%, this would imply an average cut of 63% in their industrial tariffs.

The developed countries have given to themselves a coefficient of 10, which implies an average cut of only 28% for the EU 24% for the US and 19% for Japan..

Compare the demands made of the developing countries also to the 50% average cut that the EU offered in agriculture in Potsdam.

At Potsdam, in asking a question of the EC Trade Commissioner, Peter Mandelson, a journalist pointed to this double standard of the EU position (that developing countries should cut in NAMA by 63% through coefficient 18 while the EU was offering to cut by only 50% in agriculture).

Mandelson replied: "You are confusing percentage cuts. It's a completely different concept in numbers and tariff cuts. What we were asking developing countries to do is not unreasonable."

This reply shows that the developed countries want the agriculture talks to be conducted in terms of percentage cuts which are easily understood by all, while conducting NAMA negotiations in terms of a Swiss formula and coefficients, which disguise that the coefficients they are demanding developing countries to undertake imply very deep cuts, far deeper than what the rich countries are willing to undertake themselves especially in NAMA but also in agriculture.

Finally, a conclusion can also be drawn that the US and EU on one hand and Brazil and India on the other were operating under two different and contrasting paradigms, which eventually led to the collapse of the G4 talks and perhaps of the G4 itself.

The US top officials kept insisting on "new trade flows" as the main aim and measure of the success of the Doha negotiations. By this they meant that the developing  countries have to commit to cuts in their bound duties that go below their present applied rates.

What the US and EU want is expanded market access in markets of developing countries for their firms in agriculture, industry and services.

But this cannot be equated with development or the Development Round. Schwab tried to resolve this clear contradiction by telling the media in Potsdam that "the bottom line is that trade agreements should generate new trade and lift people out of poverty, that's true of the Doha Round and unfortunately what we have here today was not going to generate new trade."

Karan Bhatia, the deputy USTR, told the BBC: "The US and EU were ready to make concessions but not India and Brazil. The key US demand is new trade flows. But they were not willing to give that."

Mandelson said: "We were not able to get commercially meaningful changes to the tariffs of the emerging economies as a reasonable return on what we are paying into the Round."

There are many flaws in the US and EU argument. Firstly, cutting tariffs in developing countries cannot be said to produce development -- though it can produce more market access for developed countries' companies.

Secondly, as Kamal Nath said, a Development Round implies new trade flows for developing countries, into markets of developed countries, and not the other way round.

"Development content clearly specifies who are the givers and takers in this Development Round. Now (with the demands of the rich countries), the givers become the takers and the takers have become the givers."

And thirdly, the insistence that developing countries have to cut tariffs below their present applied rates ignores the fact that many developing countries, including India and Brazil, have already liberalised autonomously and significantly in recent years, so that many of their applied tariffs are significantly below the bound rates.

In the WTO, it is recognised that "credit" should be given to countries that undertake such autonomous liberalisation. In fact these countries have already been creating "new trade flows" by lowering their applied tariffs.

But instead of crediting or even appreciating these countries' actions, the EU and US demand is seeking to penalise them by discounting that they have already liberalised autonomously and by demanding that there now be cuts to the bound rates that must go below the applied rates.

These countries are being penalised because if they had not autonomously liberalised their applied rates would not be so low today, and they would not face the pressure to cut the bound rates to below the already lowered applied levels.

All these lead to the conclusion that the developed countries were never interested in development or the interests of the developing countries when they launched the Doha Work Programme in 2001.

They had to call it the Doha Development Agenda and later the Development Round to entice the developing countries to join in the launch of a new round. Now, the developing countries are calling the bluff of the developed countries and asking that the outcome of the Round really have a development content.

And in answer, the US and EU are saying that they want "new trade flows" from developing countries in order for their offers in agriculture to stand. And their agriculture offers are nothing to shout about, and in some important elements, even really nothing.

The USTR has had to resort to saying that "new trade flows" (read significant cuts to applied rates of developing countries) is what lifts poor countries out of poverty.

But the poor countries think otherwise, which is why the great majority of them have defensive interests in the negotiations, and are fighting to limit the degree of liberalisation they have to undertake.

The clash of perceptions of what is development and what is anti-development in the proposals of this "Development Round" is what led to this new crisis and impasse in the Doha talks.