Evolution of international economic system from Bretton Woods to WTO.
Liberal International Economic Order (LIEO) was established after 2nd World War. It was believed that LIEO is conducive for peace (14 points of Woodrow Wilson, golden arches theory).
However, USA established the order because USA’s prosperity is dependent on free trade. Up till 2nd WW, Britain was fulfilling the responsibility. After weakening of Britain, USA had to come forward to establish the order.
It is supported by hegemonic stability theory given by scholars like Robert Gilpin. According to theory, there is no invisible hand in international political economy, there is need of global policeman.
IMF, World Bank, GATT are the pillars of new international economic order.
Present status of global international liberal economy.
USA, which has built the liberal international economic order and has been the champion of globalization, free trade and economic interdependence has adopted an entirely opposite policy i.e. America first. America first is not only the feature of its strategic policy but also foreign trade policy released in 2018. Currently USA has initiated tariff war. Many of US decisions are unilateral. For example:
1] Utilizing the clause of import surge USA has imposed safeguard tariffs on solar cells & washing Machines
2] Using the national security clause, USA has imposed 25% tariff on steel and 10% tariff on Aluminum from all countries, though the national security clause is only meant for enemy countries.
3] Trade war between USA and China. We can say that it was triggered by USA 1st by increasing the tariffs on imports from China.
4] USA has also tried to undermine the platform of G7, APEC. USA has threatened to come out of NAFTA, calling it worst trade deal ever.
5] Trump also declared WTO also as the ‘worst trade deal ever made and if it does not shape up’, USA will withdraw from WTO.
There is a continuity in the policy of USA towards international economic order since Obama administration. Obama administration also has not done anything to end the deadlock on Doha or to bring significant reforms in IMF. Obama preferred to weaken multilateralism in trade by initiating the trade deals like TPP and TTIP. Trump has withdrawn from TPP, thus Trump is going back to the policy of isolationism followed by USA before the announcement of Truman doctrine. There is only a different of posture between Trump and Obama. Trump is more offensive in his approach. Tariffs, threats and twitter have become the hallmark of Trump’s approach to foreign policy.
Background of US actions.
US actions have to be seen in the background of the rising challenge of China to US hegemony. Up till now USA was thinking that China aims to challenge the hegemony but now USA is convinced that China aims to displace USA, determined to establish its own hegemony. Hence tougher actions are needed before it becomes too late. China will soon surpass USA as a world’s largest economy in nominal GDP terms. China’s integration with international economy will become too big that it will be difficult to avoid China. Hence it makes sense when USA not only weakens WTO as China has been the beneficiary, USA also has to pull out from the trade deals or to put strong terms and conditions because. China itself is a major trading partner of all of USA’s trading partners.
The future of liberal international economic order?
Though some scholars predict the end of globalization, but others suggest globalization 2.0. Since China have benefitted by globalization, it has a huge interest in maintaining liberal international economic order. At world economic forum in 2017, China proclaimed that it is ready to take the burden of leadership of globalization. We may expect China led international economic order. Pax Americana giving way to Pax Sinica. Other countries of the world are not interested in the retreat of globalization e.g. Canada, France, Germany, BRICS countries, have opposed USA’s protectionist approach. Countries are also coming closer to China.
But it is extremely doubtful if China can replace USA. China cannot provide such a huge market to rest of the world like USA. China’s growth is export oriented and it is also China’s compulsion. It has become the manufacturing hub because of the lower wages. If China has to increase its internal demands, it has to increase wages. Once it increases wages, it will loose its competitiveness.
WTO – World Trade Organization
Purpose of WTO.
WTO establishes the rule of law in international trade. It replaces GATT. GATT was limited to trade in goods (manufactured goods) but over a period of time, there has been a growth in international trade in agriculture, services, new areas of international trade keep on emerging like IPRs, now e-commerce, fisheries and other areas.
Logic of WTO.
Aim of WTO is to establish free trade. The concept of free trade is based on Ricardo’s theory of comparative advantage. Comparative advantage creates win-win situation for all. Each country will have the entire world as a market. Hence the mantra is ‘trade rather than aid’ for poverty alleviation. Bigger market means bigger demand. It means more production which means more economic activities, which means more GDP, more resources and better way of poverty alleviation. This was the main logic, on the basis of which developed countries sold the idea of WTO to developing countries. Global trade has always been a cause of war among states. It has not been easy to communicate to the states, the benefits of cooperation. WTO was conceived in 1940s, WTO is a product of Uruguay round of talks and there were 8 round of talks. Present WTO treaties are based on Dunkel draft. WTO came into existence on 1st January 1995 at Marrakesh, Morocco.
Since the objective of WTO is to establish free and fair trade rules, members agreed on following fundamental principles.
1] To make trade free. by reducing the tariff and non tariff barriers.
2] Adopt the principle of non-discrimination. This requires two principles: MFN status, national treatment.
3] Special and differential treatment. Developing countries will be given some exemptions to make the trade free.
4] Transparency and Predictability.
Argument of USA
According to USA, China has not adhered to the fundamental principles, it only takes the advantage without offering reciprocal benefits. China has denied market access to foreign companies. This is one of the reason why rest of the world has negative balance of trade with China. China has coerced American companies to transfer technology to the Chinese firms, thus violating IPR norms.
US has also mentioned that China, which is going to become the largest economy with huge surplus, does not deserve to be treated as developing country to take the advantage of the special and differential treatment.
Even with respect to transparency, China has not been transparent in its trade policy.
1] Ministerial council
Summit level body where ministers of trade and commerce meet.
2] General council
Administrative body/executive body.
3] Trade policy review board.
This will ensure the transparency and predictability by reviewing the trade policies of different countries. It will find out in case a member country is violating the norms.
4] Dispute settlement body (DSB)
The dispute settlement body has been one of the significant innovation of WTO so that countries can resolve their trade disputes in a peaceful manner. Appellate body is a part of DSB, consisting of 7 members which pronounces judgements on various disputes.
5] There are different councils like Council on Trade and Goods, IPR etc.
Current attitude of USA towards dispute settlement body.
Dispute settlement body (DSB) is meant for all the members but practically speaking, the dispute settlement process is extremely costly, hence even when developed countries violate the norms, developing countries could hardly afford to utilize the platform. It is not in their capacity to pay the lawyers to advance their case. Many WTO members of developing countries cannot even afford office in Geneva.
The platform has been used primarily by powerful countries. The maximum number of disputes has been between US and China, and US and India.
Since USA lost many cases, USA is bent on undermining the body. The appellate body in dispute settlement process of WTO consists of 7 members: The quorum is 3 members. At present only 2 members are serving. USA is blocking the process of appointment of the new members. Presently the body is defunct.
In WTO all countries posses Veto, hence USA has stopped the appointment. USA has accused the members of DSB for corruption. USA has huge concerns with overall WTO administration. According to USA there is lack of transparency, huge red tapism and corruption among officials.
Way out? As suggested by WTO secretariat, appointment can be done even without US consent. Consent of the countries is needed only on trade agreements and not on administrative matters. However USA does not accept this interpretation.
Read more about present crisis in DSB- Appellate body. Its implications and causes.
WTO round of talks.
Trade treaties are the dynamic treaties. It is not easy to establish complete free trade in a single go. Hence in 1996, 1st ministerial meeting took place in Singapore. Developed countries brought new issues known as Singapore issues. It included trade facilitation, government procurements, competition policies, investments, IT agreement, environment and labour standards.
Developing countries opposed the inclusion of labour standards for which the ILO standard is adequate. Developing countries viewed it as an attempt to impose non tariff barriers.
Since then there is hardly any achievement of WTO. The last achievement was in 2013 at Bali ministerial, when countries agreed for trade facilitation.
2nd Ministerial meeting took place in Geneva in 1998 with no achievement.
3rd ministerial took place in Seattle.
There was huge protest by the members of civil society, especially from developing countries because the implementation of WTO agreements have increased poverty in developing countries. WTO policies resulted into more interstate and intra-state disparities.
4th ministerial 2001 at Doha
A non democratic country was chosen so that protests can be avoided and WTO meeting could take place. At Doha, developing countries presented a strong solidarity, forced developed countries to adopt ‘Doha development agenda’.
Adoption of Doha development agenda was a big victory for developing countries and since then USA had lost interest in WTO.
What in unique in Doha development agenda?
Priority to development over trade. Developing countries joined WTO in the hope that they will get resources for development, but it didn’t happened that way. Hence they imposed the priority of the development of the countries of South over the trading interest of the countries of North.
Since the main commodity traded by the developing world are agricultural goods, agricultural negotiations became the core agenda of Doha talks.
In Doha, countries agreed for the modality (method) of single undertaking. It means nothing is agreed till everything is agreed.
Doha development agenda contains the subjects which are of the interest to developing countries as well as developed countries. It should not happen that the issue of concern of developed countries is agreed, developed countries loose motivation to negotiate further.
The attitude of developed countries has been to ‘use the ladder to climb and then remove the ladder’. Developed countries had taken huge advantage because of first round of negotiations based on Dunkel draft. Now they do not want to leave the advantages. Developed countries are only interested in arriving at the agreements like trade facilitation, ecommerce, which favour them. They agreed to Doha development modalities in 2001 but now they are not in favour.
Why developed countries adopted/accepted the Doha agenda?
Against Sep 11 2001 terror attack, USA wanted to communicated the non state actors that the entire international community is together.
Major ongoing areas of negotiations.
Agreement on Agriculture. (AOA), NAMA (Non agricultural market access), Trade in services, TRIPS (Trade in Intellectual property rights, TRIMS ( Trade related investment measures), Trade in fisheries, e-commerce, IT, Gender issues. Agriculture has been contentious issue and is the major reason for deadlock.
Major Issues in WTO at present.
1] Market access issue:
There is a major conflict between India and USA. USA is offensive whereas India is defensive. India and USA have conflict over
(1) SSM (Special Safeguard Measures). In case there is a import surge, country can impose tariff wall. India has kept very low threshold limit i.e. even a small surge is seen by India as a reason to impose tariff wall.
(2) SP (Special Product). Certain products can be kept out of tariff liberalization subject to the condition the product is linked with rural development, livelihood issues and employment. USA keeps minimum product in the list, maximum five. India wants to keep as many products as possible, keeping very few out.
Besides this, developed countries also impose non-tariff barriers, sanitary and Phyto sanitary measures.
2] Export subsidies:
This issues has been resolved as a part of Nairobi package.
3] Domestic support:
It is most controversial and is related to the food security issue. EU and USA allege that in India there is lack of transparency and the amount of subsidy given to the farmers has gone beyond the permissible limits.
India and other developing countries have been offered peace clause at Bali. It was expected that permanent solution will come at Buenos Aires summit, Argentina 2017. No permanent solution emerged from the summit. Hence the talks have collapsed. WTO talks at Buenos Aires collapsed because India maintained the position that first, food security issue has to be resolved. India is seen as a spoiler.
At international level, India’s image is of a spoiler, tuff negotiator but poor bargainer. India has been defensive about other proposed agreements e.g. in e-commerce, IT and fisheries.
WTO and Agriculture
Impact of WTO policies on agriculture.
Agriculture has been the backbone of most of the countries in third world. It has been worst affected by WTO policies. WTO policies not only had adverse economic consequences, they have adverse environmental, social, political and security consequences. Since WTO came into existence, the problem of hunger and malnutrition has increased many times, farmer suicides have also increased.
Why such an impact?
When developing countries entered into the agreements, they had very limited experience and understanding of the WTO agreements which can be called as lawyer’s paradise. Developing countries lacked capacity to understand the nuances of international trade. Developed countries took the advantage and imposed unfair agreements. Hence Doha development agenda emphasized on not only free but fair agreements. The most unfair has been the game of boxes played by developed countries.
How does WTO agreements contradict the food security programs?
Comparison between North and South in context of agriculture.
1_In North, agriculture is a commerce but in south it is a way of life.
2_In North, the climatic conditions are favourable whereas South is in adverse climatic conditions.
3_In developed countries, agriculture is a part of 3% of their GDP whereas in South the average share is 30% of GDP. In case of India it is 16% of GDP.
4_In developing countries, around 17% of the population depend on agriculture for employment whereas in developed countries just 3-4%.
5_In developed countries, per capita land holding is huge whereas in developing countries, it is very small.
6_In developed countries, agriculture is done as a commerce but in developing countries most of the farmers are subsistence farmers.
Agriculture subsidies and game of boxes.
WTO policies has resulted into developing countries reducing the domestic support. It has exposed our farmers to the fluctuations of international market, they have to face tough competition from the farmers of developed countries. Playing the game, developed countries continue to provide huge subsidies. The average subsidy given to farmers in
a) India is $306 per farmer per year.
b) China $ 348 per farmer per year.
c) EU $ 12384 per farmer per year.
d) USA $ 68910 per farmer per year.
Since WTO has come into existence, developed countries have actually increased the subsidy. In 1995 USA was giving a subsidy of $46.1 bn which they have increased in 2011 to $ 125.1 bn. At present, the subsidies are given through three routes.
1) Green Box – They are meant for research and development. Not considered as trade distorting subsidies. Hence no limit. Hence developed countries have been disbursing the subsidies through this route.
2) Blue Box Subsidies – Blue box subsidies are part of ‘Amber box’ but are not considered as trade distorting. In fact they decrease the production. e.g. Subsidies given to farmers to shift towards animal husbandry. No limit and primarily EU gives these subsidies.
3) Amber Box Subsidies – they are considered as trade distorting. Because they are given for the purpose which increase the production like fertilizers, seeds, electricity, irrigation etc. Since they are trade distorting, there is a limit: 5% of total value of their produce per year for developed countries, 10% of total value of their produce per year for developing countries.
Value of the produce is calculated at the rate of the prices prevailing between 1986 to 1988. (The time of Uruguay round of talks). In real terms, the amount of subsidy permitted to developed countries is many times more.
There were two options available 1) Either spread the subsidy across the products or 2) Concentrate it to few products.
Developed countries have chosen for the cumulative subsidy, concentrating on 2-3 crops. In July 2017, India and China have presented the paper to show how developed countries played with the norms. The paper also mentions that there have been times when developed countries have been giving subsidy of up to 300-400% to particular crops, targeting the market of developing countries.
How food security programs of developing countries come in conflict with limit imposed by Amber Box subsidies?
Since govt. has to give MSP (minimum support price) to the farmers, so that they continue to produce food crops. MSP is seen as a trade distorting measure. Developed countries also accuse that the real objective of developing countries is to dump cheap food grains in international markets, unfair competition policy.
1) Food security programs to be brought under green box. 2) End the boxes. 3) If present system is to be continued, the revise the base prices taking into account, the inflation in food items. But so far, there is no progress. USA has threatened that they will come out of WTO.
At WTO, agricultural negotiations include following groupings.
1] Cotton 4 countries (C4) – Mali, Chad, Burkina Faso and Benin.
2] G20 – Group of developing countries, negotiating export subsidies.
3] G33 – Group of developing countries, negotiating public stock holding.
4] Cairns group – Major exporting countries – Australia, New Zealand, Brazil.
Other disputes at WTO
1] NAMA – Non Agricultural Market Access
Developed countries have already reduced the tariffs and developing countries are supposed to reduce the tariffs. But developed countries have imposed non-tariff barriers and developing countries didn’t get any major advantage from tariff reduction.
Developing countries do not want to reduce the tariffs also because customs duties are major source of developmental expenditure for them.
At present, there is a tariff war going on between USA and rest of the world but particularly against China. India also has been accused of unfair practices. However India have reduced customs duties considerably. e.g. In 1991-92, the custom duties on agricultural products has been 150% which has been reduced to 10%. According to USA, there is underreporting, lack of transparency, red tapism, corruption.
2] Intellectual property rights.
USA accused China of coercing foreign companies to transfer their technology. There is a huge dispute between India and USA, India and EU in context of pharmaceuticals. WTO policies created a situation of health epidemic in poor countries of Africa. Hence developing countries could pressurize the developed countries to grant exemption / compulsory licensing of certain life saving drugs. EU has complained against India exporting the generic drugs to African countries. According to EU, exemption is meant only for domestic use.
3] Service sector.
Weakest agreements are in this sector, considering the sensitivity. WTO has gone for bottom up approach where countries can themselves decide the amount of liberalization.
Service sector negotiations are happening in four modes.
Mode 1: Where services are consumed abroad like BPO (business process outsourcing) sector. India is offensive but developed countries are defensive. EU does not give India the status of data secure country.
Mode 2: Where consumer absorb the service in the country of service provider. e.g. Tourism. Western countries are in favour of these services.
Mode 3: Establishing commercial presence abroad like Banking and Insurance sector. (Developed countries interest.)
Mode 4: Movement of natural persons. India is offensive but west is defensive.
Future prospects of WTO.
USA calls WTO as a catastrophe or disaster. ‘WTO has to shape up otherwise USA will withdraw’. USA is not in favour of multilateralism. USA is playing the game of bad cop (Trump) good cop (US Secretary of trade Lighthizer). Lighthizer has assured that USA will continue in WTO. China, India, EU, Canada are working hard so that WTO continues. These countries have organized informal ministerial conferences.
However the approach of developed and developing countries seem to be divergent. e.g. The Ottawa communique has suggested following options.
1] End the consensus rule and introduce qualified voting. Any WTO resolution can be passed by qualified majority by 85%. The share of the countries will be determined by their share in world trade.
2] It has been suggested that WTO should allow plurilateral agreements. Other countries can join the agreements later.
3] The developing countries will get exemption on case to case basis – WTO allows special and differential treatment to developing countries. USA has an objection treating China and India as developing countries.
4] India does not support any of the proposals. According to USA, WTO is a raw deal for USA. Five out of six richest countries claim differential treatment. There should be no self proclaimed development status.
Write a short note on WTO and developing countries.
WTO has been proposed as a means to address the poverty of developing countries. Under WTO, there is a provision for special and differential treatment, capacity building for developing countries. Decision is taken by consensus. Multilateralism is good for weak countries rather than going for bilateral deals. With the exception of semi-peripheries, WTO has not benefitted the developing countries as promised. Developed countries continue to be protectionist. It has even impacted the food security in developing countries.
Developed countries go for coercive diplomacy, known as green room diplomacy. Many developing countries have not even used the dispute settlement body even once.
Purpose of IMF
Short term liquidity to deal with BoP crisis. However, later on IMF has established new facilities. Now IMF is also involved in poverty reduction programs.
Several IMF facilities.
1] Stand By facility – short term loan for BoP crisis.
2] Extended Fund facility – some countries cannot overcome the crisis without structural reforms. e.g. India.
3] Supplementary reserve facility – in case there is a sudden flight of capital.
4] Poverty and growth fund – given to low income countries.
5] European financial stabilization facility – created after Eurozone crisis.
What reforms are needed and why?
Most urgent reform is that IMF needs more funds. The volume of international trade has increased. More countries are approaching to IMF more frequently. But it lack funds, as seen during Greek debt crisis.
But it is not an easy task. Subscription by countries is linked to voting rights. IMF was created by USA to establish its hegemony. USA has the largest amount of vote share around 17%. Hence no decision can be taken at IMF without consent of USA. USA does not want that its share decrease. But USA is not in a position to give funds either. China is willing to give funds but IMF is not permitting China to increase the subscription substantially. Hence US policies are ultimately weakening IMF.
BRICS countries had the major agenda of reforms of IMF, G20 summit in Seoul in 2010 accepted the proposal. However it has been implemented only in 2016. More than 6% quota share has shifted towards emerging economies. Presently USA’s share has gone down from 17% to 16.7%. China’s share has increased from 3.8% to 6%. India’s share increased marginally from 2.3 % to 2.6%.
Greater share means greater say. The biggest problems is that when countries approach for the liquidity/loans, IMF imposes conditionalities. When developing countries do not accept the developed countries point of view at WTO, they utilize IMF route to force them to open their economies. At IMF, they hardly have any say. Conditionalities are also imposed when countries approach for increasing their vote share. They impose the conditions to introduce market economy. Hence China has started creating its own institutions like AIIB, NDB, BRICS CRA (Currency Reserve Arrangement).
Test Your Knowledge!
1] “Consider the following statements.
USA established Liberal International Economic Order.
USA’s prosperity is dependent on free trade.”
a) Statement 1 &2 both are correct and statement 2 is correct reason of statement 1
b) Statement 1 only correct
c) Statement 2 only correct
d) Both statements are incorrect
Ans: a) Statement 1 &2 both are correct and statement 2 is correct reason of statement 1
2] What is the full form of NAFTA?
a) North Atlantic Free Trade Agreement
b) North American Free Trade Agreement
c) North Atlantic Free Trade Association
d) North American Free Trade Association
Ans: b) North American Free Trade Agreement
3] Theory of Comparative Advantage is given by
a) Adam Smith
c) John Maynard Keynes
Ans: b) Ricardo
4] WTO came into existence in which year?
Ans: d) 1995
5] WTO works on which of the following principles?
a) Free and fair trade
c) Principle of Non Discrimination
d) All of the above
Ans: d) All of the above
6] Doha Development Agenda is related to
c) World Bank
Ans: b) WTO
7] SSM (Special Safeguard Measures) and Special Product, are the terms associated with
b) World Economic Forum
Ans: c) WTO
8] “Consider the following statements regarding WTO policies.
WTO policies on agriculture had adverse economic, environmental, and social-political consequences in Developing countries.
Developing countries had limited experience and understanding of the WTO agreements.”
a) Statements 1&2 both are correct and Statement 2 is the reason of statement 1.
b) Statement 1only correct
c) statement 2only correct
d) Statements 1&2 both are incorrect
Ans: a) Statements 1&2 both are correct and Statement 2 is the reason of statement 1
9] “Arrange the following countries in increasing order of average subsidy given per farmer per year.
Ans: b) 3-1-4-2 (India-China -EU-US
10] The subsidy given under which of the following box is considered as ‘Trade Distorting’ subsidy?
a) Green Box
b) Blue Box
c) Amber Box
d) none of the above
Ans: c) Amber Box
11] ‘Stand By facility’ is related to
a) World Bank
Ans: b) IMF
12] “Consider the following statements.
Developing countries are creating their own institutions like AIIB, NDB, BRICS CRA
Institutions such as IMF & World Bank are controlled by western/developed countries.”
a) Statements 1&2 both are correct and Statement 2 is the reason of statement 1.
b) Statement 1only correct
c) statement 2only correct
d) Statements 1&2 both are incorrect
Ans: a) Statements 1&2 both are correct and Statement 2 is the reason of statement 1