Undoubtedly, countries stand to gain by participating in international trade. Given the fact that comparative advantage varies across countries and a few nations have technology dominance, the benefits of free trade need not accrue to all nations equally. To ensure an n-sum game, such that all countries mutually gain, trade facilitation by WTO assumes significance.
Several issues have been resolved at the ministerial conference, but a few remain. Doha round-related issues on agricultural subsidies and market access to industrial products are far from settled, although three rounds of ministerial conference have so far been concluded. In particular, countries like India and China have championed the cause of developing (read: poor) countries, which fear material injury to domestic economies if they do not have proper safeguard mechanisms.
On balanced consideration, the fears of these countries are well founded. Developed (read: rich) countries like the US and EU provide startling subsidies. For instance, in 2007, the support provided to farm producers by OECD countries was estimated to be $258 billion. If their produce is allowed free entry into developing countries, they will arguably replace domestic produce. This is true for countries like India where government subsidies do not significantly reduce cost of cultivation. Although farmers in developing countries may not target the export market, they still expect a fair price in the domestic market.
Failure to get a decent price for their produce can easily put the livelihood of millions of farmers in these economies at peril. Agriculture being the largest employer in most developing nations, their governments cannot risk allowing domestic produce to compete directly with subsidised imported produce. To avoid this, they take resource to safeguard mechanisms available within the provisions of WTO. That is, whenever import causes injury in terms of displacing employment leading to loss of income, they can erect tariff barriers.
Both the provision of export subsidies and attempt to sell goods at a price lower than normal (?dumping?) distort trade. Though the WTO is opposed to tariffs in principle, it still allows member countries to use countervailing duties against export subsidies and to counter dumping. Member countries can invoke such safeguard mechanisms in the face of material injury.
The burning issue of agricultural subsidies were not resolved even at the recently concluded mini-ministerial meeting at Geneva. Fearing injury, ministers from developing nations stood steadfastly in favour of invoking safeguard mechanisms in the event of an import surge and price fall. Will a country like the US be willing to significantly reduce farm subsidies and other agricultural support? Even in a country like India, with labour abundance, the cost of cultivation is very high. Given that labour is costly in the US, reducing subsidies would raise costs for farmers. This not only reduces their competitiveness in the world market, but even nearer home.
Do developing countries truly want developed countries to reduce agricultural subsidies? When subsidies are reduced, agricultural produce from developing countries will gain market access, but these countries will have to reciprocate by giving market access to the industrial goods of developed countries. Firms in developing nations do not have the kind of technology to make their products competitive in the world market, not only based on price, but also on the basis of quality and reliability. With their technology advantage, firms of developed countries can easily out compete their counterparts in developing countries, even in their home markets. Thus, developing countries use agricultural subsidies as a convenient argument to deny market access to manufactured goods from developed nations.
More often than not, national trade policies are influenced by developments in the home market and not by opinion prevailing in the international market. When ministers from developing countries say that they do not want to risk the lives of millions of farmers, they indirectly mean they do not want to risk domestic manufacturing activities. So long as domestic issues predominate over international concerns, Doha round issues will continue to remain unresolved. After all, these ministers are elected to office not by the international community, but by national electorates.
The writer teaches economics at Icfai Business School, Bangalore