India has issued a statement on November 13 that an understanding has been reached with the US for a “perpetual peace clause” for India replacing the “interim peace clause” (that extended up to 2017), agreed to at World Trade Organization (WTO) Ministerial in Bali in December 2013. With this development, the Indian understanding is that no legal action for penalties can be initiated against India by WTO members if India violates the WTO conditions on food security and subsidies on public stock-holding of grains, and that the US is now expected to garner support from other WTO members, on the basis of this perpetual peace clause, for the signing of the WTO’s Trade Facilitation Agreement (TFA) by December 2014, which was deferred in July 2014.
Though the text of the understanding reached between the two countries is not available publicly yet, the transcript of press conference of the US Trade Representative (USTR) Ambassador Michael Froman, dated November 13, reads, “The agreement consists of two basic elements. First is a specific agreement to move forward with the full and immediate implementation of the WTO Trade Facilitation Agreement. And second, there’s an understanding about “specific” food security programs agreed to in the Bali accord. We eliminated any ambiguity in Bali about the duration of the “so-called Peace Clause”, provided that food stockpiling programs meet the agreed upon conditions in Bali.” (goo.gl/pF5pyp ).
The USTR’s statement makes it explicit that the US has merely sorted out the “ambiguity”. It remains unclear if the US has ‘altered’ its basic position. India may still not be immune from legal action if the condition of subsidy-beyond-10% of the MSP prices in the base year (1986-88) on its grain-stocking programme is breached without indexing for annual inflation. (India has very vocally told the US and the WTO that annual food inflation should be accounted in determining the subsidy-limit breach, before deciding any penal action). Neither has the USTR unambiguously stated that the peace clause will be applied till perpetuity until India’s concerns on food security and subsidies on public stock-holding are settled, as is being claimed by the Indian officialdom.
Are India, the US and WTO moving from one concentration of ambiguity to another? More details and data need to be out before a radical departure by the US from its previous position can be confirmed. A simple reading of the above quoted comments signifies that the first priority of the US remains the securing of the TFA and that legal action before 2017 cannot be ruled out entirely. As per the Bali agreement, the peace clause is an interim arrangement and so long as the US continues to speak about adherence of “conditions in Bali”, perhaps the status quo is undisturbed.
The NDA government may be right in interpreting the Bali agreement as the one that limited the availing of the peace clause till 2017 while they (NDA) themselves have aggressively initiated reforms in food security policies/public stock-holding. The US has thus addressed India’s concern by “modifying” the language rather than shifting its position on giving India an unlimited hall pass on crossing of the WTO-mandated subvention caps.
If the US position is modified, then the very objectives of the Obama administration concerning WTO become questionable. All issues raised by the USDA on Indian subsidies and trade distortions get annulled automatically. The WTO members who have already undertaken reforms will feel embittered if India alone stands excluded, above reproach or penalties. Another question that arises is: If there is a change of heart in the US versus India stand-off due to some distinct understanding on geo-political realities and economic cooperation, does it become incumbent upon other nations to follow suit and endorse policies that distort the trade?
Here is an explanation of how the Indian public procurement policy of grains leads to trade distortion in import, export and domestic market. There is a 90% subvention as per the Food Security Act. Heavily-subsidised grains discourage or deter imports into India at global market prices. Thus, India as a market, remains closed or blocked to other exporting nations.
Since India’s PDS has a leakage of 45-50%, the pilferage enables local traders to procure cereals at below market prices, which enhances Indian export competitiveness to the disadvantage of other competing nations. Despite India claiming its sovereignty in its food policy management, the other nations are not willing to endorse this flawed system because it certainly tramples on their sovereignty to trade globally.
The Indian government also knows that hoarding of grains by the FCI/state agencies sucks surpluses that would have otherwise gone to the market. This induces food inflation and generates financial losses apart from wastage of grains.
The WTO agreement attempts to put all on an equal footing. India and the US have moved forward, as claimed by both sides, but need to come out openly and transparently so that there is more clarity while assessing the terminal outcome of the deal.
The author is a grains trade analyst