UPSC IAS exam preparation - International Institutions - Lecture 9

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WTO, mega-FTAs and Idia

1.0 Key Principles of WTO system

Let us revise the key principles on which WTO is founded.

The global trading system under the WTO auspices should be without discrimination, freer, predictable, more competitive, and more beneficial for less developed countries.

Now, we again refer to the basic structure of the WTO agreements. Simply put, it is as shown in the image.

Let us quickly go through the basic principles of WTO. These are the pillars on which the organization stands.

1.1 Concept of Most-favoured-nation (MFN)

It refers to treating other people equally. Under the WTO agreements, countries cannot normally discriminate between their trading partners. Grant someone a special favour (such as a lower customs duty rate for one of their products) and you have to do the same for all other WTO members. This principle is known as most-favoured-nation (MFN) treatment. It is so important that it is the first article of the General Agreement on Tariffs and Trade (GATT), which governs trade in goods. MFN is also a priority in the General Agreement on Trade in Services (GATS) (Article 2) and the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) (Article 4), although in each agreement the principle is handled slightly differently. Together, those three agreements cover all three main areas of trade handled by the WTO.

MFN sounds like a contradiction. It suggests special treatment, but in the WTO it actually means non-discrimination - treating virtually everyone equally. If a country improves the benefits that it gives to one trading partner, it has to give the same "best" treatment to all the other WTO members so that they all remain "most-favoured". The MFN principle ensures that each country treats its over-164 fellow-members equally.

1.2 National treatment: Treating foreigners and locals equally

Imported and locally-produced goods should be treated equally - at least after the foreign goods have entered the market. The same should apply to foreign and domestic services, and to foreign and local trademarks, copyrights and patents. This principle of "national treatment" (giving others the same treatment as one's own nationals) is also found in all the three main WTO agreements (Article 3 of GATT, Article 17 of GATS and Article 3 of TRIPS), although once again the principle is handled slightly differently in each of these. National treatment only applies once a product, service or item of intellectual property has entered the market. Therefore, charging customs duty on an import is not a violation of national treatment even if locally-produced products are not charged an equivalent tax.

1.3 Freer trade: gradually, through negotiation

Lowering trade barriers is one of the most obvious means of encouraging trade. The barriers concerned include customs duties (or tariffs) and measures such as import bans or quotas that restrict quantities selectively. By the 1980s, the GATT negotiations had expanded to cover non-tariff barriers on goods, and to the new areas such as services and intellectual property. Opening markets can be beneficial, but it also requires adjustment. The WTO agreements allow countries to introduce changes gradually, through "progressive liberalization". Developing countries are usually given longer to fulfil their obligations.

1.4 Predictability: through binding and transparency

Sometimes, promising not to raise a trade barrier can be as important as lowering one, because the promise gives businesses a clearer view of their future opportunities. With stability and predictability, investment is encouraged, jobs are created and consumers can fully enjoy the benefits of competition - choice and lower prices. In the WTO, when countries agree to open their markets for goods or services, they "bind" their commitments. For goods, these bindings amount to ceilings on customs tariff rates. Sometimes countries tax imports at rates that are lower than the bound rates. Frequently this is the case in developing countries. In developed countries the rates actually charged and the bound rates tend to be the same. A country can change its bindings, but only after negotiating with its trading partners, which could mean compensating them for loss of trade.

1.5 Promoting fair competition

The WTO system does allow tariffs and, in limited circumstances, other forms of protection. More accurately, it is a system of rules dedicated to open, fair and undistorted competition. The rules on non-discrimination - MFN and national treatment - are designed to secure fair conditions of trade. So too are those on dumping (exporting at below cost to gain market share) and subsidies. The issues are complex, and the rules try to establish what is fair or unfair, and how governments can respond, in particular by charging additional import duties calculated to compensate for damage caused by unfair trade. Many of the other WTO agreements aim to support fair competition: in agriculture, intellectual property, services, for example. The agreement on government procurement (a "plurilateral" agreement because it is signed by only a few WTO members) extends competition rules to purchases by thousands of government entities in many countries. And so on.

2.0 Agriculture - the most contentious issue in WTO

WTO's agreement on agriculture was concluded in 1994, and was aimed to remove trade barriers and to promote transparent market access and integration of global markets. Agreement is highly complicated and controversial; it is often criticized as a tool in hands of developed countries to exploit weak countries. Negotiations were still going on for some of its aspects, till 2019.

The Agreement on Agriculture (AoA): Agreement on agriculture stands on 3 pillars viz. Domestic Support, Market Access, and Export Subsidies.

2.1 Domestic Support

It refers to subsidies such guaranteed Minimum Price or Input subsidies which are direct and product specific. Under this, Subsidies are categorized into 3 boxes -

Green Box - Subsidies which are no or least market distorting includes measures decoupled from output such as income-support payments (decoupled income support), safety - net programs, payments under environmental programs, and agricultural research and-development subsidies.
Blue Box - Only 'Production limiting Subsidies' under this are allowed. They cover payments based on acreage, yield, or number of livestock in a base year.
Amber Box - Those subsidies which are trade distorting and need to be curbed.

GREEN BOX PROBLEM FOR INDIA (and misuse by USA): In India farmer is supported for specific products and separate support prices are there for rice, wheat etc. On the other hand income support is uniformly available to farmers and crop doesn't matter. But the US has exploited this opportunity fully by decoupling subsidies from outputs and its green box subsidies today are about 90% of its total subsidies. USA could do it because it does not have to ensure food security (a rich nation), it has a prosperous agro economy, and farmers can better respond to market forces and shift to other crops. But in India, domestic support regime provides livelihood guarantee to farmers and also ensures food security and sufficiency. The Indian MSP regime tries to promote production of particular crops in demand. And this makes decoupling support with output very complicated. USA was also in position to subsidies R&D expenditure in agriculture as almost all the farming in US is capitalist and commercial. In India about 80% of farming is subsistence and hence, India & other developing countries can use this opportunity.

The US and EU have been gradually shifting their subsidies from the amber to green box where they are sheltered from any challenge. The EU, for instance, has slashed its AMS or amber box subsidies from €50 billion in 1995 to €8.7 billion in 2009, while its green box subsidies have shot up from €18.7 billion in 1995 to a whopping €83 billion in 2012, accounting for 19 per cent of total farm revenues. As for the US, its green box payouts have increased from $46 billion in 1995 to $120.5 billion in 2010. A huge component of this is its domestic aid programme which has soared to almost $95 billion whereas India's MSP and those of other developing countries are subjected to the strict de minimis limit.

BLUE BOX ISSUES: 'Targets price' are allowed to be fixed by government and if 'market prices' are lower, then farmer will be compensated with difference between target prices and market prices in cash. This cash shall not be invested by farmer in expansion of production. The problem is that there no limit on target prices that can be set and those are often set far above market prices deliberately. USA currently isn't using this method, but the EU actively is! And farmers there are rich.

AMBER BOX ISSUES: The Amber Box contains category of domestic support that is scheduled for reduction based on a formula called the "Aggregate Measure of Support" (AMS). The AMS is the amount of money spent by governments on agricultural production, except for those contained in the Blue Box, Green Box and 'de minimis'. It required member countries to report their total AMS for the period between 1986 and 1988, bind it (i.e. commit to it), and reduce it according to an agreed upon schedule. Developed countries agreed to reduce these figures by 20% over six years starting in 1995.

Developing countries agreed to make 13% cuts over 10 years. The LDCs (Least developed countries) do not need to make any cuts. Since subsidies were bound to levels of 1986-1988, there was inequality at very beginning of the agreement. At that time subsidies which latter came under 'Amber Box' were historically high in western countries. In developing countries, including India these subsidies were very limited. It is only now under pressure of Inflation in prices of agricultural Inputs, and wide differences between market prices and Minimum support Price, subsidies have grown to this level. In effect developed countries are allowed to maintain substantially higher amount of trade distorting subsidies.

De-Minimis provision: Under this provision developed countries are allowed to maintain trade distorting subsidies or 'Amber box' subsidies to level of 5% of total value of agricultural output. For developing countries this figure was 10%. So far India's subsidies are below this limit, but it is growing consistently. This is because MSP are always revised upward whereas Market Prices have fluctuating trends. In recent times when crash in international market prices of many crops is seen, government doesn't have much option to reduce MSP drastically. By this analogy India's amber box subsidies are likely to cross 10% level allowed by de minimis provision.

2.2 Market Access

Market access requires that tariffs like custom duties fixed by individual countries be cut progressively to allow free trade. It also asks countries to remove non-tariff barriers and convert them to Tariff duties. Earlier there were Quotas for Imports under which only certain quantities of particular commodities could be imported (into a nation). That was a classic non-tariff barrier.

India agreed to this agreement and substantially reduced tariffs. Only goods exempted by the agreement are kept under control. Maximum tariffs has been limited as required by WTO, under which a higher side of tariffs is fixed (in percentage terms) that should never be surpassed. Generally actual tariffs are far below this high limit. This makes custom policy transparent and tariffs can't be fixed arbitrarily. So trade benefits.

If India is able to diversify its production and add value by food processing, then this is a win-win deal for India. A number of commodities are exported to the West and low tariffs there will benefit Indian suppliers. The Trump administration made market access a key point of contention with India, ultimately with drawing benefits to India under the GSP (Generalised System of Preferences), in 2019.

2.3 Export Subsidy

These can be in form of subsidy on inputs of agriculture, making export cheaper or can be other incentives for exports such as import duty remission etc. These can result in dumping of highly subsidized (and cheap) products in other country. This can damage domestic agriculture sector of other country.

These subsidies are also aligned to the 1986-1990 levels (as discussed earlier), when export subsidies by developed countries was substantially higher and Developing countries almost had no export subsidies that time.

The USA has blunted this provision by its Export Credit Guarantee Programme. The US government gives subsidized credit to purchaser of US agricultural products, which are to be paid back in long periods. This is generally done for Food Aid programs, under which food aid is sent massively to under developed countries. India also received this Aid early on in the 1960s. But this is only at concessional rates and credit options. This finally results in perpetual dependence on foreign grain in recipient countries and destroys their domestic agriculture. So this is equally trade distorting subsidy, which is not currently under ambit of WTO's AOA. Hence it benefits the USA at the cost of India.

Subsidies and support to agriculture must be clearly controlled, but as per national needs. Conflicting and vested interest of few countries are too influential in WTO. Every country's requirements are different, so enough flexibility is required in any agreement. Further, right to food is a global movement and is guaranteed by numerous UN conventions. So, ensuring food security is a domestic concern of a nation, international community can just advice but can't coerce other sovereign country. Thus, India has to made its expenditure much more effective, with dynamic policy and resist any outside pressure which is misdirected towards negative results for Indian people. The US approach, under Trump, was to force India to cut any exports promotion subsidy.

2.4 Special Safeguard Mechanism (SSM)

A Special Safeguard Mechanism (SSM) would allow developing countries to impose additional (temporary) safeguard duties in the event of an abnormal surge in imports or the entry of unusually cheap imports.

Debates have arisen around this question, and some negotiating parties claim that SSM could be repeatedly and excessively invoked, distorting trade. In turn, the G33 bloc of developing countries, a major SSM proponent, has argued that breaches of bound tariffs should not be ruled out if the SSM is to be an effective remedy. SSM is quite important in a scenario in which west has significant powers to subsidize their production and in turn, exports.

3.0 What India wanted in the Trade Facilitation Agreement (TFA)?

The TFA was the first major global deal struck after the formation of WTO in 1995. It promised global trade growth by

USD 1 trillion and millions of new jobs.

In 2014, the World Trade Organisation (WTO) was happy that a "trade facilitation agreement" (TFA)-a pledge to cut red tape at customs posts around the world - was finally struck.
It was the result of talks in December 2013 among its 159 members meeting in Bali. It was the first big win of the Doha round, a 13-year slog to bring down trade barriers. The UPA government had relunctantly agreed to the TFA subject to a "peace clause" for India (related to agriculture foodstocking issue).
On July 31st, 2014, just before ratification, India's NDA government withdrew its support, prompting the deal's collapse. Some Indian concerns with the latest round of trade talks are valid. But WTO was in mortal danger just before its 20th birth anniversary.
Then, the NDA govt. managed to win an indefinite extension of the peace clause; however, that is not a long-term option. The conditions attached to the clause have not been dropped and it bars the expansion of the food security programme to new areas.
Critics say that to get a temporary exemption, India went backwards to conform to the July 31, 2014 deadline that WTO had imposed. Instead of standing firm, India had buckled under pressure to accept the TFA in lieu of its food security concerns. Under the rules, India can go on maintaining its food buffer stocks till a permanent solution is found but cannot export subsidised food that can distort markets. Subsidised food exports from India, therefore, can be challenged by any member country.
The developed countries, including US, EU, Canada, and Australia are against giving India any permanent waiver. What the rich countries want is to limit the provisions of MSP given to Indian farmers. Treating MSP as an agricultural subsidy, the rich countries have accused India of exceeding the 10 per cent limit - called de-minimis level - that was imposed way back in 1986-88. But at the same time these countries are not willing to re-open the 2008 revised draft modalities achieved at the WTO that aimed at cutting the massive domestic and export subsidies in the rich countries.
According to a study, the average farm subsidy a farmer in India gets is Rs 1,000 per month. America on the other hand provides an average monthly farm subsidy of Rs 2.5-lakh.
New Delhi's push for a permanent solution failed at the WTO's Tenth Ministerial at Nairobi in December 2015, with member nations failing to reaffirm the Doha mandate-launched in 2001, and with a focus on development issues. Little wonder New Delhi has finally acceded to the TFA; the cost-benefit analysis no longer favours holding out.
9.Post Nairobi 2015 - Contentious Issues -

The US has now demanded the budgetary outlays for product-specific input subsidies for agriculture - like fertilizer, pesticides, seed, irrigation and credit - to be capped at the levels existing at the time of the Nairobi Ministerial, 2015. Such an obligation, if accepted by India, will strike a death-knell for Indian agriculture. What has to be understood is that these subsidies are primarily to keep the cost of production low so as to keep food prices low for consumers. Withdrawing the input subsidies will only increase the cost of cultivation, which means the food prices will skyrocket. The socio-economic as well as the political implications of restricting input subsidies to farmers are too grave to even visualize.
The second contentious issue pertains to special safeguard measures (SSM) that were granted to developing countries so as to minimise the harmful impacts of cheaper imports. The rich countries have already been using Special (Agricultural) Safeguards (SSGs) very effectively to check import surges. Norway has applied SSG 581 times; Switzerland 961 times and US 189 times. Similarly, for the developing countries a SSM is being worked out, which too is being opposed by US, EU, Canada, Japan and Australia. SSM actually means raising tariffs temporarily to deal with a flood of imports and price falls.
So, India and China which have a huge food security programme which depend upon massive food procurement from small farmers, will be badly affected. In other words, procurement of food, which the WTO wants to dismantled, ensures livelihood security for millions of small and marginal farmers. India cannot ever think of placing the livelihood security of 600 millions farmers on the chopping block of international trade.

Anyway, the Indian government approved the WTO Trade Facilitation Agreement (TFA) in February 2016.
The TFA is designed to reduce administrative barriers at ports and customs, reducing transactional costs of international trade and consequently-according to various studies-increasing global gross domestic product by $1 trillion. This TFA promise has found greater consensus between developed and developing economies than most WTO issues manage.
It was argued by rich nations that developing countries had the most to gain from the TFA. Even such a limited bargain (like the TFA), which does not cut tariffs, would boost developing-country GDP by $523 billion.
The TFA aims to fast track any movement of goods among countries by cutting down bureaucratic obligations. The problem with TFA is in a clause that says farm subsidies cannot be more than 10 percent of the value of agricultural production. If the cap is breached, other members can challenge it and also go on to impose trade sanctions on the country.
India along with other developing countries had raised objection to the clause, which calls for a sufficient time gap between the announcement of change in tariff to its coming into effect. This would be against India's constitution, since most of the budget announcements related to tariffs come into effect within 24 hours. "We cannot change our constitution for WTO," said the official, adding that India has submitted an alternative proposal to this effect, wherein, budget-related announcement should be kept out of this clause since they need to become applicable immediately. "Deliberations are still on, we need to be given flexibility," he added.
Besides, India has sought a binding agreement on Customs cooperation under trade facilitation, which will ensure mandatory exchange of information between Customs administrations (on request) so as to prevent under-invoicing, overvaluation, tax evasion and illicit capital flows.
However, the developed countries want to agree to it only on 'best endeavour basis'. "It is important for us, and has been on the table for over 20 year. It is only for cross checking, as information is available at both ends. However, developed countries are putting in so many conditions, confidentiality laws, secrecy. So, we are not sure in what form it will finally look like," said the official.
India has also been pushing for a binding technical and financial assistance by the developed countries to the developing countries to accept TF agreement.
Biggest issue - Agri subsidies - Under WTO rules, trade-distorting subsidies to farmers in a developing country cannot exceed 10% of the total value of its harvests. But under the legally binding Food Security Act, the government will provide very cheap food to the most vulnerable part of the population at extremely low prices ( = subsidies to consumers). Apart from that, through the public distribution system (PDS), India also provides subsidies to the producers of food grains ( = subsidies to farmers). So India buys food grains from farmers at a minimum support price (MSP), and subsidises inputs like electricity and fertilizer, and gives a lot of food at low prices to consumers.

The Food Secuirty Act will cost $4 billion-a-year and will provide cheap food for 800m (80 crore) people; and the minimum support prices the government offers to farmers, which for rice have more than doubled since 2001-02, will continue rising. If these measures breach the 10% limit, India would be open to a WTO challenge. The government insists it will not sacrifice food security on the altar of a trade deal.
The core issue is India's public stockholding programme for food security. The price support mechanism this entails falls into the WTO's so-called 'amber' box of agriculture subsidies-those that are considered to have a trade-distorting effect. These are barred beyond a minimum, calculated on the basis of a fixed reference price dating back three decades.
The whole system is flawed. US's massive agricultural subsidies, implemented via direct payments to farmers, fall into the WTO's permissible green box. The UPA government signed off on the Bali Package at the WTO's Ninth Ministerial Conference in 2013 in exchange for a time-limited peace clause-a wholly inadequate four-year amnesty from punitive action for violations on the subsidy front. It thereby approved the TFA and gave up on using it as a bargaining chip to play hardball.
So there are three problems for India now.

The first problem is with the 10% cap on subsidies which will not be possible for India to achieve. Adding to the woes is the fact that the 10% cap is calculated based on 1986-88 prices when the prices of food grains were much lower. So the cap has to be updated taking into account the present prices of foodgrains.
The second problem is that even for providing subsidised food, India will have to open up its own stockpiling to international monitoring. It will not be able to add protein heavy grains like say, lentils, if it wants to, due to conditions in the peace clause. And lentils (or pulses) are the key source of protein for vegetarian India. Asas
Third, developing countries find it very unfair that the United States provides its farmers more than $20 billion worth of subsidies per year. While the WTO is binding the developing countries to protocols, the issue of subsidies by developed giants like US seems to be off the table. (Refer the discussion on BOXES)

WTO argues that if the developing countries continue to give prices to farmers which are higher than the market prices, it might harm the poor farmers in other parts of the world. It also says the deal (TFA) could add $1 trillion to global gross domestic product and 21 million jobs, by cutting down red tapes. Also, the developed world wants the issue of food security to be delinked from the TFA, and developing nations don't want that.
India agreed to the TFA in Bali only under the condition that interim relief would be provided to the developing nations. It said no legal actions or sanctions would be imposed on the developing nations till 2017, by which time a solution would be worked out among the nations. However, this interim relief would not be applicable if such subsidies would lead to trade distortions, by which one means, that prices of exports and imports cannot be affected by this.

As said, in December 2013, before India's elections, the WTO tried to accommodate its demands with a "peace clause" that would have made the food-security programme immune from challenge for four years. But the new Modi government was unsatisfied with the fudge, worried that come 2017 it would have little bargaining power to get a permanent exemption.
India now wants a permanent solution to the issue of public stock holding of foodgrains. G33 members including China have supported India's stand on the ability to subsidise agricultural production and distribute it to the poor at low cost.
Developed nations argue that India's tactics will hurt her as it is struggling to shake off its protectionist reputation. Of 95 countries tracked by the World Bank in 2013, India's exports-to-GDP ratio was 19th from bottom. Agricultural protection is high. In 2012 the European Union, rightly scorned for its own farm policies, spent the equivalent of 0.73% of GDP on agricultural support. India's 1.15 trillion rupees ($18.8 billion) spending on food subsidies touches 1% of GDP-and has doubled since 2009. Even that is before counting subsidies to farmers for fertilisers, tractor fuel and the like. (This entire argument of rich nations is debatable)
What is the logic of India's moves? India has been let down by agreements made during the Uruguay round of trade talks that finished in the mid-1990s. At that time, rich countries were allowed to keep many protectionist policies in return for promising to reduce them progressively. India, which was deemed not to subsidise domestic agriculture at the time, was thus left with stricter limits on supporting farmers, even as it lowered its import tariffs.
The WTO should reword the statistics. The reference prices for commodities used to measure subsidies to agriculture are from 1986-88, which has the effect of exaggerating India's protectionism. Rich countries do not want to update the reference prices, for fear it may open the floodgates for all sorts of other quarrels. This is the core of the issue.
Can India do some things herself? Three things -

First, it could exploit another historical legacy of the Uruguay deal. It has been a more enthusiastic tariff-cutter than that deal required: it is free, for example, to raise the tariffs on vegetables from 30% to more than 100%. A commitment to keeping such tariffs low, or cutting them further, could form part of a deal whereby the WTO turns a blind eye to other subsidies even beyond 2017.
Second, India's food-security law need not lead to increases in rice and wheat purchases. The government intends to buy more than 30m tonnes of rice in the year from October, a 13% rise on the last haul. But its rice reserves exceeded 21.2m tonnes in July-over twice the recommended buffer stock. Stores get so bloated that grain threatens to spoil and bureaucrats dump it on the world market: India is the world's largest exporter of rice. To help poor farmers, India could instead focus on producer subsidies that are not linked with levels of output, such as cash transfers. The WTO finds this sort of help more palatable.
Third, it could phase out minimum support prices, which tend to favour bigger, richer farmers (and which 62% of Indian farmers are not getting). With the money saved, it could focus on subsidising grain sales to India's poor. No-one objects to using state funds to subsidise consumption, at least not on trade grounds.

Technical aspects to be understood -

India is seeking the flexibility to impose additional tariffs, popularly called special safeguard mechanism (SSM), to counter import surges and low priced imports in agricultural products. India's need for SSM arises from pragmatic considerations and not due to any "lofty theologizing about freedom and sovereignty needs". India's need for SSM must not be confined only to those products in which the tariff bindings are in the range of 10-40%. It should also include products with higher bindings, but in which the applied tariffs have been close to the bound rates in some of the past few years, e.g., rice, wheat, olive oil and poultry products. Rich nations over the past few years have not really cut their farm support and have not accepted product-specific subsidy ceilings. Consequently, Indian farmers are perpetually threatened by highly subsidised and unfair exports, especially of the developed countries. Domestic subsidies of the developed countries have been particularly high compared to the value of production in the following products: United States - canola (61%), dairy (30%), rice (82%) and sugar (66%); and European Union - apples (68%), butter (71%), rice (66%), wheat (22%), olive oil (76%) and white sugar (116%). Given these subsidy levels in the developed countries, SSM would be an important policy instrument for India to protect its farmers from unfair trade, if the developed countries wriggle out of agriculture subsidy cuts in the WTO negotiations.
India must have the freedom to provide support to its farmers. The main agriculture support programme being defended by India at the WTO is its minimum support price (MSP) scheme. The implications of withdrawal of MSP on domestic availability of rice and wheat need to be carefully examined.
The Indian government is committed to providing direct income support to farmers and crop insurance which will not be restricted by WTO rules. Under the WTO rules an income support scheme that is not restricted by a monetary ceiling has to comply with stringent conditions. So, the amount of support shall not be dependent upon what the farmer produces, or the volume of production or the current price of his produce. Given the sheer number of farmers, it would be extremely difficult to implement such a scheme in India.
India should never offer to reducing its so-called "very high tariff bindings" and seek to provide higher levels of domestic support (subsidies). This suggestion may be well suited for a few developed countries with deep pockets, but is totally inappropriate for India. No country is going to agree to raise the level of agriculture domestic support for anyone else. Far from being in a position to secure higher subsidy limits, India is already under considerable pressure to curtail the existing elbow room available to it for providing farm support. Thus, securing higher subsidy limits in negotiations should be completely ruled out. If India were ever to tread on this path, it will end up with reduced tariffs and no gains on the subsidy front.
The above argument would be especially true for pulses. The government can increase the procured quantity of pulses by at least 5-6 times compared to the current level and continue to remain within the subsidy limits mandated by the WTO Agreement on Agriculture (AoA). If still higher levels of procurement are required in future and at higher procurement prices, then India could seek recourse to the peace clause agreed to by the WTO members at Bali in 2013 and in Geneva in November 2014. Enhancing support for pulses cannot be an excuse for adopting the "tariff for subsidy approach" in the WTO negotiations.

India must aggressively bring the rich country agricultural subsidies back on the negotiating table. All eyes will be on what the 12th MC in 2020 achieves.

4.0 How much subsidies are actually given by rich nations?

Agricultural subsidies in the developed countries had increased from US $ 350 billion in 1996 to $ 406 billion in 2011. Lately, the EU alone has notified Euro 84.106 billion farm subsidy for 2013. The latest US Farm bill 2014, which makes budgetary provision for farm subsidies for the next ten years, has forecast a subsidy support of $ 956 billion. So even after the X Ministerial Meet at Nairobi, the issues remain.

The most comprehensive measure of transfers to the farm sector is the Total Support Estimate (TSE) compiled by the Organisation for Economic Cooperation and Development (OECD). It covers producer support, general services support to agriculture and transfers to consumers through food subsidies.

At $327 billion in 2014, China's TSE has overtaken that of US making it the biggest support provider to agriculture. But China had a huge 200.16 million farming households (agricultural census 2006). On the other hand, there were only 2.08 million farms in the US in 2014 and 12.25 million in the EU (2010). The average Chinese TSE per farmer, thus, worked out to just around $ 1,630. Against this, the average US farmer would have received well over $ 46,000 worth of support. Moreover, the average farm size in the US is 438 acres, compared to a mere 1.6 acres for China (and 35.5 acres in the EU). It means the subsidies in the US or EU are essentially going to better-off farmers.

Where does India stand? In India's WTO filings, the total monetary value of domestic support for the agriculture was placed at $ 51.09 billion in 2010-11. This included $ 13.81 billion towards public stockholding for food security, which India has claimed to be exempt from any reduction commitments under the WTO. Again, given the large number of holdings (138.35 million, based on the 2010-11 agricultural census) and an average farm size of 2.8 acres, the total subsidy on a per-farmer basis for India may not amount to much.

In general, there are 3 groups. FIRST, rich nations that continue to heavily subsidise their relatively small populations engaged in agriculture (US, EU and Japan); SECOND not-so-rich countries that have substantially stepped up support to their large farming populations (China, Indonesia); and THIRD those that haven't really done so despite having huge numbers of predominantly smallholder cultivators (India). At the other extreme are countries like New Zealand, Ukraine and Brazil that barely subsidise - if not effectively tax - their farmers.

India supports 17 per cent of the world's population and its farmers are among the poorest. While per capita landholding in the EU, US and Canada have almost doubled, in India it has declined to 0.13 hectare of arable land. Besides, it is largely rain-fed agriculture. "We have to take on board the concerns of our farmers who are extremely resource poor. In India, the issue is not just about food stockpile for food security but also about supporting low-income farmers. Experts point out WTO's 1994 AoA stems from the Blair House agreement of 1993 that was cobbled together by the US and the EU in order to shield their phenomenal farm subsidies from any dispute at WTO.

This has allowed the two largest trading blocs in the world to provide huge subsidies to their farmers without inviting penalties.

30 WTO members have commitments to reduce their trade-distorting domestic support in the amber box, those without commitments have to maintain their total AMS to within 5 per cent of the total value of production, that is, the de minimis level. In the case of developing countries the de minimis is 10 per cent of their value of production of a particular crop. There is no amber or blue box for India and other WTO members. More problematic is the way the de minimis support is calculated. It is an outdated and flawed methodology based on the external reference price (ERP) prevailing during 1986-88. The rates are irrelevant since prices have shot up 650 percent in the intervening 25 years. These inherent inequities in AoA prevent developing countries from meeting their special needs on food security.

5.0 Main Provisions of GATT

A nation must extend the same tariffs to all trading partners that are WTO members.
Tariffs may be imposed in response to unfair trade practices such as dumping.
Dumping = Sale of export goods in another country at a price less than that charged at home, or at a price less than costs of production and shipping.
Countries should not limit the quantity of goods and services that they import.
Countries should declare export subsidies provided to particular firms, sectors, or industries.
Article XVI - countries should notify each other of the extent of subsidies and discuss the possibility of eliminating them.
Countries can temporarily raise tariffs for certain products - Article XIX, called the safeguard provision or the escape clause.

The importing country can temporarily raise the tariff when domestic producers are suffering due to import competition.

6.0 Regional Trade Agreements Under GATT

Regional trade agreements are permitted under Article XXIV of the GATT. The GATT recognizes the ability of blocs of countries to form two types of regional trade agreements:

Free-trade Areas: in which a group of countries voluntarily agree to remove trade barriers between themselves.

Customs Unions: which are free-trade areas in which the countries also adopt identical tariffs between themselves and the rest of the world.

7.0 The coming storm - Mega FTAs versus WTO

The TPP (Trans-Pacific Partnership), a free trade agreement (FTA) signed among 12 countries in the Asia Pacific region, was designed to drastically change the structure and function of the governance of global trade and investment, for the following two reasons.

First, the TPP members, notably the US, were aiming at concluding a "21st century model of an FTA", with a high level of trade and investment liberalisation and a set of high level standards on a broad range of economic regulations, thus establishing an optimal regulatory/institutional framework for servicing the pressing needs of firms expanding their business through global value chains (GVCs). Secondly, as several mega-FTAs are under negotiation, and the TPP was signed and on the way to being put in force, the rules and liberalisation commitments of the TPP could have become de facto global standards, by its reference in the negotiation of other mega-FTAs, such as TTIP (Transatlantic Trade and Investment Partnership), Japan-EU EPA (Economic Partnership Agreement) and RCEP (East Asian Regional Comprehensive Agreement).

So a natural question is - what happens to the WTO?

{ The US exited TPP, which then became the 11-member CP-TPP in 2018. }

To fully understand the drastic change in global trade governance, namely the stalemate of the Doha Development Agenda (DDA) and the frenzy of mega-FTAs, we must realise the driving force that has brought this change. The changing pattern of global trade and investment is the driving force. What is this changing pattern? Well, two parts.

Part 1 – Globalisation of value chains (GVCs)

Part 2 – Globalisation of supply chains, or international production networks

7.1 Understanding GVCs

GVCs started in the 1970s in North America (Canada, US, and Mexico) in the automotive industry and expanded in Central and East Europe (Germany and former socialist countries in the region) in a number of manufacturing industries in late 1980s to early 1990s. However, it was in East Asia in the mid-1990s on that GVCs developed on a full scale. Japanese firms took the initiative by aggressively investing in the manufacturing sector (electronic appliances, machinery and automobiles) in several ASEAN countries (Thailand, Malaysia and Indonesia) and Taiwan, with the US and EU as major export markets. Later, Japanese firms expanded their production bases to China, India, and more recently to Vietnam and Myanmar. Currently, GVCs are getting more and more "global" both geographically and in sectoral coverage, as firms are doing business globally regardless of their size, country of origin and their field of activity. In particular, the services sector has become a major component of GVCs, not only because they provide services indispensable to globalisation of manufacturing (e.g., transportation, telecommunication, logistics and financial services), but also because many services are traded globally (e.g., professional services such as lawyering and accounting, retail and wholesale, tourism, construction and civil engineering, water supply and even health services).

Problem with WTO - In light of the slow consensus process of the WTO, where usually US, EU, China, India and Brazil could never reach an agreement, as seen in the Doha Development Agenda (DDA) stalemate, major firms and industry associations in developed countries began to pressure their governments to shift the trade policy priority from WTO to the negotiation of mega-FTAs. Till 2020, there were differences on key issues.

7.2 Is Mega-FTA the way forward?

The TPP rules and commitments may become de facto global standards, but they have two intrinsic defects in achieving the goal of providing optimal trade and investment environment for GVCs.

First, mega-FTAs will cover their members and exclude non-members, most of which will be LDCs. There will be a split between those included in "mega-FTA clubs" and those excluded. Poverty and income disparity in LDCs will worsen, and this might lead global insecurity.

Secondly, membership of "mega-FTA clubs" will not automatically secure that they will be chosen by global firms. The rules and commitments of mega-FTAs are necessary conditions for GVCs but they are not sufficient conditions. Countries must develop human resources, supporting industries and industrial agglomeration to attract global firms. These measures are not covered by mega-FTAs. They are rather provided by the voluntary and unilateral efforts of each country. This means that even non-members of mega-FTAs may have a chance to join GVCs by unilaterally providing rules, commitments and policies that are needed for GVCs. Members of mega-FTAs cannot prevent such efforts.

By transplanting the rules and commitments of mega-FTAs to the WTO, those rules and commitments will become truly global, and WTO members, whether developed or developing, will get a chance to join GVCs gradually but steadily. The WTO will be reinvigorated with new rules and commitments that will match the needs of GVCs, and we may coin it as WTO 2.0.

7.3 How can WTO 2.0 be achieved?

What is needed is, therefore, not only the WTO 2.0, but the comprehensive reinvention of global economic governance institutions. Such reinvention needs not the complete destruction of existing institutions such as IMF, World Bank, G8, G20, OECD and Basel Committee, to mention a few. Rather it can be achieved by fine-tuning the functions of such institutions and by furthering their coordination and co-operation. So, we may need a Bretton Woods 2.0.

7.4 What is Bretton Woods 2.0?

Seven decades have passed since the inception of the Bretton Woods system for governing global trade, investment and finance. The 21st century global economy, characterised by GVCs and GFB, needs fundamental reform of its governance structure. Bretton Woods 2.0 will be realised by fine-tuning the functions of the existing institutions, strengthening the coordination among them, and giving them new functions to meet the needs of GVCs and GFB. What is needed is an insight into the changing patterns of global economy in the 21st century, and an innovative and evolutionary approach to reinvigorate the existing institutions for global economic governance.

The first attempt to establish such liberal economic policy reforms multilaterally, the OECD-sponsored Multilateral Agreement on Investment (MAI) failed in 1998. The second attempt was the DDA of the WTO that started in November 2001. However, perhaps due to the power structure of the WTO which was quite different from that of the GATT, members of the WTO found it much more cumbersome and time-consuming for multilateral trade negotiations to reach consensus. On almost all issues of the DDA agenda, key members, namely, US, EU, China, India and Brazil, couldn't reach agreement. Even till 2020, major issues remained unresolved.

8.0 ComParing WTO and mega-FTAs

Here is a comparison of WTO and mega-FTAs –

9.0 CASE STUDIES

9.1 Case Study 1: U.S. Tariffs on Steel and Tyres

On September 11, 2009 President Barack Obama announced a tariff of 35% on imports of tyres made in China. It was implemented due to the strong lobbying by the United Steelworkers of America (a union of american tyre workers). During the 2000 presidential election campaign, George W. Bush promised to implement tariffs on import of steel. It helped Bush secure votes in steel producing states - West Virginia, Pennsylvania and Ohio.

After election, the US tariffs on steel were raised in March 2002, though they were removed less than two years later.

Response of the European countries

The WTO has a formal dispute settlement procedure under which countries that believe that the WTO rules have not been followed can bring their complaint and have it evaluated.
The countries in the European Union (EU) took action by bringing the case to the WTO. The WTO ruling entitled the European Union and other countries to retaliate against the United States by imposing tariffs of their own against U.S. exports.
The use of tariffs by an importer can easily lead to a response by exporters and a tariff war.

9.2 Case Study 2: China and the Multifibre Arrangement (MFA)

One of the founding principles of GATT was that countries should not use quotas to restrict imports.

The Multifibre Arrangement (MFA), organized under the auspices of the GATT in 1974, was a major exception to that principle and allowed the industrial countries to restrict imports of textile and apparel products from the developing countries.

Importing countries could join the MFA and arrange quotas bilaterally (i.e., after negotiating with exporters) or unilaterally (on their own).

The MFA expired on January 1, 2005. The biggest potential supplier of textile and apparel products was China. Immediately after January 1, 2005, exports of textiles and apparel from China grew rapidly.

Effect on import quality

The prices of textile and apparel products dropped the most (in percentage terms) for the lower-priced items.
So an inexpensive T-shirt coming from China and priced at $1 had a price drop of more than 38% (more than 38 cents), whereas a more expensive item priced at $10 experienced a price drop of less than 38% (less than 3.80).
As a result, U.S. demand shifted toward the lower-priced items imported from China: there was "quality downgrading" in the exports from China.

Reaction of the United States and Europe

The European Union threatened to impose new quotas on Chinese exports, and in response, China agreed on June 11, 2005, to "voluntary" export restraints.
Due to the worldwide recession, Chinese exports in this industry were much lower in 2009 than they had been in earlier years.
China indicated that it would not accept any further limitation on its ability to export textile and apparel products to the United States and to Europe, and both these quotas expired.

9.3 Case Study 3: Infant industry protection

There are two cases in which infant industry protection is potentially justified.

Protection may be justified if a tariff today leads to an increase in Home output that, in turn, helps the firm learn better production techniques and reduce costs in the future or When a tariff in one period leads to an increase in output and reductions in future costs for other firms in the industry, or even for firms in other industries. This type of externality occurs when firms learn from each other's successes.

As both of these cases show, the infant industry argument supporting tariffs or quotas depends on the existence of some form of market failure. In the semiconductor industry, it is not unusual for firms to mimic the successful innovations of other firms, and benefit from a knowledge spillover.

U.S. tariff on heavyweight motorcycles

In 1983, Harley-Davidson, the legendary U.S. based motorcycle manufacturer, was in trouble. Facing intense import competition, Harley-Davidson applied to the International Trade Commission (ITC) for Section 201 protection.
To evaluate the future gains in producer surplus, we can examine the stock market value of the firm around the time that the tariff was removed. By this calculation, the future gain in producer surplus from tariff protection to Harley-Davidson (131 million) exceeds the loss of the tariff.

Computers in Brazil

Persistent gap between the prices in Brazil and the United States meant that Brazil was never able to produce computers at competitive prices without tariff protection - infant industry protection was not successful.
Higher prices in Brazil imposed costs on Brazilian industries that relied on computers in manufacturing, as well as on individual users.

Protecting the automobile industry in China

In 2009 China overtook the United States as the largest automobile market in the world. Strong competition among foreign firms located in China, local producers, and import sales resulted in new models and falling prices.
Beginning in the early 1980s, China permitted a number of joint ventures between foreign firms and local Chinese partners. Various regulations, combined with high tariff duties, helped at least some of the new joint ventures achieve success.
Cost to Consumers: Quotas have a particularly large impact on domestic prices when the Home firm is a monopoly. That situation applied to the sales of Volkswagen's joint venture, in Shanghai, which enjoyed a local monopoly on the sales of its vehicles.
Gains to Producers: For the tariffs and quotas used in China to be justified as infant industry protection, they should lead to a large enough drop in future costs so that the protection is no longer needed.
Volkswagen and other carmakers used to prosper by sending outdated factory equipment to China to produce older models no longer saleable in the West.
Competition has become so fierce that Honda introduced its latest version of the Civic in China only several months after it went on sale in Europe, Japan and the United States.
American and European carmakers are introducing their best technology to their plants in China, and not only to compete against one another. They also face rapidly growing competition in the Chinese market from purely local companies.
One in four GM cars is now made in China. Even those cars made in Detroit were partly designed in Shanghai.
In exchange for a deal to sell Chinese mini-commercial vehicles in India, GM agreed to give up the 50-50 ownership of its leading mainland joint venture, Shanghai General Motors.
Will observers one day look back at that deal and say that was the day GM signed over its future to the Chinese?
Without China, GM probably cannot be saved at all, which is a remarkable reversal from a decade ago, when the Chinese auto industry was just getting on its feet and desperately needed GM investment.

9.4 Case Study 4

Measure and product at issue

Measure at issue: US import prohibition of shrimp and shrimp products from non-certified countries (i.e. countries that had not used a certain net in catching shrimp)
Products at issue: Shrimp and shrimp products from the complainant countries

Summary of key panel/AB findings

GATT Art. XI (quantitative restrictions): The Panel found that the US prohibition, based on Section 609, on imported shrimp and shrimp products violated GATT Art. XI. The United States apparently conceded this violation of Art. XI because it did not put forward any defending arguments in this regard.

GATT Art. XX (exceptions): The Appellate Body (AB) held that although the US import ban was related to the conservation of exhaustible natural resources and, thus, covered by Art. XX(g) exception, it could not be justified under Art. XX because the ban constituted "arbitrary and unjustifiable" discrimination under the chapeau of Art. XX. In reaching this conclusion, the Appellate Body reasoned, inter alia, that in its application the measure was "unjustifiably" discriminatory because of its intended and actual coercive effect on the specific policy decisions made by foreign governments that were Members of the WTO. Also, the measure constituted "arbitrary" discrimination because of the rigidity and inflexibility in its application, and the lack of transparency and procedural fairness in the administration of trade regulations.

While ultimately reaching the same finding on Art. XX as the Panel, the Appellate Body, however, reversed the Panel's legal interpretation of Art. XX with respect to the proper sequence of steps in analysing Art. XX. The proper sequence of steps is to first assess whether a measure can be provisionally justified as one of the categories under paragraphs (a)-(j), and, then, to further appraise the same measure under the Art. XX chapeau.

Other issues

Amicus curiae briefs: The Appellate Body held that it could consider amicus curiae briefs attached to a party's submission since the attachment of a brief or other material to either party's submission renders that material at least prima facie an integral part of that party's submission. Based on the same rationale, the Appellate Body reversed the Panel and ruled that a panel has the "discretion either to accept and consider or to reject information and advice submitted to it, whether requested by a panel or not" under DSU Arts. 12 and 13.

9.5 Case Study 5

Measure and intellectual property at issue

Measure at issue

The insufficiency of the legal regime- India's "mailbox rule" - under which patent application for pharmaceutical and agricultural chemical products could be filed; and
the lack of a mechanism for granting exclusive marketing rights to such products.

Intellection property at issue

Patent protection for pharmaceutical and agricultural chemical products, as provided under TRIPS Agreement Art. 27.

Summary of key panel findings

TRIPS Art. 70.8: The Panel held that India's filing system based on "administrative practice" for patent applications for pharmaceutical and agricultural chemical products was inconsistent with TRIPS Art. 70.8. The Panel found that the system did not provide the "means" by which applications for patents for such inventions could be securely filed within the meaning of Art. 70.8(a), because, in theory, a patent application filed under the current administrative instructions could be rejected by the court under the contradictory mandatory provisions of the pertinent Indian law - the Patents Act of 1970.

TRIPS Art. 70.9: The Panel found that there was no mechanism in place in India for the grant of "exclusive marketing rights" for pharmaceutical and agricultural chemical products and thus TRIPS Art. 70.9 had been violated.

9.6 Case Study 6

Measure and product at issue

Measures at issue: India's import restrictions that India claimed were maintained to protect its balance-of-payments (BOP) situation under GATT Art. XVIII: import licensing system, imports canalization through government agencies and actual user requirement for import licences.

Products at issue: Imported products subject to India's import restrictions: 2,714 tariff lines within the eight-digit level of the HS (710 out of which were agricultural products).

Summary of key panel/AB findings

GATT Art. XI:1 (quantitative restrictions) The Panel found, based on the broad scope of a general ban on import restrictions embodied in Art. XI:1, that India's measures, including its discretionary import licensing system, were quantitative restrictions inconsistent with GATT Art. XI:1.

GATT Art. XVI II:11 (balance-of-payment ("BOP")): The Panel found that as India's monetary reserves were adequate, and, thus, India's BOP measures were not necessary to forestall the threat of, or to stop, a serious decline in its monetary reserves within the meaning of Art. XVIII:9, India had violated Art. XVI II:11, second sentence, which provides that measures may only be maintained to the extent necessary under Art. XVIII:9.

Justifications under GATT Art. XVI II:11 (Ad Note and Proviso): Since a removal of India's BOP measures would not immediately produce the conditions contemplated in Art. XVII I:9 justifying the maintenance of import restrictions, the Appellate Body upheld the Panel's finding that India's measures were not justified under Note Ad Art. XV III:11. Also, the Appellate Body upheld the Panel in finding that since India was not being required to change its development policy, it was not entitled to maintain its BOP measures on the basis of proviso to Art. XV III:11.

AA Art. 4.2: The Panel found that the measures violated the obligation under Art. 4.2 not to maintain measures of the kind required to be converted into ordinary customs duties and that they could not be justified under footnote 1 to Art. 4.2 either since the measures were not "measures maintained under balance-of-payments provisions".

Other issues

Burden of proof (GATT Art. XVIII): The Appellate Body upheld the Panel's findings that the burden of proof with respect to Art. XVI II:11 proviso is on the defending party (as an affirmative defence), and with respect to the Note Ad Art. XVII I:11 on the complaining party.

Competence of panels to review BOP measures: The Appellate Body held that dispute settlement panels are competent to review any matters concerning BOP restrictions, and rejected India's argument that a principle of institutional balance requires that matters relating to BOP restrictions be left to the relevant political organs - the BOP Committee and the General Council.

9.7 Case Study 7

Measure and product at issue

Measure at issue: Definitive anti-dumping duties imposed by the European Communities, including the European Communities' zeroing method used in calculating the dumping margin.

Product at issue: Cotton-type bed linen imports from India.

Summary of key panel/AB findings

ADA Art. 2.4.2 (dumping margin - "zeroing"): The Appellate Body upheld the Panel's finding that the practice of "zeroing", as applied by the European Communities in this case in establishing "the existence of margins of dumping", was inconsistent with Art. 2.4.2. By "zeroing" the "negative dumping margins", the European Communities had failed to take fully into account the entirety of the prices of some export transactions. As a result, the European Communities did not establish "the existence of margins of dumping" for cotton-type bed linen on the basis of a comparison of the weighted average normal value with the weighted average of prices of all transactions involving all models or types of cotton-type bed linen.

ADA Art. 2.2.2(ii) (profits calculation): The Appellate Body reversed the Panel's finding and found that the method set out in Art. 2.2.2(ii) for calculating amounts for administrative, selling and general costs and profits cannot be applied where there is data for only one other exporter or producer. The Appellate Body also found that, in calculating amounts for profits, sales by other exporters or producers not made in the ordinary course of trade may not be excluded. The Appellate Body, therefore, concluded that the European Communities acted inconsistently with Art. 2.2.2(ii).

ADA Art. 3.4 (injury): The Panel found that the European Communities acted inconsistently with Art. 3.4 by failing to consider "all" injury factors listed in Art. 3.4. The Panel also found that the European Communities could consider under Art. 3 information related to companies outside of the sample, where such information was drawn from the "domestic industry". However, the European Communities acted inconsistently with Art. 3.4 to the extent that it relied on information on producers not part of the "domestic industry".

ADA Art. 15 (developing country): The Panel found that Art. 15 requires that a developed country explore the possibilities of "constructive remedies", such as the imposition of anti-dumping duties in less than the full amount and price undertakings, before applying definitive anti-dumping duties to exports from a developing country. The Panel concluded that the European Communities acted inconsistently with Art. 15 by failing to reply to India's request for such undertakings.

Other issues

DSU Art. 6.2 (panel request - identification of a provision): The Panel dismissed India's claim related to ADA Art. 6, on the grounds that India failed to identify that provision in its panel request and, thus, denied the responding party and third parties of notice. The Panel did not accept India's reliance on the fact that this provision (Art. 6) was included in its consultations request and was actually discussed during consultations, considering that consultations are a tool to clarify a dispute and often issues discussed during consultations will not be brought in the actual case.

9.8 Case Study 8

Measures taken to comply with the DSB's recommendations

EC Regulation 1644/2001 pursuant to which the European Communities reassessed the original anti-dumping measure on bed linen. Also, EC Regulation 696/2002 according to which the European Communities reassessed the injury and causal link findings.

Summary of key panel/AB findings

ADA Art. 3.1 and 3.2: The Appellate Body reversed the Panel's findings on this issue and concluded that the European Communities' consideration of all imports from un-examined producers as dumped for the purposes of the injury analysis was based on a presumption not supported by positive evidence. Therefore, the Appellate Body held that the European Communities acted inconsistently with Art. 3.1 and 3.2 as it had not determined the "volume of dumped imports" on the basis of "positive evidence" and an "objective assessment".

ADA Art. 3.1 and 3.4: The Panel rejected India's claim that the European Communities did not have information on the economic factors and indices in Art. 3.4 (i.e. inventories and capacity utilization). The Panel concluded that the European Communities had collected data on these factors and that it did conduct an overall reconsideration and analysis of the facts with respect to the injury determination, as would an objective and unbiased investigating authority. In this relation, the Appellate Body rejected India's allegation that the Panel acted inconsistently with DSU Art. 11 and ADA Art. 17.6(ii).

ADA Art. 3.5: The Panel rejected India's claim under Art. 3.5, as that provision does not require that the investigation authority demonstrate that the dumped imports alone caused the injury.

ADA Art. 15: The Panel found that the European Communities had not violated the requirement of Art. 15 by failing to explore the possibilities of constructive remedies before applying anti-dumping duties because the European Communities had suspended application of these duties on Indian imports.

Other issues

Terms of reference (DSU Art. 21.5): The Appellate Body upheld the Panel's decision not to examine India's claim on "other factors" under Art. 3.5, as it had been resolved by the original panel (i.e. the claim was dismissed as India had failed to make a prima facie case) and thus was outside the Panel's terms of reference. The Appellate Body concluded that the original panel's finding, which was not appealed and was adopted by the DSB, provided a "final resolution" of the dispute between the parties regarding that particular claim and that specific component of the implementation measure.

9.9 Case Study 9

Measure and product at issue

Measure at issue: India's (i) indigenization (local content) requirement; and (ii) trade balancing requirement (exports value = imports value) imposed on its automotive sector.

Product at issue: Cars and their components.

Summary of key panel/AB findings

Indigenization requirement

GATT Art. III: 4 (national treatment): The Panel concluded that the measure violated Art. III:4, as the indigenization requirement modified the conditions of competition in the Indian market "to the detriment of imported car parts and components".

Trade balancing requirement

GATT Art. XI:1 (restriction on importation): Having found that "any form of limitation imposed on, or in relation to importation constitutes a restriction on importation within the meaning of Art. XI", the Panel found that India's trade balancing requirement, which limited the amount of imports in relation to an export commitment, acted as a restriction on importation within the meaning of Art. XI: 1, and thus violated Art. XI:1. The Panel also found that India failed to make a prima facie case that this requirement was justified under the balance-of-payments provisions of Art. XVIII:B.

GATT Art. III:4: As for the aspect of the trade balancing obligations, which imposed on the purchasers of imported components on the Indian market an additional obligation to export cars or components, the Panel found that the measure created a "disincentive" to the purchase of imported products and, thus, accorded less favourable treatment to imported products than to like domestic products inconsistently with Art. III:4.

Other issues

Evolution of the measures: As to India's claim that since the import regime that gave rise to the two requirements had already expired, and thus the Panel need not recommend to the DSB that India should bring its measures into conformity, the Panel said that where a measure has been withdrawn so as to affect the continued relevance of the Panel's findings of violation, it is understandable for a panel to make no recommendation at all. However, the Panel found the situation in this case different, as the expiration of the import regime subsequent to the Panel's establishment did not affect the continued application of the measures. As such, the Panel recommended that the DSB request that India bring its measures into conformity with its WTO obligations.

GATT Arts. III and XI (measures): Regarding the scope of measures under (and thus the relationship between) Arts. III and XI, the Panel noted that it could not be excluded that there may be a potential overlap between these two provisions and thus a certain measure may fall under both provisions.

9.10 Case Study 10

MEASURE AND PRODUCT AT ISSUE

Measure at issue: Mexico's tax measures under which soft drinks using non-cane sugar sweeteners were subject to 20 per cent taxes on (i) their transfer and importation; and (ii) specific services provided for the purpose of transferring soft drinks and bookkeeping requirements.

Products at issue: Non-cane sugar sweeteners such as High Fructose Corn Syrup ("HFCS") and beet sugar and soft drinks sweetened with such sweeteners.

SUMMARY OF KEY PANEL/AB FINDINGS

National treatment

GATT Art. III:2, first sentence (internal tax): As for soft drinks sweetened with HFCS, the Panel found that the tax measures were inconsistent with Art. III:2, first sentence, as these drinks were subject to internal taxes (20 per cent transfer and services taxes) in excess of taxes imposed on like domestic products - i.e. soft drinks sweetened with cane sugar (exemption from those taxes).

GATT Art. III:2, second sentence (internal tax): As for non-cane sugar sweeteners such as HFCS, the Panel found that the tax measures were inconsistent with Art. III:2, second sentence as "the dissimilar taxation (i.e. 20 per cent transfer and services taxes)" imposed on "directly competitive or substitutable imports (HFCS) and domestic products (cane sugar)" was applied in a way that afforded protection to domestic production.

GATT Art. III:4, (internal regulation): The Panel concluded that Mexico acted inconsistently with Art. III:4 in respect of non-cane sugar sweeteners, such as HFCS, by according them less favourable treatment (through tax measures as well as bookkeeping requirements) than that accorded to like domestic products (cane sugar).

Exceptions clause

GATT Art. XX(d): The Appellate Body upheld the Panel's finding that Mexico's measures, which sought to secure compliance by the United States with its obligations under the NAFTA, did not constitute measures "to secure compliance with laws or regulations" within the meaning of Art. XX(d). The Appellate Body stated that the terms "laws or regulations" under Art. XX(d) refer to the rules that form part of the domestic legal order (including domestic legislative acts intended to implement international obligations) of the WTO Member invoking Art. XX(d) and do not cover obligations of another WTO Member. Also, the Appellate Body held that a measure can be said to be designed "to secure compliance" even if there is no guarantee that the measure will achieve its intended result with absolute certainty, and that the use of coercion is not a necessary component of a measure designed "to secure compliance".

Other issues

Panel's jurisdiction: The Appellate Body upheld the Panel's decision that under the DSU, it had no discretion to decline to exercise its jurisdiction in a case that had been properly brought before it.