India & China: On the same side at the WTO

 Jayshree Sengupta, WTO, Sino-India, India, China, fora

A container ship berth in northeast China's Liaoning province

Years of effort by India to build good relations with China have ended up in a prolonged face off at Doklam. But on the economic front, China and India have been together at various fora like the IMF and the WTO and have expressed their solidarity against the position adoped by developed countries which is unfavourable to the developing countries.

The advanced countries have been afraid of an alliance between powerful and important Emerging Economies and have tried to water down the BRICS’ growing importance lest their own dominance is threatened. For decades since World War II, the developed countries have called the shots in formulating the rules of international financial institutions and trade negotiations between the developed and developing countries. They have been the architects of the existing global order in which their voice has prevailed. In trade and finance, the North has tried to subjugate the global South and China and India have fought a common battle at the WTO against the tilt in global trade rules in favour of developed countries that is hurting the developing countries’ exports.

Recently China and India have opposed the huge subsidies that US and EU give to farmers, at the WTO, which lead to increased export production and artificially low prices which in turn hurt the developing countries that are competing against them in the global markets. For example the subsidies that US gives to cotton farmers hurt cotton exporting countries in Africa which cannot match the low prices of US cotton.  Large subsidies to a handful of farmers in the US and the EU, is one of the worst practices that has perpetuated the dominance of developed countries in agricultural trade despite objections being raised by developing countries.

Under the WTO, certain subsidy programmes are considered as minimally or non- trade distorting and come under the category of Green box. These subsidies can be given in an unlimited manner. Another category is the Amber box which represents trade distorting type of subsidy and can be product specific—in favour of special type of producers, and non product specific which provides for supporting agriculture in general. According to the rules of the WTO Amber box subsidies given by developed countries should fall to 5 per cent of the total value of agricultural production and for developing countries, these subsidies have to be limited to 10 percent (de minimis ) level of the total value of agricultural production.

 In the US, subsidies under the WTO’s Agreement on Agriculture (AOA) billions of dollars have been given to farmers as direct subsidy, enabling them to cut costs and produce for the market. Direct subsidies have been regularly paid to farmers who produce a designated crop and the payments are ‘decoupled’ from production which means that farmers can produce as much or as little as they want and still receive their subsidy.

In EU also, subsidies have helped to sustain unviable farming practices and they have flooded the global markets with cheap dairy products and sugar. Production support given by developed countries to their agriculture has exceeded the value of their production in some years.   According to the OECD agricultural support estimates statistics ( 2016) US spent $38.7 billion on farm subsidies given directly to products like soya, wheat, rice, corn and cotton. EU spends $89.9 billion and Canada $4.2 billion.

Since 1994,  the US and EU have been transferring nearly all their agricultural subsidies into the Green Box which according to the WTO’s Agreement on Agriculture are subsidies that are not price distorting. These Green Box subsidies make up 88 to 90 per cent of EU’s and America’s total farm support and as a result, the total amount of subsidies US gives to its farmers is higher. It increased from $46.1 billion in 1995 to $125.1 billion in 2011 (the most recent US notification to the WTO of domestic agricultural support.)

According to the joint India-China paper circulated in Geneva on July 17, 2017, developed countries’ subsidies under the Green Box, which are more than 90 per cent of their total entitlements, have resulted in a major asymmetry in the WTO’s Agreement on Agriculture. India and China have demanded a reduction of such subsidies and they should be capped because research has shown that they lead to enhanced productivity and lower prices.

In Asian countries like India and China where the number of farmers is much larger, the per capita subsidy works out to be much less. According to a research paper by South Centre, Geneva (‘The WTO’s Agricultural Domestic Supports Negotiations’, January, 2017), the EU spends $12,384 a year per farmer whereas the US, where there are fewer farmers, spends $68,910 per farmer a year (in 2013). India spends $306 per farmer and China $348 per farmer (in 2010-11) a year.

India does not give product specific subsidy and its product specific price support is negative (because domestic prices are lower than global prices and the minimum support price does not cover the cost) while non product specific support (Power and fertilizer subsidies) are well below the permissible level of 1 per cent of the value of total agricultural output.

India’s fertilizer, irrigation and power subsidy was at $22.8 billion in 2014 which was less than the subsidy given in 2011 at $21.1 billion. All the support that India gives to agriculture is under the Green Box category of the WTO and exempt from reduction commitments of the AoA. They are not in any way price- distorting and India is not under obligation to reduce them.

Compared to the US, EU and even China, India’s agriculture is much weaker. According to the 2005-06 Census, 99 per cent of the farm holdings are low income and resource poor. While India has been spending more on marketing and promotion in agriculture, its infrastructure spending has declined in recent years. China’s spending on infrastructure has increased. It also gives a huge subsidy to its agriculture but mostly for provision of infrastructural services (Green Box).

US has criticised China in the past for increasing its farm support programme enormously. Thus the battle continues with China and India on one side and the developed countries on the other. India and China now ought to think of how to resolve their own faceoff.

This commentary originally appeared in The Tribune.

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Jayshree Sengupta