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December 31, 1998


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Business Commentary / Bibek Debroy

Who is afraid of WTO, US and disputes?

The World Trade Organisation is a handmaiden of developed countries, especially of the United States. So runs the belief in some quarters in India. Yet, if one considers the dispute resolution mechanism, there is no reason for such a belief.

In disputes between India and the US before the WTO, the score used to be 2:1 in India's favour. This is if one only counts disputes that have been adjudicated, not those pending or those settled through bilateral consultations. Systems of redressal therefore seem to work.

India won two (woolen garments, turtles/shrimps) and lost one (intellectual property rights).

The woolen garments case concerned unwarranted quotas imposed on garment imports by the US, unwarranted in the sense that they violated disciplines laid down in the textiles and garments agreement.

In the turtles/shrimps case, the US imposed an import embargo on shrimps caught by boats that did not have turtle extruder devices.

Conversely, India lost an intellectual property rights case. From January 1, 1995, regardless of what one did about eventual transition to product patents, one should have accepted applications for product patents and granted exclusive marketing rights for five years. India failed to do this and the US complained.

India lost this dispute and the resultant appeal and now has to change legislation by April 1999. Incidentally, if one includes all countries, the score used to be 2:2. India lost a case on intellectual property rights with the European Union, parallel to the US case, and decided not to appeal.

If one goes by media reports in India, the score is now 3:1 in India's favour, since India has reportedly won the dispute on quantitative restrictions. However, the reported win is not without blemishes.

The issue is QRs on imports, not permissible under the WTO disciplines, but allowed under Article XVIIIB for countries that have Balance of Payments problems. Very few countries invoke Article XVIIIB now. A complete listing is Bangladesh, Pakistan, Sri Lanka, India, Nigeria and Turkey. The pressure began on these countries ever since the Philippines gave up use of Article XVIIIB in 1996.

Other trading partners like Australia, New Zealand, Japan, the European Union and Switzerland have also complained about India's QRs, the implicit argument being that India's state of foreign exchange reserves cannot justify Article XVIIIB.

In the WTO system, disputes are preferably sorted out through bilateral consultations and for these other trading partners, this is what happened. Over a period of six years beginning 1997, India agreed to phase out QRs on imports. The six-year period is divided into sub-periods of 1, 2 and 3 years. This begins retrospectively from 1997. So by the end of 2002, there should be no QRs in India.

At present, QRs characterise five major product categories -- textiles and garments, agricultural products, consumer goods, petroleum products and urea.

QRs exist in four forms other than goods that are on open general licence. These are in the form of four lists -- canalised, restricted, SIL (special import licence) category and prohibited or banned.

Under the eight-digit harmonised classification system followed by the ministry of commerce, around 10,500 items are described and around 2,500 are on QRs today.

These have to be eliminated by 2003, in accordance with the time-frame agreed with the trading partners mentioned earlier. Of course, when liberalisation comes, it will be done on MFN (most favoured nation) basis. That is, QRs will be eliminated for all trading partners that are members of the WTO, not selectively.

However, unlike these other trading partners, the Americans found such a time-frame unacceptable and bilateral consultations with the US fell through. A panel was constituted to adjudicate the dispute and we now have the interim report.

If there are no replies to the interim report and appeals by the US, a final ruling is expected in January 1999.

With appeals, one can perhaps add another three months before final adjudication. The interim report will satisfy neither party.

First, the report states India's QRs violate Article XVIIIB and this can be construed as an Indian loss, since the American stance has been vindicated. In view of this, the media is not quite right when it applauds an Indian victory.

Second, QRs hurt American exports. So even if India may have won the battle, the war is not over.

Third, developing countries must get special and differential treatment, since the process of liberalisation for developing countries is "fragile" and "external shocks" cannot be ruled out. Therefore, India must have more than 15 months to phase out QRs and the details can be worked out through bilateral consultations with the US.

This longer time frame represents the "win" element, the Americans wanted an immediate phase-out. (Tunisia was granted three years and South Korea seven-and-a-half years to phase out QRs and 15 months is the normal time period granted in such rulings.)

Back to square one. These bilateral consultations were where the dispute started in the first place.

As a counterfactual, what might have happened had there been no east Asian crisis? Would the panel still have accepted that liberalisation is fragile and subject to external shocks? The currency crisis has offered India a window of opportunity in more ways than one.

Just as capital account convertibility is now postponed because of east Asia, the QR phase-out has also been postponed.

More fundamentally, QRs are inefficient and the panel ruling does not negate this proposition. Therefore, we would have wanted to remove them not only because of WTO and the Americans, but even otherwise.

In addition, India's foreign exchange reserves of $ 26 billion provide more than adequate BoP cover. This is what is repeated ad nauseam in various issues of Economic Survey and the Tarapore committee had agreed. Isn't seven-and-a-half months of import cover more than adequate?

The International Monetary Fund has argued that India could safely have removed QRs and the panel ruling does not negate this either. The WTO also has a BoP committee, which does not necessarily accept IMF recommendations. It is a moot point whether BoP issues should be decided by a panel (as in the present dispute) or by the BoP Committee.

The interim report does not answer such questions and this is an issue the WTO might have to confront later.

Meanwhile, India has yet another excuse to postpone reforms. Newton's second law of motion said something about the status quo continuing until an externally imposed force is applied.

There are no externally imposed forces now. There is not yet a BoP crisis, as in 1990-91. Nor are the WTO, the IMF or the World Bank exactly twisting our arms. So we can afford to chug along at the new Hindu rate of growth of 5.5 per cent.

Bibek Debroy

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