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Explained: Understanding the permanent solution at WTO

The deal is seen as a breakthrough, ending the impasse that had stalled the implementation of a landmark TFA hammered out at the WTO.

Written by Harish Damodaran | Updated: November 17, 2014 10:19:03 am
Modi met Obama at the White House this week and held talks on strengthening the bilateral ties. (Source: AP photo) Modi met Obama at the White House this week and held talks on strengthening the bilateral ties. (Source: AP photo)

Last week, India and the US reached an understanding on working out a “permanent solution” to the issue of public stockholding for food security purposes at the World Trade Organisation (WTO). The deal is seen as a breakthrough, ending the impasse that had stalled the implementation of a landmark Trade Facilitation Agreement (TFA) hammered out at the WTO’s ministerial conference in Bali last December.

What is this deal on a new “peace clause” that India and the US have signed?

It allows countries such as India to continue to freely procure and stock grains for the public distribution system even if subsidies resulting from these breach limits under the WTO’s Agreement on Agriculture (AoA). The original peace clause proposed at the Bali ministerial conference provided only a four-year reprieve, during which no country would be penalised for any excessive expenditures on food security programmes. The India-US agreement – which has to be endorsed by the WTO’s general council – replaces this temporary peace clause with an open-ended one until a “permanent solution” to the issue of farm subsidies linked to national food security is arrived at.

Is this a victory for the Narendra Modi government?

India had, in July, blocked the adoption of a TFA that commits WTO member-countries to simplify and standardise their Customs procedures for expediting clearance of goods at ports/border posts. It clubbed the inking of this pact with working out a “permanent solution” to address its concerns over food security. This stance came under criticism, especially from industrialised countries who claimed that it had left India isolated at the WTO. But with the US now agreeing to an indefinite peace clause, India’s position has seemingly been vindicated.

But there must be a reason why the US seems to have climbed down, apart from it just paving the way for wrapping up the TFA?

The finer details of the bilateral agreement are still unclear. What we do know is that the “permanent solution” is something to be negotiated and the peace clause will hold until this has been “agreed and adopted”. The US probably believes it can extract concessions from India during this process of negotiations. According to a fact sheet on the website of the Office of the US Trade Representative, the agreement reached between the two countries “sets out elements for an intensified program of work and negotiations to arrive at such a permanent solution”.

Why is India demanding a “permanent solution”?

One reason is the way subsidies are calculated under the AoA. A farmer producing, say, wheat is considered receiving a subsidy if the procurement price paid to him is higher than a world “reference” price, which is, however, taken at the levels prevailing during 1986-88.

Global wheat prices averaged below $ 125 a tonne then, as against $ 240-250 now. This obviously exaggerates the extent of any subsidy.

India wants the subsidy computation methodology to reflect current international prices. It will, then, have more flexibility in fixing minimum support prices (MSP), which have already crossed $ 235 per tonne in wheat.

Secondly, the AoA rules on public stockholding are vague and general. While direct provision of food to vulnerable consumers at subsidised prices is permitted, such programmes are not to have “the effect of providing price support to producers”. At the same time, there is specific exemption with regard to supporting “low-income or resource-poor producers”. According to India, over 90 per cent of its farmers fall under this category and hence the subsidies incurred its food security programmes would be exempt from any reduction commitments under AoA. Greater clarity on these provisions is what India is seeking as part of a “permanent solution”.

What problem does the US have with India’s public stockholding policies?

In its most recent filing before WTO on September 9, India said its total domestic support for agriculture amounted to $ 56.1 billion in 2010-11, of which $ 13.8 billion was on public stockholding for food security purposes. The US may not mind India’s procuring and stocking foodgrains, so long as these do not end up distorting global trade. In the last two years, India has exported over 12 million tonnes of wheat worth $ 3.5 billion – all of this from its public stocks. During the upcoming negotiations, US could insist that India refrain from exporting grain procured ostensibly for domestic food security purposes.

Is there anything else that the US and others may push as part of the “permanent solution”?

They would ideally want India to replace all subsidies arising from physical procurement, stocking and distribution of grain with direct benefit transfers to low-income consumers and resource-poor farmers. The new government has indicated its preference for such non-marketing-distorting supports, though how far and soon it would move in that direction remains to be seen.

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