Wednesday, August 6, 2014

India vs. the World

The Wall Street Journal Asia
By Mr. Dhume, a resident fellow at the American Enterprise Institute, and a columnist for He tweets @dhume

Scuttling a WTO trade deal hurts the Modi government’s attempt to project a reformist image to the world.

If a country is known by the company it keeps, then India could scarcely have chosen worse during its showdown last week with the World Trade Organization in Geneva. The new Modi government’s attempt to reopen negotiations on a global deal to simplify customs procedures agreed to by its predecessor last year found backing only from an axis of economic laggards: Cuba, Bolivia and Venezuela. Most others blamed New Delhi for failing to live up to its commitment to honor an agreement crafted largely at its behest to begin with.

At issue is a so-called trade facilitation agreement concurred to by the WTO’s then 159 members in Bali last December. Under its terms, countries agreed to streamline and standardize customs procedures and improve infrastructure, which some economists say could add $1 trillion to the global economy and create 21 million jobs.

By refusing to sign the deal by the agreed-upon deadline of July 31, India may well have scuppered it for good, and raised questions over the future of the WTO itself. That this eleventh-hour brinkmanship came from the Modi administration, widely expected to be more outward-looking and reformist than its predecessor, adds shock to the expected dismay.

If Narendra Modi deliberately set out to destroy global goodwill for his government among trade negotiators and free-trade supporters, he could scarcely have been more effective.

In the run-up to Bali, India led the charge to link trade facilitation with its concerns about preserving an extensive system of food grain stockpiling. In the end, it settled for a so-called “peace clause,” which kicked the can on an agricultural deal to 2017 while allowing progress on trade facilitation, which had support from rich and poor countries alike.

This meant that India and other developing countries would face no challenges for their food stockpiling and farmer subsidies while they negotiated a more permanent solution over four years. At the time, both India and the WTO hailed the agreement as a victory, the first tangible progress since the Doha round of talks began in 2001.

Defenders of the Indian government say it had no choice but to pull the plug on the Bali deal. As the argument goes, over half of India’s work force is employed in agriculture. A massive “food security” program initiated by the Congress Party government last year promises subsidized food grains to two-thirds of India’s 1.2 billion people, and this will require maintaining stockpiles that will likely breach current WTO norms. Moreover, the U.S. and Europe also lavish subsidies on their farmers, albeit in different ways.

While India’s concerns aren’t without merit—few issues are more politically explosive than grain subsidies in a predominantly agricultural country—the downsides of its stand in Geneva outweigh the potential upsides. Failure to garner support from a single developing country with a large agriculture sector undercut the fiction that India was making some sort of heroic stand on behalf of poor farmers everywhere. This newspaper reported that China, Mexico and Thailand, among others, criticized Indian intransigence.

By reneging on a deal its own negotiators had hammered out barely seven months earlier, New Delhi conveys to businesses and governments worldwide that the turmoil and unreliability of the latter Manmohan Singh years may not be a thing of the past.

New Delhi’s position stems from a defense of one of the Congress Party’s worst legacies—the morally bankrupt and fiscally irresponsible food security program that pours billions of dollars into a creaky procurement system notorious for leakage and graft. Instead of protecting this system, a reformist government would have used the Bali deal as an excuse to spur domestic reform. Many economists say cash transfers to the poor would both cut corruption and stave off potential WTO challenges to India’s current practices from other countries.

In the longer term, India may also have cut off its nose to spite its face. At this point, India arguably has a greater stake in the success of the WTO than richer countries such as the U.S. and Japan. Should disillusionment grow with the WTO as an impossibly unwieldy organization vulnerable to capricious vetoes, pro-trade countries will likely double down on proposed regional trade agreements such as the Trans-Pacific Partnership.

If India is locked out of these blocs, as appears likely, it will undermine its goal of building a manufacturing base by integrating itself into global supply chains.

The drama in Geneva sends a disquieting message about the Modi government. On the campaign trail, Mr. Modi benefited from the support of some of India’s finest conservative and libertarian thinkers on economics and foreign policy. They helped create the image of a leader who would break from welfarism in economics and reflexive Third Worldism in foreign policy.

But none of Mr. Modi’s reformist backers has yet found a slot in his government. Along with a lackluster budget and a maximalist position in Geneva, this suggests less a new approach to governing India and more a doubling down on some of the worst instincts from the past. Already Mr. Modi’s government is beginning to look like merely a more efficient retread of Mr. Singh’s, rather than a bold departure from the past.

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