(The conclusion of a two-part series)

Note to readers: Yesterday, in an article headlined “Fed Up,” I reported that many members of the World Trade Organization have reached the end of their patience with a handful of members — India, and a few African and Latin Americans who love to nurture their grudges against the “rich” countries. Frustrations that such countries have poisoned the WTO’s negotiation atmosphere have been gradually building since the WTO was launched in 1995. The tipping point came in July, when India’s new prime minister, Narendra Modi, vetoed the only successful multilateral trade negotiation the WTO has ever conducted.

 As the future viability of this vital international trade rule-making institution is now on the line, it’s important to take a closer look at how the present fight started, and why. Today’s report offers more details on: where Modi is coming from, exactly what he wants, and who his sympathizers are. While India claims to speak for the world’s poor, that certainly is not the view of an increasing number of developing countries around the world. India’s trade distorting agriculture subsidies have caused food riots in parts of Asia, Africa, and Latin America. These days, complaints of the harm that India is inflicting upon other poor countries are surfacing again, particularly in Rwanda and other African countries. Concluding, the report highlights how leading WTO member countries plan to move on, with or without the cooperation of India and the other laggard countries.

So where is Modi coming from?

Modi, proudly, is a hardline Hindu right-winger, an economic nationalist who boasts of a 56-inch chest. He is a tough guy, a man who loves a brawl. His top political aide is dodging a prosecution for various murders. Modi himself has denied (unconvincingly) his role in the killings of some 2,000 Muslims in organized riots in his home state of Gujarat, back in 2002.

And in the past week, Modi has rather exuberantly been raining mortars and machine-gun fire across a populated India-Pakistan border area of Kashmir. The fighting, which has broken a tenuous truce reached in 2003, has so far killed nearly 20 civilians and displaced nearly 20,000 civilians, according to news reports. “The prime minister’s office has instructed us to ensure that Pakistan suffers deep and heavy losses,” a senior Indian Home Ministry official has told Reuters reporters Rupam Jain Nair and Mehreen Zara-Malik. Modi himself has boasted that “it is the enemy that is screaming.” Kashmir, with the possible exception of the Korean DMZ, is perhaps the world’s most dangerous border. A border where Hot Heads on both sides brandish their nuclear weapons.

Some of the other opinions that Modi brandishes are less scary, but well, unusual. Speaking to the United Nations General Assembly in New York on Sept. 27, Modi called for an “International Yoga Day.” He asserted that “yoga,” “spiritualism” and clean living could contribute to a better global environment. “By changing our lifestyle and creating consciousness, it can help us deal with climate change,” he explained to the diplomatic dignitaries. Meanwhile, back in New Delhi, the clean-living prime minister has authorized “hundreds of projects” to clear pristine forests, making way for mega power plants and other industrial projects that previous Indian governments had rejected on environmental grounds, Tommy Wilkes has reported for Reuters.

Modi held the WTO’s trade-facilitation package hostage to India’s demands to be allowed — permanently — to violate existing WTO restrictions on the subsidies it is allowed to dole out to uncompetitive Indian subsistence farmers. Adding to the indignity: previous Indian governments had agreed to those WTO rules in the 1980s. And the Indian government that Modi replaced in May had duly signed onto the Bali Package last December. As U.S. Trade Representative Michael Froman said last week, India has now “reneged” on its signed obligations.

Moreover, Modi’s demands have left WTO diplomats scratching their heads, wondering what he might have been smoking.

***

Food Insecurity

Since obtaining independence from Great Britain in 1947, India’s leaders have never figured out how to feed their people. In the name of “food security,” Indian governments have been buying food from the country’s farmers, paying above-market prices. The grains are then stockpiled. Perhaps half of the mountains of grain rot away, or are eaten by rats. Much of the rest is siphoned off by corrupt (politically connected) operators for sale on the black market.

What doesn’t rot or is not stolen is then doled out to feed India’s infamously malnourished urban population — especially when elections loom, which in India is often.

Perhaps because politics trumps economics, Indian politicians — no matter which party is in power —  have been increasing the subsidies, making bigger stockpiles.  And they have been demanding permission from the WTO to keep jacking up the subsidies as much as they want, even higher than the allowable limits that Indian governments have pledged to honor.

In Bali last December, the Indian negotiators won a generous four-year “peace clause.” That gave New Delhi four years to go ahead and violate existing WTO limitations by increasing agriculture subsidies, without fear of being held legally accountable. As the purpose of the WTO’s trade negotiations is to reduce trade barriers, not allow additional protectionism, this was arguably overly generous.

Yet the four-year grace period still wasn’t enough for Modi, when he came into office in May. He demanded that India be given the “permanent” right to break the existing rules — and right away, by the end of this year, thank you. Many diplomats, in many ways, have told the new Indian leader that this would never happen. Undeterred, Modi, somewhat joyously, brought down the Bali Package, thus shaking the foundations of trust that the WTO must have to remain viable.

At least, the ploy has generally played well at home. Indian officials have launched a whispering campaign, some of which has made its way into various Indian news accounts, falsely accusing the WTO’s top leadership of favoring the rich countries.

Claiming the Moral High Ground

Modi, like all of his predecessors dating to Jawaharlal Nehru (who ran India from 1947 to 1964, useful information for readers who are crossword puzzle addicts), has claimed that he holds the high moral ground. We are simply demanding the rights to feed our own poor, and we are the champion the world’s poor, so goes the refrain.

Some champion.

India is the world’s largest exporter of (subsidized) rice. The subsidies distort food markets in other countries by driving down prices. That’s bad enough in normal years for farmers in African and other nations who have to compete with the cheap Indian rice. Of course, the Europeans and Americans aren’t exactly innocents in such matters. But at least they have long ago moved away from stockpiling surpluses that cause real damage in world markets, preferring to pay their farmers cash subsidies that are considered less trade-distorting.

But India seems stuck on stockpiling and other protectionist schemes that cause real harm to trading partners. Remember the 2008 food riots in Haiti, Cameroon, Senegal and other countries? Global rice prices had skyrocketed after India put a damper on supplies by slapping on export controls during the previous year’s election season. Not only has no Indian politician ever apologized for the damage those export controls inflicted — after coming to power this May, Modi quickly imposed new price controls on onions and potatoes.

More recently, Rwanda’s trade minister, Francois Kanimba, explained to Shawn Donnan, the world trade editor of the Financial Times, how India’s present agriculture subsidies are hurting his country’s farmers. Rice and sugar from India had been reaching Rwanda “at such low prices [that] you are left wondering if these are really global market prices, simply explained by the competitiveness of the Indian economy,” Kanimba said. Donnan noted that the same concerns are being expressed in Nigeria, Benin, and other African food importers. This is “why the solution India is seeking at the WTO, which celebrates its 20th birthday in January, is unlikely to be palatable to many of its members,” Donnan concluded.

India’s claims to speak for the world’s poor used to be accepted automatically in the Third World. Signs that that’s been changing surfaced at the WTO’s Bali meetings last December. At a press conference, India’s then top trade official, Anand Sharma, asserted that India was only seeking “food security” for poor people everywhere. Sharma was humiliated by a furious journalist from Benin, one of the world’s poorest countries. “You don’t speak for us,” the Benin journalist angrily shouted. Those of us who were in the room will never forget the emotions on display at that press conference. (For further details, see “India’s Bali Debacle,” which I authored for the Wall Street Journal Asia. The piece, along with two other investigative reports into India’s WTO stance in recent years, is posted on the Wall Street Journal section of www.rushfordreport.com.)

India’s Admirers

These days, Modi’s been enjoying his success in having placed himself on the WTO’s center stage, even though he is playing the role of a pariah. Modi knows he enjoys the tacit backing of envious fellow economic nationalists in places like Venezuela, Bolivia, Zimbabwe, Ecuador and Cuba. Such leaders love to nurture their grudges against the rich countries, seeing the WTO as a tool of the rich. President Jacob Zuma of South Africa runs with this crowd. These days, Zuma must be especially envious of Narendra Modi’s nerve.

Zuma is another economic nationalist who is skeptical that the WTO’s multilateral trade liberalizing negotiations will benefit South Africa. But he might be better advised to seek some sound economic advice as to why South Africa’s economy has been losing its dynamism.

Two very savvy Pretoria-based authorities on what used to be called “political economy” — Mzukisi Qobo of the University of Pretoria and Peter Draper, of Tutwa Consulting — recently succinctly explained Zuma’s attitude on economics in a May 27 article in South Africa’s Business Day. Under Zama’s economic guidance, South Africa’s economic growth has been on a steady decline, Qobo and Draper noted. Nor does Zuma seem to grasp the “gravity” of the economic challenges that are holding his country back, they added. “He also seems to have given up on leaving a great economic legacy, and instead prefers to manage a balancing act of contending factions within the African National Congress (ANC).”

Zuma’s trade minister, Rob Davies, is a member of the Politburo of South Africa’s Communist Party. That fact speaks well of Davies’ personal courage in having opposed apartheid in the days when to do so was to risk one’s life. But it doesn’t necessarily suggest that Davies’ economic credentials are sterling. Many African observers worry that South Africa, traditionally the most solid African economy that still regards itself as the “gateway” to the rest of Africa, will inevitably be left behind. Watch the East Africans — especially the emerging ties and improved infrastructure linking Rwanda, Tanzania, Uganda and Kenya — many African watchers say. Yes, these countries also have their own economic weaknesses. And in the WTO, the East Africans seem to be split on whether to speak out in favor of India, or against. Still, one has a growing sense that their future could be brighter than South Africa’s, depending upon how well they manage to integrate themselves into the global economy. At some point, the South Africans will likely kick themselves for their lack of economic foresight.

Zuma first worked earlier this year behind the scenes with the Addis Ababa-based African Union (an opaque organization which wasn’t even a participant in the Bali negotiations) to reopen the Bali deal. Conveniently, Zuma’s former wife now heads the AU. But Zuma and the AU came under intense pressure, mainly from Europeans and Americans, but also by dozens of other WTO member countries. They backed down during African Union meetings held in Malabo, Equatorial Guinea, in August. Since then the African Group of WTO members has basically been holding their tongues, trying to pretend that what India has done, hasn’t really happened. (For the background, see “Power Plays in the WTO,” www.rushfordreport.com, June 3, 2014). South African and African Union officials declined repeated requests for comment, as did a spokesman for the WTO’s Africa Group.

In sum, what the Africans started and India’s Modi finished was the tipping point. Leading circles in the WTO — the “North” definitely, and many in the “South” — believe that this time, the chronic naysayers have simply gone too far.

An Uncertain Plurilateral Future

While the WTO’s future is presently clouded, one thing appears clear: no longer will a handful of malcontents be allowed to poison the chances of dismantling as many of the world’s remaining trade barriers as possible. That means the WTO will turn away from its tradition of conducting trade-liberalizing negotiations on a multilateral basis. Instead, there will be smaller groups of like-minded countries that will work together to facilitate trade flows. This is the so-called plurilateral option.

The future likely model has precedents. The WTO’s Government Procurement Agreement has 43 member countries (counting the European Union’s 28). The GPA’s rules, which are only extended to participating countries, are aimed at improving transparency and competitive bidding when governments agree to award contracts to all bidders (as opposed to just doling out lucrative contracts to well-connected domestic cronies). China, New Zealand, and eight other countries have been negotiating to join in that plurilateral. No African country has shown interest in joining in such an experiment in open government. Nor has India.

India is, however, a member of the WTO’s Information Technology Agreement, a plurilateral WTO success story that dates to 1997. ITA signatories, including India, have slashed tariffs on imports of high-tech gadgets like computers and telecommunications equipment. But India has refused to participate in ongoing negotiations to expand the ITA’s product coverage to include new inventions — iPhones, iPods and so forth — that weren’t invented in the 1990s. In fact, Modi has already moved in the opposite direction: jacking up tariffs on imports of iPhones.

Late last week, the WTO’s director-general, Roberto Azevedo, described the uncertain future for further WTO multilateral trade negotiations, especially if “no solution” is found for the “Bali impasse.” In such a case, the director-general noted to a business audience in Toronto on Oct. 9,  “then members must ask themselves some tough questions — about how they see the future of the Bali package and the post-Bali agenda. And what this means for the WTO’s negotiating function.”

Translated from the nuanced diplomatic language, Azevedo was pointing to a plurilateral future for the WTO, at least until the benefits of multilateral trade liberalization become apparent to the laggards. It might even turn out that the Bali deal will proceed as a plurilateral arrangement. India and the backward-looking African and Latin countries will be offered the choice to be left behind, if they prefer.  Such, it appears, is their future — at least until the day comes when they will be willing to take off their economic dunce caps.

OPINION ASIA

India’s Bali Debacle

Delhi holds free trade hostage to score political points at home

 By
GREG RUSHFORD
Wall Street Journal Asia
Dec. 9, 2013 11:50 a.m. ET
Bali, Indonesia

After four days of intense round-the-clock negotiations, the 159 members of the World Trade Organization struck a deal last week that is expected to give the global economy a $1 trillion boost. But progress toward freer trade came at a price. Indian Commerce Minister Anand Sharma held up the deal to extract permission for Delhi to break current WTO rules that limit agricultural cash subsidies and food stockpiling.

The real surprise was how India’s backsliding provoked an angry reaction even among its fellow developing countries. By overplaying its hand, Delhi damaged its reputation as the champion of the world’s poor. That may have important consequences for future WTO negotiations.

First the unalloyed good news. The core of the deal, the Trade Facilitation Package in WTO parlance, aims at moving goods more efficiently across international borders, especially in the less-developed parts of Asia, Latin America and Africa. It should help streamline inefficient customs procedures, improve some of the world’s worst roads and otherwise foster efficiencies in clogged ports of entry.

Mr. Sharma was willing to throw all of these benefits away to score political points at home. Sonia Gandhi’s Congress Party, weakened by corruption scandals, is lagging in the polls ahead of next April’s general election. Mr. Sharma’s mission in Bali was to secure agricultural protectionism, a centerpiece of Congress’s appeal. The largesse is meant to be doled out to hundreds of millions of India’s poor voters–from subsistence farmers to urban slum residents.

At a contentious Dec. 5 press conference, Mr. Sharma told reporters that he had come to Bali not “to make a deal,” but “to secure the interests of the poor, as well as food security.” India was no longer a “beggar nation,” he insisted, and called all criticisms of his position wrong or misinformed.

That infuriated a journalist from Benin, one of the world’s poorest countries, who at the conference shouted to Mr. Sharma, “You don’t speak for us.” WTO members like Benin recognize they cannot afford to lavish subsidies on their poor farmers, Indian style. They did not want Bali to fail.

Nor did more than 100 influential WTO members and groups, including Hong Kong, New Zealand, Costa Rica, Chile, all of Asean, and most African and Latin American countries. On Nov. 29 these WTO leaders circulated a strong letter supporting Director-General Roberto Azevedo’s attempts to ensure a “successful outcome” in Bali. “We were sending a clear message about India’s likely obstructionism,” one Asian diplomat involved in drafting the letter explained.

India also lost the support of important players like China, Brazil, and even Russia. An upset Indonesian President Susilo Bambang Yudhoyono leaked to the Jakarta Post that he planned to call Indian Prime Minister Manmohan Singh, hoping to persuade India to be more reasonable. Indeed, the leading Indonesian newspaper hammered India all week, rightly reporting that Delhi had been “widely blamed” for the hardball tactics leading to the negotiating impasse.

Mr. Sharma offended many peers and undermined his claims to be negotiating in good faith by asserting that his demands were “non-negotiable.” Diplomats privately called the Indian position “arrogant,” “condescending,” and “insulting.”

Said one Latin American trade negotiator, “The WTO is supposed to be about freeing trade, not negotiating increased protectionism.” Another senior Asian diplomat reminded me that India’s unfortunate record of stockpiling grains contributed in 2008 to skyrocketing rice prices that caused food riots from Haiti to the Ivory Coast and Indonesia. “You can’t trust these people,” he said of the Indian delegation.

At the end of the day, Mr. Sharma’s insistence that India needed a permanent exemption from existing WTO rules limiting agricultural subsidies was supported only by the usual suspects when it comes to backward-looking economics: Zimbabwe, Venezuela, Cuba, South Africa, and Bolivia. Not that Mr. Sharma had reason to care. He was really speaking to Congress Party constituencies back home.

Still, the threat to torpedo the entire negotiating package was considered credible enough that Mr. Sharma ended up getting most of what he had wanted. The “peace clause” in this deal allows India to continue its subsidies for four years, at which point the fight could start all over again.

The politics of trade are distorted in India by the country’s failure to take advantage of past openings. China and others have developed their manufacturing industries by exporting finished goods to North America and Europe. In the process they have created unskilled jobs for people moving off the land and into the cities.

In India, by contrast, excessive regulation, taxation and corruption prevent companies from building factories. So the rural poor continue to demand handouts and protection from agricultural imports.

Most other developing countries face a different political calculus. As their labor force moves into the cities, they are less concerned with protecting grain markets and more interested in using the WTO to open markets wider to their manufactured exports.

That created what some are now calling a “South-South split.” While it’s not clear how this will affect the political landscape in future WTO negotiations, it was clearly evident in Bali. The backlash against the main obstructionist power in global trade talks could mean that the tide is finally turning away from a “rich vs. poor” mentality that has stymied the WTO’s Doha Round for the last 12 years.

Mr. Rushford publishes the Rushford Report, an online journal based in Washington, D.C. that specializes in the politics of international trade and development.