Bloomberg News

EU Says Global Trade Talks Risk Collapse as India Resists

July 25, 2014

The European Union and dozens of nations warned that World Trade Organization talks are at risk of falling apart as India seeks to renegotiate part of a breakthrough agreement reached last year.

WTO members are striving to pass part of a package of deals reached in December in Bali by a July 31 deadline. The government of Indian Prime Minister Narendra Modi, who took power in May, will block the process until he receives further assurances that he can expand food subsidies without penalty, according to two Indian officials with direct knowledge of the talks who asked not to be identified because they aren’t authorized to speak to the media.

“A great opportunity to mobilize trade as an instrument for growth and development would be lost” if the July 31 deadline is missed, the 28-member EU said in a statement yesterday. “The credibility of the WTO, which has during the financial crisis proven its value as a firewall against protectionism, would be further damaged.”

Failure to make progress this week risks undermining the first major accord in the WTO’s 19-year history. While the global trade body says the deal will stimulate the world economy by more than $1 trillion through cutting regulatory hurdles, opponents say it could hurt the ability of poorer countries like India to provide cheap food for their citizens.

‘Step Away’

“A decision to step away would be in no one’s interest,” 25 WTO members, including Australia, Pakistan, Peru and Vietnam, said in a statement yesterday. “It would seriously undermine the ability of the WTO to deliver for the future.”

The Bali agreement, reached under Modi’s predecessor, lets India and other developing countries subsidize food staples such as rice without the risk of legal challenges so long as they don’t distort trade, according to a text on the WTO’s website. Members also agreed to negotiate a permanent solution for adoption at a meeting scheduled for 2017, the text says.

“It is profoundly disappointing that we have arrived at this moment,” Michael Punke, the U.S. ambassador to the WTO, said in a statement in Geneva. “The question is this: Will members of the WTO keep their commitments?”

Modi’s government now plans to block a Trade Facilitation Agreement due to be concluded by the end of the month until it receives a detailed plan for reaching a permanent solution on food security, according to the two Indian officials. Modi’s party won the biggest Indian election mandate in 30 years on a promise to bring economic development.

‘Simple Issue’

“India is seriously concerned about the lack of progress on some of the Bali outcomes and minimal movement on the others,” according to an e-mailed statement from India’s Ministry of Commerce in New Delhi today. “We believe this is a simple issue which can be addressed very quickly.”

Indian Trade Minister Nirmala Sitharaman said in a statement to lawmakers today that India “will find it difficult” to endorse the Bali agreement without assurances that a permanent solution on food security will be reached. Decisions on food security have been sidelined since December, she said.

“There is a political compulsion in India’s decision because it has to run this subsidy program,” said Biswajit Dhar, a professor of economics at Jawaharlal Nehru University in New Delhi. “There’s a fear in India that if the subsidy is left behind now, it will be left behind forever. These assurances aren’t enough.”

Minimum Targets

India last year allocated 1.25 trillion rupees ($20.8 billion) for its public food distribution system, the world’s largest. More than two-thirds of its 1.2 billion people eat less than the minimum target set by the government, leading to the highest rate of malnourished children in the world after East Timor, according to the 2013 Global Hunger Index published by the International Food Policy Research Institute in Washington.

Modi’s first budget since his election win was seen as a missed chance to take tough measures on subsidies by economists at banks including Deutsche Bank AG and Nomura Holdings Inc. (8604) Finance Minister Arun Jaitley announced plans to “overhaul” food and fuel subsidies to narrow the fiscal gap to 3 percent of gross domestic product in 2017 from 4.5 percent in the last fiscal year, without providing details.

Blocking the deal would undermine optimism among foreign investors that Modi’s administration would be more pro-business, according to Jake Colvin, Washington-based vice president of the National Foreign Trade Council, whose members include The Coca-Cola Co., Google Inc. (GOOG:US) and Wal-Mart Stores Inc. (WMT:US)

“CEOs from around the world have come out and said this deal is really important,” Colvin said by phone. “Holding the deal hostage is sending the wrong signal.”

To contact the reporter on this story: Kartikay Mehrotra in New Delhi at kmehrotra2@bloomberg.net

To contact the editors responsible for this story: Daniel Ten Kate at dtenkate@bloomberg.net Jeanette Rodrigues


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