Published: The Financial Express, June 04, 2004,

By Pradeep S Mehta

The international community is engaged in a trade negotiation, not at the WTO, but at the Organisation for Economic Cooperation and Development (OECD). Forty countries are involved in these negotiations. These negotiations are aimed at having an agreement for the reduction or the elimination of trade distorting subsidies in the steel sector. There are various implications to this which can be quite portentous to the developing world, including India.

One cannot but wholeheartedly agree with the supporters of such an endeavour, that state subsidies to the steel sector distort the market. Therefore, there has to be a complete ban on such subsidies. India is very enthusiastically participating in this endeavour. India is in favour of a basic draft which would form the starting point for the hard negotiations. OECD sources say that the first draft agreement would be ready by September. A meeting in the first week of April at Paris renewed the commitment to cut all trade distorting government subsidies on steel. Soon thereafter, OECD officials visited India in the first week of May, to be told by industry representatives that conditions for countries like India would have to be different from those of developed countries. This resistance has been constant right from the beginning, and India has been in the vanguard about the rights and separate status for the developing countries.

While there is no gainsaying of the fact that trade or market-distorting subsidies are bad and need to be combated, the question to be asked is whether the OECD is the right forum for such negotiations. In other words, is the OECD the right place to negotiate and if not then why?

Negotiating an international agreement at the OECD would set a wrong precedent for a number of reasons. This would encourage countries to ask for negotiations at the OECD on many other issues which do not meet with success at the WTO.

It is pertinent to recall that the earlier effort of the OECD members and five observer non-member countries of negotiating a multilateral agreement investment at the OECD was not successful. A successful agreement reducing or banning all steel subsidies will once again open the door for many other issues. For instance, the Singapore issues. Even after the commitment made at Cancun, the EU continues to demand them with ‘flexibility’ as the cornerstone. There is strong opposition at the WTO to restart negotiations on all, though there is greater acceptance on trade facilitation. The wily EU could easily start the process at OECD, though the jury is still out about how the US will react. Already EU has upset the US dream of an America’s block by offering a special trade deal to the Mercosur block (Argentina, Brazil, Paraguay and Uruguay). The two leading countries of this block are both members of G-20 and the Cairns Group. By this clever move, the EU would possibly break the unity of G-20 and also annoy Australia, New Zealand and Chile, the more aggressive Cairns Group members. Further, the special concessions would include investment and competition.

Who knows that a move could be made at the OECD to bring in other non-trade issues like labour standards, animal welfare, human rights, etc through the OECD route. The other important issue is related to market distorting subsidies.

Be that as it may, an agreement reducing or banning all state subsidies on steel does not address the larger issue of how to tackle the trade or market distorting subsidies that affect all sectors. This would be a very blinkered approach to the whole issue of dealing with market or trade distorting subsidies. Forums like the OECD could be used to discuss such issues but certainly not to negotiate an agreement.

At the multilateral trading level there is an Agreement on Subsidies and Countervailing Measures (ASCM). This Agreement governs the law related to subsidies at the WTO. Any negotiation on the question of subsidies must be within the framework of the ASCM. Such a negotiation at the WTO would take care of market distorting subsidies and encompass all the sectors.

All international trade negotiations are based on the principle of give and take. For an international trading negotiation to succeed, the negotiating parties must be happy with what they get as against what they have to give. Thus, a satisfactory level of “trade off” is the bedrock of every trade negotiation. The steel negotiations at the OECD will be without a “trade off”. In other words, what a country will get in lieu of what it is offering is not certain in negotiations in the OECD. For instance, in the present negotiations on steel in the OECD, India is very vocal about asking for a developing country status, an SDT provision. A developing country status would mean that while in principle there is an agreement to ban subsidies, more time and flexibility is sought for its implementation. If India does not get the developing country status now and compromises on the issue, then OECD will not have any thing substantial to offer to India. On the other hand, in the negotiations in the WTO, if a country makes a compromise, then it ensures that it gets its pound of flesh in return from others. Such a “trade off” does not have any scope in forums like the OECD. Thus these type of negotiations at the OECD cannot be in the interest of developing countries. Even if such negotiations were to take place outside the WTO, organisations like the United Nations Conference on Trade and Development (UNCTAD) would be a better place to negotiate than OECD. After all UNCTAD has good experience in negotiating agreements on commodities.

The other important issue that needs to be addressed is that if a treaty on steel subsidies is negotiated at the OECD, then, what will be its legal character. What type of teeth will it have? Otherwise, it will be just another showcase treaty like many others which are often never implemented properly. Some have suggested that once the agreement is ready, it should be taken to the WTO. Fine, but is that a sensible way to do it! Why not do it at the WTO to begin with?