WTO: Why India and China Said No to U.S.

by Bruce Einhorn and Mehul Srivastava
from Business Week

Trade talks broke down July 29 as India and China refused to bow to U.S. demands on agricultural subsidies

It’s not often that China and India find themselves on the same side. They’re the world’s most populous countries and have two of the fastest-growing economies, but one is ruled by a communist regime, the other by an unruly coalition government. They don’t see eye to eye about relations with the U.S. China has been a longtime supporter of Pakistan, India’s bitter rival. And Indians look enviously at China’s manufacturing strength, while Chinese want to replicate India’s IT services success.

Following the collapse of the latest global trade talks, though, the two Asian giants find themselves in the same boat. The negotiations over the World Trade Organization’s Doha Round of trade liberalization came to an inglorious halt July 29 amid disagreements about agricultural subsidies. The U.S. blames what it sees as intransigence on the part of India and China. Other nations are scolding New Delhi and Beijing, too. For instance, rather than concentrating on helping to address global concerns, India and China “focused too much on their own interests,” Japan’s Chief Cabinet Secretary Nobutaka Machimura told a news conference on July 30.
Rural Unrest Threatens India and China

The criticism may sting, but the two Asian giants aren’t likely to succumb to overseas pressure. Both countries enjoy high economic growth, thanks to overseas demand for their manufacturing and outsourcing services. At the same time, Indian and Chinese leaders also have to worry about economic hardship in the countryside, where hundreds of millions of farmers have struggled to compete against imports from the U.S. and other countries.

China, for instance, has been trying to alleviate pain in the countryside for several years. The economy in the country’s well-off coastal provinces has boomed, leaving behind rural areas home to some 500 million people (BusinessWeek.com, 2/16/07). When it comes to competing against American agribusiness, “Chinese household farmers are very weak,” says Wang Yong, associate professor and director of Peking University’s Center for International Political Economy in Beijing.

Certainly, Chinese farmers are not able to supply all of the country’s needs. Imports of soybeans, a staple of the Chinese diet, surged 53% last year, to $11.5 billion, according to statistics from China’s Agriculture Ministry. Total agricultural imports for 2007 amounted to $41 billion, a 28% increase over the previous year. While Beijing has taken some measures to ease the burden on local farmers by reducing taxes, the imbalance still worries leaders such as President Hu Jintao and Premier Wen Jiabao, who have talked frequently about the need to boost development in rural areas. “The government faces very serious pressure from farmers,” says Wang.
Indian Farm Subsidies: A Political Crutch

The pressure is even more acute for the Indian government. While Beijing’s leaders have to worry about potential unrest in the countryside, officials in New Delhi have to confront a genuine rural revolt. The Naxalites, a violent Maoist insurgent movement based in rural parts of eastern and central India, have targeted poor farmers for recruiting (BusinessWeek, 5/7/08).

The government has other reasons to be concerned about unhappy farmers. For India’s Congress-led coalition, farm subsidies remain a crucial electoral crutch. Nearly 70% of the population lives in the countryside and the vast majority of Indians derive their income directly or indirectly from farming, even though agriculture makes up less than a fifth of India’s almost trillion-dollar economy. “If the government were to agree to something which will kill our agricultural sector, then their political futures will be finished,” says MS Swaminathan, the director of India’s National Commision on Farmers, who led the country’s green revolution in the 1970s. “Already, agriculture has been neglected in India, and that affects about 700 million people.”

In the past decade, as India has embraced reforms that have opened up and revitalized most of the developed sectors, agricultural growth has lagged, even as the rest of the economy grew by 8%-10%. On Indian cotton farms, for instance, the cost of reduced subsidies in the form of government price controls has already had disastrous effects. Unable to compete internationally on the cotton market, cotton farmers in central India, the second-biggest cotton producer after China, have spent a decade falling deeper into debt. According to government estimates, more than 160,000 farmers have killed themselves because of those debts. That’s prompted the government to announce a $15 billion loan waiver for farmers in its current budget.
Inflation Is Also a Factor

Part of the reason for India’s firm stand on protection for its farm sector is the crippling food-price inflation the country is facing. The cost of basic cereals, beans, and lentils has risen 25% in the past three years.

Maintaining some kind of stability in its agricultural sector is key to helping tame the nearly 11% annual inflation rate that threatens not only the current government, but also decades of meager income and nutritional gains among India’s poor, says Karkade Nagraj, an agricultural expert at the Madras Institute for Development Studies. “You can’t isolate what happens to Indian farmers because of WTO policies from what is happening in the world economy,” he says. “With the crisis on the financial market, a huge amount of money moves to the commodity markets, leading to a commodity bubble. In a condition such as that, if you open up agriculture, then the farmers could gain, but that’s not going to sustain anything for a long while.”

Preoccupied with their own rural problems, Chinese and Indian policymakers have little sympathy for the U.S. and other countries that subsidize farmers. The Americans, Europeans, and Japanese are “asking weaker countries to dismantle their own protection measures without doing the same in their own countries,” says Shi Yinhong, a professor of international relations at People’s University in Beijing. “It’s a double standard.”
India, China Seem Unlikely to Back Down

The misunderstanding can go both ways, though, as people in China and India have inflated ideas about what sacrifices foreign governments can ask of their farmers. “People in developing countries don’t fully understand the difficulties of advanced countries,” Shi says. “They think rich countries have much more leeway to make [concessions] themselves.”

And with the global economy hit by the American downturn, the credit squeeze, and high prices for oil, steel, and food, says Shi, governments on both sides of the debate are worried about risking any bold moves. That means it’s even less likely India and China will back down in the current trade dispute.

Einhorn is BusinessWeek’s Asia Regional Editor in Hong Kong. Srivastava is a BusinessWeek reporter in Delhi.

Einhorn is Asia regional editor in BusinessWeek’s Hong Kong bureau . Srivastava reports for BusinessWeek from New Delhi.