GATT, WTO – FLOW OF FOREIGN CAPITAL

GATT, WTO – FLOW OF FOREIGN CAPITAL

GATT

            The General agreement on Tariff and Trade GATT was established in 1948 in Geneva to pursue the objective of free trade in order to encourage growth and development of all member countries. The principal purpose of GATT was to ensure competition in commodity trade through the removal or reduction of trade barriers. The first seven rounds of negations conducted under GATT were aimed at simulating international trade through reduction in tariff barriers and also by reduction in non tariff

restrictions on imports imposed by member countries. GATT did provide a useful forum for discussion and negotiations trade issues.

            The 8^th round of Multi-lateral Trade Negotiations, popularly known as Uruguay Round (since it was launched at Punta del Este in Uruguay) was started in September 1986 at a special session of GATT Contracting parties held at Ministerial level. World trade had undergone a structural change during the four decades since the establishment of GATT in 1948.

            The GATT agreement stipulates that anti-dumping proceeding will be terminated if the volume of dumped imports from a particular country is less than 1% of the domestic market. The only exception is less than 1% of the dumping countries collectively account for more than 2.5percent of the domestic market. Anti-dumping proceedings will be terminated if the margin of dumping is less than 2%. These clauses do help India to protect its exports from antidumping investigations. It would have been much better for India, had the figure of dumped imports as a share of domestic market been more than 1%.

            Some critics are of the view that Trade-Related Intellectual property Rights (TRIPs) as embodied in the GATT agreement will have disastrous effects on our economy, more especially in two vital areas i.e., pharmaceuticals and agriculture.

Both these areas affect the well-being of the people.

Trade Related Investments Measures (TRIMs) were initiated by US in 1980 since it was losing ground in competition in goods to Japan and other newly industrialised nations of East Asia and intended to recover its lost ground through trade in services. Although GATT had never discussed the idea of trading in services as part of the earlier seven rounds of negotiations, the USA tried to sell this idea in the 8th Round of GATT negations. The principal objective was to benefit the Multinational Corporation (MNCs) so that they could undertake investment in financial services, telecommunications, and marketing so as to boost world trade.

There is no doubt that in a world of unequal partners, multilateralism is superior to bilateralism  and if some concessions are to be extracted from strong partners belonging to US and European Community, then the combined strength of the developing countries can exercise a stronger of their favour. One redeeming feature of the GATT is that there is the principle of one country, one vote. However, the developed countries by various new devices, more especially through intellectual property rights and TRIMs. Although the Government of India is claiming that very substantial benefits are likely to accrue as a consequence of GATT agreement, but it is premature to reach any definite conclusion.

The history of GATT reveals that whenever newly industrialised nations have challenged the competitive strength of the developed Countries, they have immediately retaliated by imposing both tariff and non-tariff batteries. They have now enlarged these in the form of TRIPs and TRIMs. The innovation of the social clause was also conceived with the same intention of blunting the competitive advantage of developing nations. This game will continue. The solution lies in the fact that the developing nations should advantage of the multi-lateral trade organisms and show their combined strength by closing their ranks, rather than surrender their sovereignty one after another. To say that there is no alternative is a defeatist solution. Now that china has also been admitted to WTO, both China and India should work together to assert a fair and just treaty among the trading partners of WTO, rather than pushing down the throat of the weak, the will of the strong partner(s).

The World Trade Organism (WTO):

            The World Trade Organism (WTO) as contained in the Final act was established on 1^st of January 1995 and India became a founder member of WTO by ratifying the WTO agreement on 30 December 1994. According to the Estimates prepared by the World Bank, OECD and GATT Secretariat, the overall trade impact as a consequence Uruguay Round Package will be additional to the merchandise good by $745 billion by the year 2005. The GATT Secretariat further projects that the largest increase will be in the area of clothing (60%), agriculture, forestry and fishery products (20%) and processed food and beverages (19%). But the Economic Survey (1994-95) has underlined the stark reality that whereas the developed countries want that under the pressure of the super-statal organization (WTO), the developing countries should reduce trade barriers and permit free flow of goods, they themselves want to pursue protection it policies  to save their interest by erecting trade barriers.

            India, being a founder member of the WTO, a has been following the WTO decisions, but as a consequence certain effects on the Indian economy have become evident.

            WTO has been urging India to lower import duties, remove controls on consumer goods imports, reduce quantitative restrictions, etc. Under the Uruguay Round Agreement, India offered to reduce tariffs on capital goods, components, intermediate goods and industrial raw materials to 40% in case our tariffs were between 25 to 40 per cent and to bind the tariff ceiling at 25 percent in case our tariffs were below that percentage. This reduction in tariffs was to be achieved by the year ending 2000.

            The United States has signed WTO agreements with the proviso that all such agreements will have to be passed by the US Congress, being a sovereign body. There is another assurance given by the US President to the Congress. In case, the decisions of Dispute Settlement Machinery of WTO go against the United States, they will be reviewed by US justices. If they find the decisions unfair, the US has unilaterally reserved for itself right to walk out of the WTO.

            Criticizing this big brother like attitude, some commentators believe that the rule makers are not going to tolerate being over-riled. Many of the US laws like section 301 of US Trade Act is clearly a violation of WTO agreement. This matter was considered by the Dispute Settlement Panel of WTO which gave its verdict that those laws are WTO complaint. This has emboldened the US administration as complaint with US trading interests.

            WTO Agreement on Agriculture stipulated that developed countries would reduce their subsides by 20 percent in six year and developing countries by 13 percent in 10 years. But as facts stand today, developed countries tried to circumvent this agreement by providing Green box and Blue Box subsidies to support agriculture.

            Green box subsidies include amounts spent on Government services such as research, disease control, infrastructure and food security. They also include payments made directly to farmers that do not direct income support assistance to help farmers restructure agriculture, and direct payments under environmental and regular assistance programmes.  This definition is very wide and includes all types of Government subsidies.

            Blue Box Subsidies are certain direct payments made to farmers where the farmers are to limit production, certain government assistance programmes to encourage agriculture and rural development in developing countries, and other support on a small scale when compared with the total value of the products supported 15 per cent or less in the case of developed countries and 10 per cent or less for developing countries.

            “In the real world, as distinct from the imaginary or inhabited by free traders, survival in agricultural in agricultural markets depends less on comparative cost advantage than on comparative access to subsidies. Liberalizing local food markets in the face of unequal competition is not a prescription for improving efficiency, but a recipe for the destruction of livelihood.”

            Earlier, Indian agriculture prices were lower than international prices mostly. But as a result of the heavy subsidization of agricultural exports by developed & centuries, that situation undertook a dramatic about –turn. Indian farmers have been put to serious disadvantages. The phenomenon of farmer’s suicides and the growing interest in several states because of the distress of farmers specializing in agricultural commodities and their exports is a very serious human problem.

Flow of Foreign Capital:

            Most countries of the world which embarked on the road to economic development had to depend on foreign capital to some extent. The degree of dependence, however, varied with the extent to which domestic economy in respect of technical progress, the attitude of the respective governments, etc. But the fact cannot be denied that foreign capital contributed in many important ways to the process of economic growth and industrialization. The need for foreign capital for a developing country like India can arise on account of the following reasons:-

(a)                          Domestic capital is inadequate for purpose of economic growth  and it is necessary to invite foreign capital.

(b)                          For want of experience, domestic capital and entrepreneurship may not flow into certain lines of production. Foreign capital can show the way for domestic capital.

(c)                          There may be potential savings in a developing economy like India but this may come forward only at a higher level of economic activity. It is, therefore, necessary that foreign capital activity in the initial phase of development.

(d)                         It may be difficult to mobilize domestic savings for the financing of projects that are badly needed for economic development. In the early stages of development, the capital market is itself underdeveloped. During the period in which the capital market is process of development, foreign capital is essential as a temporary measure.

(e)                          Foreign capital brings with it other scarce productive factors, such as technical know how, business experience and knowledge which are equally essential for economic development.

It was only during the eighties that government relaxed its policy towards done specially in respect of investors from Oil Exporting Developing countries with a well-defined package of exemptions.

This was followed by Technology Policy Statement (TPS) in January 1983. The objective of the Policy was to acquire imported technology and ensure that it was of the latest type appropriate to the requirements and resources of the country. Under this policy, a number of policy measures were announced liberalizing the licensing provisions: 

a.       All but 26 industries were exempted from licensing in case of non-MRTP and non-FERA companies;

b.      Private sector was allowed to participated in the manufacture of telecommunications equipment;

c.       A number of electronic were allowed to manufacture electronic MRTP act;

d.      Foreign companies were allowed to manufacture electronics components;

e.       MRTP companies were allowed to set up industries in backward areas;

f.       A number of new items were added to the list of industries allowed to be set up by FERA and MRTP units;

g.      Broad banding of a license for a number of industries was allowed.

After the announcement of New Industrial Policy (1991, there has been an acceleration in the flow of foreign capital in India, As per data provided by the Government of  India, during 1991-1992 to 2004-2005, total foreign investment flows were of the order of $85.7 billion. Out of which about $40.6 billion (47.4 per cent) were in the form of Foreign Direct Investment and the remaining $45.1 billion (52.6 per cent) were in the form of portfolio investment. This clearly shows that the performance of foreign firms was more in favour of portfolio investment. Moreover, out of the total direct foreign investments of the order of $40.6 billion, nearly 9.1 percent ($7.8 billion) was contributed by Non-resident Indians. Thus, the net contributed of foreign firms in direct investments was about 38 per cent of total foreign investments flows.

            As a response to the policies of liberalization, the foreign investors were very keen to undertake portfolio investment, including GDR (Global Depository Receipts) and investment by Foreign Industrial Investors, Euro equities and others rose sharply from $244 million in 1992-93 to $3,824 million in 1994-95 and declined to $1,828 million in 1997-98. Portfolio investment became negative in 1998-99 but again improved to $2.76 billion 2000-01, but again declined to nearly $1 billion in 2002-03 but touched a record level of 11.4 billion in 2003-04 and $9.3 billion in 2004-05.