Economic Integration

The US and China have announced separate initiatives to help improve the cotton sector in four major African nations.  China’s commerce minister, Mr. Chen Deming, along with African trade ministers and representatives, announced earlier this month their agreement on a US$20 million three-year scheme.

An article published by the Chinese Xinhua News Agency suggested that the program may be just the first step in a longer term effort that could result in the eventual presence of Chinese textile manufacturing interests in Benin, Burkina Faso, Chad and Mali (C4), which account for about 40 percent of the continent’s raw cotton output.

Initial efforts, according to Xinhua, are aimed at the transfer of technology, along with the provision of machinery, planting seed, fertilizer and pesticides.  China also will share research  technical assistance and its experience with cotton cultivation.

Mr. Chen said that the initial three-year program could be renewed, and that over the longer term, China could eventually move a portion of its textile and apparel industry onto the continent, as part of what he called an “aid for trade”.

The full Xinhua article is here.

Meantime, the US Trade Representative’s Office has announced its intention to extend the West African Cotton Improvement Program for an additional four-years at a cost of US$16 million, when the current program expires in April 2012.

Introduced in 2005 with an initial investment of US$27, the program focuses on a number of key activities described by the US Agency for International Development, such as:

• supporting policy and institutional reform for private management of the cotton sector;
• improving the quality of cotton;
• establishing regional training programs for cotton ginners;
• strengthening a cotton biotechnology program;
• expanding the use of good agricultural practices in cotton-producing areas, including soil degradation and pest management; and
• improving relationships between the US and West African agricultural research organizations.

Questions:  Given China is not the first country to put money, services and expertise into Africa to improve the continent’s cotton industry, what are the chances of success?

How successful have previous attempts been?

The World Trade Organization (WTO) concluded its eighth biennial ministerial conference in Geneva, Switzerland, on December 17, with what Director General Pascal Lamy described as “constructive dialogue among Ministers which has improved the WTO's atmosphere and outlook”; however, accomplishments on the Doha development round remained elusive.

Among the ministerial’s accomplishments were the accession of Russia, Montenegro and Samoa, a government procurement agreement and seven specific decisions that included, among others, a work program on small economies, accession of least-developed countries, preferential treatment to services and service suppliers of least-developed countries and a Trade Policy Review mechanism.

To the dismay of a large number of ministers, however, virtually no forward movement was achieved in the WTO’s Doha Development Round.

In a report to its members, the National Cotton Council of America said that at the conference’s opening session, Mr. Lamy pressed WTO members to address the primary question causing the impasse in the negotiations, specifically: What contribution major emerging markets, such as China, India and Brazil, should make towards the further opening of global markets?

The Council noted that efforts to re-start the Doha negotiations earlier this year, following the collapse of the talks in July 2008, were unsuccessful, in part, because the United States insisted that Brazil, China and India increase access for goods and services. This effort was followed by an unsuccessful attempt to secure a “deliverables” package in favor of least developed countries (LDCs) for the December ministerial. That package would have included concessions on cotton.

The United States refused to include a commitment to 100 percent duty-free/quota free market access for exports from LDCs without additional initiatives that would benefit developed and developing country exporters. To facilitate the discussion of a way forward, Mr. Lamy said he would convene a “panel of multi-stakeholders of the WTO” to analyze all these elements and report back to the WTO membership by the end of 2012, said the Council.

Meantime, US Trade Representative Ron Kirk told the Bureau of National Affairs early this month that he was encouraged that more and more WTO members were coming to the realization that the Doha talks could not go on with “business as usual.” He said, “We can't go back to the same formula and think we'll magically produce a different result. At least we've acknowledged we're at an impasse.”

In his remarks, Mr. Kirk said that the WTO also must lead the way to examine the issues of vital importance to a “healthy global trading system.” These include establishing new market access, disciplining fisheries subsidies leading to stock depletion, food security, trade facilitation and regional trade agreements, he insisted. He said members should celebrate the organization's “day-to-day work” through its standing committees and monitoring functions, as well as the contributions of the dispute settlement system and existing rules. 

Question:  What are the chances that China, India and Brazil will agree to more liberal market access in order for the Doha Development Round to move forward?

Foreign multi-product department stores and supermarkets have lost the opportunity, at least temporarily, to tap into the $450 billion Indian retail market at an ownership level of more than half.  Earlier this month, the Indian government withdrew a plan within days of implementation that would allow a foreign direct investment (FDI) of 51 percent or more in cities with populations of at least 1 million.

"The decision to permit 51 percent FDI in multi-brand retail trade (such as US-based Walmart and UK-based Tesco) is suspended until a consensus is developed through consultations among various stakeholders," Finance Minister Pranab Mukherjee said in a statement.

New Delhi was forced into the decision because of strong complaints from both the government’s political opposition and key allied parties, who said they were not consulted.

The plan to broaden foreign participation in India’s retail sector was meant to provide a means of improving the country’s supply chain, widen consumer choices and expand markets for the country’s farmer.  Indian manufacturing interests generally supported the effort.  Intentions to increase the ownership percentage for single-product retailers, such as Nike, from 51 percent to 100 percent have faced little or no objection and have not been abandoned.

Nandita Dasgupta, a professor of economics at the University of Maryland in the United States, contends that there are enough case studies to show that FDI in the retail sector of India, with proper checks and balances, actually has benefited small retailers and agriculture in the past.

In an article published in the Hindustan Times, he said:

“The policy comes with some riders to protect the interests of neighborhood stores, farmers and small and medium-sized enterprises. If effectively implemented, such FDI has the potential to:

-- Bring in foreign capital, technology and the managerial expertise of big international retailers;

-- Develop an efficient linkage between the back-end supply chain and the front-end via capital investment and technological inputs;

-- Create a proper farm-to-fork infrastructure through direct purchase from farmers and the resultant control of intermediaries;

-- Bring about efficient movement of produce through the reduction of transit costs;

-- Minimize the prevailing wastage of fresh produce through improving and adding upon the existing cold storage facilities, transport infrastructure, warehousing technology and food processing facilities;

-- Help raise farm productivity through the application of contract farming;

-- Increase agricultural production, reduce intermediate costs, render remunerative prices to farmers for their produce and eventually lower final food prices to consumers, thus integrating retailers into the value chain; 

-- Create employment in small and medium-size industries and back-end infrastructure.”

Mr. Dasgupta acknowledges that “despite the regulatory provisions to ensure domestic competition and protect the domestic retail industry and farmers, the policy has met with stiff opposition. Concerns include the possibility of monopoly power of foreign entrants over both farmers and consumers, predatory pricing strategies of the entrants, manipulation of prices for the entrants’ own benefit and a fall in income, employment and the eventual destruction of the unorganized indigenous retail sector dominated by small family-run outlets.

“But it is important to remember that other countries like Argentina, Brazil, Chile, China, Indonesia, Malaysia, Russia, Singapore and Thailand have allowed 100 percent FDI in multi-brand retail since the 1990s and many of them have had encouraging experiences. China, for one, permitted FDI in retail as early as 1992. It has since attracted huge investments in the retail sector without affecting either small retailers or domestic retail chains. Since 2004, the number of small outlets rose from 1.9 million to over 2.5 million in China. Employment in the retail and wholesale sectors increased from 28 million to 54 million from 1992 to 2001. In Indonesia, even after 10 years of opening FDI in multi-brand retail, 90% of the business remains with small traders.

“Favorable experiences of other emerging markets suggest that the appropriate implementation of FDI in multi-brand food retailing, with effective checks designed to protect indigenous small and medium-size enterprises, will eventually alleviate the supply-side impediments to agricultural production. It will transform the way perishable agricultural produce is acquired, stored, preserved and marketed — and thus help control India’s persistent food inflation, he said.”

Questions:  Has India lost a long-term chance to improve its national supply chain in the retail sector and the economic well-being of a population that represents almost 20 percent of the world total?

If the effort should be relaunched in the future, what basic strategy should be followed?  Should it be led by domestic Indian interests, foreign interests, or be a coalition of both?