A Floundering WTO – Part I

The long-term future of global trade hangs in balance as the World Trade Organization struggles to reach consensus on desperately needed reform. A two-part series analyzes the promise WTO once held and how the pursuit of narrow and immediate gain by the richer nations may threaten the future for all. In the first article, policy analyst Edward Gresser notes that trade agreements among nations have led to a more peaceful world, and he describes the consequences if WTO members fail to meet an impending April 30th deadline for consensus on farm and manufacturing trade reforms, then working out details throughout the rest of the year. WTO members have worked for five years on the ambitious negotiations that cover many areas including clothing tariffs, fishery policies and services trade. The goal of the negotiations is to ease trade for poor developing nations and thus reduce poverty. If the 150 WTO members cannot reach some agreement, this will be the first round of trade talks to fail since they began in 1945. US President George Bush holds “fast-track” authority over trade agreements until July 2007, which probably won’t be extended by Congress. If this round of negotiations fails and if individual US trade agreements must win approval by Congress, other countries will find little reason to continue the complex negotiations. Poor nations will continue to bear the burden of immense tariffs, developed nations will argue over limited markets, and the opportunity for economic agreements that lead to stable international relations will vanish. – YaleGlobal

A Floundering WTO – Part I

Without WTO agreement on reforms before April 30th, the hopes of fair trade for developing nations could be postponed indefinitely
Edward Gresser
Tuesday, March 21, 2006
Beware of what you wish for: The failure of the Doha Round could be disastrous for all, including poor countries

WASHINGTON: Franklin Roosevelt, launching the first international trade negotiations in the spring of 1945, observed that “the point in history at which we stand is full of promise and danger: the world will either move toward unity and widely shared prosperity, or it will move apart” toward new conflicts and upheavals. Trade negotiations offered a chance for a more unified world; by undoing Depression-era trade barriers, Roosevelt suggested, governments could help to “lay the economic basis for the secure and peaceful world we all desire.”

The 1945 talks led ultimately to twelve successful “rounds” of international trade negotiations. Together, they untied most of the Depression-era trade knots, creating in the process an integrated and interdependent world economy. As Roosevelt predicted, despite daily headlines and video feeds, it seems to be a more peaceful world; a comprehensive study by a Canadian university last year found wars among great powers rarer than at any time since the 1820s.

Each of the twelve rounds was eventually successful. Will the next be the first to fail?

Members of the World Trade Organization (WTO) have worked for five years on a new round, known as the “Doha Round,” named for its 2001 launch in Doha, the capital of Qatar. So far failing to finish the job, they face an April 30th deadline for consensus on farm and manufacturing trade reform. If they can’t do it, the Doha Round could be put off for many years, or even indefinitely.

The challenge is not an easy one. Doha is among the most ambitious negotiations to date, covering issues from clothing and computer tariffs to fishery policy, subsidies and services trade. Its participants represent 5.5 billion of the world’s 6.5 billion people, and produce 97% of the world’s annual $13 trillion in exports. While the 1945 talks included only 23 countries, mainly World War II allies, the Doha Round has150 participants. They range from giant China to tiny Tonga – whose 120,000 people earn $20 million a year from exports of coral, cassava and fish – and from ultra-rich Norway to arid Mali. Each can block an agreement, making success more complicated than ever before.

But the reward is worth the challenge – especially since the central goal of the Doha Round, uniquely among postwar trade agreements, is to help the poor.

An American congressman observed a century ago that tariffs almost everywhere were ways of shifting tax burdens from the rich to the poor, or “taxing want rather than wealth.” The same could be said today. The 12 earlier agreements, despite their achievements, did least in the areas of priority for poor countries and poor people. Governments, businesses and workers in low-income countries around the world have nasty stories about the resulting tilt against the poor.

American tariffs on goods from low-income countries in Asia and the Muslim world are ten and twenty times higher than those imposed on rich countries. Cambodia’s 240,000 garment workers rely on exports of simple consumer goods like t-shirts, pajamas and sweaters for their jobs. These are the products that bear the brunt of American tariffs, reaching 32 percent on sweaters and 20 percent on t-shirts. By contrast, American tariffs on French wines, artwork and pharmaceuticals are close to zero. This is why, in 2005, US customs officials collected $280 million on Cambodia’s modest $1.8 billion in exports – nearly as much as the $350 million on $34 billion worth of French exports.

European tariffs and subsidies exclude farm products produced in the Middle East, Latin America and Asia from the market. Olive-orchard managers in Morocco and Tunisia, for example, make high-quality oil. A Maghrebi brand called Volubilia, pressed from groves near Meknes in Morocco, was recently dubbed the world’s best extra-virgin oil. But EU olive-oil subsidies pay Spanish, Greek and Italian growers $2.5 billion a year to produce, more than double the value of the world’s olive-oil trade. This is why virtually no Moroccan or Tunisian olive oil ever shows up in an American supermarket.

Large, fast-growing developing countries are often tougher on the poor. India is a good example. Despite high US tariffs, Americans buy $2.5 billion worth of Bangladeshi clothes a year. But Bangladesh can sell only $100 million of goods a year to India. Indian trade policy imposes a series of flat fees ranging from 85 rupees for a cotton shirt to 485 rupees for a wool skirt, on the cheap goods made by its neighbors. Amounting to tariffs of 100% and 200%, these fees make it almost impossible for Bangladesh, Nepal and Sri Lanka to sell India anything.

The Doha Round can fix many of these problems. World Bank studies predict that by allowing the poor to sell the items they make and grow without complications, a successful Doha Round could lift tens of million people out of poverty. Lower tariffs on products like t-shirts, shoes, rice, butter and orange juice, meanwhile, can help poor families in wealthy countries make ends meet. Meanwhile, rich countries could find new export opportunities as markets for services and technology products open.

It all sounds very nice – but reality is a bit different.

When the round began in 2001, the participants agreed to finish the job by the end of 2004. They didn’t. Instead, farm exporters from developing countries got into a bitter argument with the US and Europe, and a ministerial meeting in Mexico in 2003 fell apart.

Last December in Hong Kong, members managed to avoid a second big public fight, but still couldn’t agree on how deeply rich countries should reduce farm tariffs, and how much responsibility big developing countries such as China, India and Brazil should accept. Instead they delayed a basic consensus on these questions until April 30th.

This deadline now looms. If the members meet it, they can work out the fine points by the end of the year, taking the next eight months to sort out the details of tariff schedules, services commitments and other issues. If not, the negotiating authority that US Congress granted the Bush administration in 2002 for the Doha Round, as well as agreements with individual countries, will run out in the middle of 2007. Hopes for success might then vanish altogether.

The job isn’t easy, of course. The food, fishery and textile issues central to pro-poor reform of trade are precisely the topics twelve earlier agreements couldn’t resolve. The WTO itself is larger and more complex. And outside pressures weigh upon the talks, too. Though world economic growth is strong and unemployment fairly low, the US has high trade deficits, Europe has low growth and remains divided over EU expansion, and most countries feel pressured and anxious by the rapid integration of China and India into world investment and trade.

All these issues make completing the agreement a difficult job. But the challenges do not make success impossible, and failure would have a high cost.

The world’s poor, of course, would see hopes for fairer trade put off for many years. Richer countries, deprived of a chance to find new markets, could easily start quarreling over the old ones.

And the answer to the question Roosevelt posed six decades ago would no longer be clear. In the 20th century, governments chose to move toward broadly shared prosperity, creating an economic foundation for stable relations among fractious powers. Will they still do so in the 21st? They have six weeks to make the right choice.

Edward Gresser is director of the Progressive Policy Institute’s Project on Trade and Global Markets.

© 2006 Yale Center for the Study of Globalization