EVENTS

Date:	Friday, December 2, 2005
Time:	12:00 PM -- 1:45 PM
Location:	Wohlstetter Conference Center, Twelfth Floor, AEI 1150 Seventeenth Street, N.W., Washington, D.C. 20036

December 2005

The State of Trade: The Doha WTO Round, APEC, and the FTAA

Over the past several weeks, trade negotiations at the multilateral World Trade Organization (WTO) level and the regional level (APEC and FTAA) have stalled, leaving the outlook for further trade liberalization in the near term quite bleak. To analyze the factors behind these setbacks, Columbia University trade economist Arvind Panagariya and Henrik Rasmussen of World Growth joined AEI’s Claude E. Barfield and James K. Glassman at a December 2 AEI discussion.

Claude E. Barfield
AEI

The failure of the two recent regional trade negotiation meetings--the Mar de la Plata Summit of the Americas in Argentina and the Asia-Pacific Economic Cooperation (APEC) meeting in South Korea--reflects the problems that have also plagued the multilateral negotiations of the WTO Doha Round. The Summit of the Americas failed to reach an agreement on a regional trade deal, and APEC did not restart stalled negotiations on a free trade agreement in Asia for developed countries by 2010 and developing countries by 2020. In regional trade negotiations, the United States has hampered progress by asking other countries to agree on a time frame for trade liberalization, while hesitating to further open its own agricultural sector. Also, concerning the Doha Round, disagreement over a multiplicity of issues apart from agriculture--including industrial tariffs, services, and specific products within agriculture like cotton and sugar--are stalling progress.

As the United States enters the upcoming meetings in Hong Kong, two aspects of the Bush administration trade policy deserve special attention:

• “Competitive liberalization”--the use of bilateral trade agreements as steppingstones to regional and multilateral agreements: While it is relatively easy for the United States to secure preferential bilateral agreements with smaller countries, especially due to the president’s renewed trade promotion authority, these agreements do not translate to progress in the multilateral arena.
• The explicit combination of trade policy with foreign policy and security goals: Because APEC has lost influence compared to ASEAN (Association of Southeast Asian Nations), of which the United States is not a member, Washington has less of an entry point into the region. Thus, the United States has sought to promote trade liberalization by tying it to issues that the Asian countries may be more willing to negotiate.

Arvind Panagariya
Columbia University

The agricultural subsidies of developed countries are not as big a problem as many nongovernmental organizations (NGOs) and members of the media make them out to be. In recent years, critics such as Oxfam, the editorial page of the New York Times, and World Bank president Paul Wolfowitz have claimed that the developed world provides its farmers with hundreds of billions of dollars in farm subsidies each year. These critics claim that these subsidies cause overproduction in developed countries and thus have disastrous effects on the developing countries. However, the numbers critics use, such as the $300 billion per year in agricultural subsidies quoted by Oxfam, are inaccurate. Those numbers take into account tariffs, quotas, and subsidies that are “decoupled” from production and trade, subsidies that do not factor into negotiations at the WTO. The actual amount of subsidies subject to negotiation at the WTO is less than $100 billion. The greater cause of economic stagnation in developing countries is not agricultural subsidies in the developed world, but barriers to market access put in place by the poorer countries themselves.

Indeed, tariffs are generally higher in the developing countries than in wealthier ones. Whereas Canada, the United States, Australia, and the EU-15 have average bound import tariffs on agriculture of 8.8, 9.0, 2.5, and 20.0 percent respectively, developing countries such as Colombia, India, Indonesia, and Sri Lanka have tariffs of 105.6, 101.0, 59.9, and 50.0 percent respectively.

There are potential compromises that the developed and developing countries could reach that would result in lower trade barriers and net economic gains. Because the United States has a comparative advantage in agriculture, it would export more goods if given greater market access. Thus, to get farmers to agree to forgo subsidies, other countries would have to reciprocate with lower tariffs. The European Union, which does not have a comparative advantage in agriculture, would want greater cross-sector reciprocity from developing countries. In exchange for reducing subsidies, the Europeans would want greater access to trade in non-agricultural products and services. Concerning the developing countries themselves, nearly all studies show that developing countries gain from both the developed world’s eliminating of tariffs on industrial products and from liberalizing their own markets.

James K. Glassman
AEI

The current paradigm in WTO negotiations is that developing countries should only open their markets if wealthy countries do the same. In light of the failure of the 2003 WTO talks in Cancun, it is clear that this paradigm needs to change.

There were two main reasons for the failure in Cancun. First, the developing countries refused to liberalize, in part due to pressure from groups like Oxfam and Doctors without Borders, which encouraged them to maintain high barriers to trade. However, lowering these barriers is precisely what the poorer countries need. In a 2004 report, the World Bank estimated that were the world to liberalize the agriculture market, net gains would total $248 billion dollars. Of that figure, $106 billion would go to developed countries, and $142 billion would go to developing ones. Moreover, $111 billion of that $142 billion would result from the developing countries’ lowering their own barriers. Second, during the Cancun talks, the United States decided to make common cause with the EU trade commissioner, who was intent on making no concessions on agriculture.

Concerning the Hong Kong talks, on a positive note, the U.S. rhetoric towards Europe has changed. U.S. trade representative Rob Portman has claimed that progress at the WTO level will not take place unless the EU offers larger cuts in protection for farmers. However, Portman’s attitude still falls under the failing paradigm.

First and foremost, the governments of developing countries must end their mercantilist policies and stop catering to special interests, regardless of what wealthier nations do. By blocking imports, poorer countries end up paying higher prices for food, promoting inefficient farms and industry, and making much-needed medicine unaffordable for millions of people. However, these WTO talks are not as critical as certain people claim. Developing countries can reduce their own trade barriers outside of the WTO context. Furthermore, for a country to achieve economic success, the rule of law, democratic institutions, sensible regulations, low taxes, and lack of corruption are even more important than free trade.

Henrik Rasmussen
World Growth

The negotiators at WTO meetings, especially those of large democratic nations, typically require a popular mandate when they attempt to promote certain positions. With the coverage they receive in the media, NGOs try to provide negotiators with that popular mandate, though they typically advocate protectionist policies. World Growth, a pro-free-trade NGO, was founded to provide greater balance in the debate.

The NGO Oxfam, for example, has argued that the best way to help the poor is to maintain high trade barriers. Oxfam claims that globalization and multinational corporations are bad for developing countries. However, the data contradicts these assertions. The U.S. Department of Labor estimates that U.S. companies doing business in high, middle, and low-income countries on average pay respectively 1.4, 1.6, and 2 times the wages of local firms. Further, though Oxfam will critique multinational textile companies for supposedly exploiting women, most of those jobs pay more than what women could earn in agriculture. The jobs also help elevate the status of women by helping the join the workforce.

Another misguided policy that Oxfam advocates is charity trade, which attempts to give developing countries special access to markets in the developed world. To see the inefficiencies and problems inherent to this approach, consider two examples: First, the European Union decided to allow Caribbean countries to sell goods at the same subsidized prices given to European producers. By giving subsidies to certain Caribbean sugar exporters, they became less efficient firms. Second, the European Union sought to give clothing firms from Laos greater access to Europe. The problem was that to produce the garments, Laos used low-cost textiles from China, on which Europe has placed high trade barriers. Therefore, many garment shipments never actually made it into European stores.

As Europe and the United States enter the Hong Kong negotiations, they should stop blaming each other for stalled progress over agriculture and unite on bigger issues, such as integrating China into the world economy. Whereas agriculture continues to decrease as a percentage of world trade ($783 billion in 2004), trade with China is increasing and has even eclipsed aggregate trade in agriculture ($1.1 trillion in 2004). Because the European Union and the United States agree on 96 percent on the issues involved in transatlantic trade, they should team up and focus on intellectual property rights in developing countries, encouraging the expansion of multinationals and integrating larger developing economies such as China, India, and Brazil into the world economy.

AEI staff assistant Dan Geary prepared this summary.