Reasons for cheering the trade talks' failure

July 28, 2006|By PETER MORICI

President Bush earlier this month urged the Group of Eight to recommit to successfully concluding the Doha Round of World Trade Organization negotiations. Now, the United States is being blamed for the talks' collapse last weekend.

The final rift among representatives from the United States, the European Union, Australia, Brazil, India and Japan was sparked by the question of agriculture - the same issue that has made the climate of the talks tense from the start.

The EU, especially, but also India and Brazil - the coordinators of the Group of 20 developing countries that share common agricultural interests - held the U.S. responsible for the failure of the talks because of its refusal to cut the subsidies shelled out to American farmers.

"The United States was unwilling to accept, or indeed to acknowledge, the flexibility being shown by others and, as a result, felt unable to show any flexibility on the issue of farm subsidies," EU Trade Commissioner Peter Mandelson said.

Advocates claim that a new global trade pact would raise millions from poverty. Sadly, though, a Doha agreement would benefit mostly the wealthy and large, multinational corporations. It would offer little for smaller developing countries or farmers and workers in industrialized nations.

The sticking points in negotiations have appeared to be U.S. and EU reluctance to dismantle expensive agriculture support programs, and resistance in developing countries to slashing tariffs on manufactured imports. The issues surrounding farm and industrial products are extremely complex, and in the details lay the failings of Doha and agendas of politicians.

Agriculture is protected by so many layers of income support, export subsidies, tariffs and import quotas and questionable health regulations that gains negotiated in one or several areas can easily be undone by adjusting policies in others. We have seen that sort of thing many times - for example, to protect North American and European livestock industries.

Moreover, India and other developing countries want to exclude their most sensitive products from a Doha deal. This turns the agriculture talks into a farce.

Developing countries routinely sport tariffs of 25 percent and higher on autos and other complex industrial products where U.S. and EU-based industries could accomplish the greatest export gains. The United States wants these tariffs slashed, but developing countries routinely impose other protective devices, such as undervalued currencies, all manner of subsidies and regulations on the conduct of foreign investors. These devices are not meaningfully addressed by the Doha Round agenda.

A deal on tariffs would only encourage more opaque protectionism, and developing countries with large domestic markets are much better at applying those tactics. Already, most of the benefits of WTO-sanctioned mercantilism go to the big developing countries.

For the United States and the EU, Doha is a mug's game. Their growing trade deficits with China, since they agreed to its WTO membership, provide patent evidence of the ineptness of U.S. and EU trade negotiators.

So why was Mr. Bush pushing so hard for a Doha agreement?

Multinationals have greatly profited from protectionism in China, India and other large developing countries by placing factories and selling services in their markets. In the process, they have been able to grind down wages for the workers they still employ in the United States and Western Europe.

General Motors and Caterpillar, for example, profit well in China thanks to an undervalued yuan and restrictions on imports. Meanwhile, the United Auto Workers girds for more give-backs and plant closures.

If the Doha Round ultimately fails, China, India and Brazil, having little to gain from further negotiations with the United States, will be freer to impose onerous terms on Western multinationals. Multinationals need a Doha deal that appeases China, India and others to maximize profits in those economies.

Mr. Bush's economic initiatives have favored the interests of large multinationals, whose political support he has enjoyed. A Doha deal would similarly serve those interests. Trade policy is always political, and Mr. Bush knows how to reward his friends.

But some have suggested that though the U.S. is being blamed internationally, its tough stance on agricultural subsidies plays well with farmers leading up to November's midterm elections.

Meanwhile, WTO Director-General Pascal Lamy said the situation is "very serious" and announced he would recommend that the WTO's 149 member states suspend the negotiations, which were set to end in December.

Mr. Lamy reflected the views of the majority of the negotiators when he said, "I cannot hide the truth: We are in dire straits."

Peter Morici is a professor at the University of Maryland School of Business and former chief economist at the U.S. International Trade Commission. His e-mail is pmorici@rhsmith.umd.edu.

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