Sunday, July 02, 2006
Trade talks failure need not be a disaster
Posted by David Smith at 11:00 AM
Category: David Smith's other articles

Ask most people to say what the Uruguay Round was and they’ll probably tell you it was something to do with the World Cup. No, it was much more painful than that - world trade. Conceived in 1982, it got going in 1986 and was finally completed, though with some contentious issues left for later, in 1994.

Part of the Uruguay deal was the creation of the World Trade Organisation, the WTO, to replace the General Agreement on Tariffs and Trade (Gatt). The WTO came into being in 1995 and quickly became the focus of protestors, railing against the unfairness of the global trading system.

The Doha round, or to give it its proper name, the Doha development agenda, started in November 2001. Many argued after the Uruguay experience that it would be unwise to embark on another ambitious round of trade liberalisation, particularly one involving agricture. But the pressure to respond to the grievances of the developing world, and the strong sense that some North-South solidarity was needed in the wake of the 9/11 attacks on America, prevailed.

Those warnings should have been heeded. With numerous deadlines already passed, the Doha round is limping along towards failure, or at least success so limited that it will not deserve to be regarded as such. Trade ministers and officials have been meeting in Geneva to try to cobble together a deal but the omens do not look good.

Pascal Lamy, the WTO director-general, who a few days ago set out the “modalities” (dread word) for the talks, warned that a “once in a generation” opportunity to tackle the imbalances in the international trading system was in danger of being squandered.

Kamal Nath, India’s commerce and industry minister, in London en route to Geneva, said the “livelihood security and subsistence of the poor are not negotiable issues”. If Doha breaks down, it would mean the richest fifth of the world’s population had turned its back on the poorest four-fifth, he said.

Others have been more bloodthirsty in their warnings, saying that failure could mean the end of the WTO and the collapse of the international trading system, which could descend into 1930s-style protectionism.

Some development NGOs (non-governmental organisations) have got so fed up with the whole process that it is time to call it off. “The time has come to admit that the current WTO system will not result in a pro-development deal,” said John Hilary of War on Want. “The Doha round must be scrapped - the current package would be a bad deal, serving exclusively the interests of the biggest corporations around the world. The only chance for a real development agenda is to bury the Doha round, tear up the text and start anew.”

Aftab Alam Khan, head of ActionAid’s trade justice campaign, said “poor countries must take a hard line and refuse a bad deal that will only increase poverty.”

We know where most of the blame for a Doha failure should be directed. Rich countries are still determined to protect their farmers - the average agricultural tariff is 60% against 5% for industrial goods - and the reductions offered by America and Europe do not go far enough. The farm sector is small but disportionately influential.

Rich countries are also quite good at keeping developing country industrial products out of their markets when they want to, by the use of so-called tariff peaks. Developing countries, meanwhile, often have high tariff barriers, and are reluctant to reduce them in the absence of rich-country concessions. The effect, however, is to do more damage to other developing countries, restricting so-called South-South trade. Nobody wins from the deadlock.

How much would we lose if Doha does not succeed? While a deal would be preferable, failure might not be a disaster.

The shift in the global economy, largely brought about by the rise of China and India, is changing things in a way that dwarfs the efforts of trade negotiators. The developing-country share of world trade has risen to more than 30%, its highest for more than half a century, because fast-growing China and India are categorised as developing countries.

Wen Jiabao, the Chinese prime minister, has just been on a seven-nation trip to Africa, to sew up deals to supply his country with oil and commodities. China’s hunger for resources helped give sub-Saharan Africa its strongest growth for 30 years last year. Africa’s exports grew by an average of 20% a year over the period 2003-5.

For developing countries in Africa and elsewhere, trade with China is a two-way street. Beijing’s commodity demand helps producers but its low-cost products undermine manufacturers in poor countries. Africa has struggled to compete, including in its home markets, with China. What economists call the “resource curse” is a danger; developing countries benefit from exporting commodities but get stuck at that stage in their development. Resource riches often find their ways into the Swiss bank accounts of corrupt leaders.

But things are shifting. Rich countries will soon start to need the fast-growing Chinese and Indian markets as much as, say, developing countries need Europe. The balance of power is shifting. Protecting American, European and Japanese farmers at the cost of holding up a trade deal looks like folly now. Before long it will be economically suicidal.

In the meantime, world trade - which is growing healthily - is not about to collapse, and neither is the WTO. India’s Nath, while angry about the failure of rich countries to give enough ground, said countries would remain committed to a rules-based global trading system. As long as that survives the Doha disappointment we need not be too disheartened.

PS The Bank of England’s monetary policy committee (MPC) meets this week in depleted form, as a result of the departure of Richard Lambert and David Walton’s untimely death. Seven members will vote, and the expectation is of no change in rates. The legislation requires a minimum six MPC members to meet, although back in August 1997 - before the legislation was passed - it met with only five. In the case of Lambert, the CBI’s new voice, he voted for the last time on March 9. This will be the fourth meeting with his chair empty. Mervyn King, the governor, made his disquiet about this known when testifying to the Commons Treasury committee last week.

Why does it take so long? Talented economists up and down the country would give their eye teeth for a place on the MPC. The problem lies with the selection procedure. I’m not aware of anybody being asked and turning it down, partly because the Treasury is careful only to ask those who will say yes. That is a search process that would challenge recruitment professionals, let alone Whitehall’s gentleman amateurs.

The Commons Treasury committee is currently examining the issue. One obvious way forward is to invite suitably qualified economists, who would willingly take the job if asked, to submit their names. It could unearth a considerable pool of talent, and if such a list had existed when Lambert announced his departure, the MPC would not have been forced to operate below strength for so long.

The shadow MPC, which meets under the auspices of the Institute of Economic Affairs, is itself a considerable pool of talent. In its monthly meeting it votes 7-2 for unchanged rates. The two hikers, Tim Congdon and Gordon Pepper, are worried about continued rapid rate of broad money supply growth. Four of those who vote to hold rates - John Greenwood, Ruth Lea, Kent Matthews and David B. Smith - think rates should go up soon. But the other three “holders” - Roger Bootle, Peter Warburton and Andrew Lilico - haven’t yet given up on the chances of a cut.

From The Sunday Times, July 2 2006

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