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The world has everything to lose if trade liberalisation fails
Martin Wolf
11/8/2005
 

          "Liberalism," according to Jacques Chirac, "is as dangerous an ideology as communism and, like communism, it will not prevail." In this remark, astoundingly, the centre-right leader of a civilised nation draws a parallel between liberty and the 20th century's most pervasive ideology of slavery.
If elected leaders of the European Union (EU) utter remarks so foolish, indeed depraved, the effort to sustain open economies may founder, as it did in the first half of the 20th century. This, more than the details of the deal, is now at stake in the World Trade Organisation's Doha round of trade negotiations. If this effort at multilateral co-operation -- launched in the aftermath of the terrorist outrage of September 11, 2001 - should fail, disorder alone would triumph.
Doha has a deadline, set, as has been the case in previous negotiations, by the expiry of the US president's "fast-track" authority. The date on which the administration's trade carriage turns into a pumpkin is July 2007. To meet this, the US president would need to present the text to Congress by the beginning of April. To achieve this, the negotiators must agree by the end of 2006.
Moreover, as Pascal Lamy, the admirable (and French) new director-general of the WTO points out, the ministerial meeting next month in Hong Kong "has to take us two-thirds of the way on the path to a successful conclusion. If this does not happen, our prospects of concluding the round by the end of 2006, when our window of opportunity closes, will be seriously jeopardised."
Fortunately, responsible negotiators recognise this. It is why the pace of negotiations is picking up. It is also why the French government is accusing Peter Mandelson, the European Union's trade commissioner, of exceeding his authority. If it were not protesting, one would know that nothing was happening.
Should anybody care if it does not? After all, trade continues to grow. The answer is: yes, for two reasons.
The first is that a failure to complete a multilateral negotiating round -- the first such failure since agreement on the General Agreement on Tariffs and Trade (Gatt), the WTO's precursor, in 1948 -- would undermine the credibility of the WTO. That would matter because the WTO represents the world's most impressive achievement in multilateral rule-making.
A weakening of the WTO would almost certainly lead to yet more preferential agreements. Since these agreements are almost entirely unregulated, the weak would be at the mercy of the strong, while the latter would, in effect, be seeking to create commercial spheres of influence. The consequences must include a rise in global political tensions.
The second reason why completion is desirable is that it could generate gains for the world economy. A recent study from the World Bank estimates the global gains from radical trade liberalisation at nearly $300bn (170bn) a year, by 2015, even without the additional productivity gains any extra competition would generate. (Kym Anderson and Will Martin, Introduction and Summary to Agricultural Trade Reform and the Doha Development Agenda, 2005, www.worldbank.org)
Developing countries would obtain 45 per cent of the gain from freeing merchandise trade, well above their one-fifth share of global output. The reasons for this discrepancy are partly that developing countries retain the highest barriers to trade (and so would enjoy the biggest gains from liberalisation) and partly that the comparative advantage of developing countries is in products that are highly protected in world markets.
Moreover, they argue, the biggest cuts are required in agricultural protection for the same reason that people rob banks: that is where the money is. In fact, "food and agricultural policies are responsible for more than three-fifths of the global gain ... despite the fact that agriculture and food processing account for less than 10 per cent of world trade and less than 4.0 per cent of global gross domestic product".
In addition, because the so-called "bound" -- or maximum -- level of agricultural tariffs within the WTO is much higher than the actual tariffs a weighted average of 27 per cent, against just 14 per cent, in advanced countries, in 2001 -- cuts in bound rates need to be substantial if they are to lower actual protection. Some apparently radical offers of significantly lower agricultural protection are "full of sound and fury, signifying nothing".
Perhaps most important, the great majority of developing countries would gain from full liberalisation. The exception would be a few low-income net food importers, which must be compensated for their losses. There would also be reductions in the number of people in extreme poverty: the World Bank study estimates a fall of 32m in 2015, relative to the baseline level of 622m.
In practice such a radical outcome is unlikely. But realists cannot let the best become the enemy of the good.
The least that is needed is a package that moves the world forward.
So what now needs to be done? First, there needs to be agreement at least on the modalities of the negotiations in Hong Kong. The aim should be a substantial cut in protection, with the biggest falls where barriers are now highest.
Second, the limited number of developing countries that are significant players in world trade need to make substantial offers in all three areas of the negotiation: agriculture, non-agricultural market access and services. With the European Union's internal trade excluded, just 20 countries accounted for 82 per cent of world imports of goods and 86 per cent of world imports of commercial services in 2004. Fewer than 30 players matter in these negotiations.
Third, developing countries that do little trade should be allowed not to make commitments, as has already been agreed for the least developed. This does not mean it is in the interests of these countries to tax consumers in favour of politically powerful domestic producers, far from it. It is far more important, however, to sustain liberal world trade than to force a host of small trading countries to make binding commitments.
Mr Mandelson is right to make offers on farm trade that have at least some chance of leading to ultimate agreement. If he does then reach a final agreement, let the French decide whether to bring the edifice down upon their heads. Those who recognise the case for sustaining a liberal world economy would then, at the very least, know their enemies.
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