Trade agreements out of reach

We’re riding a shopping trolley into the global market trough. In October, the trade gap between our imports and exports was wider than any we’ve previously recorded. If the dollar stays strong it could choke off manufactures and services export growth and, in most years, would cripple farm sales too, except the drought got there first.

But our trade gap is hardly the biggest concern, even for us. Australian traders will have more cause to rue the massive deficits that the U.S. and E.U. have built with China if the ‘sub-prime-led’ credit-crunch restores global trade balances by throwing the U.S. consumption engine into reverse for the first time since 2001.

Back in 2001, shortly after the dot-com bubble burst, the 150 governments that belong to WTO had a plan for staving off that slump. They set out to lock-in and expand the opportunities offered by ‘globalized’ markets and the emergence of China and India by negotiating lower barriers to trade.

Six years later, the WTO project, two years overdue, has run into serious trouble. Most analysts close to the negotiations, according to a global survey by Adelaide’s Institute for International Trade, do not expect a deal to be done before next year’s U.S. elections bring them to a halt.

The deal on the table is, in any case, disappointing. A World Bank estimate put the difference between a high-ambition Doha round result and the one we are likely to have (if any) at $US5 billion (2001 dollars) annually from 2015 for Australia and New Zealand, mostly due to the changes in the terms of trade impact on our rural exports.

We had a ‘backup’ plan that partly insured against the WTO project going wrong: a program of bilateral and regional agreements that would open a few key markets while WTO labored. But the ‘free trade’ negotiations are stymied, too. After a rush in 2004/5 (Singapore, USA, Thailand), several negotiations stalled over the past year (Malaysia, ASEAN with New Zealand, the Gulf Cooperation Council) or can’t get moving (China) or haven’t got off the mark (Japan).

Why has it become so hard to reach trade agreements? The answer is not as simple as growing protectionism. There’s a more subtle and difficult set of problems including some positive use of trade barriers in developing economies; the difficulty of negotiating compromises among diverse interests, and; a of lack of positive leadership from the world’s biggest economies.

Protectionism goes up and down; like the stock market, the apparent trend depends on when you last looked. It’s never hard to find worrying signs: the U.S. Congress’ extension of multi-billion dollar subsidies to their richest farmers; India’s 45% duty on imports of cooking oil or it’s recent subsidies on exports of sugar; President Sarkozy’s sarcasm about the ‘religion’ of trade competition and his demand for greater protection of EU businesses.

But there is no convincing evidence that protectionism is spreading. Global and regional opinion polling consistently shows, despite concern about job impacts, there is substantial majority support for the benefits of globalization and freer trade.

Besides, what looks like protectionism may turn out to be a more subtle and difficult question. There are cases where taxing trade is a reasonable solution to difficult economic management problems. This makes it impossible to apply general rules for opening markets in an equitable way.

Take the 30 percent-plus taxes that Indonesia, the worlds’ biggest importer of rice, imposes on essential import supplies. Economic models show the big winners from this price-support policy are the richest farmers; most Indonesians, especially the poorest, are worse off. But the issues are very complex, affecting not only food supply but the balance between rural and urban incomes. Indonesia is within its WTO rights to impose the tax and is insisting on an exception clause in the WTO negotiations to allow it to keep doing so.

If WTO agrees a ‘special’ exemption for Indonesian rice, however, other giant emerging economies (China?) will have a claim, too. And if it’s OK to protect vital rice supplies like this, why not sugar or wheat or dairy or canola oil? Who’s to make the judgment? And how?

The challenge of making market-opening rules fit economic diversity doesn’t stop with agriculture. There are equally tough dilemmas in the negotiations on manufactured goods, and in services market negotiations there seems to be no prospect of negotiating more open markets in most developing countries.

Complex though they are, these problems could still be solved, if leaders gave them a higher priority. But President Bush for most of his term has shown little interest in WTO and his Democrat opponents–including Mrs Clinton–have already taken the populist path, expressing caution and doubt. France’s high-profile President (and his Socialist opponents) and almost every Japanese PM since the 1960s are, on balance, hostile to trade reforms. The leaders of globalization’s big ‘winners’ including India and China, say the right thing when prompted, but in the WTO negotiations they have left the burdens to be borne by other shoulders.

The reality is that the global trade negotiations have become an unattractive child–almost (but not quite) disowned by its parents–whose plight many Members deplore but, since they are unable to agree on a solution, may continue for some time. Even if, as experience suggests, it will eventually be resolved in the next U.S. Administration, it might be done by lowering ambitions and weakening the system for the future.

Fortunately for the Australian economy, and even for Simon Crean, trade agreements ultimately have less impact on our trade success than our own economic policies including, factor market and infrastructure improvements. But we need a better technology to get trade agreements working again, and we need to start thinking about it now.

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