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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