Why we needed this agreement
Variations in trade volumes tend to lead annual growth rates in an economy over the period a year or two and on the decades-long scale of economic development. Right now, the world is heading into a second year of low trade growth, down from 8.5% in 2006to 5.5% last year and probably 4.5% this year. Economic growth will fall even further to about 2.6% on average in 2008. Growth in the big industrialized markets of North America and Europe is slowing in part due to the crunch in credit markets and high energy and commodity prices. Developing countries are slowing for the same reason, but on average not as much.
Fortunately, lower trade growth does not explain the drop in economic growth—for the moment. But it did in the past and could easily do so again. As prices for grains and oil rise, for example, and as local demand slows, firms press governments to prevent domestic demand ‘leaking’ to foreigners whether for shoes or software. As economic growth slows, the clamor for trade barriers, muted during the last decade or so of rapid world economic growth, is again being heard in the United States Democrat nomination battle. If the barriers do go up they’ll start to weaken and postpone the recovery of growth. But that doesn’t stop politicians canvassing the possibility or listening to the whisper that if they threaten barriers, at least, they’ll look strong and will maybe win some concessions in foreign markets.
Agreements among governments in the WTO and the negotiations that lead to these agreements are the only defense we have against the risk that trade barriers could put a lid on future growth. The agreements comprise a contract among governments on their maximum protection levels that very few of them will ever risk breaking. The negotiations that lead to the agreements are devices for ‘ratcheting down’ the maximum levels of protection recorded in the contract. Every couple of decades since the 1960s (more often before that), governments have agreed to lower their maximum limits a little more, and to apply the trade barrier limits to more sectors of production. Manufactures trade was fully covered by the end of the 1970s. Agriculture and textiles and some services trade were exposed in the 1990s. The upper limits are still far too high on agriculture and sectors like fishery and there is still quite a way to go to apply the rules to the services sector that employs most people in middle- and high-income countries.
The secret to the success of these negotiations over more than half a century was that the limits agreed in WTO were mostly what governments had already done or planned to do. This was true even of some of the most important negotiations such as those with China when it joined the WTO (Russia is the next major economy on the list). But, at the margins, the negotiations did usually press into new territory, especially when they extended the limits to areas of trade not previously covered.
Locking-in decisions already made is a pretty timid policy when it is apparent that there are big gains to be made by moving more quickly to cut border barriers. One of the few things that all economists agree is that the gains from trade are real and within reach; pretty easy reach compared to other ways to boost income and productivity. There are disagreements about the exact size of the potential gains and their distribution. But the net global gains are known to be big enough to bridge any gaps between ‘winners and losers’ ensuring everyone is better off. Most governments already have such income compensation devices; the progressive income tax schedule, for example.
How big would the gross gains be? A widely-accepted model created by Prof. Kym Anderson at the University of Adelaide shows that if all barriers to merchandise trade and export subsidies on farm products were eliminated, the world would be sharing a real income boost of at about $US300 billion ($2001 dollars) by 2015, of which Australia’s share would be about $US6 billion or about 1% of our expected real GDP in 2015. Developing countries, as a group, would do better than this (about 1.2% of expected GDP); so would poor groups such as African countries south of the Sahara (1.1% of expected GDP).
But we’re not going to get there. Not even close. The WTO agreements are not breaking down, but the ratchet of negotiations is stuck for reasons that say a lot about how the world we live in. The trade regime began a transition to what you might call a ‘democratic’ basis—although ‘demographic’ basis is probably more accurate—in the mid-1980s at the start of the Uruguay Round. But the reality of the power-shift has been apparent only since mid-1990s when the economies of Brazil and India, and then China, were beginning assume a prominent role in world markets. The crucial fact about these new mangers of the system is that they are much poorer than half the other countries in the developing group and much poorer than the countries that formerly called the shots. They have their own problems and ambitions dictated by poverty and don’t have much interest in pursuing ideas about the health of the global ‘system’ as long as it serves their interest up to a point.
We have become used to the visible changes that China’s rise and India’s (to a lesser extent) has brought to what we buy, sell and trade. What would Target (&hellip or Wal-Mart etc) sell if there were no China? Who could afford an iPod? We have witnessed a profound change in the trading system. The era marked by the ‘hegemony’ of the world’s wealthiest and most idealistic (or ideological) country has long gone. The USA could afford to—and did—care about the global spread of competitive markets and ideas like regulatory due process. Europe, too, although its foreign policy was a fiction before the 1990s. But China and India, who from now on start to hold at least equal sway in WTO with the USA and Europe, don’t. Not yet.
Backing up to the way forward
In many big international treaties, like the WTO trade agreements, the ‘devil’ is in the detail, as everyone knows. But it is much harder to see the ‘big picture’, especially during long negotiations when the details start to overwhelm a broader prospect. Negotiators need to keep the broad prospect in mind, however, because the world is always moving under their feet. The goals they set at the start of the talks might no longer seem so valuable when they arrive at the end. This can lead to nasty surprises. For example, the world’s first attempt at comprehensive global trade rules, the International Trade Organization, was still-born in 1947 when it turned out that the United States that had demanded a global commercial treaty during the war no longer wanted it. More recently, the member governments of the OECD labored for three years on a multilateral investment treaty that they had to disown as soon as it was ready for signature in 1998.
The World Trade Organization adopted a rule in 1994 that makes it impossible to make changes to its agreements unless every member wants them. The so-called ‘single undertaking’ of WTO negotiations means that every one of the 150+ Member government must sign up to everything. At first, that sounds like a tough demand to make on the poorest countries; to abide by the same rule as the rich. In fact, it turns out to be a rule that is toughest on good agreements. For one thing, it means that every part of a potential deal has to wait until all other parts are ready for adoption. For another, it means that governments with only a ‘defensive’ interest can hold up an agreement until their interest is met, whatever the cost might be for the growth of the global market. It has bought the latest negotiations on a new set of international treaties on goods and services trade to the point where, if it doesn’t collapse after nearly eight years of effort, it could turn out to do more harm than good.
Although the WTO negotiations have almost sunk from the skeptical notice of the press after a number of false starts and re-starts, the sprawling government-led enterprise of the Doha round continues in Geneva . Doggedly, hundreds of government negotiators and analysts still fly-in to the Swiss home of the UN every few weeks to wrangle over the minutiae of more and more tortured texts of possible agreements to cut import barriers or government subsidies on farm products, non-farm products (separately) and traded services. The Director General of the WTO, former European trade commissioner Pascal Lamy, is hanging out for an agreement on all topics before the end of July this year because, in practice, the USA can continue negotiating only until the elections for the new administration get under way in the second half of the year.
But it’s likely that Lamy will be disappointed. These talks have struggled since they were launched in Doha, Qatar, in November 2001. Within two years, they had collapsed at a Ministerial meeting in CancÃºn, Mexico. They were resurrected in a new format six months later but ground to a halt, in part because the Bush Administration was more interested in negotiating bilateral ‘free-trade’ deals. Lamy had to shut the talks down in mid-2006 when Trade Ministers including Australia’s Mark Vaile ran out of ideas on agricultural trade. He ‘rebooted’ them after six months, hoping the system would right itself, but it didn’t. The talks fell over again after a brief but stormy meeting of the USA, EC, Brazil and India at Potsdam in June 2007.
Lamy’s ‘fall-back’ strategy for the past year relies on a technique long-favored by the European Commission when governments can’t agree: substituting process for decision. He has encouraged the diplomats chairing each negotiating group to cobble together ‘personal’ drafts of a possible agreement for their group. The idea is that other negotiators react to the draft and the chair redrafts in an attempt to reduce the number of objections and to bridge differences. Its a peculiar cycle that could possibly produce what Lamy wants; a text with which no member government vigorously disagrees. That is, in fact, the definition of the consensus that is supposed to characterize all WTO decisions. But agreeing (or not disagreeing) on what you can is very different from wanting what you can agree (or don’t disagree) on. Lamy’s process, as we’ll see, is a deeply flawed method for achieving ambitious goals such as those that the WTO adopted for itself in 2001.
Who wants this, now?
Many governments do not, in fact, still want what they said they wanted in November 2001 at Doha. Then, under the shadow of the attack on the World Trade Towers and in the middle of the last global economic recession, they all agreed that it was essential to open world markets in the interests of, among other things, the economic development of poor countries. They said that what they meant by opening markets was ‘substantial improvements in market access’ and reducing or eliminating government subsidies—mostly by rich countries—that hurt production and trade. But it is pretty clear that many WTO Member countries, rich and poor, don’t care so much about those things now.
The US Congress doesn’t want more trade agreements. It declined to review the most recent set of ‘free trade’ agreements—with Colombia and Korea—proposed by the President. Last week it voted to ramp up farm subsidies, beyond the limits being negotiated in WTO, ignoring warnings from the US negotiators that this would cause trouble. There’s every sign the next Democrat President will fall into line with them, or possibly go further, reversing trade agreements that do not result in larger US exports (the Australia-US FTA is safe, it seems).
The governments of the two largest developing economies have no ambitions to open their markets to more imports that compete with local production. India, which flirted with lower import barriers a decade ago, has no intention of opening its farm sector to foreign competition and will keep high barriers on other goods, too. China, which joined WTO in 2001, has stayed on the sidelines of these talks ever since, except to make it clear that it has nothing more to give. Other recent Members including Vietnam and Saudi Arabia also get a free pass this time around. By prior agreement, WTO will not oblige any of the poorest countries to cut their trade barriers, although this would lift economic growth rates in most of them.
Europe? They’ve changed their policies on their most protected industry, farming, over the past decade or so to cut costs for their own consumers and taxpayers. They’ll go along with a WTO agreement that requires them to do just what they’ve already decided and no more. Japan, one of the world’s largest food importers, clings to absurdly high protection for its aging and shrinking farm sector but is unwilling to overturn a WTO consensus even if the price is high. Japan has next to no influence in the negotiations until the last moment, when its diplomats bargain furiously to secure marginal exceptions.
Faced with the declining interest in opening markets, the negotiators have reacted in a way you might consider either characteristic or pathological, depending on your tolerance for the habits of diplomacy. In an attempt to make disagreements go away and to make sure all WTO Members can join the final agreement, including governments that have no intention of making any change to their trade policies, the diplomats have moulded the disagreements into the texts as alternatives or options. They’ve included multiple and overlapping options, or ‘deviations’ subject to various conditions and particular circumstances with provisions said to compensate for the failure of any option to move toward the general objective. In other words they’ve ‘fuzzed it up’.
In the late 1960s, in a seminal paper entitled “How Committees Invent”, a U.S. academic, Mel Conway, developed a thesis now taught in every school of engineering. Briefly, it states that the design of any complex system—like a trade agreement—recapitulates the structure of the design team. The ‘fuzz’ in the drafts for the WTO agreements is yet another demonstration of Conway’s law. For the process that Lamy has launched channels the views of WTO member governments through a single ‘coordinator’ who does not have the information or, ultimately, the power to adjudicate opposing views. His only option is somehow to comprehend them and ‘fuzz’ is his friend in that endeavor.
The texts on farm and non-farm products are filled with compromises based on qualifications, optional rules, exceptions and even exemptions to the rules for self-selected groups of products or groups of countries. This clutter has been created by iterative drafting and re-drafting of the chairmen’s texts (there are no women chairs) that allows exceptions to build on themselves. For example, developing countries as a group were assured, from the outset of the talks in 2001, that they would be required to open markets less than the industrialized countries. But the elaborate exceptions crafted for different groups of developing countries in the text on agricultural trade rules mean that more than half of the group (not counting the poorest of them that have no obligations at all) will have still softer, more exceptional, targets than the nominal ‘developing country’ target. Even so, this target is bolstered by clawbacks that allow the restoration of barriers in routine cases such when import prices or import volumes rise.
Developed economies, too, have crafted exceptions built on ‘carve outs’ they negotiated in the last WTO round. The broadest of these is the right to designate the most highly protected agricultural products—those where trade would expand most if protection were cut—as ‘sensitive’ and thus subject to smaller duty cuts and exceptional quantity controls. They must expand the imports of ‘sensitive’ products to a small extent. But the proposed rules for calculating th e expansion, using proxy numbers, special provisions for different sectors and thousands of lines of ‘coefficients’ to distribute the proxies are so complex that they’ve been given their own annex. Here’s a sample of the rules on ‘sensitive’ products:
“For one of those two product categories only, if the average annual volume of commercial exports of the product category not benefiting from export subsidies in the 2003-2005 base period represents at least 15 times the volume of imports of the same product category, and provided the minimum deviation is applied, Members shall have the option to provide a tariff quota expansion that is equal to the larger of the tariff quota expansion resulting from the application of the partial designation methodology using a 1.75 per cent expansion (of the domestic consumption allocated to the Sensitive tariff lines) or 1 per cent of the domestic consumption of that product category.”
A rule-of-thumb for would-be WTO jurists says: “There’s at least one exception to every WTO rule (including this one)”. With such a principle, sooner or later, the exceptions take over the rule-book. That has finally happened in the case of the proposed Doha agreement on agriculture. In reality, you need only a sentence to agree to prohibit export subsidies on farm products such as those from the EC that brought the international sugar trade to its knees in the 1990s. A decision to cut import barriers needs perhaps a paragraph or two and just a few lines more would describe the cuts needed in harmful production subsidies as defined by WTO in the 1990s. But thanks to the ‘fuzz’, the chair’s draft text for an agriculture agreement has swollen to almost 80 pages of single-spaced text. Even then it doesn’t make the cuts that matter (more of this in a moment).
Deals far from done
Although offensive to clarity, fuzz helps postpone the consequence of meaning different things until after the agreement is done. So fuzz is Lamy’s friend in bringing these negotiations to a conclusion in mid-2008. Eventually, there would be a reckoning because the senior legal arbitrator of disputes among WTO members—the Appellate Body—interprets the text of the agreements by considering their plain meaning, as far as possible. It cuts ambiguities into little pieces, whenever it has the chance, and it rebuilds the sense of the text in a way that may surprise everyone.
Meanwhile, Lamy’s short-term goal is threatened by the lack of comforting fuzz in the draft agreement on non-agricultural products. Protection for manufactured products, especially, is more straightforward than protection for farm products. Subsidies of all sorts were prohibited decades ago, as were quantitative import barriers. Unfortunately, the greater clarity only exposes the dimensions of disagreement. You and I might think that it follows from a decision to make ‘substantial improvements’ in market access that countries with high tariffs would need to cut their protection more than countries with low tariffs. But that sort of thinking causes deep offense in WTO these days, especially when the high protection countries are developing countries. The hapless chair of the non-agricultural negotiations had tried telling the truth plainly, not telling it at all and telling it with some sliding windows and a couple of compensated options. But with fewer opportunities for obfuscation his text tends to put member governments on the spot. Some of them don’t like it; perhaps enough to walk away from the whole deal (again).
No fuzz can conceal the emptiness of the text on trade in services. So small is the prospect of continued substantial opening of services markets that the text circulated in that negotiating group fails even to name the date by which member governments will make relevant offers to their trading partners. That blank line is eloquent about the low ambitions of the developing majority of WTO members.
The text on new WTO ‘rules’ deals with a rule that the United States alone wants to break. It concerns an application of the phony mathematics of anti-dumping known as ‘zeroing’ that is prohibited because it is blatantly unfair to importers. But they don’t pay the fees of the U.S. anti-dumping bar that wants to break the rule. There is no apparent compromise on this issue and, without fuzz, Lamy’s process is unlikely to deliver a result. Anti-dumping must go to Ministers for decision.
But wait… there’s more (of the same). For example, in the proposals for agreements on fisheries subsidies, developing countries want the flexibility to subsidize their fishing industries—the largest in the world—without restraint, apparently on the theory that they deserve an opportunity to overfish their seas just as developed countries have done in the past.
The differences among WTO members seem stark everywhere but in agriculture where they’ve been blurred by the fuzz. That might be sufficient to make an agreement that would rescue at least one part of the Doha round from a final collapse. Although the rules on the ‘single undertaking’ do not permit an agreement on one subject without an agreement on all, Members could agree to remove everything else from the agenda (a sleight of hand, but so what?). In reality, there is no prospect of that; the EC would never accept a narrow agreement in which Australia, Brazil and New Zealand seem to be a big ‘winners’ at Europe’s expense. The current US Congress that has just overturned a Presidential veto on higher farm subsidies seems unlikely to ratify any WTO deal, but not in any case one that left out a new rule on ‘zeroing’.
An agriculture agreement made possible by fuzz has modest value, at most, for Australia, or Brazil or New Zealand or for global trade, for that matter. The fuzz rules out any chance of the 1% of GDP gain that the model projects for Australia. The reasons are technical but not complex. We saw before that the main function of the WTO negotiations is to ratchet-down the maximum limits of protection. In the most protected tariff lines in Europe, the United States, Japan and in many developing countries, especially India, the maximum protection levels are set well above the level required to defend the actual domestic wholesale price. This excess protection is often called ‘water in the tariff’; a lot of it was created by the fuzz needed to reach agreement on agriculture in the last round of global trade negotiations.
When the ‘ratchet’ bites down, it first has to swallow the water in the tariff before it reaches the point where it starts to make a difference to commercial competition. In most cases where Australia faces high levels of protection against our agricultural exports—wheat or rice in Japan or India, for example, or dairy or sugar or beef in Europe or the USA or Canada—the proposed deal on the table in Geneva will do little more than wring out some ‘water’. Although the headline tariff-cut numbers look big—including a proposed 54% average minimum tariff cut by developed economies—ninety percent of that cut is ‘water’ in products whose duty rates are currently in the 15-30% range. Half of the protection in products whose duties range from 60-150% is water, and two thirds of the protection of products whose duties climb from 150-300% (some Japanese wheat wheat barriers).
That leaves the expansion of the ‘sensitive’ product quotas as the most likely avenue for increases in import opportunities. Here the rules for calculating the tightly constrained increases in quotas make it almost impossible to assess the gains. At a maximum, in these markets, some ‘core’ products (unprocessed meat, grains, commodity dairy and sugar) import quotas might double over the volumes that were agreed in 1994; up to around 6-8% of domestic consumption. For some idea what that means, imagine what our roads would be like if 94% of domestic sales were reserved for Australian-made cars and trucks. Very likely you’d still be driving the Torana that you bought in 1989 (if you could get it started).
What of the developing countries? What would they get out of an agreement based on the current text on agriculture? If they export temperate agriculture (Brazil, Argentina, Thailand) they will win some share of the industrialized country ‘sensitive product’ expansion. But they’ll miss out, like everyone else, on expanded access to some of the most rapidly growing markets in the world—in other developing countries—because of the fuzz of ‘flexibility’ in the rules on developing country import barriers. Most other developing countries will be, on balance, worse off than they would have been with lower import barriers because that’s were the biggest boost to the income of most of their population (consumers) would come from. Worse, their food supply will be less secure because producers at home will have no incentive to become more efficient or adopt new technologies and producers abroad will find farming less profitable. Their economies will hold on to agricultural jobs a little longer, but the jobs will pay less than they would in a more open market because the workers will be less productive. Also, with workers staying on the farm, the economy of most developing countries will develop more slowly and wealth—in the non-farm sector, too—will grow more slowly.