World trade talks: The Cancun challenge

Date: 06/09/03

The current Doha round of trade talks was supposed to help the world's poor. But a range of disagreements have stymied the negotiations. To keep the round alive, next week's meeting in Mexico needs to produce some real progress

TRADE ministers from the 146 member countries of the World Trade Organisation (WTO) arrive in Cancun on September 10th for what officially is yet another yawn-inducing routine meeting to mark the halfway point of the current round of global trade talks. But the meeting promises to be anything but routine, or boring. Every negotiator knows that, in reality, the Cancun meeting will be a desperate effort to keep the trade talks alive.

Since it was launched in the Qatari capital of Doha in November 2001, the WTO's latest round of multilateral trade talks has made almost no progress. Every deadline has been missed as politicians, from rich and poor countries alike, have proved reluctant to make tough compromises on issues from freeing farm trade to cutting tariffs on industrial goods.

Recent weeks have seen two small rays of light. On August 30th, after years of negotiations, a deal was finally agreed to allow poor countries to import cheaper generic drugs in emergencies to fight scourges such as AIDS. Also last month, the United States and the European Union, the titans of global trade, agreed to offer a joint proposal for liberalising farm trade.

Both developments are welcome, and long overdue. But the drugs deal, by itself, is unlikely to do much to help the ill and dying in the poorest countries. In the overall context of world trade, moreover, the drugs agreement is small potatoes. And it is too early to say whether the vague American-EU joint approach on farm trade will lead to a genuine breakthrough on this thorniest of all trade issues.

On the biggest questions, fundamental divisions remain: over the scope of the negotiations, over how far countries are willing to reduce trade barriers, and over the role and responsibility of poor countries themselves, which were meant to be among the biggest beneficiaries of the current round. Without a breakthrough in Cancun, the chances of finishing the talks on time by January 2005, or even of concluding them at all, are slim. A failure to reach agreement could be a disaster for the multilateral trading system, the world economy and, most of all, for the world's poor.

High hopes

Launched in November 2001, barely two months after the September 11th terrorist attacks, the Doha round of trade talks began with high hopes. Just agreeing to embark on a new round of talks was a victory after the debacle of the WTO's 1999 meeting in Seattle, when efforts to do the same ignominiously collapsed amid anti-globalisation riots on the city's streets.

The Doha agenda was ambitious, aiming not only to cut barriers in highly protected economic sectors, such as agriculture and services, but to write new rules for globalisation in areas such as investment and competition policy. Most of all, Doha was purportedly focused on helping the poor. Rich countries promised to open their markets in areas, especially farm goods and textiles, which matter most to poor countries. They promised to help poor countries with cash, technical assistance and “special and differential” treatment in implementing any agreement. To underline the pro-poor message, the words “development” and “developing” were included 63 times in the 10-page document that launched the Doha round.

Rhetoric is cheap, but there is little doubt that the Doha round has the potential to bring substantial economic benefits to poor countries. A new analysis by the World Bank, published in its Global Economic Prospects on September 3rd, suggests that an ambitious, though achievable, reduction of trade barriers in the Doha round could boost global income by between $290 billion and $520 billion a year. Well over half of these gains would go to poor countries. By 2015, the World Bank reckons, a successful Doha round could lift 144m people out of poverty.

If trade in services, from shipping to accountancy, were significantly freed, another Doha goal, the benefits could be even greater. Nearly all economists agree that freer trade in services would lead to gains several times larger than those from lowering barriers to goods alone

Despite these potential gains, governments in both rich and poor countries pedalled backwards from the moment they agreed to the Doha agenda. The EU, champion of mollycoddled farmers, was quick to downplay the extent to which it had committed itself to free farm trade. The Americans talked big, putting forward radical proposals to free trade in agriculture and industrial goods. But their actions, particularly last year's boost to American farm subsidies, suggested the opposite.

We're special

Many poor countries were defensive from the start. Still smarting from what they regarded as unfair treatment in the earlier Uruguay round of trade talks which were concluded in 1994, they moaned about the iniquities of past trade deals and focused on minimising their responsibilities in the Doha round. “Special and differential treatment”, poor nations seemed to feel, should mean “we do nothing and the rich world opens up”.

The result has been stalemate. Trade negotiators in Geneva made modest progress on technical details, but the overall talks stalled. In farm trade, a chasm between big agricultural exporters, such as Australia and Argentina, which want to tear down barriers and slash trade-distorting subsidies, and the big farm subsidisers, especially the EU and Japan, who want minimum change, meant that negotiators have not even agreed on how to conduct and measure progress in the negotiations. These “modalities” should have been decided by April. Instead the decision was put off to Cancun.

The paralysis on agriculture spread to the rest of the talks, because many developing countries were reluctant to make concessions elsewhere without progress on farm trade. Efforts to agree a way of measuring cuts to industrial tariffs also stalled, and were put off to Cancun. Nor has there been much headway on agreeing the scope of negotiations in controversial new areas such as investment.

The result is that trade ministers next week have five days to reach a series of complicated political compromises after almost two years of stalemate. A month ago that seemed an impossible task. WTO insiders at Geneva were privately fretting that the Cancun meeting could easily become another Seattle-style debacle.

Fortunately, the agreements on drugs and agriculture announced last month, though modest, seem to indicate that trade negotiators, and their political masters, are at least waking up to the dangers of the round collapsing. With so much at stake, next week's meeting might just salvage the talks. The drugs deal removes an emotive and highly symbolic issue which could have torpedoed the entire round. And the American-EU announcement on farm trade at least signals that a final deal is still possible.

Agriculture is the issue which puts the most pressure on rich countries. The World Bank estimates that over two-thirds of the overall benefits from Doha's barrier-lowering would come from freer farm trade. It is easy to see why. Farm protectionism is a scandal. Over three-quarters of the world's poor live in rural areas, mostly dependent on agriculture. Yet the rich world spends over $300 billion a year supporting its farmers, more than six times the amount it spends on foreign aid. Average agricultural tariffs in rich countries are many times higher than those on manufactured goods. On individual products, barriers are often much higher. In Japan, for instance, tariffs on rice, at up to 1,000%, are ludicrous.

This lavish support distorts prices and blocks market access for poor countries that are natural exporters of farm products. Cotton is a classic example. The world's biggest exporter of cotton is America, even though its production costs are far higher than those of African producers such as Mali or Burkina Faso. America's 25,000 cotton farmers receive $4 billion of government subsidies in return for producing $3 billion-worth of cotton. These subsidies push down the world market price, hurting, among others, 11m cotton producers in West Africa. Similar stories abound in other products. From beef to cereals, world markets are distorted by rich country's cosseting of their farmers.

Less well known, however, is that poor countries themselves engage in farm protectionism. They cannot generally afford subsidies, but tariff rates on agricultural goods are often even higher in poor countries than in rich ones. While rich countries would benefit most from getting rid of their crazy agricultural systems, the World Bank analysis suggests that 80% of the benefits reaped by poor countries from farm reform would come from reductions in the barriers between poor countries themselves.

Can the Doha round cut through this morass? Much depends on what the United States and the EU decide to do. Their agreement last month was something of a fudge. On cutting agricultural tariffs, they simply added their opposing positions together. America had long demanded that countries with higher tariffs on farm goods should cut them more. The more protectionist Europeans, by contrast, wanted all countries to cut their tariffs by an equal percentage. They now suggest a mixture of the approaches.

On export subsidies, America lowered its ambition, giving up the goal of eliminating export subsidies altogether. The Europeans, in turn, agreed to get rid of subsidies in certain products that matter to poor countries (without naming what those products might be). Their joint framework also recognises that the poorest countries needed special treatment in freeing farm trade, but implies that big agricultural exporters, such as Brazil, should not get such privileges.

The deal's ambition - or its potential impact on poor countries - is difficult to gauge because it includes no numbers, dates or references to specific products. And yet despite its vagueness, the American-EU framework galvanised debate. Suddenly a plethora of proposals for how to structure the farm talks are on the table, largely modelled on the American-EU approach. Most important is a plan presented by 20 developing countries, led by Brazil, India and China, which represent 60% of the world's farmers. This group followed the American-EU approach but, predictably, demanded more subsidy cuts and tariff reductions from rich countries while offering much less ambitious liberalisation from poor countries. In particular, it suggested poor countries should be able to use the “average” formula for cutting tariffs, while rich countries should be required to cut their higher tariffs more.

The task at Cancun will be to forge compromise between the American-EU position and that of these developing countries, while somehow keeping extreme agricultural protectionists, such as Japan, on board. Ideally, that compromise should push both sides into more liberalisation. One risk is that the negotiators settle for the lowest common denominator: an unambitious effort to reduce support for the rich world's farmers coupled with even fewer demands on poor countries, in the name of “special and differential treatment”. That compromise, as the World Bank's numbers show, would forgo most of the potential economic benefits of the Doha round.

Textiles and beyond

The debate about how to reduce barriers to the trade of industrial goods follows a similar pattern. In this area, too, the public focus of the Doha round has been on the rich world's need to cut its barriers to the exports of poorer countries. While overall rich-country tariffs on manufactured goods are low, they are high in areas, such as textiles and footwear, that are most important to poor countries. On average, tariffs applied by rich countries on the types of goods that poor countries produce are four or five times higher than the tariffs on goods usually imported from other rich countries. As a new study for Oxfam, an aid agency, points out, the tax rate which America applies to imports from Bangladesh is 14% compared with a rate of 1% on imports from France. Rightly, Oxfam points out that an important measure of progress in the Doha round will be a commitment by rich countries to reduce these high tariffs.

But, again, the biggest potential gains for poor countries themselves, contrary to popular belief, are actually from tariff cuts in other poor countries. For the past decade, trade flows between poor countries have risen twice as fast as overall global trade, precisely because many poor countries have been cutting tariffs. Trade between developing countries now makes up 11% of all global trade.

Nonetheless, barriers between poor countries are still far higher than those between rich and poor countries. And the maximum barriers allowed under WTO rules - that is, the level at which countries have “bound” their tariffs - is often higher still. In America, for instance, the average tariff on industrial goods is 4%. In Brazil, by contrast, the average tariff level permitted under trade rules is 30% while in India it is almost 40%. The average tariff levels actually applied in Brazil and India are 14% and over 30% respectively.

Although poor countries would gain most from slashing these barriers, the debate at Cancun is almost certain to revolve around the question of how much the rich world should “give” and how little poor countries should “give up”. Most rich countries want a formula which requires those countries with higher tariffs to cut more, although with special provisions for poor countries, especially the very poorest. Rich countries are willing to make extra efforts to reduce barriers in sectors such as textiles, but they want the more advanced developing countries to do the same.

But most developing countries are reluctant to expose their domestic industries to more international competition. India is the most extreme example, and is deeply opposed to a formula that demands bigger cuts from those with higher tariffs. China thinks it should do less than others because it has just cut tariffs to join the WTO. Big farm traders, such as Brazil, are loth even to discuss industrial goods until they see gains in agriculture. Worse, many supposed champions of the poor, such as Oxfam, reinforce this mercantilist mindset. “Responsibility for Cancun's fate”, Oxfam writes in its most recent report on the subject, “resides overwhelmingly in the national capitals of the rich world.” As far as industrial goods are concerned, that is simply not true.

The final area of controversy at Cancun - how far to broaden the Doha round into new areas - also pits poor countries, notably India, against rich ones, specifically Europe and Japan. This time, however, poor countries have more of a point.

At the insistence of the Europeans and Japanese, the Doha agenda promised to launch full-fledged negotiations at Cancun to write rules in four new areas. These are investment policy, competition policy, procedures for transparency in government procurement, and trade-facilitating policies, such as customs procedures - generally known as the four “Singapore issues” after the summit at which they were first raised.

The prospect of expanding the WTO's remit to these new areas has long frightened many poor countries. Some have worried that rich governments would use any new rules to dictate their investment regimes, a fear that the anti-globalisation protesters have encouraged. More reasonably, many small poor countries have worried that they simply do not have the political or technical ability to negotiate about such rules. After all, more than half of the WTO's members lack even a domestic competition authority.

Off limits

There are signs that most poor countries could, albeit reluctantly, accept negotiations on government procurement and trade facilitation. But they consider competition and investment as off-limits. India, which objected most to the introduction of the Singapore issues into the Doha round, has said loudly and repeatedly that it will not allow negotiations in any area, though it clearly cares most about investment. But the EU and Japan have, so far, refused to budge from their position that negotiations must be launched in all four areas. The EU sees progress on the Singapore issues as a necessary exchange for any concessions it will make on agriculture. Exactly why is hard to fathom. European companies have not been loudly demanding new WTO rules on investment.

It now no longer looks likely that the Cancun meeting will collapse into a Seattle-style fiasco. The deal on drugs for poor countries has removed one dangerous obstacle, and farm-trade negotiations have at least begun to move. But to be judged genuinely successful, negotiators at Cancun will have to do more than avoid an embarrassing breakdown. On a range of issues, the Doha round is clearly in trouble. To keep it alive, Cancun needs to produce some real progress in all three areas - farming, industrial tariffs and new topics such as investment and competition - that nearly all 146 participating countries, however reluctantly, can support.

Given the difficulty rich countries have had in making any progress towards liberalising farm trade, and the mercantilist instincts that drive many poor countries, the prospects are still not good. But the stakes, especially for the world's poor, should be too high for any country, rich or poor, to accept failure willingly.

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