Time for a New Trade Agenda

The Doha round of trade liberalization negotiations is in deep trouble, and with good reason. Though positioned as a “development” round intended to benefit the world’s poorest countries, it in fact does little in that regard. On close examination Doha turns out to be a Trojan horse that pushes the type of trade liberalization that has made globalization so deeply unpopular and unfair.

At this stage, the Doha architecture should be discarded. The agricultural access negotiations should be transformed into a tropical products access agreement, and the manufacturing and services access negotiations abandoned entirely. Such a proposal can yield immediate development benefits, and rejection of the manufacturing and services agenda can send a signal that new thinking is needed in these areas. This can set the stage for a 21st century trade agenda that rectifies the structural failings of today’s trading system.

Much attention has been focused on agriculture, and agricultural products access has been used deceptively to try and enlist civil society support for trade liberalization. Yet, it is now clear that Doha’s agricultural access provisions would do little to alleviate global poverty, and might well increase it. A recent Carnegie Endowment Report estimates that these agricultural provisions would raise global GDP by just two one-hundredths of one percent. Moreover, all of those gains would accrue to consumers in northern (developed) economies, and developing countries as a group would actually lose.

The reasons for this pattern are clear and simple. Northern countries would commit to reduce agricultural subsidies, but since they produce foodstuffs – cereals, meat, and dairy – the elimination of subsidies would tend to raise global food prices and harm food-importing developing countries. Second, northern countries would also reduce their agricultural product quotas, driving down prices in northern markets. Though quotas restrict imports, they provide higher prices to those developing countries with quota access and they would lose this benefit.

Finally, developing countries would have reciprocal obligations to improve agricultural product access in their own economies. In many countries, agriculture is dominated by small-scale farming that may be unable to compete with large northern agro-businesses. Prices would fall in these countries benefiting urban consumers, but there is also the potential for massive rural dislocation, the costs of which are not even caught in conventional economic models that are calibrated in terms of prices and quantities.

Instead of generalized agricultural trade liberalization, the world should enact tropical products liberalization. Global poverty is heavily concentrated in the tropics – a region lying roughly within the lines of latitude demarcating Mexico and Bolivia. A tropical products round could give freer access to agricultural products and processed derivative products from this region. That means commodities such as sugar, cotton, rice, orange juice, and coffee.

Such a tropical products round has clear win – win potential, and is consistent with the true logic of comparative advantage. By taking northern produced foodstuffs off the negotiating table, food-importing developing countries will be saved from higher food prices. Most northern agriculture interests would also be unaffected. The exceptions are those with no economic justification – sugar cane growing in Florida, rice farming in Japan, and excessive sugar beet production in Northern Europe.

Meanwhile, increasing market access for tropical products can significantly lower prices for northern consumers. Additionally, they will be saved from paying expensive subsidies to farmers who have no comparative advantage in these products and should not be producing them. Finally, northern countries will be saved from the environmental damage wrought by such farming, as evidenced by sugar cane growing in Florida’s everglades.

Doha’s manufacturing and services access negotiations represent a traditional trade liberalization of the type that has made globalization so contentious. Whereas the logic of comparative advantage is crystal clear in agriculture and primary products, it is much less clear in manufacturing. From the standpoint of northern workers, in a world where capital and technology are fully mobile, manufacturing and services trade are increasingly driven by labor arbitrage rather than by advantages in comparative productivity. From the standpoint of developing countries, elimination of tariffs eliminates a policy instrument that has proven useful historically in helping countries (including the U.S.) catch up and industrialize. It also takes away a vital means of raising tax revenues to finance public infrastructure investment since developing countries usually lack cost-effective and non-distorting alternative ways of raising revenue.

The spread of technology, the lowering of transportation costs, and the improvements in electronic communication and long-distance management mean that the classical era of free trade is over. The world is increasingly one market rather than many markets linked by international trade. That speaks to the need for a new agenda.

The new agenda must tackle the question of labor and environmental standards. This is a problem that industrialized countries tackled in the last century when they put in place rules determining what constitutes legitimate competition. Competition based on slavery, discrimination, child labor, and the suppression of workers’ right to organize was disallowed. Now similar rules need to be established for the single global economy that is subsuming national economies. This is obviously good for workers, but it can also help developing countries capture more of the economic value they produce by preventing destructive competition between them. Today, value is increasingly captured by corporations situated at the retail and distribution end of the value chain (think Gap and Nike) that can put developing countries in competition with each other. Standards can limit that power.

The agenda must also tackle the system of global intellectual property rights (IPR) that was set up with the establishment of the WTO. Insistence on a single global system is an infringement of developing country sovereignty, and is nothing short of economic imperialism. Sovereign countries have the right to establish their own internal laws regarding copyright and patents. In addition to the sovereignty argument, it makes no sense for countries that differ so widely in terms of economic endowments and stage of development to have the same IPR laws. This is sub-optimal policy that generates economic inefficiency.

Finally, the post-Doha trade agenda must confront the question of exchange rates. International competition must be based on product quality and productive efficiency, not on under-valued exchange rates. Today’s disorganized system of exchange rates risks recreating the beggar-thy-neighbor economics of the 1930s when countries sought to gain international competitive advantage by devaluing their exchange rates. Competitive devaluation is a negative sum game that makes the world economy worse off. One countries competitive gain is another’s loss, while all lose because of the financial and monetary uncertainty that competitive devaluation produces.

Responsible world leaders must resist scare tactics of those who claim failure of the Doha round will bring down the global trading system. That is nonsense. There is no evidence supporting the metaphor that the global economic system is like a bicycle that requires more liberalization to keep rolling. Indeed, the opposite is true. Liberalization tends to result in economic lock-in, and we should avoid locking-in bad liberalizations. Optimal economic decision theory recommends “when you don’t know, go slow.”

This article was originally published at http://commentisfree.guardian.co.uk by The Guardian. Permission to reprint can be obtained by e-mailing rights@guardian.co.uk

5 Responses to “Time for a New Trade Agenda”

  1. David Bunnett Says:

    Tom– Enjoyed your column as always. I appreciate that you put your creative and analytic skills in the service of values I share.

    Re the characterization of some activities as uneconomic, for example, growing rice in Japan… Of course on the basis of monetary cost in today’s market it makes no sense, but perhaps the Japanese prefer to maintain a degree of self-suficiency in food production. This does not seem imprudent, although the potential future value of the policy– in case of some type of disruption in the world system that presently prevails– is not captured in today’s market prices.

    I guess I’m interested in moving today’s market economy in directions that provide greater long-term security. Like many, I’m concerned that the carrying capacity of the natural world will eventually require a scaling-back of global economic activity.

  2. Arline Prigoff Says:

    Dear Thomas Palley,

    In your article on ” Time for a New Trade Agenda,” the erased line, which is the third line in the second paragraph, is very distracting, and discourages printing out the blog as an article. Would it be possible for you to edit this important essay, for greater reproduction and distribution to many people around the world? This article is valuable and clarifying, but I do not want to forward it in this condition.

    Very sincerely,

    Dr. Arline Prigoff
    Division of Social Work
    California State University, Sacramento

  3. Arline Prigoff Says:

    When I printed out your excellent article, “Time for a New Trade Agenda,” I found that a gap in the article, an erased line to which I was objecting, had already been removed in the process of printing, and the article printed out very well.

    Please accept my apologies, and my regrets at not having printed the article first,
    before asking you to alter it. I very much value this article, and will forward it to
    many other colleagues and students.

    Dr. Arline Prigoff
    Division of Social Work, California State University, Sacramento

  4. John Bohn Says:

    You make excellent points about the desirable but, of course, in human affairs the possible so often tends to diverge from that. First you suggest that broad liberalization in agriculture has little value and would probably better be replaced by a narrower and less ambitious agenda. It seems that if half a loaf both tastes better and is cheaper to get, it’s a desirable option. Many of the G-20 agriculture exporters such as Australia, Aregentina, New Zealand, and even Brazil would not be happy with this reduced goal. But perhaps they would be content to rely on anti-subsidy cases regarding products like soybeans, wheat and beef, to try to obtain through dispute settlement what they could not obtain through negotiations. Brazil might be a leader on this as it has interests in both tropical and non-tropical products and has proven success in dispute settlement.

    But I don’t see how an ambitious new labor/environmental agenda could possibly succeed until workers and environmentalists in developed countries first obtain more power within their own national governments. In the United States, neither party has pushed such a thing effectively. Perhaps someone might emerge from the next presidential primaries more committed to this, but I have no idea who.

    As to exchange rates, negotiated reform would seem very tough to obtain, but some such as John Magnus have at least discussed the chance that anti-subsidy actions could succeed there as well, in recent testimony to the US-China Economic Security and Review Commission. http://www.tradewinsllc.net/publi/USCC%20Testimony%204-06 There are many obstacles but it’s an interesting idea, again assuming that the US government would push for it.

  5. stephen lande Says:

    Before I am able to give my view on your thoughtful proposal, I would need to know your definition of tropical products, your views on whether advanced developing countries could benefit from such duty reductions and whether your emphasis on labor rights is limited to core labor principles or go beyond that where it threatens developing country’s competitive advantage.

    Tropical products already duty-free–in fact one of accompishments of Tokyo Roundl. What you are proposing is to expand definition i the WTO to encompass tropical products that compete with temperate agriculture . Since this list will include many products grown both in the tropics including oilseeds and many fruits and vegetables, why not favor liberalizing all pruducts. You are principally leaving out grains although many grainsa re grown in the tropics as well.

    Why not favor an expansion of GSP.

    I have a similar view on NAMA negotiations. If you do no want to liberalize for everyone why not put all products on GSP. I do not whether I would give benefits to highly competitive countries.

    For Manchester Trade, the most important provisions are those that could cover Aid for Trade. Without trade related infrastructure and suppy-side capacity building, little will assist vulnerable economies.