Thomas Palley

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

This entry was posted on Friday, May 26th, 2006 at 6:50 am and is filed under Globalization. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.