Why world trade stalled

By MARTIN WALKER, UPI Editor Emeritus   |   July 29, 2008 at 6:27 PM   |   0 comments

AMSTERDAM, Netherlands, July 29 (UPI) -- The failure of the Doha Round of the world trade talks, for the third time in a row, means the looming global economic slowdown is going to be rather worse than it might have been and that developing countries will suffer the most. World merchandise exports, which had been growing at an average 8 percent a year from 2004 to 2007, are down to 4 percent growth this year and dropping fast.

Some of this can be quantified. Staff at the World Trade Organization in Geneva calculated -- with some precision -- that had a deal been reached then around the world, people (which in the end means consumers) would have been paying $125 billion a year less in tariffs. That is equivalent to the gross domestic product of Egypt. And according to WTO figures, 70 percent of the import duties paid to developing countries are paid by other developing countries. Tariffs hurt the poor.

Then economists at France's CEPII think tank worked out how much the world economy would grow if a deal were to be reached. They reached a total of around $43 billion per year if a modest deal were achieved (the equivalent of Bulgaria's GDP) and as much as $75 billion a year (the GDP of Bangladesh) if the deal also included parts of the service sector.

So the failure of the Doha Round will this year cost $200 billion -- the GDP of Hong Kong. It is a remarkably profligate world that can, as its main economies in Europe and North America are sliding into recession, afford to give up a shot in the arm equivalent to Hong Kong. And that is without counting on the morale effect of a successful world trade deal, the encouraging signal it would have sent to investors, spurring what economist John Maynard Keynes called their "animal spirits."

On the face of it, the blame should fall primarily on the shoulders of the eight key people whose negotiations, which over the weekend looked hearteningly close to success, finally stalled Tuesday after an unprecedented nine days of hard and detailed bargaining. One of them, Pascal Lamy, the director general of the WTO and the convener and chairman and chief facilitator of the talks, probably blames himself, but nobody did more to deserve success than he. Without Lamy, a veteran French socialist who defends globalization as the greatest mechanism ever found for hauling hundreds of millions of people out of poverty, the talks might not have started.

After Lamy, the two heavyweights at the WTO talks are Susan Schwab, the U.S. trade representative, and EU Trade Commissioner Peter Mandelson. Between them they represented almost half of the world's economy and international trade. Despite restrictions on their freedom to negotiate from their masters back home, with French President Nicolas Sarkozy threatening to veto any deal Mandelson struck, each one found creative ways to make key concessions without quite breaking the negotiating mandate.

"I've never been in an environment that combines bare-knuckle political argument and technocratic detail in quite the same way," Mandelson wrote in his daily blog from Geneva.

The ministers for trade of Japan, Australia and Brazil made it clear all along that they wanted a deal, were prepared to make concessions, and recognized that the Americans and Europeans had moved as far as they possibly could. They were ready to vote for the deal that looked to have been reached on Friday night, and the Australians and Brazilians performed well in keeping the 30 ministers from other countries informed and engaged as the core group of Lamy and the seven key ministers (and their staffs) haggled.

The two people who finally blocked the deal were Indian Commerce Minister Kamal Nath and his Chinese counterpart, Chen Deming. Nath at least had the excuse that coming from a democratic country with a general election looming, the fate of his country's government at the hands of the voters might have been in the balance. The Chinese decision was baffling, since they accepted the deal on Friday and then turned it down Monday. And Chinese negotiators have the luxury of being responsible only to their party bosses, not to any voters.

The outline deal, which would have limited agricultural subsidies in rich countries in return for easing tariffs on industrial and service imports into poorer ones, finally broke apart on an arcane-sounding provision called a "special safeguard mechanism." This would have allowed a country to increase its tariffs on agricultural imports if their prices suddenly rose by 40 percent, the kind of nightmarish prospect that suddenly faced a lot of poor countries when rice and wheat prices spiked earlier this year.

Nath said this was not enough; he demanded the right to raise tariffs at far smaller levels of spikes in import prices, and he blamed the United States and Europe for the deadlock. "Who's holding up this round, I think, are the large developed countries ... who are looking for commercial interests and enhancing prosperity rather than looking for content which reduces poverty," he said.

China, with an eye on its strategic interests in Asia and preventing the development of too close an alliance between India and the United States after the surprise success of the U.S.-India nuclear deal, decided to back him.

Lamy then came up with a vaguely worded compromise proposal that would have allowed emergency tariff hikes in the event of import spikes causing "demonstrable harm … to food security, livelihood security and rural development needs."

The United States balked, citing the dangerous precedent of accepting in principle any country's right suddenly to change an internationally agreed tariff rule. (Some WTO staffers also warned of legal battles over proving or even defining "demonstrable harm.") Schwab, under pressure from Congress and U.S. lobbying groups, also warned that the developing countries would have to learn the need for compromise -- to give as well as take.

"Time and again at the Geneva meetings, China and India reiterated how they could not lower their barriers, but insisted we must lower ours," commented former Michigan Gov. John Engler, head of the U.S. National Association of Manufacturers.

"Revealing the sort of negotiation he had in mind, Indian Trade Minister Nath, for example, remarked that cars will no longer be made in Detroit and Duesseldorf but in Asia, a process he seeks to foster by maintaining India's impenetrable barriers against U.S. cars while having virtually open access to our car markets," Engler added.

With Brazil breaking the ranks of the developing countries and siding with the United States, the EU and Japan, Schwab reckoned she had just enough momentum to stand firm and reach a deal. But once China decided to back India, the game was over. And not just the game. The split between India and Brazil has damaged the ties between developing nations. Egyptian trade negotiator Samiha Fawzy lamented the collapse of the G-20 group of middle- and low-income food exporters, noting, "The differences and the gaps between the different developing countries are huge. Each country is looking for its own national interests, not the collective interests of the group."

So world trade stalls for another year, with everyone waiting on the results of the elections in the United States and India, and the possible emergence of new negotiators. Nothing will happen now until next summer, when the world will be $200 billion poorer than it might have been.

© 2008 United Press International, Inc. All Rights Reserved. Any reproduction, republication, redistribution and/or modification of any UPI content is expressly prohibited without UPI's prior written consent.
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