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The General Disagreement on Tariffs and Trade

The General Disagreement on Tariffs and Trade

Nearly 70 years ago, with fresh memories of the disastrous trade wars of the 1930s, leaders of the United States and 22 other countries launched the GATT, the General Agreement on Tariffs and Trade. The GATT was charged with slashing tariffs and dismantling other protectionist barriers to global economic growth. And the Geneva-based international organization delivered. By 1995, when the GATT morphed into the World Trade Organization, a series of successful multilateral trade-liberalizing negotiations had slashed average global tariffs, which had been in the 40 percent range in the 1940s, to about 5 percent. Even though many protectionist schemes remained, the WTO seemed poised to continue the good work. But in the last two decades, the WTO has descended into dysfunction, lurching from one bitter fight to another.

A deeply concerned WTO Director-General Roberto Azevedo has bluntlywarned the WTO’s 160 member countries that the GATT/WTO system has been “living on borrowed time.” He’s spot-on. I’ve been watching the GATT and its successor global trade rules-making institution for nearly four decades — witnessing the gradual destruction of the world’s most successful experiment in peaceful international economic cooperation. Although the most recent crisis that sparked Azevedo’s warnings was averted on Nov. 27, at least for now, the tensions that have weakened the WTO will remain for the foreseeable future.

The root of the problem is that too many countries either no longer believe that multilateral trade liberalization is beneficial for them, or that they lack, for varying reasons, the political will to lead.The root of the problem is that too many countries either no longer believe that multilateral trade liberalization is beneficial for them, or that they lack, for varying reasons, the political will to lead. Too many shortsighted political leaders, forgetting their history, are back in the business of creating trade blocs. They are more interested in defending their own protectionist trade schemes to fret much about what they have been doing to the WTO-supervised multilateral trading rules. And without a shared core belief that the non-discriminatory global rules work for all, the WTO cannot deliver.

In Washington, D.C., President Barack Obama has never given high priority to the WTO. Neither have Republican or Democratic leaders in Congress. While individual European WTO members like the United Kingdom, the Netherlands, and Sweden still believe in the organization’s rationale, the 28-member EU makes the notion of “European leadership” an oxymoron. Tokyo’s main goal in any trade negotiation is to preserve Japan’s stratospheric 500-plus percent rice tariffs. The Chinese now run the world’s second-largest economy, but they aren’t leading either. In parts of Africa and Latin America, leaders tend to see multilateral trade liberalization as a plot for economic domination perpetuated by their rich former colonial masters. AverageAfrican tariff barriers still hover in the 12 to 20 percent range. And when it turns to former colonies that enjoy playing the spoiler, India leads the pack.

In May, India’s new prime minister, Narendra Modi, cast a gimlet eye on the only successful multilateral trade-liberalization deal the WTO had concluded in nearly 20 years of trying. Last December, when WTO members convened in Bali, India’s government (then controlled by the leftish Congress Party that Modi’s right-wing Bharatiya Janata Party trounced in this spring’s elections) signed a deal that was widely cheered. For good reason: The so-called Bali Package was guesstimated to give the global economy a trillion-dollar boost. The WTO’s richer countries pledged to provide developing countries with billions of “trade facilitation” dollars to modernize clogged ports, fix terrible roads, and streamline corrupt customs procedures. But Modi balked.

On July 31, the strong-willed Indian leader took trade facilitation hostage,refusing to sign the necessary legal protocol to implement it.

India’s veto — unprecedented in GATT/WTO history — brought the WTO into what Director-General Azevedo called a state of “paralysis.”India’s veto — unprecedented in GATT/WTO history — brought the WTO into what Director-General Azevedo called a state of “paralysis.” The good news is that after months of bitter wrangling, Modi released his veto, declaring victory.

Some victory. Essentially, India “won” the right to continue to increase the amount of subsidies that New Delhi has been lavishing upon its farmers into an indefinite future, without fears of being held legally accountable in the WTO. India’s “food security” program — paying globally uncompetitive farmers above-market prices to stockpile grains that are later doled out to the urban poor — has been widely criticized. Perhaps half the grain rots, or is sold on the black market. Meanwhile, Indian exports of surplus rice have distorted global markets for years. Undeterred by criticisms that the purpose of WTO trade negotiations is to reduce protectionism, not enhance it, Modi nevertheless claimed the high moral ground: asserting that Mother India is only fighting for the rights of the world’s poor.

The hypocrisy extends beyond agriculture. Modi has hiked tariffs on imports of high-tech equipment from other developing countries like the Philippines, Vietnam, and China. Meanwhile, India’s main goal in the WTO’s long-stalled Doha Round of broader trade liberalizing negotiations — which the Bali deal was intended to revive — is the “flexibility” to raise all industrial tariffs even more, whenever New Delhi finds enhanced protectionism politically attractive.

As it turns out, that’s basically what many African leaders also want from the WTO: the right to raise tariffs and advance their own industrial policies — while the rich countries dismantle theirs. It’s called necessary “policy space.” South Africa’s president, Jacob Zuma, has hardly bothered to disguise hissuspicions that the WTO’s Bali deal was tilted in favor of the rich “North.” And some officials in Uganda, Tanzania, and Kenya also complained that trade facilitation meant opening their borders to import competition from giant multinational corporations.

On April 27, after meeting behind closed doors, a handful of African diplomats — nobody has publicly claimed credit — persuaded the African Union to “instruct” African WTO ambassadors in Geneva to try to delay the Bali deal’s implementation. As the AU, based in Addis Ababa, hadn’t even participated in the Bali negotiations, the power play ran into intense criticism from furious Americans, Europeans, and a long list of others. The Africans subsequently backed down, but the poisonous distrust that has paralyzed the WTO’s negotiations was back.

That distrust memorably first surfaced in late November 1999, when WTO ministers convened in Seattle, hoping to launch a new round of multilateral trade-liberalizing talks. The Battle of Seattle is best remembered for the vociferous band of anti-globalist protestors (colorfully dressed as sea turtles or ninjas) who trashed that city’s streets. Less noticed were the secret smiles from key African trade officials inside the barricaded convention center who were happy that the talks failed.

In 2001, it seemed trade liberalization was on the move again when the WTO’s Doha Round was launched. But then in September 2003, there was open cheering from African officials when WTO meetings in Cancun again collapsed in acrimony. The meetings in the Mexican resort had been intended to breathe life into the Doha Round, but instead threw those negotiations into intensive care, where they still remain. (The trade-facilitation deal that was reached in Bali last December was split off from the broader Doha negotiations, the idea being to harvest the easier parts to generate momentum to complete the Doha Round.)

Just a few hours after the Cancun debacle, I ran into a Kenyan diplomat named Mukhisa Kituyi in an Argentine-style steakhouse. It was a memorable September evening in the famous Mexican resort. Kituyi and his colleagues were celebrating that afternoon’s failure of the WTO meetings, washing down copious quantities of red meat with red wine.

“We killed it,” one of the Kenyan officials boasted, referring to that afternoon’s negotiating failure.“We killed it,” one of the Kenyan officials boasted, referring to that afternoon’s negotiating failure.

Kituyi is now secretary-general of UNCTAD, the United Nations Conference on Trade and Development. While he declines to comment, it appears the Kenyan official remains a trade skeptic. Kituyi invited President Rafael Correa of Ecuador to deliver on Oct. 4 a rousing Special 50th Anniversary speech at UNCTAD’s Geneva headquarters, just a few blocks from the WTO’s offices along the Rue de Lausanne. Correa railed against “an immoral and unjust” world economic order. In a world “dominated by transnational capital and the hegemonic countries,” the Ecuadorian leader declared, the poor countries should protect themselves by forming regional trade accords. “The world of the future is a world of blocs,” he declared. Led by an approving Kituyi, the UNCTAD audience applauded.

This is not a trivial matter. In recent years, WTO members have cut more than 300 trade-distorting preferential trade deals with various favored trading partners. They all violate the fundamental GATT/WTO principle that member countries should not discriminate against each other. Perhaps half of global trade is diverted through these discriminatory “free trade” routes.

The top U.S. trade priorities are forming two regional trading blocs, one with Europe and the second with some Asian countries. China is excluded. Meanwhile, the Chinese are advancing their own regional trade bloc that would exclude the Americans. Many Africans are looking to their own side deals with each other.

Preventing the re-emergence of discriminatory trade blocs is exactly why the GATT was created in 1947. It’s a history lesson that present world leaders would be well advised to reflect upon.

BAY ISMOYO/AFP/Getty Images

OPINION

Elephant In the Room

By

GREG RUSHFORD The Wall Street Journal Asia
Updated Dec. 14, 2007 12:01 a.m. ET
At the World Trade Organization’s headquarters in Geneva, there’s a growing sense that a global trade deal is finally possible. The negotiations are now mostly characterized as serious. Big players, notably including the United States and the European Union, want to move forward. But that still doesn’t mean a deal is necessarily probable. This six-year, on-again-off-again process is now being threatened by a country that can least afford the collapse of the Doha Round: India.

Last week, the Indians were back to the rhetoric that has marked their negotiating style throughout the Doha process. The latest spat was over a newly circulated draft negotiating text on “rules,” including possible reforms of protectionist antidumping laws. The measure is controversial, and even the Americans have voiced concerns on some issues. But whereas U.S. officials expressed willingness to negotiate, their Indian counterparts threatened to close the door. Ambassador Ujal Singh Bhatia, India’s top trade diplomat in Geneva, called the draft text effectively an insult. India has been committed to the Doha negotiations, the ambassador said, “but if, God forbid, a time comes when that price of engagement is unpayable by us, then we will have to stand up and say that.”

That’s a rich statement, given India’s negotiating tactics. Rather than express willingness to negotiate gradual, phased-in liberalizations — which is how the Doha process is supposed to work — Trade Minister Kamal Nath has a long list of sectors he has insisted are “non-negotiable” from the get-go, including a “negative list” of politically “sensitive” imports that are discouraged, if not actually prohibited, from fruits and vegetables to grains, edible oils, rubber, cotton and silk.

* * *

While the rich Europeans and Americans actually could afford to walk away from the Doha Round, India would pay a dear price for its failure. Consider the gains India has already reaped from earlier rounds of partial trade liberalization.

Over the past 16 years, India has already unilaterally cut many tariffs to the 10%-12% range from an average of more than 40%. The effects are palpable. In 1991, trade was only 17% of GDP; by 2005 it was 45% and rising. India has become a major player in information technology, which has shot up to nearly $24 billion in exports from $13 billion four years ago, and now accounts for about 30% of its exports. The earlier tariff cuts, by lessening the costs of imports for Indian manufacturers, have contributed to average annual GDP growth of 8.5% in recent years, and have pulled millions of Indians out of poverty.

Yet India’s industrial tariffs are still high enough to put Indian manufacturers at a competitive disadvantage by taxing essential imported raw materials, which is why Doha is such a critical next step. For instance, India’s two biggest exports are petrochemicals and jewelry. But 14% tariffs on machinery, 15% on chemicals and 20% on transport equipment drive up the costs for domestic firms that need the foreign inputs. Thanks in large part to the barriers that are built into its tariff schedule (combined with the domestic red tape and bottlenecks), India produces fewer than 1% of the world’s manufactured goods.

India’s history of liberalization also shows how tariff reductions and the ensuing exposure to international market forces can create useful pressure to implement domestic reforms. Following the earlier trade liberalization, India found itself with little choice but to ease some licensing requirements on imports of capital goods. The country has been looking to attract more foreign investment by beginning to dismantle barriers that have long held its heavily regulated banking, pharmaceutical and insurance sectors back.

This is no small consideration in India, where domestic regulatory and infrastructure bottlenecks are notorious. The World Bank’s latest Doing Business survey estimates that the cost, including tariffs, poor roads, others customs duties and bureaucratic red tape, for India to export a carton of goods to the U.S. is $820; for China, it’s $390. It costs India $910 to import a carton from America, compared to $430 for China. Overall, the survey ranks India 120 out of 178 for ease of doing business. China ranks 83.

Absent pro-trade legal structures — like Doha — there’s little concrete pressure to change. Even with Doha, bottlenecks at ports would throw up short- to medium-term roadblocks to economic development. In one sense it’s a catch-22. Under Doha, India would chafe under its infrastructure constraints. But without Doha, there’s no pressure to fix those problems.

Take the rag trade. Given its large, hard-working population, India should also be able to compete with China in textiles and apparel. It’s not. Last year, China sold clothing worth about $27 billion to the U.S., a 25% increase over 2004. India’s clothing exports to the U.S. were about $5 billion last year, an increase of less than 2%, and only about $2 billion more than Bangladesh’s clothing exports to the U.S.

India is clobbered by an economic double whammy. First, its domestic labor laws make it near-to-impossible to fire workers, even if there is no work for them to do. This discourages large companies from moving into the market, ensuring that the industry remains at the mom-and-pop stage. And in the Doha Round, India’s negotiators are fighting hard to keep its protectionist tariffs averaging 42% on imports of clothing, which would result in little incentive to change the labor laws. Chinese clothing manufacturers must be laughing.

* * *

Since the economic logic is so powerful, one would think that India’s trade negotiators would be eager to bargain away tariff walls that hurt the country’s competitiveness. Wrong. In the Doha talks, India wants to retain “policy space” — a code word for protectionism — to raise tariffs any time it might find it convenient to prop up this or that uncompetitive domestic industry, like Brazil has been doing. Somehow it doesn’t occur to the Indians that their models on tariffs, instead of Brazil, should be the likes of Singapore and Hong Kong, where tariffs are negligible and economic growth is rampant.

India, of course, is hardly the only major WTO player that is playing brinksmanship games as the Doha negotiations lurch toward an end. Mr. Nath is right to complain that the EU’s infamous farm subsidies, which inflict hardships on poor countries, shouldn’t have existed in the first place. He isn’t the only trade minister to lament rising protectionist sentiments in the U.S. And other developing countries in the Doha process — Brazil, to name the most notable — have been busy raising their own tariffs while ostensibly negotiating in Geneva to lower them.

Despite India’s overall intransigence, Mr. Nath declared in late October that “We are in the last mile” in reaching some sort of Doha consensus. Key to further progress will India’s recognition that it stands only to benefit from freer trade.

Walk that last mile, Mr. Nath.

Mr. Rushford is editor of The Rushford Report, an online journal that tracks trade politics and diplomacy.