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Mother mercantilism

There was a small measure of progress at the WTO Hong Kong conference, but negotiators still see trade as an arm of politics

By Jack Thurston   January 2006

To leaven the mood at the opening session of the WTO ministerial conference in Hong Kong in mid-December, Pascal Lamy, the WTO’s newly installed director general, pulled a magic wand from his breast pocket. Progress has been so slow and the main protagonists dug in to such seemingly irreconcilable positions that Lamy, who has the unenviable task of brokering a final deal, could be forgiven for resorting to sorcery.

But if he had been looking for a prop to sum up the overall mood of the delegates and observers arriving in Hong Kong, Lamy might well have brandished a stethoscope. After the acrimonious walkout by developing countries at the last summit in Cancún in 2003, the main objective for the WTO this time around was survival. The diminishing of expectations to such a low level was profoundly depressing, particularly in a year when the British government threw the weight of its twin presidencies of the G8 and the EU behind the trade justice movement.

The good news is that the WTO did survive Hong Kong, and its 149 members agreed a text which includes a small measure of progress towards a final deal. The new text is less than spectacular, but everyone agreed to keep talking, and to hold a Hong Kong 2 in Geneva in the spring. The bad news is that there is an enormous amount still to do, and not much time in which to do it.

The EU delegation came to Hong Kong expecting the worst. In the late summer “bra wars,” Peter Mandelson had flunked his first major test as EU trade commissioner, and over the months that followed, the US consistently outmanoeuvred the EU in the build-up to Hong Kong. And if America’s multibillion-dollar cotton subsidies, so crippling to poor west African farmers, had made the US the villain at Cancún, it did not seem impossible that fortress Europe would carry the can for a potentially fatal breakdown at Hong Kong. This is because progress in agriculture, the sector of the world economy most heavily distorted by trade barriers and most important to developing countries, has become the prerequisite for progress in other areas like manufactured goods and services. Brazil, the world’s most competitive agricultural exporter and leader of the powerful G20 grouping of developing countries, recently turned its fire away from US cotton, corn and soybean subsidies and towards Europe’s farm tariffs.

Mandelson’s negotiating position has not been helped by a French government whose leaders – from President Chirac down – seem to relish the chance to strut on the world stage and belittle EU institutions by threatening to veto any trade deal which might require shaving a little of the fat from Europe’s bloated farm subsidy programmes. US negotiators face exactly the same kind of opposition from an increasingly protectionist congress, but the difference is that for the most part congress has had the good grace to refrain from using the handcuffs in such a public manner.

Facing isolation, Mandelson’s strategy in the early exchanges at Hong Kong was to go on the offensive. To the point of obsession, he criticised US “food aid” (see “Aid-dumping,” Prospect July 2005), arguing that it serves the narrow interests of American farmers and aid charities more than the needs of the world’s hungry. In a more subtle and effective move, he challenged the US, Japan and middle-income countries, including Brazil, to match the EU’s unilateral move to completely open its markets to the 50 least developed countries for all products other than armaments.

Economists tell us that the benefits of trade liberalisation always outweigh the costs. While this may be the case as far as economics is concerned, with politics the reverse is closer to the truth. This is why trade negotiators have to construct grand bargains across many economic sectors to generate the political cover necessary to take on the powerful vested interests that benefit from protectionism. This is the essence of mercantilism. And for all the talk of the Doha round being motivated by a millennial upsurge in compassion towards developing countries, the past week in Hong Kong proved beyond any doubt that trade negotiators are still strongly wedded to a mercantilist mindset.

With the WTO now covering more and more economic sectors and with more and more players at the table, the grand bargains are ever more complex. However, the two most important that will need to be resolved in 2006 are as follows. First, the US can only begin to rein in its massive – and growing – farm subsidy payments if it can offer its farmers new market opportunities outside the US, mainly through reducing tariff and other barriers to trade. Second, the EU can only reduce its market barriers in agriculture if it can increase its exports of manufactured goods and services to the likes of India, China and Brazil.

The Doha round has come a long way in four years. The idealist – and ultimately naive – declarations that marked its launch have matured into a more sophisticated appreciation of the political dynamics of trade opening, and particularly the importance of addressing the legitimate needs of people who lose out from the dismantling of trade barriers. Moreover, there is an understanding of the enormous diversity among developing countries. A family smallholding in landlocked Zambia will never be able to compete with the giant, mechanised farms in Brazil’s fertile cerrado. For that matter, can a landless Brazilian peasant expect to feed himself and his family in a world of ever-increasing productivity and falling commodity prices?

The minor street disturbances which marred the last night of the negotiations were led by the Via Campesina, a self-styled “international peasant movement” whose presence in Hong Kong drew heavily on a large contingent of farmers from South Korea. It is a telling paradox that South Korea is a country which owes its remarkable economic growth since the 1960s to the opportunities of the global economy, yet shelters its farmers with a level of trade protection far beyond that of the EU or the US. Trade policy offers many such conundrums, and their solutions usually lie beyond the remit of the WTO. Facing up to these challenges and at the same time recognising that the WTO is the least bad way of regulating the international trading system offers the best chance for much-needed progress in the early months of 2006. This is a job for trade realists. Sorcerers need not apply.

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