«November 4, 2005 From Seattle to Hong Kong: Are we Getting Anywhere? By Jagdish Bhagwati Jagdish Bhagwati is Senior Fellow in International Economics ...»
In truth, these wafer-thin majorities imply that trade legislation has become more difficult to pass in the US Congress. A principal cause is the steady erosion of support by the Democratic leadership for trade liberalization. This owes in large measure to the fact that the AFL-CIO has become terrified by trade with the poor countries, and wants to raise the cost of production in these low-wage countries by raising their labour (and environmental) standards to those in the United States, so as to reduce the force of competition and what organized labor and indeed many other workers fear to be the downward pressure on their wages and on their standards in a “race to the bottom”. As it happens (as demonstrated in my book, In Defense of Globalization), there is little empirical basis to argue that the stagnation of wages in the United States is significantly attributable to trade rather than unskilled-labor-saving technical change; and the evidence for decline in standards due to trade or outward flow of investment is also hard to find.
But evidence does not always matter: a Russian proverb says that fear has big eyes, but one should add that it also has deaf ears.
Democratic leaders have therefore found it increasingly difficult to negotiate trade liberalization without surrendering to de facto protectionism. Assertions of “unfair trade” are continually cited, and often masked under the cloak of altruism and concern for the poor countries’ workers, to make sure that trade liberalization with the poor countries is ruled out unless their costs of production are brought closer to those in the United States through incorporation of higher standards. So, each trade liberalization effort is accompanied by a chorus of demands for making “trade free and (even more) fair”, while the name of the game really is to handicap free trade by effectively targeting the competitiveness of the poor countries.
The Democratic leadership has increasingly surrendered to these tactics, flirting with not just the “fair trade” variety of protectionism but even going so far as to embrace other forms of near-xenophobia. Thus, even famously free- trade-oriented leaders like the former Presidential candidate John Kerry stooped during the campaign to describing firms that buy from abroad or invest abroad as Benedict Arnolds: Mr. Arnold being, not an obscure English poet, a distant cousin of Matthew Arnold, but in fact America’s most notorious traitor! What Secretary of Defense Donald Rumsfeld infelicitously called the “old Europe” can match this, as when Franz Muntefering, the vice-chancellor-in-waiting and former chairman of SPD, graphically condemned hedge funds as “locusts” during the last German election.
The result has been drastic for freeing trade in two ways. First, the number of Democrats voting for each trade legislation has steadily fallen in recent years, the latest being fifteen for the CAFTA vote. The reaction to their pro-trade vote has also grown increasingly shrill within the Democratic Party: the House Minority leader, Representative Nancy Pelosi, in fact vowed to work to deny them a Democratic ticket in the next election, an anti-reform agenda of political retribution that did not even have the humor of the pro-reform Prime Minister Koizumi who, after the defection of some of his LDP members from support for the Post Office reforms, fielded against them an impressive slate of accomplished women candidates whom the Japanese press immediately christened the “assassins”!
Second, these “fair trade” agendas have no support in the multilateral trade negotiations from their intended targets, the developing countries. Especially, the bigger developing countries such as Brazil and India, who will not accept being taken for a ride, resist such intrusion of non-trade agendas into the WTO. In fact, that is also the position of Brazil on the FTAA, that it be focused on reducing trade barriers, not on inserting trade-unrelated agendas such as labor standards: and remember that President Lula is a far more impressive, and representative, labor union leader than the head of any richcountry union.
But when the United States takes the developing countries, one by one, in a bilateral Free Trade Agreement negotiation, it can exercise hegemonic pressure to get the immensely less powerful partner country to accept almost any “fair trade” agenda in exchange for a preferential access to its gigantic market. So, the various lobbies in the United States have now shifted from multilateral trade negotiations to bilateral FTAs because they expect a much richer harvest for their own agendas. Thus, every FTA by the US in recent years, while trivial in trade terms, is a milestone for the lobbies who force what are euphemistically called “WTO plus” obligations as if they represented progress relative to a deficient WTO. And former USTR Robert Zoellick, a passionate enthusiast of FTAs, has even called the Brazil-proposed FTAA, which discards these non-trade obligations, the FTAA-lite version, not in the welcoming spirit of an obese consumer but rather as a guest having to put up with a soup minus the cream at a banquet! George Orwell would have admired the US newspeak.
These bilateral and less-than-multilateral FTAs are therefore dangerous, not merely in thus constituting a threat to the support for multilateralism which will not indulge the rich-country lobbies’ demands for inserting trade-unrelated demands into trade negotiations, but also because they multiply preferences worldwide and creating a “spaghetti bowl” of multiple tariffs depending on source of a product and, in turn, a flood of rules of origin to determine which source is to be assigned to a product. With over 300 such preferential trade agreements in place already, and more coming down the road, nearly all first-rate economists have now begun to tire of them and consider them to be a pox on the trading system. While the disease began in Europe, as the EU Commissioners fanned out to negotiate FTAs with all and sundry (outside of the European core, now 25 nations), the United States could have used its immense status at the GATT to stop their spread by providing leadership. Instead, under Secretary Baker and his deputy Robert Zoellick at the time, the US joined in, and now Asia is following suit. We now have a pandemic.
There are two added reasons why this outbreak of ever more FTAs poses particular danger to Doha. First, the largely reactive Asian FTAs will not necessarily include the US; this will fuel resentment in the US public against trade because few will know that the blame does not belong in Tokyo or Beijing but in Washington with its trade leadership. This danger is particularly acute since the FTAs between China and other developing countries do not carry any discipline whatsoever. Where a developed country like Japan is involved, Article 24 of the GATT provides some discipline such as that nearly all tariffs must go to zero within the FTA, so one cannot pick and choose the levels of preferential tariff reduction and the sectors where they will apply for trade partners in the FTA. But if an FTA is among developing countries only, as the Chinese one will be in much of Asia, and then it comes under the Enabling Clause of GATT which entitles the member countries literally to liberalize preferentially among themselves in whatever manner they wish, with no other WTO members being able to assert any nondiscriminatory MFN rights! If one wants to predict what will happen then, one only needs to recall how the otherwise-benign US Congressmen marched down the steps of the Capitol Hill with a Toshiba radio and smashed it. Maybe they will wear a Chinese shirt and tear it off on the steps like the Incredible Hulk!
But even more damaging to the US ability to liberalize trade is the fact that, given the widespread fear of freer trade in the population, it is almost insane to present the Congress with a string of piffling FTAs and ask Congressmen to go to the well, and to bat for trade liberalization, again and again. Each time, they must use up some political goodwill. Increasing resistance is surely the most likely prediction; and if pork was not used liberally, the result would be catastrophic, not just disturbing. Is this a sensible way to run trade policy in the United States?
It is against this backdrop that one must assess the argument that Doha is in real trouble because the US fast-track authority (now called the Trade Promotion Authority) expires in July 2007. If we go over that date, as we will if Hong Kong is not show “twothirds” success (a statement whose import is clear but whose full meaning is elusive), in Lamy’s words, and the deal is not essentially done by the end of 2006 next year, then the renewal of US fast track authority becomes a real problem. Of course, Doha was declared when there was none. But for all the reasons just stated, a renewal is truly problematic;
and the failure to have reached conclusion of Doha might just add to the difficulties in maintaining momentum and progress.
Should we ring the alarm bell by saying that if Doha is not successful by midwe will have abandoned the multilateral trading system to a cruel fate of neglect and role shrinkage? There is a widespread view that preferential trade agreements, the bilateral and regional, will break out. But frankly, this is an absurd view. Can anyone seriously hold that, thanks to a blinkered trade leadership in the US and the EU and now much of Asia, these are not already multiplying at full speed? If the multiplication of FTAs is truly admitted to be an evil, as by now it is in many circles, why are politicians and bureaucrats allowed to get away with their game of enacting bilaterals while pretending to be virtuous in light of all evidence and argumentation? Why are these unnuanced, misguided and destructive trade leaders not roundly condemned, in the elite media?
Then again, will the failure of Doha mean that massive gains from trade will be lost to one and all? That depends, of course, on what Doha can reasonably be expected to achieve. As with the Uruguay Round, when different computable models of trade were used to indicate great gains, there is a danger that the estimates of enormous gains from trade are currently being bandied about from substantial liberalization under the Doha Round. There will certainly be loss of some gains from trade; and any gain is welcome.
But no one benefits from exaggeration and ballooning up of numbers in huge models that few understand and which obscure a slew of assumptions about matters such as the responses of farmers in Botswana and Uganda to estimated price change in response to removal of a price support in the EU that must be made in the teeth of little empirical knowledge. The economist John Whalley, who is arguably the best practitioner of such large models, had this to say about the models that had been produced to examine the
effects of the prospective Uruguay Round tariff cuts on the developing countries:
“…there are substantial, and at times hard to explain inconsistencies across model results.
One model shows most of the gains come from agricultural liberalization, another from textiles, and yet another from tariff cuts. One model shows developing countries losing from the elimination of the MFA, another shows them as large gainers... These differences occur even where similar data sets, and benchmark years are used.” A little restraint in citing the estimates of the massive gains from trade liberalization under Doha is in order. Yes, we will lose possibly substantial gains from trade if it fails; but we will survive.
Removing the Current Obstacles to an Agreement But we can succeed. The obstacles that remain are within what economists call the “policy zone”: they can be reached by appropriate policy decisions.
First, agriculture is more manageable than is generally assumed. The magnitudes of the subsidy support by the EU, in particular, are always reported as amounting to $1 billion a day, but these include both subsidies that are “decoupled” from production and trade and those that are not. In trade negotiations, only the latter matter. The former are a matter of internal politics and while those in the EU who pay (e.g. the UK) and those who receive (e.g. France) would fight over the matter, there is no reason for the rest of the world to worry about the same. The coupled subsidies that impact on other countries’ trade are, as Arvind Panagariya notes in his illuminating essay in this issue, are less than a third of the $ 1 billion a day estimate. And the export subsidies are only a very small fraction of that, reaching not even two digits; they surely can be removed with the least difficulty.
But this refocus in the public domain would mean having to debunk influential NGOs such as Oxfam (a British charity whose muddled campaign perhaps reflects the British concern about having to pay net on the decoupled subsidies), the intellectually disappointing World Bank leadership under James Wolfensohn, and the Cairns Group exporters who have made a big deal of the $ 1 billion a day estimate as a propaganda coup.
In fact, these groups have long been fond of the remark that a cow in the EU gets a subsidy of $2.20 a day, more than what 1.2 billion poorest people subsist on daily. But this bovine analogy is in fact asinine. The total EU subsidy is not all going to the cows but helps buy fertilizer, pesticides, irrigation and other inputs that lead to increased production when the subsidy is coupled to production; and to whatever the farmer decides to spend it on when the subsidy is decoupled from production. Next, what sense does it make to imply that what is generally a domestic transfer payment could have been given by way of aid to poor farmers abroad instead? A half-decent economist would instead calculate the deleterious effect of the producer subsidy on the income of the poorest farmers abroad; this effect can be beneficial if the subsidy lowers world prices and the poorest farmers are consuming imported food. And then she might compare it with what economists call the grant-equivalent flows of aid from the EU to the poor countries where these poor people reside. These groups dumb down the debate; and they lead to ill-informed policy prescriptions.
But if the subsidy problem has been grossly mis-stated and hence considered to be beyond the pale and beyond the realm of the negotiable, Panagariya also notes that the tariffs (defining what WTO negotiators call “market access”) are very high, but not only in the EU and US but also in the Cairns Group countries (some of which are even higher).