CAMBRIDGE – Will they or won’t they? Will the world’s trade ministers eventually sign a new multilateral trade agreement that reduces agricultural subsidies and industrial tariffs, or will they walk away empty-handed? The saga has been ongoing since November 2001, when the current round of negotiations was launched in Doha, Qatar, with numerous subsequent ups and downs, near-collapses, and extensions.
The latest round of talks in Geneva has once again failed to produce an agreement. Judging by what the financial press and some economists say, the stakes could not be higher.
Conclude this so-called “development round” successfully, and you will lift hundreds of millions of farmers in poor countries out of poverty and ensure that globalization remains alive. Fail, and you will deal the world trading system a near-fatal blow, fostering disillusionment in the South and protectionism in the North. And, as the editorialists hasten to remind us, the downside is especially large at a time when the world’s financial system is reeling under the sub-prime mortgage crisis and the United States is entering a recession.
But look at the Doha agenda with a more detached set of eyes, and you wonder what all the fuss is about. True, farm-support policies in rich countries tend to depress world prices, along with the incomes of agricultural producers in developing countries. But for most farm products, the phasing out of these subsidies is likely to have only modest effects on world prices – at most a few percentage points. This is small potatoes compared to the significant run-up in prices that world markets have been experiencing recently, and it would in any case be swamped by the high volatility to which these markets are normally subject.
While higher world farm prices help producers, they hurt urban households in developing countries, many of which are also poor. That is why the recent spike in food prices has led many food-growing countries to impose export restrictions and has caused near panic among those concerned about global poverty.
It is hard to square these fears with the view that the Doha trade round could lift tens, if not hundreds, of millions out of poverty. The best that can be said is that farm reform in rich countries would be a mixed blessing for the world’s poor. Clear-cut gains exist only for a few commodities, such as cotton and sugar, which are not consumed in large quantities by poor households.
The big winners from farm reform in the US, the EU, and other rich countries would be their taxpayers and consumers, who have long paid for the subsidies and protections received by their farming compatriots. But make no mistake: what we are talking about here is domestic policy reform and an internal redistribution of income. This may be good on efficiency and even equity grounds. But should it have become the primary preoccupation of the World Trade Organization?
What about industrial tariffs? Rich countries have demanded sharp cuts in import tariffs by developing countries such as India and Brazil in return for phasing out their farm subsidies. (Why they need to be bribed by poor countries to do what is good for them is an enduring mystery.) But here, too, the potential benefits are slim. Applied tariff rates in developing countries, while higher than in advanced countries, are already at an all-time low.
According to World Bank estimates, complete elimination of all merchandise trade restrictions would ultimately boost developing-country incomes by no more than 1%. The impact on developed-country incomes would be even smaller. And, of course, the Doha Round would only reduce these barriers, not eliminate them altogether.
The Doha Round was constructed on a myth, namely that a negotiating agenda focused on agriculture would constitute a “development round.” This gave key constituencies what they wanted. It provided rich-country governments and then-WTO Director General Mike Moore with an opportunity to gain the moral high ground over anti-globalization protesters. It gave the US a stick with which to tear down the EU’s common agricultural policy. And it was tailor-made for the few middle-income developing countries (such as Brazil, Argentina, and Thailand) that are large agricultural exporters.
But the myth of a “development” round, promoted by trade officials and economists who espouse the “bicycle theory” of trade negotiations – the view that the trade regime can remain upright only with continuous progress in liberalization – backfired, because the US and key developing countries found it difficult to liberalize their farm sectors. What ultimately led to the collapse of the latest round of negotiations was India’s refusal to accept rigid rules that it felt would put India’s agricultural smallholders in jeopardy.
More importantly, the fears underlying the bicycle theory are wildly inflated. We live under the most liberal trade regime in history not because the WTO enforces it, but because important countries – rich and poor alike – find greater openness to be in their best interest.
The real risks lie elsewhere. On one side is the danger that today’s alarmism will prove self-fulfilling – that trade officials and investors will turn the doomsday scenario into reality by panicking. On the other side is the danger that a completed “development round” will fail to live up to the high expectations that it has spawned, further eroding the legitimacy of global trade rules over the longer run. In the end, it may well be the atmospherics – psychology and expectations – rather than the actual economic results on the ground that will determine the outcomes.
So don’t cry for Doha. It never was a development round, and tomorrow’s world will hardly look any different from yesterday’s.