Divergent paths of trade

The future of global trade talks is mired in uncertainty as differences persist on major issues and big powers try to circumvent the multilateral forum of the WTO.

SERIOUS strategic discussions are under way over the future of global trade talks. Union Commerce Minister Arun Jaitley held consultations in early December in Brasilia, the Brazilian capital. He met with his counterparts from other developing nations that had played a pivotal role in grounding industrialised countries' ambitions to stitch together a deal at the last ministerial meeting of the World Trade Organisation (WTO) in Cancun, Mexico.

At issue are the best options on the resumption of the dialogue that collapsed at the Mexican seaside resort in September (Cover Story, Frontline, October 10). The General Council (GC) of the WTO is expected to begin its deliberations soon. Whether it will succeed in charting a course for the future is uncertain. The WTO membership remains torn between contending and irreconcilable positions. And the presidential elections due in the United States by November 2004 have already begun to cast a long shadow.

General Council Chair Carlos Perez del Castillo concluded a series of informal consultations on agriculture with the more influential WTO members on November 21 and reported a serious lack of engagement and a "persistence of differences on the big issues". The group of developing countries - 20 at the last count - whose unity was quite the revelation of Cancun, has put forward proposals focussed especially on a tough set of disciplines on subsidies and import tariffs. While offering tariff reductions of their own, the developing countries have placed the main onus of adjustment on the industrialised countries' export subsidies and domestic support. India has persuasively put forward the case that the formula that is currently on the table, prepared by conference Chairman Ernesto Derbez before the Cancun collapse, imposes the most severe tariff reduction obligations on developing countries.

The European Union remains insistent on exempting certain agricultural subsidies and has called for more time to complete internal consultations. The U.S. is sticking to its demand that WTO disciplines be applied uniformly though special and differential treatment provisions could be invoked in certain cases involving developing countries.

Postures on the so-called Singapore issues are also sharply polarised. The E.U., which has been pursuing these issues with singular interest since the last global trade deal was concluded, agreed at Cancun to drop the two more contentious ones - investment and competition policy - from the Doha agenda. It is now seemingly intent on reintroducing them in negotiations involving a limited number of the WTO membership. The model invoked is the "Ministerial Declaration on Trade in Information Technology Products" (or Information Technology Agreement, ITA) that was adopted in December 1996 by 14 members of the WTO. From this small core group, the ITA has now grown to include 60 participants, who between them account for well over 90 per cent of the trade in IT products.

The E.U. now intends to press for negotiations on the less controversial of the Singapore issues - transparency in government procurement and trade facilitation - as part of the overall trade deal. The other two would be taken on board as part of a "plurilateral" process within the WTO, involving only members who choose to opt in. This is seen by most developing countries as a transparent effort to confuse the agenda and divert attention from the fundamental issue of agricultural trade, for which a mandate already exists.

The future of the Doha agenda finally is likely to be determined by the degree to which the U.S. and the E.U. really value the multilateral forum of the WTO. The U.S. indicated after the Cancun breakdown that it was disinclined to spend any more time within large bodies like the WTO, which were host to diverse and often intractable polarities of interest. Its clearly stated preference is to negotiate bilateral free trade agreements with willing partners. An ambitious plan to extend free trade to the entire western hemisphere - in the so-called Free Trade Area of the Americas - failed to take off at a November summit in Miami. The U.S. immediately announced that it was preparing for bilateral negotiations with a number of willing partners - Ecuador, Colombia, Peru, Bolivia and Panama.

The new bilateralism has not been received well in other parts of Latin America. Typically, the negotiations would involve the extension of the rules and disciplines involved in the North American Free Trade Area (NAFTA), to all countries that sign up. The restraints on U.S. agricultural subsidies for one, would be less rigorous than envisaged in any multilateral forum - certainly far less demanding than the regime that Brazil and other developing countries have been urging in the WTO. The intellectual property rights protection clauses, in contrast, would be far more rigid than those prevalent in the multilateral regime.

This is not a policy mix that is designed with the interests of the developing countries as its primary focus. Indeed, the two issues which most deeply divided Brazil and the U.S. at the Miami summit that they jointly chaired, were agriculture and intellectual property protection. With investment and government procurement also adding to the muddle, a composite deal acceptable to both the conference chairs proved impossible. The final result was a set of weakly binding obligations that bitterly disappointed business groups and just managed to save face for the U.S. administration.

If NAFTA is the model, then countries embarking on free trade negotiations with the U.S. have ample reason to be cautious. A World Bank report early this year purported to find major economic benefits for Mexico from NAFTA. A study of the fine print though, reveals that the claims made on behalf of NAFTA are rather modest. Without the agreement, the World Bank has argued, Mexico's recovery from the currency crisis of 1994 would have been much more arduous and prolonged. The Carnegie Endowment for International Peace, a liberal think tank based in Washington D.C., came up with radically different findings in a study published just on the eve of the Miami summit. Real wages for most Mexicans, it points out, are much lower today than they were when NAFTA took effect. Employment in agriculture has fallen from 8.1 million to 6.8 million in the nine years of the agreement in great part because subsidies given to U.S. producers have enabled them to flood the Mexican market. Some estimates put the price of U.S. corn in Mexico at 30 per cent below its cost of production.

Industry and services have failed to absorb the growing employment slack in agriculture. While the most optimistic scenario puts the increase in industrial employment since NAFTA took effect at just over 500,000, the impact in the services sector has been negligible. These outcomes are admittedly not entirely attributable to NAFTA. The collapse of real wages, for instance, could more accurately be traced to the peso crisis of 1994. By the same token, the increase in manufacturing employment could be ascribed for most part, to the devaluation of the Mexican currency that followed.

FINANCIAL liberalisation for most developing countries preceded trade liberalisation. It may serve a limited academic purpose to distinguish between the relative impact that each has had. But the two have not remained clearly distinguishable over the last decade and more. And increasingly, it is becoming the practice for the U.S. to insist that partner countries entering into free trade agreements should also do away with all residual controls on capital flows.

This is a pointer to a wider U.S. strategy, inseparably bound up with its faltering leadership of the world economy. In 1985, faced with mounting trade and current account deficits - which inevitably generated growing political pressure for protectionism at home - the Reagan administration in the U.S. had contrived to negotiate the Plaza accord with other leading economies. A gradual decline of the dollar was engineered, which brought the U.S. deficit into more manageable territory by about 1988.

The U.S. deficits today dwarf those of the mid-1980s and they have engendered very similar political responses. There are demands for trade retaliation focussed especially on the two countries that enjoy the largest counterpart trade surpluses: Japan and China. U.S. Treasury Secretary John Snow has been adopting a different tack: urging Japan and China to moderate their purchases of U.S. treasury bills and allow their currencies to appreciate against the dollar.

These exhortations seem to overlook the simple fact that Japan and China have indeed been trimming their holdings of U.S. treasury securities over the last year. Current data indicate a rapid strengthening of trade relations between the two countries, at the expense of their erstwhile dependence on the U.S. market. Japan, for instance, increased its exports to China by 27.8 per cent in October in relation to the same month of 2002. At the same time, its exports to the U.S. fell by 6.2 per cent over the same period. This was the 10th consecutive month of decline for Japan's exports to the U.S. And the strongest message in these figures comes from the reading of most analysts that the Japanese economy, after over a decade in depression, is now on a recovery path. In other words, breaking free from the paralysis of its dependence on the U.S. may be the best thing that has happened to the Japanese economy in a long time.

The dollar has been on the slow path of decline against the East Asian currencies, though its decline against the euro has been much more rapid. This trend is driven by other forces. E.U. member-states recently concluded a round of consultations on economic fundamentals. The basic issue was the widening of budgetary gaps in the two main economies in the euro-zone - Germany and France. Recent trends in government revenue and expenditure in the two countries have put them widely at variance with agreed European norms on monetary and fiscal stability. The European Commission bureaucracy has raised the alarm and called for a rapid tightening of fiscal posture. But Finance Ministers meeting in Brussels in mid-November seemed not to hear. The final upshot of their deliberations was a decision by the two countries to go on exactly as they have been.

The conjunction of widening budgetary gaps in the euro-zone and a strengthening euro represents a new point of departure for the world economy, which points to a still more rapid decline of the dollar. Whether this will, in turn, trim the U.S. deficit and promote growth is the crucial question on which the debate over the prospects of a "soft-landing" for the global economy hinge. Current indications are that it will not, simply because structurally, U.S. economic growth is driven by consumer demand rather than manufacturing output or exports.

Employment data for the U.S. economy released on December 5 showed that job growth over November had been a mere 57,000 - far below the forecast 150,000. Stock market indices contracted sharply and the dollar fell to another low against the euro. Markets are driven by the unshakeable conviction that the high rates of growth of the U.S. economy over the previous six months must necessarily mean a higher trade and current account deficit. Driven by consumption demand, which in turn is premised upon tax cuts and the wealth effect that a speculative rise in stock markets engenders, U.S. economic growth is also failing manifestly to create jobs on anything like the required scale.

With less than a year to run before he faces a re-election bid, U.S. President George Bush attended on December 2 a fund-raising event at the steel city of Pittsburgh in Pennsylvania State. Among the main organisers of the $2,000-a-plate buffet lunch that netted a total of $850,000 in campaign funds, was the chief executive of U.S. Steel Corporation. And he was clear about the manner in which he would have liked his favour requited: the Bush administration was to sustain the import tariffs it had imposed on steel and ride out the challenge from the WTO ruling holding them illegal. The threat of retaliation from Europe, Japan and South Korea, in other words, was to be simply ignored. It was a tough choice for Bush. Pennsylvania is a pivotal state in the industrial north. But the threatened retaliation from Europe especially, had carefully focussed on export products from states such as California and Florida, which are equally vital. Pennsylvania went against Bush in 2000 but two other steel producing states, Ohio and West Virginia, voted for him.

Even as the removal of protective tariffs was under consideration, the U.S. Customs Department was contemplating a payout of $150 million to steel manufacturers in the country under the so-called "Byrd Amendment" adopted by the U.S. Congress, which mandates that the revenue realised from anti-dumping duties should be distributed among firms that suffered injury from the unfair trade practices of foreign producers.

This too is a form of domestic support that has been held illegal by the WTO. The U.S. has until December 27 to repeal the measure, but with Congress having adjourned for the year, there is little prospect of that deadline being met.

The tariffs question was settled with some delicate calculation of political gains and losses. The U.S. President's handlers inferred from their reading of the tea leaves that the political balance could be decisively tilted against him by steel consumers who would stand to lose from the higher tariffs and producers whose exports would be directly hit by retaliatory duties in Europe and Japan. Automobile and household appliance manufacturers in the U.S. would appreciate the removal of steel tariffs. And textile producers in the Carolinas and citrus growers in Florida would be relieved that the threat of European and Japanese retaliation had abated.

The removal of steel tariffs earned major headlines in the global media, but it was a decision that the Bush administration chose consciously to downplay. Coming in the immediate wake of a major fund-raising effort from the steel industry, it led to predictable murmurs about presidential duplicity and deceit. Overseas, it was seen as a signal of U.S. vulnerability and its eroding credibility in setting an agenda for global trade negotiations. For all the rhetoric about the virtues of multilateralism, recent events have only highlighted the long evident fact that free trade principles are only honoured when it is politically convenient to do so. But in the convenience of the industrialised world lies little advantage for developing countries.