Global Policy Forum

By Kevin Watkins

Robert Zoellick, the US Trade Representative, is a man with a mission backed by a sense of history. Writing in the 7 - 13 December edition of The Economist, he sketched the battle plan for an American crusade to promote global free trade, tracing the roots of the Bush administration's policies back to the protestors who dumped English tea in Boston harbour.

The analogy was apt – but inadvertently so. After all, the dumping of agricultural produce is one area in which the United States retains a powerful comparative advantage, spending billions of dollars each year disposing of American farm surpluses in developing countries. Another area of trade policy in which the Bush administration exercises global leadership, superbly captured by the Zoellick manifesto, can be summarised in a single word, ‘hypocrisy'. Like the British colonialists that attracted the ire of the Boston tea party fraternity, the United States is a good old-fashioned mercantilist power, combining protectionism at home with a commitment to free trade overseas.

Of course, there are differences. In the 19th century, Britain opened markets through gunboat diplomacy and occupation. These days the preferred instruments for America's crusade are the World Trade Organisation (WTO), regional trade pacts and bilateral agreements on open markets.

The road to Illsville

Nothing better illustrates the double standard of current US trade policy than agriculture. Consider the case of cotton. In 2001, the US Commodity Credit Corporation spent $4bn subsidising the income of cotton producers, a fraternity comprising some 25,000 corporate farms in California, Texas, Mississippi and elsewhere.

Given that the world market value of the cotton crop was slightly over $3bn, one might question whether the Bush administration's farm policies owe more to the principles of Bolshevik state planning or the market principles espoused by Zoellick. But as the world's largest cotton exporter, domestic subsidies in America have global consequences. According to the International Cotton Advisory Committee, they lowered world prices by around one-quarter, reinforcing the deepest and most protracted depression in world cotton markets since the Great Depression.

Skip from the subsidy fest in Texas to West Africa and you can see the results. The latter is a region where some 11 million households depend on cotton cultivation for their livelihoods, and where cotton is a crucial source of foreign exchange and government revenue. At a conservative estimate, it lost some $200m in 2001 as a direct consequence of American farm subsidies.

To put this figure in context, it dwarfs the amount that governments in the region receive in the form of US aid or debt relief under the Heavily Indebted Poor Countries (HIPC) Initiative. And behind the number there are real people, ‘agricultural labourers who get lower wages, small farmers who have less to spend on food and health, and children being taken out of school because their parents can no longer afford the fees.'

Like his illustrious predecessors, Robert Zoellick likes to wax lyrical about the merits of a ‘level playing field' in agriculture. No doubt President Bush himself will waste no opportunity to press on African producers the benefits of open markets when he visits the region in January. But what sort of level playing field is it when the subsidies given to corporate cotton farms in America are bigger than the entire national income of cotton-producing countries such as Burkina Faso and Mali? This is a level playing field that slopes all the way downhill from Texas.

US farm policy and world poverty

The case of cotton is a particularly dramatic example of how American agricultural policies destroy markets for vulnerable people in the developing world. Sadly, it is not an isolated example. Currently, Mexico is lowering tariffs on imports of maize as part of the final phase of market liberalisation under the North American Free Trade Agreement.

The domestic maize economy is already in a state of crisis. Domestic producers, especially those in the southern poverty-belt states, cannot compete against American imports, which have risen fourfold in the last seven years. And why should they? According to the Organisation for Economic Cooperation and Development (OECD), the US maize sector receives some $8bn a year in subsidies.

Zoellick claims that farm policy is one area in which the Bush administration has started to introduce market-based principles. There are two possible explanations for this view. Either the current US trade representative has a sense of humour to match his sense of history or he has lost touch with reality.

Under the 2002 Farm Security and Rural Investment Act, the administration is committed to spending up to $20bn a year in farm subsidies, an increase of around 10% over the last farm bill. Moreover, the new legislation introduces elements that will be deeply damaging to developing countries. It reinforces the link between subsidies and output, raising the spectre of an expanded surplus to be dumped on world markets. And by shifting the burden of supporting farm incomes away from the market and on to taxpayers, it enables agribusiness exporters such as Cargill and Archer Daniels to get access to produce at prices far below costs of production.

The upshot is relatively straightforward. Smallholder farmers in developing countries – ‘a group that accounts for three-quarters of all people living below the extreme poverty line of less than $1 a day' – will continue to face grossly unfair competition in local and global markets.

Protectionism in the guise of free trade

For those clinging to the hope that the Doha ‘development round' will help resolve the problems in world agricultural markets caused by northern government subsidies, here is some simple advice: forget it.

True, Zoellick can point to an apparently bold US proposal that would cut support to agriculture in rich countries by about one-third. But ask yourself if the same Congress that just contrived the new farm bill is really likely to go down this road.

The most likely outcome from the current round of WTO talks is a repeat performance of the US–EU deal that marked the culmination of the Uruguay round. Under that deal, the world's two agricultural superpowers sank their differences and agreed to cut subsidies, having first redefined what constitutes a subsidy to accommodate their own programmes.

Just in case you missed the subtle courting ritual on agricultural trade now underway between Robert Zoellick and his European Union (EU) counterpart, Pascal Lamy, their proposals call for a reduction in ‘trade distorting subsidies'. This definition excludes around two-thirds of current US payments to farmers, not to mention the huge disguised subsidies provided through assorted food aid and export credit programmes.

Looking beyond agriculture, it is difficult to avoid being struck by the discrepancy between the picture of US trade policy painted by Zoellick and the realities facing developing countries.

To take one example, much has been made of America's generosity towards Africa under the Africa Growth and Opportunity Act (AGOA). This provides what, on the surface, looks like free market access for a range of textile, garment and footwear products. Scratch the surface and you get a different picture. Under AGOA's so-called rules-of-origin provisions, the yarn and fabric used to make apparel exports must be made either in the United States or an eligible African country. If they are made in Africa, there is a ceiling of 1.5 per cent on the share of the US market that the products in question can account for. Moreover, the AGOA's coverage is less than comprehensive. There are some 900 tariff lines not covered, for which average tariffs exceed 11%.

According to the International Monetary Fund (IMF), the benefits accruing to Africa from the AGOA would be some $420m, or five times, greater if the US removed the rules-of-origin restrictions. But these restrictions reflect the realities of mercantilist trade policy. The underlying principle is that you can export to America, provided that the export in question uses American products rather than those of competitors. For a country supposedly leading a crusade for open, non-discriminatory global markets, it's a curiously anachronistic approach to trade policy.

Africa's experience under the AGOA reflects a deeper problem in US trade policy which, as a seasoned user of selective data, Zoellick is adept at obscuring. As he rightly told readers of The Economist, America has the rich world's lowest trade-weighted tariff barriers. The average level is around 1.5%. But averages obscure wide variations, including the far higher levels of tariff facing many of the world's poorest countries.

In fact, the US places far higher tariffs on the least developed countries than the EU, with an average of 13% compared to 2%. In the case of agriculture, the average tariff on imports from the same countries is 28%. Moreover, America subjects a far higher share of manufactured imports from poor countries to tariff peaks in excess of 15%, principally because of the high level of import taxes applied to textiles and garments. This helps to explain why revenues collected by the United States on imports from Bangladesh are roughly equivalent to those collected on imports from France, even though the latter are some twelve times larger.

One of the problems with debates on trade barriers is that their technical bias obscures the human consequences. Estimates by the World Bank suggest that northern protectionism in textiles and garments may cost as many as 27 million jobs in developing countries. For many of the world's poorest households, these jobs represent a possible escape route from poverty. True, labour conditions in many export industries are appallingly bad, with women workers in particular facing systematic violation of their labour rights. Yet these conditions are probably worsened by protectionist policies that serve to exercise a downward pressure on wages.

The US's regional route around the WTO

It is not just with respect to average tariff data that Zoellick is economical with the truth. Like the EU and Japan, the US imposes higher tariffs on processed goods, in effect, taxing local value added. To take one example, it is far easier for a poor country to export textiles and yarn to America than it is to export clothes. This tariff escalation, as it is known, has the pernicious effect of keeping developing countries trapped in low value-added ghettoes, with attendant consequences for investment, economic growth and employment.

Like an iceberg, only a small proportion of US trade barriers are visible. In addition to tariffs, developing country exporters face a bewildering array of prohibitions, seasonal restriction and technical barriers, not to mention potential legal hurdles. Between 1995 and 2001, the US launched 255 anti-dumping cases following complaints from American industry about unfair competition. Almost two-thirds of the total were directed against exporters in developing countries. In many more cases, the mere threat of an anti-dumping action with its implied legal cost is more effective than any trade barrier.

Looking beyond issues of agriculture and market access, some of the claims made by Zoellick simply defy credibility. Take, for example, his suggestion that the US is leading the way in implementing the Doha public health declaration.

This was a commitment undertaken by northern governments at the start of the WTO round to ensure that trade-related intellectual property rules (TRIPs) do not compromise public health in developing countries by raising the costs of medicines. The US has in fact comprehensively reneged on this commitment.

For all the complexities involved, the issues at stake are relatively simple. The application of twenty-year patents to drugs, as required under TRIPs, will have the effect of raising prices, unless countries are allowed to produce and import generic copies. For countries lacking strong domestic generic industries, including sub-Saharan Africa, the right to import from countries with such industries ‘such as Brazil and India' is critical.

Far from seeking to enshrine this right in WTO rules by allowing a general waiver from TRIPs for public health purposes, the US is insisting that the claims of developing country governments should be considered on a case-by-case basis, and that both the importing country and the country exporting the generic drug should be required to seek authorisation.

This will open the door to endless litigation, which is presumably what is intended. The US pharmaceuticals industry, architect of the TRIPs agreement and author of Zoellick's negotiating scripts, is well placed to contest claims against financially-strapped third-world governments, few of which will contemplate legal action. The losers, of course, will be the millions of poor households who will face higher costs for the treatment, and the prospect of increased vulnerability to ill health.

The focal point for the debate on TRIPs is the WTO. But there is growing evidence, reinforced by Zoellick's article in The Economist, that this may be misplaced. The locus of US policy has shifted strongly towards regional agreements, spearheaded by negotiations on the Free Trade Agreement for the Americas (FTAA), and bilateral deals such as that recently concluded with Singapore.

One of the attractions of these arrangements for the US is that the provisions go far beyond what it has been possible to negotiate in the WTO. For example, the agreement with Singapore provides far stronger protection to US patent holders and investors than offered through the WTO, and the US strategy for the FTAA is to build on this model.

Free trade or blackmail?

It is increasingly clear that regionalism and bilateralism, rather than multilateralism, is the preferred instrument for driving global liberalisation in US trade policy. To a lesser degree, this is also true for the EU. One of the important implications for developing countries is that they will be negotiating future trade deals in an environment where the balance of power is even more heavily stacked against them.

Another important trend, accelerated by the shift away from multilateralism, is the emergence of a new form of mercantilism in trade policy. Under the old General Agreement on Tariffs and Trade (GATT) regime, countries negotiated on a relatively limited agenda dominated by tariff reductions and market access. Developing countries were granted special and differential treatment under this system in recognition of the fact that their lower level of economic development meant that they should not have to reciprocate liberalisation by rich countries.

Under the new regime, the rules of the game have changed in two respects especially for developing countries. First, access to northern markets for manufactured and agricultural goods, is increasingly contingent on developing countries acceding to northern demands in other areas.

Eligibility for the AGOA, to take but one example, is conditional on African governments extending rights for US investors in their local economies, and enforcing the patent claims of American companies. At the WTO, both the US and the EU have made it clear that any concessions on market access for poor countries will require developing countries to accept a radical agenda for extending and deepening market liberalisation across a broad swathe of areas, including investment, financial services, and public utilities such as water. In short, the message is this: ‘if you want us to buy your shirts and agricultural produce, you open your door to our corporations.'

The second change is the erosion of the principle of special and differential treatment. When Zoellick recently tabled his proposal for zero tariffs on manufactured goods, he was including developing countries. It is worth reflecting for a moment on the sheer scale of the inequity implied by this approach. Because average tariffs in developing countries are far higher than in America, they would have to make far deeper cuts and absorb far higher adjustment costs than the world's richest country – a novel approach to special treatment.

More importantly, the Zoellick zero-option reflects an approach to the relationship between trade policy and poverty reminiscent of the most crass thinking in the IMF and the World Bank twenty years ago. There is no question that carefully designed and properly sequenced trade liberalisation can be good for growth and for poverty reduction. But the ‘big bang' liberalisation model envisaged under the US proposal is a prescription for de-industrialisation, rising inequality and poverty. Countries such as China and Vietnam have succeeded in capturing the benefits of integration into global markets in part by doing the opposite of what Zoellick advocates, liberalising imports slowly as part of a broader domestic reform programme.

At one point in his article, Robert Zoellick berates ‘anti-globalisation nihilists' and special interest groups for seeking to obstruct his free trade mission. He might want to reflect on whether his brand of nihilism and blind pursuit of US economic and corporate special interest represents an obstacle to the creation of an international trading system capable of extending the benefits of globalisation to the world's poor.

Kevin Watkins is Oxfam's head of research.

This article was originally published on the global issues website www.opendemocracy.net as part of an ongoing debate about trade.

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