Global Policy Forum

Arrested Development


By Joseph Stiglitz*

August 10, 2006

Hopes for a development round in world trade - opening up opportunities for developing countries to grow, and for reducing poverty - now seem dashed. Though crocodile tears may be shed all around, the extent of disappointment needs to be calibrated: Pascal Lamy, the head of the World Trade Organization, had long worked to diminish expectations, so much so that it was clear that whatever emerged would bring, at most, limited benefits to poor countries.

The failure hardly comes as a surprise: the United States and the European Union had long ago reneged on the promises they made in 2001 at Doha to rectify the imbalances of the last round of trade negotiations - a round so unfair that the world's poorest countries were actually made worse off. Once again, America's lack of commitment to multilateralism, its obstinacy, and its willingness to put political expediency above principles - and even its own national interests - has triumphed. With elections looming in November, President George W Bush could not "sacrifice" the 25,000 wealthy cotton farmers or the 10,000 prosperous rice farmers and their campaign contributions. Seldom have so many had to give up so much to protect the interests of so few.

The talks bogged down over agriculture, where subsidies and trade restrictions remain so much higher than in manufacturing. With 70% or so of people in developing countries depending directly or indirectly on agriculture, they are the losers under the current regime. But the focus on agriculture diverted attention from a far broader agenda that could have been pursued in ways that would have benefited both the north and the south. For example, so-called "escalating tariffs," which tax processed goods at a far higher rate than unprocessed products mean that manufacturing tariffs discourage developing countries from undertaking the higher value-added activities that create jobs and boost incomes.

Perhaps the most outrageous example is America's $0.54 (28p) per gallon import tariff on ethanol, whereas there is no tariff on oil, and only a $0.50 per gallon tax on gasoline. This contrasts with the $0.51 per gallon subsidy that US companies (a huge portion of which goes to a single firm) receive on ethanol. Thus, foreign producers can't compete unless their costs are $1.05 per gallon lower than those of American producers.

The huge subsidies have meant that the US has become the largest producer of ethanol in the world. Yet, despite this huge advantage, some foreign firms can still make it in the American market. Brazilian sugar-based ethanol costs far less to produce than American corn-based ethanol. Brazil's firms are far more efficient than America's subsidized industry, which puts more energy into getting subsidies out of Congress than in improving efficiency. Some studies suggest that it requires more energy to produce America's ethanol than is contained in it.

If America eliminated these unfair trade barriers, it would buy more energy from Brazil and less from the Middle East. Evidently, the Bush administration would rather help Middle East oil producers, whose interests so often seem at variance with those of the US, than Brazil. Of course, the administration never puts it that way; with an energy policy forged by the oil companies, Archer Daniels Midland and other ethanol producers are just playing along in a corrupt system of campaign-contributions-for-subsidies.

In the trade talks, America said that it would cut subsidies only if others reciprocated by opening their markets. But, as one developing country minister put it, "Our farmers can compete with America's farmers; we just can't compete with America's treasury." Developing countries cannot, and should not, open up their markets fully to America's agricultural goods unless US subsidies are fully eliminated. To compete on a level playing field would force these countries to subsidise their farmers, diverting scarce funds that are needed for education, health, and infrastructure.

In other areas of trade, the principle of countervailing duties has been recognised: when a country imposes a subsidy, others can impose a tax to offset the unfair advantage given to that country's producers. If markets are opened up, countries should be given the right to countervail American and European subsidies. This would be a major step forward in trying to create a fair trade regime that promotes development.

At the onset of the development round, most developing countries worried not only that the EU and the US would renege on their promises (which they have in large part), but also that the resulting agreement would once again make them worse off. As a result, much of the developing world is relieved that at least this risk has been avoided. Still, there was a second risk: that the world would think that the agreement itself had accomplished the objectives of a development round set forth at Doha, with trade negotiators then turning once again to making the next round as unfair as previous rounds. This concern, too, now seems to have been allayed.

There remains one further concern: America has rushed to sign a series of bilateral trade agreements that are even more one-sided and unfair to developing countries, which may prompt Europe and others to do likewise. This divide-and-conquer strategy undermines the multilateral trade system, which is based on the principle of non-discrimination. Countries that sign these agreements get preferential treatment over all others. But developing countries have little to gain and much to lose by signing these agreements, which almost never deliver the promised benefits.

Indeed, the entire world is the loser if the multilateral trade system is weakened. The rest of the world must not embrace America's unilateral approach: the multilateral trade system is too precious to allow it to be destroyed by a US president who has repeatedly shown his contempt for global democracy and multilateralism.

About the Author: Joseph E. Stiglitz, the 2001 recipient of the Nobel Prize in economics, is the author of the forthcoming book Making Globalization Work. Anton Korinek of Columbia University contributed to this piece.

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