Doha Dealing: Trade Talks, Not Tax Cuts, Will Decide Our Economic Future

Listener: 16 July, 2005.

Keywords: Globalisation & Trade;

Unless major decisions are made this month, the Doha Round of international trade negotiations may be in trouble, and the New Zealand economy along with it. Although negotiations are occurring largely beneath the radar of most media, a good outcome is vital to New Zealand. Our economy has been doing well in recent years. The most important reason – other than we have not been doing anything too stupid – is the higher prices for our farm exports, a consequence of the Uruguay Round trade negotiations of the 1990s, which reduced some of the rich world’s subsidies on farm products, lifting world export prices, giving a boost to our farm and farm-processing incomes, and to the overall economy.

We talk about “fair trade”, but arguably the most unfair trade is in the world market for farm products, which the rich countries – especially the EU, Japan and the US – rig, in order to protect their farmers. Forty percent of the EU budget goes on farm subsidies, for example, but only four percent of their workers are farming. A recent World Bank report concluded that a major reason for the poverty of the poorest countries is this rich world agricultural protection.

When the biggest rich countries dump their inefficient production into world markets, making up the difference out of their treasuries, efficient producers have their prices depressed, too. To add to the injury, market access to rich countries is heavily restricted, so their consumers pay higher prices for their food as well as higher taxes. A few rich countries – especially New Zealand – also suffer.

In 1979, in perhaps the most important speech he ever made on New Zealand’s behalf, Prime Minister Rob Muldoon told the OECD that they were hypocritical to go on about the evils of protecting manufacturing and the benefits from eliminating its protection, while they had far higher levels on agricultural products. Slowly, perhaps shamefacedly, but ever-so-reluctantly, the rich countries have heeded the message. The Uruguay Round got a few concessions. The Doha Round, which began in November 2001 in the Arab Gulf city that gives the round its name, offers an opportunity to eliminate some of its most pernicious unfair trade.

Why the urgency now? The due date for settlement is not until December next year, based on the fact that US President George Bush’s authority to negotiate the deal runs out in 2007.

But so complicated is any settlement that major decisions have to be made at a ministerial meeting in Hong Kong this December. That involves making key decisions this month to allow officials to have their August (northern summer) holidays and then coming back in September to work like the clappers to fill in the details for Hong Kong.

Why the complexity? The trade negotiations stretch across a very wide front. (New Zealand is also particularly concerned about market access for fish and forest products.) But agriculture is the key. The poor nations have said, “No agricultural deal, no deal.” Any final deal has to be by consensus; every country involved has a potential veto.

Why not get rid of the agricultural protection at one stroke? The rich countries won’t wear that, and neither will many poor ones, who also protect their farmers. Some subsistence farmers would go out of business. Some countries insist on food security, although many of their demands are absurd. And then, to get the deal, there has to be special treatment for politically “sensitive products”. Sugar producers matter to so many in the US Congress that sugar’s protection will have to be phased out much more slowly.

There are collateral impacts. Recall that Pacific Island clothing producers were destroyed when East Asian clothes flooded in following our general tariff cuts in the 1990s, and the Pacific lost its special access to New Zealand. Despite the rhetoric, trade liberalisation makes some people worse off (at least in the medium run). A particular problem that our Pacific neighbours face (and so, in good conscience, must we) is that their preferential access to the EU for tropical fruits and sugar is likely to be reduced in favour of Latin America suppliers.

Meanwhile, the EU is in disarray over its budget, the largest single item of which is farm subsidies. Yes, subsidies will be permitted post-Doha. The ideal is they are for social purposes only, and should not distort production. In practice, they may be used to covertly subsidise exports.

Many poor countries – and rich countries for that matter – worry they will be swept aside by the sheer force of China’s economic growth. New Zealand will lose some manufacturing, including exports to Australia that China will displace. But it should be more than offset by the food and forestry sales to China. Their workers can’t eat what they manufacture. Other countries, however, may be less well placed to seize the upside.

The agricultural negotiations are a bit of a rolling maul, with on occasions the ball confusingly lost. The referee is New Zealander Tim Groser, with the almost impossible job of trying to get the EU and the US to co-operate, together with other parties, such as Brazil, which leads the G20 team of poor countries.

Until recently, Groser was our ambassador in Geneva. (He resigned when he became a National Party candidate in the next election.) He was only “ambassador” in title. A successful conclusion to the Doha Round is so vital to us, that New Zealand wanted him to chair impartially the key WTO Committee on Agriculture, rather than acting in our specific interests.

What might be the final outcome for agriculture? There is an excellent chance that export subsidies will end. Recent WTO rulings, taken under Uruguay Round provisions by Brazil on the EU’s sugar and US’s cotton export dumping, probably mean that the end of the subsidies is a matter of when and not if. There are also likely to be further restraints on subsidising of domestic production, although the outcome may be a process for settling disputes rather than elimination of particular practices. There is more pessimism about market access: further opportunities to sell, say, more dairy and meat products in the US and Europe may be small and only gradually increasing.

Such an “unambitious” package would still be a great step forward. (How much the New Zealand economy will benefit depends on the details, and how we seize the opportunities.) The outcome could be better. It depends on how resolute the poor countries are, and the extent to which the rich countries can overcome their special interests. Nevertheless, there will still be unfair trade after 2007: there will have to be another round of trade negotiations.

If there is a deal this time. Old hands debating whether an agreement will be reached recall that prospects looked as bleak at the same stage in previous trade negotiation rounds. This month’s deadline may sneak into the first week of August, but “why”, they say, “will it fail this time?”

Others warn against complacency. There should be a deal, but the conflicting pressures may result in a limited – “unambitious” – one. The New Zealand economy would still get gains, but not as much as if the world ends unfair trade in agriculture products.