Free Trade's Perilous Position

The latest round of world trade talks is floundering, as rich countries insist on keeping farm subsidies high, at the expense of poor nations

By Christopher Farrell

With the exception of war and peace, few negotiations are as important to world prosperity as global trade talks. Unfortunately, the news out of the so-called Doha Round (named for the city in the Persian Gulf nation of Qatar where the talks were initiated in 2001) is pretty gloomy. Trade worldwide is expanding at less than a 2.5% annual rate -- sharply below the 6.7% average pace of the '90s.

Multilateral trade talks are always contentious, full of high-minded rhetoric and sharp-elbowed politics. Yet compromise has triumphed over the past half-century, and world trade has grown at a rapid clip as result. International commerce flourished with the collapse of communism in the late 1980s and the embrace of freer markets by much of the developing world in the aftermath.

Three major trade negotiations during the 1990s -- the North American Free Trade Agreement, completion of the Uruguay round of the General Agreement on Tariffs & Trade, and the establishment of the World Trade Organization -- gave global commerce a huge shot in the arm.


  More recently, however, the combination of September 11, war in Afghanistan and Iraq, and a sagging global economy have chilled world trade, emboldening nations to give higher priority to domestic security and diplomatic concerns than to fostering open borders.

Peace and security are certainly important. But the price for failure at Doha would be high. The centerpiece of this round of talks is liberalizing agricultural trade, an industry where many developing nations hold a comparative advantage. Almost all economists agree that breaking down steep barriers on farm-grown goods, especially in the U.S. and Europe, will boost emerging market economies in Africa, Asia, and Eastern Europe, and could reduce poverty levels in those regions.

For instance, research by economists Díaz-Bonilla, Sherman Robinson, and Xinshen Diao of the International Food Policy Research Institute suggests that developing countries would triple their net agricultural trade, and an additional $26 billion in annual income would go toward farmers and agricultural workers, if the rich countries ended their farm subsidies and opened their borders.


  Indeed, many developing nations can't climb out of poverty without agricultural reform in the rich countries. Government subsidies and support for farming in the major industrial nations totals more than $300 billion a year, well in excess of the $50 billion in foreign aid shipped to the developing world. The subsidies block farmers in developing nations from competing on price.

President Blaise Compaore of Burkino Faso recently noted that the subsidies provided to farmers in the rich countries are 60% greater than the overall gross domestic product of his impoverished African nation, formerly known as Upper Volta. Cotton subsidies are especially damaging to his country and region. Rich countries' cotton subsidies cost Burkina 1% of its gross domestic product and 12% of its export income, says Compaore.

The comparable figures for Mali are 1.7% and 8%, respectively, and for Benin, another African nation, 1.4% and 9%, respectively. More than 10 million people in West and Central Africa directly depend on cotton production, and several million more are indirectly affected.


  Still, Europe and the U.S. show no signs of breaking down agricultural trade barriers and opening their markets to food imports. President Bush has hiked subsidies for the farm sector by 80%, according to free-trade advocates. France and Germany are resisting any fundamental reform of the EU's subsidy-dependent agricultural sector. So much for President Chirac's expressions of concern for the poor of Africa and elsewhere during the recent G-8 meeting in France.

The price of failure at Doha goes even further than GDPs and income levels. A free-trade vision underlies these talks -- openness, transparency, and the free flow of ideas, people, capital, and goods across international borders holds out the promise that a bounty long confined to a handful of industrial nations can be shared by the rest of the world.

Now, skepticism is growing about the rich countries' commitment to freer trade. "[Developing nations] see a focus on wars. They see a focus on post-conflict," World Bank President James Wolfensohn said in a recent speech. "But they don't see a focus on the war against poverty, what I call 'the other war.'"

The Bush Administration should realize that lowering trade barriers is far more important to long-term prosperity than cutting taxes. European leaders need to recognize that trade, not aid, is the best policy for raising living standards in developing nations. It's time for the rich countries to liberate agriculture and eliminate subsidies to their farmers.

Farrell is contributing economics editor for BusinessWeek. His Sound Money radio commentaries are broadcast over Minnesota Public Radio on Saturdays in nearly 200 markets nationwide. Follow his weekly Sound Money column, only on BusinessWeek Online

Edited by Douglas Harbrecht

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