What Comes After Cancun?

U.S. negotiators should open bilateral talks with a few key nations, mostly in Asia, and focus on creating a hemispheric free-trade zone

By Paul Magnusson

Developing nations are exultant following the collapse of the World Trade Organization talks in Cancun, Mexico, on Sept. 14. There, African, Asian, and Latin American delegations forced an abrupt end to the deliberations. "We scored an exceptional goal" when the U.S. and Europe "were unable to impose their will," said President Luiz Inácio Lula da Silva of Brazil, which led the rebellion along with China, India, Kenya, and South Africa.

At the same time, four small West African nations, their economies based almost solely on cotton production, put the U.S. and Europe to shame with a barrage of free-trade rhetoric. The U.S., Greece, and Italy refused to cut more than $3 billion in subsidies given yearly to their cotton producers. And piling on the insults, critics of globalization cheered that U.S. and Europe-based multinational corporations would no longer be dictating the rules of international commerce to the rest of the world.

It was a feel-good ending, for those who like to see the underdog prevail. But the stage work obscures a larger picture. The breakdown of what has become known as the Doha Development Round, after the 2001 site of its kick-off meeting in Qatar, might turn out to be a fleeting victory for poorer nations, only making their ultimate goals harder to achieve.


  The deadline for the talks -- January, 2005 -- will now be moved back. But also delayed are the chances of cutting $300 billion in subsidies given to farmers in Europe, the U.S., and Japan -- an amount six times what those nations donate annually in foreign aid to the poor nations. In the meantime, struggling farmers in tropical and Southern-hemisphere countries will continue to deal with the cut-rate crop prices worldwide that are due largely to the heavily subsidized commodity production of the North.

It's not just poor farmers of the developing world who may suffer from the stalled global trade talks. Up to 75% of the benefits of trade liberalization accrue to developing countries, so "the poorest may actually lose out," says Surjit Bhalla, an Indian economist and fund manager.

Seen from another perspective, the principled insistence of Brazil, China, India, and two dozen other nations on having the U.S. and the EU zero out their farm subsidies was a hollow victory. "The developing countries have shown their negative clout," says C. Fred Bergsten," director of the Washington (D.C.)-based Institute for International Economics. "But the question is whether they can show their positive ability to bring the thing to a constructive conclusion."


  That's what America needs now, too. U.S. manufacturing has shed 2.7 million jobs over 37 straight months. Democrats and Republicans are looking for somebody, anybody, to blame for America's record $500 billion trade deficit. Meanwhile, U.S. securities, accounting, and software companies are outsourcing jobs to India, China, and Ireland at an increasing pace. Trade liberalization in this atmosphere -- and in an upcoming election year, no less -- will be an increasingly difficult sell.

What to do? The Bush Administration needs to soldier on in the cause of trade liberalization, but with a different focus. First, it should abandon attempts to garner support within the WTO from smaller nations by opening negotiations for bilateral free-trade pacts. The strategy hasn't worked.

U.S. Trade Representative Robert Zoellick had counted on the votes within the WTO of 14 such nations and from a host of trade-partner wannabes. Sub-Sahara Africa, in particular, was presumed beholden because of a recent package of medical aid and trade preferences proffered by the U.S.


  Yet, many of these nations proved the most defiant of U.S. goals in Cancun. What's needed now "is more emphasis on free-trade agreements with commercially meaningful countries, particularly in Asia," says Franklin Vargo, vice-president for International Affairs at the National Association of Manufacturers. Countries such as Thailand, the Philippines, and New Zealand might be more willing to cut deals in the name of trade expansion, and the economic impacts on the global economy could be far more substantial. That sells free trade better than anything.

The second leg: Talks among 34 nations to fashion a hemispheric Free Trade Area of the Americas need to be revived. Those negotiations are scheduled to conclude in just 16 months. But they've been stalled by disputes between the U.S., Brazil, and Argentina over rich-nation subsidies for farmers and high tariffs on manufactured imports in Latin America.

The hemispheric talks could provide a smaller forum to work out some of the disputes that torpedoed the talks in Cancun. How? By focusing on smaller and more manageable issues, such as the high U.S. barriers to Brazilian orange juice and the impossibly complicated customs procedures for imports throughout Latin America. If Uncle Sam can make a free-trade case here, hopes for a worldwide pact could gain.

Ultimately, the issue of the highly protected American and European farm industries will have to be settled in the WTO. "If African farmers can't export their food, how are they going to get the dollars to buy our equipment?" says William Lane, Caterpillar's (CAT ) Washington lobbyist. The answer is, they can't. And they won't until serious negotiations take place and real compromises are made.

Magnusson covers international trade from BusinessWeek's Washington bureau

Edited by Douglas Harbrecht