The WTO's Shaky Common Ground

Negotiators at this week's conference in Hong Kong are unlikely to make much progress. But if no gains are made, the WTO itself could become irrelevant

By Frederik Balfour

By just about anyone's reckoning, the Dec. 13-18 World Trade Organization conference in Hong Kong is unlikely to yield much progress. The bar on expectations has been lowered so much that some people believe just getting through the week without the whole process grinding to a halt will be a major accomplishment.

Rich and poor countries alike are guilty of slowing trade liberalization, so much so that WTO Director General Pascal Lamy has warned that the organization's very credibility is at stake.

That's sad evidence of the trend of growing protectionism. When trade ministers met in Doha, Qatar, not long after the September 11 attacks in the U.S., they aimed for talks that would boost global living standards and political stability by bringing poorer nations into the global trading system. But the so-called Doha Round of negotiations have foundered time and again on disputes over rich countries' farm subsidies and import barriers in nations such as India and Brazil.


  Now, instead of agreeing on a sweeping trade agreement this week in Hong Kong -- as had once been hoped -- participants will be lucky to set a deadline for agreeing to a continued framework for talks. That's crucial because if the negotiations are to succeed, participants must find a way to complete them by yearend 2006. In early 2007, President George W. Bush's negotiating authority from the U.S. Congress expires, which would enormously complicate any U.S. agreement to a deal.

How far the brinkmanship will go is an open question as the delegates from 149 countries gather. Developing nations could undermine further trade liberalization by seeking special exemptions for certain industries and services. And developed countries, especially the U.S. and members of the European Union, are at loggerheads over how much they should liberalize their agriculture markets.

Europe is increasingly isolated on subsidies for its farmers. Brussels wants far higher levels of tariff protection for agricultural products than most of the rest of the world. "A watered-down agreement that provides very little market access or very little reduction in subsidies is not a good agreement," U.S. Trade Representative Rob Portman said during a Hong Kong press conference on the eve of the meeting. Brazilian Foreign Minister Celso Amorim was more blunt: Unless the EU makes bigger concessions, "I do not believe we can complete this round," he told reporters.


  Failure to make progress in Hong Kong could erode recent gains in trade liberalization. That would hurt everyone, but China could be the biggest loser. U.S. attempts this year to restrict imports of Chinese garments, TVs, and steel could be just the beginning, warns Michael Spencer, chief economist for Asia at Deutsche Bank (DB ) in Hong Kong. "This gives the upper hand to protectionists in the U.S. and Europe if it fails," Spencer says.

Some caution that the very principles of the WTO may be threatened unless developed countries make bigger concessions. "If the U.S. and the EU only have proposals on the table that produce minor change, less-developed countries will want exemptions" from free-trade commitments, says Alan Oxley, ex-chairman of the General Agreement on Tariffs & Trade (the WTO's predecessor) and chairman of a new pro-trade group called World Growth. "That carries a serious risk of decisions that will weaken the core principles and core rules" of the WTO.

That could ultimately lead to stronger regional trading blocs. ASEAN, which includes 10 countries of Southeast Asia with a combined population of more than 500 million, is planning to expand its free-trade area to include China and South Korea. North America has NAFTA, while the U.S. has completed or is negotiating bilateral trade agreements with Chile, Singapore, and Vietnam. The danger is that the least developed countries, especially those in sub-Sahara Africa, stand little chance of joining trading blocs, so they're likely to miss any potential gains from free trade.


  One way forward could be the granting of temporary exemptions from tariff reductions for the least developed countries. It makes sense to give countries a few years to shift resources away from protected industries and hone their competitive edge. In China, for instance, a schedule of gradual liberalization has allowed companies and regulators to get ready for foreign competition in sectors ranging from banking to retail.

So is all doom and gloom? Not necessarily. WTO members have reached a deal to provide poor countries with easier access to generic versions of patented medicines -- an especially welcome development in the fight against HIV/AIDS, and as a bulwark against a possible pandemic of bird flu. But as important as that may be, if it's the only deal that's struck this week in Hong Kong, then the bar will seem pretty low indeed.

With Rose Brady in New York

Balfour is a correspondent in BusinessWeek's Hong Kong bureau

Edited by David Rocks

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