The Mexican tourist resort of Canc?n is preparing for the mother of all off-seasons. In September, trade ministers and their entourages from 146 countries will descend on the town, accompanied by a small army of global justice activists. The attraction is a meeting of the Word Trade Organisation (WTO). It promises to be a defining moment in the evolution of globalisation. At stake are two questions. Will the rules-based trading system survive at all? And, if so, will the rules be used to strengthen the links between trade and poverty reduction?
Failure in Canc?n will do to the global trade system what Iraq did to the UN: leave it marginalised. It will also accelerate the US-led trend towards bilateral and regional trade deals, unleashing a wave of power politics in international trade. But success will require more than avoiding a breakdown in negotiations. If "multilateralism" is to survive, Canc?n needs to create the foundations for a new order in international trade.
Rich countries recognised this when the decision to launch a new trade round was taken at Doha in November 2001. Meeting soon after the 11th September terrorist attacks, they implicitly acknowledged that the WTO's rules were failing developing countries, the majority of the institution's members. The new round, they promised, would be a "development round" redistributing the benefits of trade towards the poorest countries and people.
International trade, linked to flows of foreign investment and technology, is the most powerful motor driving global economic integration. It has consistently grown faster than the world economy as a whole, so that national economies have become steadily more interdependent. And WTO rules matter because they are part of a global governance structure for managing this interdependence. They shape the terms on which countries at widely divergent levels of development-from Tanzania to India to the US-enter and compete in the global market.
Before the creation of the WTO in 1995 trade rules were of limited relevance. Negotiations under the General Agreement on Tariffs and Trade (Gatt), the WTO's predecessor, were technocratic affairs limited to tariffs on merchandise. The core principles of the old regime-a commitment to liberalisation and non-discrimination-were transferred to the WTO. But the rules of the game were strengthened, deepened, and extended into critical areas of national public policy. Today, the WTO's remit covers not only trade in goods, but also laws on intellectual property protection, foreign investment, the provision of services and taxation. When governments sign up for membership of the WTO they embrace the whole package-and even the strongest can be brought to book. The EU recently provoked outrage in the US when it won the right to impose $4bn worth of trade sanctions in a dispute over tax subsidies granted to US exporters. In retaliation, the Bush administration has initiated a WTO dispute aimed at overturning a de facto EU moratorium on genetically modified crops. Apart from reflecting the sorry state of transatlantic relations, these cases highlight a simple fact: the WTO is a club with rules that bite.
One unfortunate outcome at Canc?n is guaranteed in advance: the summit will reignite an increasingly polarised and sterile debate between globaphobes and globaphiles. The former are hostile to all integration into global markets, believing it to be a one-way street to increased poverty, corporate control, loss of sovereignty, and rising inequality. In place of the WTO, globaphobes offer vague "people-based" or regional alternatives, allied to a withdrawal from the global economy in favour of localised exchange. The assumption appears to be that the power politics that distort trade relations between rich and poor countries will wither away with the WTO.
This account combines implausible politics with silly economics. Lacking the means to retaliate poor countries need rules and a multilateral system that works. Trade provides one avenue through which poor countries can tap into more prosperous markets, and gain access to new technologies and ideas. And success in international trade is often correlated with dramatic improvements in living standards, as shown by East Asia's experience. Integration into global markets helped fuel China's economic growth, which lifted over 150m people out of poverty in the 1990s alone-one of the most rapid advances in human welfare in history. In Vietnam and Uganda, the expansion of agricultural exports has contributed to declining rural poverty and rising food production. In the 1980s, India started liberalising imports of gem-cutting machines, computers and communications hardware. Today, polished gems and software are among its largest exports, and millions of jobs have been created. By contrast, Africa's marginalisation in world trade-the region accounts for less than 2 per cent of global imports and exports-has been associated with rising poverty. If Africa doubled its share of world exports the foreign exchange gains would represent four times the aid it receives.
On the other side of this argument stand the globaphiles-a group that extends from the IMF and World Bank to most northern governments and much of the economics profession. This coalition sees globalisation and open trade as an unmitigated blessing for rich and poor countries. One of their most articulate spokesmen is Philippe Legrain, a former special advisor at the WTO. His book Open World: the truth about globalisation is a prime example of the misplaced optimism of the globaphile camp.
Legrain is less interested in reforming globalisation than in celebrating the current order. Liberalisation and globalisation, he argues, are lifting billions out of poverty under the auspices of the WTO-a model democracy which, unlike the IMF or World Bank, is based on "one nation one vote." Not that the voting structure matters, in his account, since all decisions are taken by consensus.
But Legrain's argument hinges on dubious claims about the relationship between openness to trade and economic growth and draws heavily on the World Bank, and in particular a globaphile classic, Trade, Growth and Poverty by David Dollar and Aart Kraay. This study identifies 24 countries-including India, China and Vietnam-as being "open" on the basis of increases in their trade-to-GDP ratios. Growth rates for these countries are found to be over three times higher than for a parallel group of non-globalisers. The conclusion drawn is that openness to trade, facilitated through import liberalisation, is good for growth, which is good for poverty reduction.
Rising trade and rising GDP are indeed linked but it is not clear how they are linked-nor what policy regime for import liberalisation is likely to bring success. Many of the countries that have integrated most successfully into the global market have liberalised in a carefully sequenced fashion. Countries in East Asia have taken advantage of globalisation to expand their exports and have grown faster as a result. But they lowered protective barriers slowly, restricted foreign investment to create opportunities for local enterprise, and kept active industrial development strategies. China and Vietnam, like South Korea and Taiwan before them, may be among the world's highest growth economies, but they are hardly advertisements for the Washington consensus. They all retain high tariffs and have high levels of state intervention. Even India, which has adopted a more orthodox reform path, retains high levels of tariff protection. (See Michael Lind's review of Ha-Joon Chang's book Kicking Away the Ladder, in Prospect January 2003.)
As Dani Rodrik, a Harvard economist, has shown, the only thing that can be said with certainty is that countries tend to become more open as they become richer-not that they become richer because they are more open. What matters is the quality of a country's institutions, and how trade policy is integrated into economic development and poverty reduction.
This is not a case for protectionism. Even the semi-protectionist policies that worked in South Korea or Taiwan may not work in Nigeria or Peru. And all too often protection has been a smokescreen for inefficiency and corruption. But consider the case of Latin America as a counter-example. Following a wave of reforms in the 1990s, this is now the world's most open region, especially with regard to import controls and foreign investment. To put it mildly, the results have been disappointing. With the exception of Chile, growth rates have been lower than in the 1970s, and the number of people in poverty rose by 5m over the past decade. Even in countries with positive growth rates-such as Mexico-poverty levels have increased.
In Legrain's world, opponents of globalisation are xenophobes, protectionist trade unionists or environmentalists united by their aversion to trade. In fact, most supporters of the global justice movement are not "anti-trade" or "anti-globalisation," but opposed to what they see as a system managed to disadvantage the poor. At least one of the prominent "anti-trade" targets attacked by Legrain, George Monbiot, has just written a book arguing for a reformed trading system as a force for poverty reduction.
Legrain's analysis of the recent political conflict over globalisation is also implausible. He attributes the breakdown of negotiations at Seattle in 1999 to an assault by protectionists and social justice activists. Perhaps this is how it looked from inside the WTO secretariat. But the collapse at Seattle was, in fact, the product of a revolt by developing countries. Angered at the failure of the WTO to address long-standing problems over market access and agricultural subsidies, and at the efforts of the EU and the US to load the agenda with other issues-such as the liberalisation of foreign investment and services-the developing world voted with its feet. This highlights a more serious problem in Legrain's book: his failure to distinguish between formal rules and informal power. Much of the agenda for the Uruguay Round of trade talks (1986-1994) was dictated by northern governments and corporate lobbies. Developing countries were pushed into compliance with agreements that were contrived through bilateral deals between the US and the EU, while old problems in market access and agriculture were unresolved.
This background is relevant to Canc?n in two respects. First, failure to address the injustices of the Uruguay Round will irreparably damage the WTO in the eyes of the developing world. Second, the debate between globaphobes and globaphiles is a false one. International trade is not the problem, the rules governing trade are.
Nowhere are the rules more important than on market access. If trade is to become a more powerful vehicle for redistributing wealth and opportunity, developing countries need access to northern markets. Rich country governments like to preach open-market principles to developing countries?and to enforce those principles through IMF?World Bank loan conditions. The same governments show a deep reluctance to embrace these principles at home-especially in areas where poor countries have a competitive advantage. At present, the poorest countries face the highest tariffs in northern markets. Average tariffs on trade between industrialised countries are around 2-3 per cent. But when poor countries export to rich ones this goes up by a multiple of five. To make matters worse, the steepest tariffs are reserved for labour intensive goods-such as agricultural commodities, clothing and footwear. Latin American farmers can export tomatoes to the US with a 2 per cent tariff, rising to 12 per cent for tomato sauce. Brazil pays a tariff of 50 per cent on concentrated orange juice to protect big fruit farms in Florida. Meanwhile, the EU lets oilseed enter the market duty free, but imposes high duties on processed oils from Indonesia and Malaysia. Tariffs on textiles and garments, still the developing world's most important manufacturing export in terms of job generation, range from 15 per cent in Europe to around 20 per cent in the US. This helps to explain why revenue duties collected in the US on imports from Bangladesh, one of the world's poorest countries, are comparable to those collected on imports from France, one of its richest.
Textiles and garments trade illustrates the unfairness of WTO rules. In the last trade round, industrial countries promised to phase out by 2005 the Multifibre Arrangement (MFA)-a system of quotas that sets a ceiling on imports. Over three-quarters of the quotas should have gone by now. But the US still has over 80 per cent in place and the EU over 70 per cent. Both have adopted the strategy of "liberalising" quotas on goods that were never subject to controls in the first place-applying the letter of WTO law while violating its spirit. Even when the quotas have gone, tariffs will still exceed 15 per cent and the EU and US have reserved the right to restrict any surge in imports under the WTO's "safeguards" system.
No agreement bearing the title "development round" will be worth the paper it is written on unless it tackles the problems caused by EU and US agricultural policies. Over three-quarters of people in the developing world living on less than $1 a day (a total of 900m) are small farmers. Many of their lives are blighted by the farm subsidies in rich countries. In the last round of trade talks, rich countries promised to make deep cuts in farm subsidies. More accurately, they agreed to cut subsidies deemed (by the EU and the US) to be "trade distorting" in the sense that they were linked to production. Payments based on land ownership or past production-or "decoupled" payments-were left outside the WTO's remit. This apparently technical distinction enables the EU and the US to repackage their subsidies, increasing the overall level of support to agriculture while complying with the WTO agreement. Rich countries allocate $311bn a year to agricultural support. Total rich country aid to Africa is worth about 12 days of farm subsidies. These subsidies, backed by high tariffs-over 100 per cent in sectors such as US groundnuts and EU livestock and dairy-generate massive over-production, and finance their dumping overseas.
Consider the case of EU sugar. Europe is one of the world's highest cost sugar producers because land and labour are expensive, and there is less sunshine than in the tropics. In a free market, Europe would be a big importer. In fact it is the world's largest exporter. The $1.6bn a year the EU gives to the sugar barons of East Anglia and the Paris Basin generates surpluses which deprive countries like Thailand and Malawi of markets. Meanwhile, tariffs above 70 per cent restrict imports. Mozambique loses almost as much as a result of EU sugar policy as it gets in European aid. This is a classic example of aid and trade policies pulling in different directions.
US trade negotiators like to talk about open markets in agriculture. But they are every bit as hypocritical as their EU counterparts. In May 2002, the Bush administration introduced its notorious farm bill providing for $83bn in additional spending over the next decade. Such US subsidies have global consequences because of the scale of the export surpluses they generate.
In 2002, America's 25,000 cotton farmers received over $3bn in subsidies. This was equivalent to the total market value of cotton output. Because the US is the world's largest exporter of cotton its subsidies reduce world prices by around one quarter, costing exporters in West Africa alone $200m in lost foreign exchange. This is a region with some of the worst human welfare indicators in the world and an estimated 11m people depending on cotton as their main source of income. The subsidies lavished on the cotton-belt states of California, Texas and Mississippi are destroying the livelihoods of farmers in Burkina Faso and Mali despite the fact that West Africa is a far more efficient cotton producer than the US.
Those African farmers cannot compete with the US treasury, nor can their Latin American counterparts. Trade ministers heading for Canc?n should spend a weekend on a trip to the southern state of Chiapas, one of the poorest places in Mexico. Most rural communities there survive by producing maize on ecologically fragile hillsides?or they used to. Rapid import liberalisation has led to a surge of imports from the US, wiping out thousands of livelihoods and unleashing a wave of forced migration. US maize farmers got $9bn worth of subsidies in 2002.
The prospects for trade rules that stop rich countries exporting at prices below the costs of production are not encouraging. Whatever their wider differences, both the US and the EU defend their right to provide "decoupled" support to agriculture, arguing that these payments will not affect production. But any subsidy payments to a sector in constant surplus are de facto export subsidies. Nominally decoupled payments are still pumping billions of dollars annually into large farms, providing capital and inflating land values. From the standpoint of farmers in developing countries, decoupling does not address the causes of unfair trade. Moreover, the 2002 US farm act substantially recouples support to production. And the latest botched attempt to reform the Common Agricultural Policy (CAP) reflects Europe's inability to rise above sectional interest. Thanks to a Franco-German deal last autumn, the budget is set to remain at $48bn, adjusted for inflation, until 2013. To make matters worse, an already weak proposal from the Commission to sever the link between subsidy and production has been heavily diluted. The cereals sectors will be only partially decoupled, and dairy and sugar?the main users of export subsidies?have effectively escaped reform. All of which leaves the EU in no position to challenge the US refusal to put its $10bn subsidised export credit programme or its food aid programme?much of which is geared towards commercial markets?into the negotiations. President Chirac may have publicly acknowledged the damage done to Africa's farmers by EU dumping but he is not ready to act against the perceived interests of French agriculture. Tony Blair and others call for fundamental CAP reform in the interests of the developing world but do nothing to build the alliances to make this possible.
There are two main reasons for the disjuncture between the formal?one country, one vote?democracy of the WTO and the actual outcomes which so often seem to favour the rich minority. The first can be traced to the political economy of reform. Northern governments do not arrive at the WTO armed only with a calculus that estimates overall welfare gains for their countries. Their actions reflect complex domestic bargaining processes between different sections of society. These processes help to explain the failure of the EU and the US to reform agriculture. Northern subsidies are economically irrational in terms of their welfare effects for the vast majority of consumers and taxpayers in the rich world, as well as for millions of farmers in the poor world. Yet the subsidies remain. The standard theory of interest group politics helps to explain why. Diffuse public interests-in this case northern consumers, taxpayers and developing world farmers-stand to make small individual gains from reform, but face high costs in organising to achieve them. By contrast, small numbers of producers stand to lose a great deal from subsidy cuts, and they are better placed to defend their interests. The National Cotton Council (NCC) in the US might only represent 25,000 farmers and a few hundred factory owners and traders, but it is defending a multi-billion dollar subsidy entitlement. The organisation heavily influences the key agricultural committees in Congress, donates handsomely to Democrat and Republican campaigns and, come the farm bill negotiations, speaks with one voice. African governments can complain, economists can scoff at the inefficiency, Oxfam can protest about inequity in global cotton markets-but if the NCC has votes in Congress and the ear of the president it is likely to prevail.
Populist politics reinforces vested interest. When President Bush signed the 2002 farm act he wore a white cowboy hat and defended the hike in subsidies by using Jeffersonian rhetoric. "Independent family farmers," he said, "show the character and values that have made this country strong." In Europe, France's agriculture minister, Herv? Gaymard, defends the CAP on the grounds that it is an integral part of the EU's social model. This is absurd. The US has the world's most unequal system of subsidy distribution: fewer than 10 per cent of farmers get over three-quarters of government payments. In France, CAP subsidies are distributed more unequally than income in Brazil, and the rural population has declined by one third in a decade. Current subsidy systems are transparently failing the rural poor. Yet these systems are defended by powerful farming lobby groups which mainly represent big farmers but whose appeal is enhanced by association with tradition and with vulnerable small farmers. There is no question that small farmers from the Welsh hills via Languedoc to Iowa are threatened by market liberalisation. But the challenge for rich country governments is to redistribute support towards rural poverty and environmental goals, not to defend a system that benefits rich farmers in the north at the expense of poor ones in the south. The same applies in the manufacturing sector. For India and Bangladesh, the benefits of opening northern markets are clear. Removing quota restrictions on textiles could create an additional 27m jobs for developing countries. It is true that some jobs would be lost in the declining, smokestack regions of rich countries. But this is surely a task for training programmes and industrial policy.
The second reason why the WTO is less democratic than it seems is corporate power. The history of the WTO agreement on intellectual property rights (Trips) illustrates the point. Dictated by the US pharmaceutical industry, and driven through by threats of US trade sanctions, the agreement was opposed by virtually every developing country in the Uruguay Round. Developing country recalcitrance was fully justified. In effect, Trips enshrines US patent law in the multilateral trade system, forcing developing countries to adopt rich country standards or face trade sanctions. More stringent intellectual property rules will increase the returns on patents for new technologies, over 90 per cent of which are held by corporations in rich countries. On the other side of the equation, the agreement will raise the costs of technology transfer and stifle innovation in poor countries, where weaker patent protection is more appropriate.
The Pharmaceutical Research and Manufacturers of America (PhRMA), probably the world's most powerful industrial lobby, continues to shape the Trips agenda. This is an organisation with some 300 full-time lobbyists in Washington alone. It has consistently pressed for the most stringent application of patents on medicines, and for the most restrictive application of criteria for restricting patent rights on public health grounds. PhRMA was a heavy funder of the Bush election campaign-and the administration has represented its views assiduously at the WTO.
Public outrage has forced the Trips issue back on to the Canc?n agenda. New rules that would ensure human health needs take priority over corporate patent claims should have been in place by the end of last year, but the US has blocked action. The problem is that under the Trips agreement, poor countries that have the capacity to manufacture generic drugs?Brazil, India, Thailand and a few others?will retain the right to do so, under certain conditions. However, countries that lack this capacity could be barred from importing generic versions of a patented drug. Thus India would not be allowed to sell generic drugs to, say, Zambia. Developing countries have asked for the right to import generic drugs in order to provide affordable medicine. Under pressure from the pharmaceutical lobby Bush has refused.
Intellectual property rules are the tip of an iceberg of corporate influence. During the Uruguay Round, global financial conglomerates lobbied for WTO rules to be extended to services such as banking and insurance. Having promised to let developing countries decide which sectors to liberalise, the EU has started the development round by tabling demands for extensive liberalisation, including banking and electricity.
The EU is also seeking to outlaw, through the WTO, the ability of developing country governments to regulate foreign investors. The EU trade commissioner, Pascal Lamy, justifies the proposal by reference to the interests of developing countries themselves, claiming that a WTO agreement would lead to a surge of foreign investment. But research shows no correlation between bilateral investment agreements (of which there are now about 2,000) and flows of new investment. Moreover, many of the developing world's most successful users of foreign investment have adopted policies?including restrictions on ownership, incentives for local investors, and technology transfer requirements?that would be outlawed under the EU's proposals. The vast majority of developing countries remain strongly opposed to negotiations on investment. So, given "one country, one vote" and consensus decision-making why has this idea not simply been abandoned?
Lobbying by powerful vested interests on WTO-related issues should not come as a surprise. International trade and the rules that govern it affect powerful private interest groups, from French farmers to European banks and US pharmaceutical giants. Their lobbying on trade is an extension of their efforts to secure forms of market regulation tailored to their interests. The problem is that the countervailing forces in the system are too weak to assert the primacy of the wider public interest. WTO processes can exacerbate this problem. Behind the fa?ade of a consensus approach, northern governments have all too often negotiated deals in private, presenting them as a fait accompli, and imposing them by bullying. But an equally serious problem is that public interest groups have failed to mobilise the domestic and international alliances needed to recast the policies that northern governments take to the WTO. Cutting the subsidies that sustain export dumping, curtailing the power of financial conglomerates, overcoming protectionist interests, and overturning patent laws guarded by the pharmaceutical industry are preconditions for achieving real change at the WTO. Yet many of these battles are being lost, or not even engaged, in the domestic politics of rich nations.
So where does this leave us? For the new WTO round to be a real development round, far more has to be done in some areas-and far less in others. Market access and agriculture are two areas in which more needs to be done. In other areas, the WTO needs to shrink, or it will sink. Developing countries must retain sufficient policy space to gear import liberalisation commitments towards their national poverty reduction strategies, and rich countries should abandon their efforts to use the WTO as a lever to prise open markets for western investors. If intellectual property is to remain in the WTO, it must do so on a more flexible basis. There is no economic rationale for a US-style global patents regime.
Some anti-globalisers will view any proposal to reform the WTO as ill-conceived. But what are the alternatives? If you want a glimpse into the future of a world with a weakened multilateral system take a look at the content of regional and bilateral trade pacts. Robert Zoellick, the US trade representative, now arrives at international meetings waving the US-Singapore free trade agreement and holding it up as a model for all countries. Its provisions include duty free market access for US exports, a legal provision prohibiting future import taxes, unrestricted rights of entry and profit repatriation for US investors, and intellectual property rules that make the Trips agreement look tame. The US would probably be happy to see the end of the WTO and is busy building a trade empire that projects the realities of its unrivalled power. Witness the creation of a middle east free trade zone-and the refusal to allow Egypt entry as punishment for its refusal to support the US case against the EU over genetically modified food.
The WTO's rules are rigged in favour of the strong. Yet abolition is not an option. Apart from removing a source of pressure on the US and the EU to open markets, cut farm subsidies, and halt protectionist abuses, it would risk a ruinous spiral of conflict. Rich countries would bulldoze poor ones into deeply unequal trade treaties. The multilateralism of convenience and bilateral power politics that the Bush administration is promoting in other international institutions would prevail. Ultimately, that is in nobody's interest-Canc?n is the place to draw a line in the Mexican sand.
