A challenge the world can’t afford to ignore

Apr 9 2008 by David Rosser, Western Mail

ONE of the most important challenges facing the global economy is the need to bring the World Trade Organisation’s Doha Development Agenda to a successful conclusion.

Within the next few months the world’s political leaders will have to rise to a challenge. Will they have the courage to forge an agreement that bolsters and enhances open markets and which should bring real benefits to the whole world, especially to those who live in the poorest countries?

As it stands it is hard to be an optimist about the Doha trade talks. They were launched nearly seven years ago in the aftermath of 9/11, a time when a spirit of multilateral co-operation and goodwill seemed to be much more evident that it is today. They have been in the last chance saloon for so long now that most people assume the process is pretty much dead and buried.

But two unrelated developments mean it is still possible to salvage an agreement from the process, and more important than ever that we do so.

One is the marked change in the global economic outlook over the past 15 months. The global credit crunch is slamming the brakes on a long period of economic expansion, and the economic shot in the arm that would come from the successful conclusion of this round of trade talks looks more and more alluring.

A recent study by two international trade economists puts the cost of distortion from trade barriers and farm subsidies at nearly $300bn a year, so the potential gains from Doha are huge.

Quite separately the rapid rise in food prices, driven in part by the growing demand for grain from the biofuels sector, has changed at least some of the arguments about agricultural subsidies, especially in the US.

That’s another reason for thinking that a deal looks more possible today than it did a year ago – and that the package currently on the table of dramatically reduced agricultural subsidies in the developed world, alongside the reduction of tariffs on traded goods and services and a process for addressing non-tariff barriers, might prove more acceptable.

Why do these talks matter so much? Trade has been the driving force behind economic growth and rising prosperity around the world for many years, and some countries have been transformed by the experience.

In 1993, 61% of Vietnamese lived below the poverty line. Six years later this had fallen to 35% and it is now reckoned to be below 20%.

Trade growth has provided this momentum, with the country’s exports doubling from one third to nearly two thirds of GDP in a decade.

In contrast, a failure of the Doha talks could lead to the WTO’s legitimacy being challenged and the shadows of protectionism rolling back the benefits of trade that we have all enjoyed so far.

If the benefits are so great why is agreement proving so difficult to achieve? One explanation is that there are losers as well as winners from removing trade distortions.

Although the benefits far outweigh the costs they are thinly spread across the economy and take time to materialise. By contrast, the losers are much more visible and vociferous, and are prepared to support politicians who resist cuts in the protection that has shielded them from competitive pressures.

That has been the same in all previous trade rounds. But there are new complexities now. In previous rounds all that mattered was agreement between a few rich countries – North America, Europe and Japan. But the world has changed. Big developing countries such as India, China and Brazil now hold a key role, and their high growth rates in recent years may have made a successful round of talks less of a priority in their eyes.

A final hurdle has been a shift in the political mood in the developed world against the idea of globalisation, which is taking the blame for growing income differentials and job insecurity in the rich countries of the West.

An FT/Harris poll last year found that only a minority of respondents in the five largest European countries and the US believed globalisation had a positive effect on their country. Hence the rise in protectionist pressures in the US and Europe.

So where next? There is much on the negotiating table which if it appeared in the final agreement would have a real benefit.

We must put pressure on our politicians to agree to the tariff and subsidy changes and business and government together will have to work at national and international levels to address the problems that are leading to the backlash against globalisation in the developed world.

Among other things, that means providing the training and skills people need to succeed in a much more competitive environment. It means providing social safety nets for workers who have been temporarily displaced by new trade patterns. And it means ensuring national labour markets are flexible and competitive so they can adapt to change without creating waves of redundancies.

Doha is the only show in town right now and we will see soon whether our political leaders have got what it takes to win this prize.