Free trade bandwagon loses its steam

IN THE next six months or so, the world has to agree on a new set of rules to reform global trade. Yet as trade ministers prepare for a critical meeting in Hong Kong next week, their ultimate choices could be between no reform at all, or reform that barely moves the goalposts.

That prospect might seem odd to Australians, who are used to governments promoting free trade regardless of public opinion.

But that is not the attitude of governments in most of the World Trade Organisation's 150 member countries. They approach trade negotiations as opportunities to gain market access, not to give it.

And so, after four years of talking, the WTO's Doha round negotiations have failed to bridge a chasm on the central issue of trade reform: how to cut tariffs on farm produce so that low-cost farmers in countries such as Australia get access to the high-cost markets of Europe, Japan, Korea, Taiwan and the US.

A valuable new book edited by World Bank economists Kym Anderson and Will Martin,

Agricultural Trade Reform and the Doha Development Agenda , shows how unbalanced trade rules are now.

In the rich countries, tariffs on manufactures now average just 3 per cent, yet tariffs on farm produce average 22 per cent. On some, they are astronomical: 94 per cent on sugar to the US, 153 per cent on beef to Europe, and 693 per cent on wheat to Japan.

Export subsidies are banned in manufacturing, yet thrive in agriculture. OECD farmers receive a staggering $A320 billion a year in subsidies. Anderson, an Adelaide economist, and Martin estimate that almost two-thirds of all potential gains from full trade liberalisation would come in agriculture.

Removing all trade barriers, say Anderson, Martin and Dominique van der Mensbrugghe, would lift the world's output by $US287 billion ($A385 billion), as resources move from high-cost producers to low-cost producers, allowing far more to be produced.

On their numbers, all countries gain, although the big winners would be countries scrapping high farm protection — Europe, Japan, Korea and Taiwan — as cheap imported food frees up money for consumers and governments to spend on other things.

Australia would be another winner, with a 1 per cent rise in national income. That's not much, but at least it's more than the 2.4 billion people in low-income countries would get.

John Howard, who keeps telling us trade reform is the cure for global poverty, might take note: the World Bank estimates that complete free trade would lift the incomes of the world's poor by just $A9 a head. It would give more income to the 24 million people in Australia and New Zealand than to the 720 million in sub-Saharan Africa. Of course, that's just modelling, based on assumptions that could be wrong: such as assuming that elderly European, Japanese and Korean farmers whose farms become unviable will find jobs doing something else.

Real-world outcomes can be very different from those in models.

The WTO's members are not flocking to the free trade banner. There has been real progress in some areas, but unless ministers can bridge the chasm on farm tariffs, that too could be lost.

There have been two big steps. The European Union independently reformed its farm subsidies so they do not act as price supports, began slashing its sugar and cotton subsidies, and offered to scrap export subsidies.

On tariffs, however, the EU's proposal would exempt up to 175 types of farm products from change — enough, say Australian officials, to block any real market opening.

Second, key developing countries such as India and Brazil have flagged that they are willing to cut manufacturing tariffs if the EU, Japan and Korea agree to genuinely open their agricultural markets.

But EU trade commissioner Peter Mandelson insists that he has offered everything he can under the mandate given him by the 25 EU governments. The EU right now cannot even agree on its budget. A second round of farm reforms could be beyond it.

Back when the WTO was known as the General Agreement on Tariffs and Trade, it was seen as the only international body that worked. But that was so because the EU and US decided the outcomes, and everyone else had to accept them.

The WTO no longer works that way, as developing country ministers showed at Seattle (1999) and Cancun (2003), when they refused to be railroaded into supporting the developed countries' agenda.

The question now is whether the WTO can work at all. If not, the trade game now is every man for himself.

And China, with its undervalued currency, will keep winning.

Tim Colebatch is economics editor.

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