For almost four years since the Doha Round of trade negotiations in the WTO began at Doha, Qatar in November of 2001, trade policy analysts have talked about the three pillars of the agricultural portion of the talks: export subsidies, market access and domestic supports. The EU and the U.S. are working through the export subsidy issues. The EU is implementing another CAP (Common Agricultural Policy) reform aimed at reducing trade distorting domestic supports. The U.S. is making changes to comply with the rulings in the Brazilian cotton case and President Bush has talked about eliminating support programs by 2010. The major sticking point in the talks continues to be market access in general and reductions in tariff rates specifically.
That progress on tariff reductions would be difficult was well known before the talks began. The benefits of high tariffs are usually concentrated in an industry while the benefits of lower tariffs are dispersed among thousands or millions of consumers. If that were not the case, most tariffs would have been removed years ago. The fact that a tariff remains relatively high today indicates that a substantial political obstacle remains in the way.
A minor political breakthrough was achieved in May when the EU and other major agricultural importers agreed to a formula for calculating ad valorem equivalent tariff rates for tariffs that are based on something other than a percentage of the value of the goods. This allows for direct comparisons of tariffs across countries and products. The EU, Switzerland, South Korea other major agricultural importers had to make political decisions that gains in other areas of the trade talks were important enough to offset the political heat from agricultural interests that would lose as tariffs are reduced.
There is no shortage of formulas for reducing rates over some period of time, such as five or ten years. Each has advantages under certain conditions. The issue is not the formula for reducing tariffs; the issue is recognizing the need to reduce tariffs. Once the need has been established, reasonable people can hammer out a formula to reduce tariffs.
Two weeks ago at a meeting of 30 countries in Dalian, China, leaders of the Group of 20 developing countries proposed that the WTO member countries be divided into five bands based on their current levels of agricultural tariffs. All countries in a band would cut all tariffs by the same percentage, with those countries with the highest rates cutting by the largest percentage.
The EU supports having only three bands and allowing countries flexibility in deciding how much to cut individual tariffs. This would allow countries to give greater protection for particularly sensitive commodities – like rice for Japan. The U.S. supports what is known as the Swiss formula in which the highest tariffs cut at a faster rate so that all tariffs end up at the same percentage at some point in the future.
The central economic issue is that lower tariffs produce greater economic efficiencies, resulting in a higher standard of living. An import tariff is a tax that reduces the standard of living of the citizens of a country. The developed countries of the world have benefited from reductions in the tariffs on industrial goods, which now average 1.3 percent, to such an extent that they can afford to pay high tariffs on agricultural products, which average 16.0 percent, and still have a comparatively high standard of living.
The developing countries face a totally different set of dynamics. They have kept their industrial tariffs, which average 8.3 percent, higher than the developed countries. They cannot afford to maintain high tariffs in agriculture, which average 17.7 percent, because their high tariffs in industrial products have hurt economic growth to the extent that their standards of living are relatively low. Many of these countries are quick to call for lower agricultural tariffs in developed countries, but are not ready to lower their own tariffs on both agricultural and industrial products.
Despite claims in the press that developed countries are holding up the talks by not cutting domestic support programs for agriculture, the reality is that the developing countries are holding up the talks by not recognizing the need for reductions in all tariffs to improve their standards of living. They need to reduce tariffs for their self interests just as the now developed countries began cutting industrial tariffs in the late 1940s under the old General Agreement on Tariffs and Trade (GATT).
The latest estimates from the World Bank on moving toward free trade show the potential benefits for developed and developing countries. If the Doha Round resulted in a transition to free trade over the period 2005-2010, by 2015 the total world economic gains would be $287 billion per year. Two-thirds of the gains would go to developed countries, but as a share of national income, developing countries would have an average increase of 1.2 percent compared to 0.6 percent for developed countries. Two-thirds of the $287 billion of gains would be produced by liberalization of trade in agriculture and food, and elimination of market access barriers account for over 90 percent of the gains for agriculture and food.
Even more important is the fact that half the gains in agricultural trade for developing countries would come from increased trade among developing countries. Almost half the gains in the industrial portions of the developing country economies would also come from trade with other developing countries.
In the “framework agreement” of July 2004, developing countries were promised “special and differential treatment” on market access barriers to allow them to keep tariffs higher than those mandated for developed countries. The World Bank estimates show that is exactly the wrong approach. Slowing the movement toward freer trade in developing countries means that their economies will continue to grow more slowly than they could under a freer trade approach and would lag behind the growth of developed countries. To quote the great New York Yankee catcher Yogi Berra, that approach is a “wrong mistake.”