A forgone conclusion is that the results of the Hong Kong WTO Ministerial meeting will be less “ambitious” than many had hoped six months ago. There are plenty of targets for blame, including EU market access for agricultural products, U.S. agricultural subsidies and access to developing countries for industrial goods and services. All of these concerns are appropriate, but are not at the heart of the problem.
The current WTO negotiations are partly a hostage of the success of market opening efforts by first the GATT (General Agreement on Tariff and Trade) and now the WTO. Developed countries that have been part of a more open trading system for industrial goods for almost 60 years have seen a stunning increase in standards of living for their people. Those developing countries that have responded to changing consumer demands in developed countries have also benefited. Developed countries now have less self interest in continuing the market opening process in agriculture and services. The push for more open trade has morphed into managed trade. Developing countries have fallen into a similar approach to trade policy.
Managed trade is focused on protecting producers rather than on creating opportunities for consumers to buy a greater variety of products at lower prices. Adam Smith framed the issue over 200 years ago, “consumption is the sole end and purpose of any production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumers.” Managed trade is the exact opposite approach.
A few examples from recent media stories show how deeply engrained managed trade is in some countries. The Swiss have a 700 percent tariff on parsley and the Norwegians have a 400 percent tariff on dairy products. Any trade policy changes short of the U.S. proposal to cap all agricultural tariffs at a maximum of 75 percent will not change the managed trade mentality of such tariffs. The U.S. and the EU have average industrial tariffs of 3-4 percent while developing countries have average tariffs of 27 percent. India has a 100 percent duty on new cars. BMW is considering importing car parts which have a tariff of “only” 15 percent and assembling cars in India. That is economically inefficient and is managed trade at its worst.
The early focus in GATT was primarily on industrial goods because the benefits to trade were greatest in those products and agriculture was recovering from the dislocations of WWII. The GATT negotiations sought to soften the sharp edges of change for producers caused by a more open trading system in industrial goods. The goal was to manage the adjustment process, not to manage trade. The economic benefits for consumers spurred increased consumption of industrial goods and economic changes for producers freed up resources, including labor and capital, which were used to increase production in new areas in response to consumer demands.
If only developed countries now pushed managed trade, it would be harmful to economic growth, but not fatal to the current trade policy talks. Developing countries, including relatively successful developing countries like India and Brazil, are leaders in the negotiations while holding to the managed trade philosophy. Protecting existing producers and the workers in those industries at the expense of consumers is not a successful economic model.
Developing countries are naturally fearful of the dislocations in production that will occur under more open trade. They do not have government funds to help cushion the loss of incomes. The recent experiences of some Chinese grain farmers who have shifted to producing fruits and vegetables and increased their incomes show how more open trade causes shifts in resource uses that can also increase incomes. The assumption had been that small Chinese farmers would never be able to compete with larger producers in other countries. By shifting to crops that better utilize low cost labor and a limited supply of land, exports have increased and incomes have gone up. They still have problems with poor roads and other infrastructure, but more markets have increased incomes. They are competitive enough that they have caused problems in markets served by U.S. producers.
Developing countries with preferential access to protected developed country markets, such as some Caribbean countries have to the EU sugar market, are opposed to lower tariffs because that would reduce their incomes from those protected markets. These countries want to continue wasting resources serving markets where they will never be competitive rather than seeking out crops where they could have a comparative advantage. They need to take a look at China’s economic results. Or, they could simply look at Hong Kong. With a commitment to open trade as its key economic policy, Hong Kong has a per capita income of $34,000 per year.
The EU has promoted a plan to grant unlimited access with zero tariffs to developed country markets for the 50 least developed countries in the WTO, while requiring them to make no changes in their import tariffs. That will open trade for outbound goods, but it will not open import markets and lower costs for consumers. It also ignores the fact that 70 percent of the tariffs paid by developing countries are paid to other developing countries.
A huge potential remains for improved economic growth through trade policy reforms by lower market access barriers in developed and developing countries. That potential can only be tapped when managed trade is jettisoned and more open trade and transitional mechanisms that ease the adjustments for producers again become the basis for the WTO negotiations.