Protectionism not the answer after Cancun<\/p>\n
Neil McCulloch, Senior Economist, The World Bank, Jakarta<\/p>\n
The failure of Cancun has been heralded by many in Indonesia
\nas a victory. Indeed, the recent trade talks in Cancun, Mexico,
\nrepresents one of the first times in which developing countries
\nhave worked together to form a powerful negotiating block to
\npressure rich countries for greater liberalization.<\/p>\n
But the failure of Cancun's will only be a true victory for
\nIndonesia, if the Doha round of the World Trade Organization
\n(WTO) is concluded successfully. Indonesia still faces
\nsignificant barriers to selling its goods and services abroad and
\nwithout a WTO deal these barriers will remain.<\/p>\n
For example, in agriculture huge subsidies and domestic
\nsupport payments by rich countries distort world markets and hurt
\npoor farmers throughout the world. The World Bank estimates that
\nagricultural liberalization could produce over US$350 billion in
\ngains worldwide, although to achieve these gains both developed
\nand developing countries must liberalize.<\/p>\n
However, although agricultural subsidies grabbed most
\nattention in Cancun, it is not the most important issue for
\nIndonesia. This is because these subsidies are heavily
\nconcentrated on meat, dairy products, and cereals.<\/p>\n
With the notable exception of rice, Indonesian farmers are not
\ndirectly engaged in these distorted world markets. Other barriers
\nin international agricultural markets are more important for
\nIndonesia. Four developed country trade practices are especially
\nharmful.<\/p>\n
First, the use of specific rather than ad valorem tariffs
\noften leads to very high effective protection, particularly on
\nlow quality goods. Specific tariffs mean that the lower the
\nprice, the higher the rate of protection, and thus low cost
\ncountries such as Indonesia get hurt. Products such as palm oil,
\nrice, and sugar, as well as fish, crustaceans, and fruits and
\nvegetables are most affected.<\/p>\n
Second, developed countries use tariffs that cascade upwards
\non goods such as coffee and vegetables, as protective devices for
\ntheir agro-processing industries. Developing countries such as
\nIndonesia therefore face a bigger disadvantage in higher value
\nadded processed goods compared to raw materials.<\/p>\n
Third, complex rules of origin make it hard for countries like
\nIndonesia to avail of all the special treatment and incentives
\ntheoretically made available to them.<\/p>\n
Fourth, conformance with health and safety regulations,
\nnotably maximum pesticide residue levels and difficulties with
\nunderstanding and administering standards, are costly for
\nIndonesia's exports, and hampers their capability to export these
\ngoods. To remove these barriers, a multilateral trade deal is
\ncritical.<\/p>\n
It is important that Indonesia does not react to Cancun's
\nfailure by retreating into protectionist policies. There are many
\nvoices in the public arena now calling for such protection --
\nparticularly in agriculture.<\/p>\n
For example, leaders of farmers organizations argued for the
\nneed to protect poor rice farmers against imports, particularly
\nduring the harvest season. These leaders are right to highlight
\nfood security and vulnerability as key concerns, and indeed much
\nmore needs to be done to address these issues. But raising the
\ntariff on rice, or, worse, restricting imports to specific
\nimporters or places of imports is not the answer.<\/p>\n
The reason is easy to see -- people consume rice as well as
\nproducing it. Rice is by far the most important food constituting
\nmore than 25 percent of food expenditure for households in the
\nbottom half of the expenditure distribution.<\/p>\n
And the vast majority of households here consume more rice
\nthan they produce -- so increasing the price of rice hurts these
\nhouseholds. Virtually none of Indonesia's 22 million urban
\nhouseholds produce rice, so the urban poor would be hit hard by
\nincreases in the price of rice.<\/p>\n
Some argue that this is a price worth paying to help the many
\nmore rural poor, but data from the Central Bureau of Statistics
\nown household survey show that 60 percent of rural households
\nalso produce no rice.<\/p>\n
Even among households that grow rice, many are marginal
\nfarmers whose holdings are so small that they cannot grow enough
\nfor their own family's needs.<\/p>\n
The poorest households in rural areas are landless laborers
\nand marginal farmers, who are net buyers of rice. When rice
\nprices rise, the urban and rural poor suffer an immediate decline
\nin their standard of living.<\/p>\n
But policies are needed to help the poor, including poor
\nfarmers. The right approach is to construct a pro-poor trade
\nstrategy. Such a policy would address the large domestic barriers
\nto trade by improving road transportation, port facilities and
\nlogistics services, and reducing bureaucratic red tape in customs
\nand elsewhere.<\/p>\n
This policy should also seek to improve food security by
\nimproving productivity through better agricultural extension and
\nincreasing the access of poor farmers to credit and warehousing
\nservices.<\/p>\n
Furthermore the evidence shows that maintaining an open
\ntrading regime actually helps to reduce rice price fluctuations.
\nDuring May to December last year retail prices rose less than one
\npercent in Indonesia despite the simultaneous occurrence of a
\ndrought and the onset of Ramadhan in November.<\/p>\n
This price stability was mainly due to the fact that rice
\nimports more than doubled -- thus openness to world markets can
\nalso be a mechanism for cushioning domestic shocks. Restricting
\nrice imports to specific importers would have exactly the
\nopposite effect, increasing price fluctuations and raising prices
\nfor poor consumers.<\/p>\n
East Asia, including Indonesia, would particularly benefit
\nfrom the greater liberalization in trade in services that the
\nDoha round is pursuing.<\/p>\n
Evidence suggests that the productivity gains associated with
\nmore efficient services are particularly high, and that
\ncompetitiveness in high-value agriculture and in manufacturing
\ndepends on efficient business services. Services liberalization
\nthroughout the developing world could yield gains of around $270
\nbillion or 10 percent of gross domestic product for East Asia by
\n2015.<\/p>\n
Cancun showed the ability of developing countries to come
\ntogether on a joint agenda. Indonesia's leadership was recognized
\nin bringing these countries together. Now, Indonesia has a great
\nopportunity to use that leadership to get the parties at the
\ntable again, and conclude a Doha trade round that benefits all.<\/p>",
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