Protectionism not the answer after Cancun

Neil McCulloch, Senior Economist, The World Bank, Jakarta

The failure of Cancun has been heralded by many in Indonesia as a victory. Indeed, the recent trade talks in Cancun, Mexico, represents one of the first times in which developing countries have worked together to form a powerful negotiating block to pressure rich countries for greater liberalization.

But the failure of Cancun's will only be a true victory for Indonesia, if the Doha round of the World Trade Organization (WTO) is concluded successfully. Indonesia still faces significant barriers to selling its goods and services abroad and without a WTO deal these barriers will remain.

For example, in agriculture huge subsidies and domestic support payments by rich countries distort world markets and hurt poor farmers throughout the world. The World Bank estimates that agricultural liberalization could produce over US$350 billion in gains worldwide, although to achieve these gains both developed and developing countries must liberalize.

However, although agricultural subsidies grabbed most attention in Cancun, it is not the most important issue for Indonesia. This is because these subsidies are heavily concentrated on meat, dairy products, and cereals.

With the notable exception of rice, Indonesian farmers are not directly engaged in these distorted world markets. Other barriers in international agricultural markets are more important for Indonesia. Four developed country trade practices are especially harmful.

First, the use of specific rather than ad valorem tariffs often leads to very high effective protection, particularly on low quality goods. Specific tariffs mean that the lower the price, the higher the rate of protection, and thus low cost countries such as Indonesia get hurt. Products such as palm oil, rice, and sugar, as well as fish, crustaceans, and fruits and vegetables are most affected.

Second, developed countries use tariffs that cascade upwards on goods such as coffee and vegetables, as protective devices for their agro-processing industries. Developing countries such as Indonesia therefore face a bigger disadvantage in higher value added processed goods compared to raw materials.

Third, complex rules of origin make it hard for countries like Indonesia to avail of all the special treatment and incentives theoretically made available to them.

Fourth, conformance with health and safety regulations, notably maximum pesticide residue levels and difficulties with understanding and administering standards, are costly for Indonesia's exports, and hampers their capability to export these goods. To remove these barriers, a multilateral trade deal is critical.

It is important that Indonesia does not react to Cancun's failure by retreating into protectionist policies. There are many voices in the public arena now calling for such protection -- particularly in agriculture.

For example, leaders of farmers organizations argued for the need to protect poor rice farmers against imports, particularly during the harvest season. These leaders are right to highlight food security and vulnerability as key concerns, and indeed much more needs to be done to address these issues. But raising the tariff on rice, or, worse, restricting imports to specific importers or places of imports is not the answer.

The reason is easy to see -- people consume rice as well as producing it. Rice is by far the most important food constituting more than 25 percent of food expenditure for households in the bottom half of the expenditure distribution.

And the vast majority of households here consume more rice than they produce -- so increasing the price of rice hurts these households. Virtually none of Indonesia's 22 million urban households produce rice, so the urban poor would be hit hard by increases in the price of rice.

Some argue that this is a price worth paying to help the many more rural poor, but data from the Central Bureau of Statistics own household survey show that 60 percent of rural households also produce no rice.

Even among households that grow rice, many are marginal farmers whose holdings are so small that they cannot grow enough for their own family's needs.

The poorest households in rural areas are landless laborers and marginal farmers, who are net buyers of rice. When rice prices rise, the urban and rural poor suffer an immediate decline in their standard of living.

But policies are needed to help the poor, including poor farmers. The right approach is to construct a pro-poor trade strategy. Such a policy would address the large domestic barriers to trade by improving road transportation, port facilities and logistics services, and reducing bureaucratic red tape in customs and elsewhere.

This policy should also seek to improve food security by improving productivity through better agricultural extension and increasing the access of poor farmers to credit and warehousing services.

Furthermore the evidence shows that maintaining an open trading regime actually helps to reduce rice price fluctuations. During May to December last year retail prices rose less than one percent in Indonesia despite the simultaneous occurrence of a drought and the onset of Ramadhan in November.

This price stability was mainly due to the fact that rice imports more than doubled -- thus openness to world markets can also be a mechanism for cushioning domestic shocks. Restricting rice imports to specific importers would have exactly the opposite effect, increasing price fluctuations and raising prices for poor consumers.

East Asia, including Indonesia, would particularly benefit from the greater liberalization in trade in services that the Doha round is pursuing.

Evidence suggests that the productivity gains associated with more efficient services are particularly high, and that competitiveness in high-value agriculture and in manufacturing depends on efficient business services. Services liberalization throughout the developing world could yield gains of around $270 billion or 10 percent of gross domestic product for East Asia by 2015.

Cancun showed the ability of developing countries to come together on a joint agenda. Indonesia's leadership was recognized in bringing these countries together. Now, Indonesia has a great opportunity to use that leadership to get the parties at the table again, and conclude a Doha trade round that benefits all.