Trading up global trade talks in the Development Round

Joseph E. Stiglitz, Project Syndicate

In the year since the breakdown of the trade talks in Cancun, sentiment has increasingly grown in the developing world that no agreement is better than a bad agreement. But what would a good agreement look like?

The British Commonwealth recently posed this question to me and the Initiative for Policy Dialogue, an international network of economists committed to helping developing countries. Our first message was that the current round of trade negotiations, especially as it has evolved, does not deserve even to be called a Development Round.

Well before the riots that marked the World Trade Organization talks in Seattle in 1999, I called for a true "development round" of trade talks to redress the inequities of previous rounds. The advanced countries, with their dominant corporate and financial interests, had set the agenda for those negotiations. Whether or not developing countries benefited was of little concern. Indeed, in the last round of trade negotiations, the Uruguay Round, the world's poorest region, sub-Saharan Africa, was actually made worse off.

Our second message was optimistic: If the agenda of the current round is reoriented towards development, and if assistance is provided to manage implementation and adjustment costs, developing countries can gain much. We analyzed which reforms in the international trade regime would most benefit those in the developing world, and we presented an alternative agenda based on our findings.

The results were perhaps obvious: More people live from agriculture in the developing world than from manufacturing, so agricultural liberalization must be high on the agenda. But genuinely beneficial agricultural reform would need to go further than merely transforming export subsidies into other types of subsidies, because many supposedly non-distorting subsidies lead to more output, which hurts producers in developing countries by lowering prices.

Trade reforms must be sensitive to the effects on developing countries, many of which are net importers of subsidized agricultural commodities. But some subsidies, like cotton subsidies in the United States, are rightly emblematic of America's bad faith. Eliminating this subsidy would help 10 million poor cotton farmers in sub-Saharan Africa. American taxpayers would also benefit. The only losers would be the 25,000 rich farmers who currently divvy up US$3-4 billion in government handouts each year.

Developing countries also need access for the unskilled labor- intensive services in which they have a comparative advantage. These were off the agenda in earlier trade rounds, as the U.S. pushed for liberalization of financial services -- thus serving its own comparative advantage. Today, unskilled services remain off the agenda.

Developing countries' gains from capital market liberalization have been widely noted (although recent studies raise some doubts about these benefits). Nevertheless, the global gains from allowing freer flows of unskilled labor (even temporarily), let alone the benefits to developing countries, far outweigh the benefits from capital market liberalization. But, as I said, this issue is not on the agenda.

The trade talks in Cancun raised new subjects -- the so-called Singapore issues. But even a cursory look at these items reveals that they primarily reflect the interests of developed countries. Indeed, poor countries' development would arguably have been set back if they had acquiesced in some of the demands.

Consider the issue of government procurement. The single largest area of U.S. government procurement is defense, a sector in which even the European Union has found it difficult to make inroads. Are developing countries really targeting this area in the next few years? Clearly, this issue is not high on their agenda.

Competition is another example. Without competition, lowering tariffs may merely be reflected in higher profit margins for a monopoly importer. The most important competition issue for developing countries, however, is reform of dumping duties. The U.S. and EU keep out products from developing countries, alleging that they charge less than the cost of production.

But why would anyone knowingly sell at a loss? This could only be rational if the seller can hope to establish a monopoly position and extract large profits in the future. But few developing countries are in a position to establish such monopoly positions, so the dumping charges are mostly bogus.

As tariff barriers have come down, the unfair "fair trade" laws are increasingly being used as America's favored protectionist tool. Treating foreign and domestic firms the same with respect to competitive practices would stop these abuses. This, too, should be a high priority of a true development round.

The breakdown of the Cancun talks may yet provide an opportunity for deeper reflection. Now that rich countries no longer need to worry about losing the developing world to Communism, they have an opportunity to redefine the global economic order according to the same principles on which they built successful national economies: Fair competition and social justice. Unfortunately, this opportunity was squandered in the Uruguay Round, as developed countries advanced their own interests at the expense of less developed countries.

The round of trade negotiations begun in Doha in November 2001 was launched in a different spirit. It aspired to promote trade as a vehicle of partnership between developed and developing countries. Regrettably, in spite of its name, the Development Round has offered far less to developing countries than one would have hoped.

The writer is Professor of Economics at Columbia University and a member of the Commission on the Social Dimensions of Globalization. He received the Nobel Prize in Economics in 2001.