The benefits of free trade must be explained, the drawbacks must be shared

Economics notebook: Doha resolution begins at home


Larry Elliott, economics editor
The Guardian, Monday August 4 2008


You have to feel sorry for Gordon Brown. Over the past year, even as his problems have been amassing, the prime minister has been working behind the scenes in pursuit of a new free-trade deal. Brown has become messianic about the need to conclude the Doha round of talks, and even while on holiday he was on the phone urging fellow leaders to cut a deal.

With house prices going through the floor and energy prices going through the roof, it is far-fetched to believe a trade deal would have done much for Brown's poll ratings. There is not much evidence of voters saying: "Say what you like about the prime minister, he at least managed to get the Brazilians to accept a Nama coefficient that will result in Brussels accepting an 80% cut in Europe's most trade-distorting farm subsidies."

No, Brown was passionate about a trade deal because he thought it was the right thing to do, and early last week he must have thought there was the chance of one small victory to set against his sea of troubles. It was not to be. Talks collapsed over a row between India and the US, two countries where protectionist sentiment is strong. Nobody knows when, if ever, the talks will resume, although it is certain the Doha round will be the most protracted set of talks since the trade-liberalisation process started in the late 1940s.

Difficult areas

To exhausted negotiators in Geneva contemplating the seventh anniversary of the launch of the Doha round in November, it must beggar belief the 1960-61 Dillon round was polished off in 11 months. Back in the 1950s and 1960s there were far fewer countries involved in the talks and diplomats had some easy wins by reducing some of the most obvious obstacles to industrial trade. In 2008, the agenda extends into far more difficult areas such as agriculture and services, the negotiations involve 153 countries, and it is no longer possible for the "big two" - the EU and the US - to decide what is good for their own citizens and then foist it on everybody else.

That, indeed, was at the root of last week's breakdown. India, led by its trade minister, Kamal Nath, wanted safeguards for its millions of farmers but the US said this would be turning the clock back to the 1960s. India's insistence on a tough special safeguard mechanism infuriated the EU and US, although given the support provided by Brussels and Washington to their farmers over many years it's hard to see why.

Susan Schwab, the US trade representative, and Peter Mandelson, Europe's trade commissioner, both know the dynamics of trade talks have changed since the Uruguay round was done and dusted in 1993. The rise of India, China and Brazil has made it impossible for the EU and the US to call all the shots, but they have tried to do so all the same.

At the end of the Uruguay round, the EU and the US agreed to unilateral reductions in agricultural support in order to compensate developing countries for the fact the gains from that bout of liberalisation went disproportionately to the west. Yet Mandelson and Schwab had to demand better access for their industrial companies in return for giving ground on agriculture, knowing they wouldn't get a deal through the council of ministers or Congress any other way.

China, India and Brazil were prepared to do a deal - but not at any price. They had agreed to launch the round in a show of solidarity with the US after 9/11, but have learned over the years the advantages of having the sort of policy space to develop that was exploited in the past by every other developed nation. China and India, for example, see their retention of capital controls as a reason why they were unaffected by the Asian financial crisis of the late 90s.

Environmentalism

The frustration for Pascal Lamy, the director general of the World Trade Organisation, is that by the time the talks broke down ministers had very few issues left to crack. That has prompted speculation there may be a speedy return to the table, but in reality there will be no movement until a new US president has been elected.

Peter Sutherland, the WTO's first director general, says the collapse of the talks is a disaster. This looks like hyperbole. As researcher Sheila Page noted on her blog for the Overseas Development Institute, a successful Doha agreement would have added perhaps $100bn a year to global trade flows of $14tn. More of a risk, she believes, is that countries will use any flexibility they have to raise tariffs or subsidies, or take action against the dumping of cheap goods in their markets. "This is a particular risk in a world recession," she wrote.

Governments that take protectionist action in the current climate would probably not pay a political price. On the contrary, it could be quite popular. In part, that's because the debate on trade has become more nuanced. The rise of environmentalism, for instance, has thrown up a challenge to the classic tenets of comparative advantage: it may appear to make economic sense for Brazil to expand production of soya beans and export them to the US, but what if doing so requires torching a large chunk of the Amazon rainforest?

Just as important, though, is a growing backlash against globalisation - of which trade liberalisation is an integral part - in the west. This is hardly surprising. For the past two decades or more, reducing protectionism has been sold in the following way: freer trade leads to more efficient use of resources which leads to higher levels of global growth and economic welfare. There are problems of adjustment with some groups losing out, but the government's task is to compensate affected groups rather than put obstacles in the way of trade.

The problem, as Lamy himself recognises, is that governments have been unimpressive in their attempts to ensure the fruits of globalisation are evenly spread, noting in the recent World Trade Report that misgivings about globalisation have been on the rise. "It is obvious that a failure to address [such concerns] will reduce the opportunities for governments to pursue policies that permit societies to benefit from globalisation."

Lamy is right. The gains from productivity have tended increasingly to go to capital rather than labour; the rich have seen the biggest increases in income and the gap between rich and poor has widened. Job insecurity has risen as the threat of outsourcing has increased, while in-work benefits such as final-salary pensions have been pared back.

As such, Brown is putting the cart before the horse. If he wants to win support for free trade - and save his own political skin - he needs to show the people he is on their side. That means a more interventionist strategy to help people with fuel bills, keep them in their homes and rein in the excesses of the City. Doha can wait.

larry.elliott@guardian.co.uk