Is this the last stand for globalisation?

Doha round

Poor nations derailed the last WTO deal. Now economic turmoil means the rich countries could kill it off for the foreseeable future, writes Heather Stewart

• Heather Stewart
• The Observer,
• Sunday July 20, 2008
• Article history

With America reeling from the worst financial crisis for half a century, poor consumers struggling to afford food, and China's appetite for raw materials forcing up the cost of oil, now may not seem the best moment for a new leap towards globalisation. Yet as trade ministers gather at the HQ of the World Trade Organisation on the shores of Lake Geneva this weekend, in a last attempt to resuscitate the seven-year-old Doha round of WTO talks, there is a powerful sense of now or never.

Conceived in the aftermath of the 11 September attacks, the 'Doha Development Agenda' was meant to provide fairer access to the global trading system for poor countries, but has repeatedly become bogged down in squabbles, including the dramatic collapse of talks in Cancun, Mexico in 2003, when furious developing countries walked out.

With the Bush presidency in its dying months, many countries hope this week could finally see the outlines of a deal emerging. Bush's team have nothing to lose and he can leave it to his successor to push any agreement through Congress.

Yet with economic uncertainty at fever pitch in the US, Europe and across a swath of developing countries, more trade liberalisation could be a hard sell. When hundreds of thousands of protesters rioted against the WTO's secretive pursuit of trade liberalisation in Seattle in 1999, most were angry about the impact of gung-ho globalisation on the world's poorest countries. But today, many in rich countries, too, are deeply anxious about the consequences of unfettered trade. Even before the credit crunch hit last summer, US politicians were pointing the finger at China for job losses in the American rust-belt, and disquiet was growing about the impact of globalisation on the lowest-paid workers.

Barack Obama has questioned the rationale for pursuing the Doha round, even hinting he could try to unpick existing agreements, including the North American Free Trade Association with Canada and Mexico. In Europe, trade commissioner Peter Mandelson has come under furious criticism from French President Nicolas Sarkozy for offering too many concessions on farm subsidies.

There is a chilling precedent for economic turmoil causing the world's trading giants to pull up the drawbridge. Between the 1850s, after Britain's protectionist Corn Laws were repealed, and the First World War, the world economy basked in what was nostalgically regarded as the first golden age of globalisation. But in 1930, after the Great Crash had hit Wall Street, America passed the Smoot-Hawley Act, which increased tariffs on imports of more than 20,000 products to protect US farmers and manufacturers from competition.

Unsurprisingly, America's rivals retaliated, and by 1934 world trade had shrunk by a catastrophic two thirds. The WTO's predecessor, the General Agreement on Tariffs and Trade, was established in 1948 to roll back some of these protectionist policies, which many economists say exacerbated the Great Depression.

Eight rounds of trade negotiations in the decades since, expanding to embrace more than 150 countries, have provided the legal and political framework for an unprecedented era of globalisation. China's accession to the WTO in 2001 marked its arrival as a full player on the international economic scene.

Securing a deal would send a powerful signal that, notwithstanding continuing economic turmoil, the WTO's members are committed to globalisation. Under the terms on the table, Europe and the US would trim their farm subsidies and reduce support for exports in exchange for cuts in tariffs on manufactured goods in many of the larger developing countries. The World Bank has estimated that the potential gains could be as high as £90bn, though most analysts believe they will be considerably lower.

For countries such as the former colonies in the Caribbean, which have long enjoyed preferential access to European markets, there is much to lose and little to gain as their advantage over other exporters is eroded. Others, such as India and Pakistan, hope that it is worth agreeing to reduce protection for their farmers in exchange for winning new export markets.

For the poorest countries, 'aid-for-trade' which helps them to develop transport links and more productive technology, is likely to be as important as the level of tariffs. Many already enjoy tax-free access to European markets, under the 'everything but arms' agreement, but have been unable to take advantage of it because they don't have the economic capacity. Europe's trade ministers agreed on Friday to provide €1bn of support for farmers in poor countries as a gesture towards a more comprehensive aid-for-trade agreement.

Emanuel Ornelas, an expert on globalisation at the Centre for Economic Policy at LSE, says too much focus has probably been given to the fraught subject of agricultural reform to the exclusion of other goods, where tariffs remain very high. 'Agricultural reform will not benefit all developing countries equally, with large exporters receiving a disproportionate share of the gains,' he says, pointing out that other important but controversial issues, such as immigration, have been badly neglected.

Because of the prominence of agriculture, some politicians have suggested that a Doha deal could provide a solution to the global food crisis, which has seen the price of staple products such as rice and wheat rocket, driven by poor harvests, the rising price of oil-based fertilisers, and growing demand for biofuels made from corn. But trade analysts say the devastation wrought by sky-high food prices on some of the world's most vulnerable communities is better seen as a cautionary tale about the dangers of ill-thought-out liberalisation than a sign of the Doha round's importance.

Many developing countries were encouraged in recent decades, partly by the last round of trade talks, but also by the lending policies of the International Monetary Fund, to tear down agricultural trade barriers in an attempt to make their farming sectors more efficient and generate export business. But with the US and Europe still spending billions on subsidising their own farmers, the result in many cases has been a dramatic increase in dependence on food imports instead of the hoped-for improvement in the health of the agricultural sector.

'In the long run, subsidies to improve production in Europe have disincentivised production in developing countries,' says Simonetta Rarrilli of Unctad, the UN's trade and development arm. 'This has led to a situation where the agricultural sector has had very little investment, and developing countries are not able to respond to the crisis because they do not have supply capacity.'

Jack Thurston, co-founder of farmsubsidy.org, which campaigns for transparency about agricultural subsidies, agrees: 'If free markets had been given a chance in agriculture over the past 40 years, I don't think we would be in the position we are. We are reaping the whirlwind.' Developing countries dismantled the barriers protecting their farmers, he says, 'without the quid pro quo of undistorted markets'.

That has meant cut-price, subsidised food products from Europe and America being 'dumped' on developing countries. When world prices are low, consumers in poor countries benefit, but at the same time there is little economic reason to invest in agriculture.

As a report from Unctad, prepared for last month's emergency Rome food summit, put it: 'Developing country producers were left defenceless and agricultural production in these countries suffered setbacks from which it has not been easy to recover quickly.'

Anti-poverty campaigners warn developing countries to remember this before signing up to a Doha deal in its present form. 'A deal along current lines would be more about salvaging political reputations and accommodating special interest lobbies rather than delivering trade reform favouring the poor,' says Amy Barry, trade campaigner at Oxfam.

Claire Melamed, of ActionAid, insists 'using the food crisis to force a resolution on these trade talks is nothing more than a shameless distortion of the truth. Luring developing countries into signing up to a bad deal when they are already coping with rising food prices, climate change and the threat of global recession is an insult to the world's poor.'

Every WTO member has a vote, and developing countries proved their willingness to ignore arm-twisting and storm out, in Cancun, five years ago.

Developing countries may decide they simply do not have enough to gain to make Doha worth their while. But this time it is just as likely to be the world's richest countries, jarred by job losses, economic insecurity and the growing toll taken by the credit crunch, which decide to walk away.

Haiti: where the recipe led to hunger

Thousands of protesters took to the streets of Port-au-Prince, the capital of the Caribbean island state of Haiti, earlier this year to protest against rising food prices, which were forcing the poorest families to go hungry. UN peacekeepers fired rubber bullets and tear gas into the crowd, and some reports suggested that five people died.

Yet this is a country that followed the rich world's recipe for opening up its farm sector - and campaigners say it is a terrible illustration of just how badly market liberalisation can go wrong.

Haiti is very poor: almost 80 per cent of its population live on less than $2 a day. A coup in 1991 led to the exile of President Aristide and a political and economic embargo, which devastated the economy. But in the mid-Nineties, after US-backed military intervention brought Aristide back from exile and helped secure elections, the new government obediently followed a World Bank and IMF-backed programme to open up its food markets to foreign competition, in exchange for much-needed aid.

As prescribed by textbook free market economics, the Haitian government slashed the tax on imports of the staple food of rice, from 50 to 3 per cent.

This liberalisation process was meant to make Haiti's farmers more competitive, and allow its consumers access to cheaper imports from the world market, while redirecting investment to more profitable industries such as tourism and, eventually, leading to a sustainable escape from poverty.

Yet, despite carefully following the so-called Washington consensus of open markets, Haiti is struggling to feed its people, and subject to wild price swings on international commodity markets.

Initially, rice prices did fall as cheap imports arrived from America, helping the poor in the cities. But local agriculture was devastated, leading to job losses and leaving little productive capacity once world rice prices shot up again.

In a recent report, Christian Aid found that Haiti has gone from being self-sufficient in food to using 80 per cent of its export earnings to pay for food imports. Rice production has fallen by almost half, and three-quarters of the rice consumed comes from the US.

Meanwhile, the other, more profitable industries, such as tourism, which were meant to help replace jobs lost in agriculture, have failed to materialise. The IMF says that's because the Haitian government didn't implement other elements of the economic development programme, such as privatisations; but, as in many developing countries, subsistence farming is a huge employer, and replacing those jobs can be very difficult.

'Rural decline has prompted a huge exodus from the countryside. This has extremely negative impacts on urban areas, where there is a growing slum population and an appalling deterioration in living conditions,' said Christian Aid, adding that hunger has increased since the food market was liberalised. In this instance, it is difficult to see trade liberalisation as a recipe for economic success.