Why I’m still an optimist on trade

08/11/2007 |

Economist Jagdish Bhagwati explains how to unlock the seemingly intractable Doha round of trade talks

I’m an optimist on Doha, and I’ll explain why. It’s been said that an optimist is someone who hasn’t heard the news. I’m an optimist because I’ve heard the news. The buzz behind the scenes is that the political will has actually changed quite dramatically.

I’m optimistic because the Doha round negotiators now realize that we are in the final phase, and we have to get down to settling the thing. There are lots of issues on the table already. Many things have already been done with a view to getting developing countries on board.

In the earlier negotiations and throughout the history of the general agreement on tariffs and trade (GATT), the view has been to get developing countries on board, to indulge them because – though they don’t amount to a hill of beans in terms of world trade – you still want them in the GATT or in the international negotiations. Down the road, they’ll graduate, become better off, and it’s good to have them inside your system. And the same attitude right now applies to the least developed countries. The point is, there’s so much on the ground now that I think there’s a vested interest in not letting it go. So that’s one reason for optimism.

The other reason is this. Take India. Indians have been misled by Oxfam and economists like Joseph Stiglitz into thinking that there’s $1 billion-worth of subsidies in the EU and US per day – $360 billion-worth a year. If that were true, I would become a pessimist too, because you couldn’t really do anything about that.

Many people believe this propaganda, which is really harmful. And then you divide it by the number of cows. [Oxfam notes that the average European cow gets a $2-per-day subsidy. Meanwhile, it claims 800 million people live on less than a dollar a day.] Why not take the number of people in the media and divide that by the number of cows? It really is a meaningless arithmetic; there is no economics there.

But the only subsidies that matter externally are trade distorting ones. The Fischler–Lamy reforms [to subsidize land use rather than agricultural produce] present a compelling way to turn a lot of distorting subsidies into non-distorting subsidies. So we should celebrate that.

American move
We have been telling India, including trade minister Kamal Nath, that the situation is not that bad if we can actually negotiate. We’ve been telling the Americans the same. On agriculture, there’s no way you can get them to liberalize now, as the Americans would like, because Indian elections are coming soon, and they’re therefore very risk averse. But I believe that if the Americans can move a little, something can be done by way of reciprocal baksheesh.

My recommendation has been that it’s probably better to collect an IOU from the Indians on agriculture, with a little gesture of some kind, to say this is not doable right now. But the Americans have a very similar problem right now with agriculture.

On manufacturing, US trade negotiator Susan Schwab is being unreasonable. India has reduced tariffs in manufacturing quite substantially over the last five years, hugely from the 1991 level of about 75% to now about 9%. The current Indian average tariff for manufacturers is about 9%. Nobody mentions that. Susan Schwab is deliberately ignorant and doesn’t take this into account. Even then, India could probably go a little further. They’ve continually been bringing it down. There are no lobbies in India against manufactured tariffs reduction.

The Americans are acting like India is a highly protectionist country, saying India hasn’t done anything, they’re not going to do anything, and so on: that’s simply giving the wrong vibes.

Meanwhile, the US farm sector has two problems. Democrats are waiting to take power, and the Republicans are traumatized about losing it. Neither party can take on the farm lobby before the election because everybody wants the farm vote. The farm lobby insists that India be forced to open up their markets. So they go for sectoral reciprocity. They want movement within agriculture.

The US has been spending on average $15.6 billion over the last five years on subsidies. The upper bound which they’re looking for is $22 billion. But they’re willing to cut back as far as $17 or 18 billion. That is not enough, but they can’t do more because nobody wants to risk the farm vote.

Pushing Fischler-Lamy
My proposal is this: we should push for the Fischler-Lamy plan to apply to the US. That way they can have their subsidies at $22 billion – or whatever – while changing the composition of subsidies. Reduce trade-distorting subsidies by half, turning them into Fischler-Lamy type non-distorting subsidies – so-called green box subsidies. Change the composition but not the total, but cut the total distorting subsidies by half, which is really what matters for Cairns Group [developed nations excluding the US and EU] and India and so on. If you do that, you’re really left with, say, only $10 billion distorting subsidies.

President Bush can’t go and tell his party and people that he’s going to cut farm support, but he can say that, while he’s supporting them wholeheartedly, the US will shift about $8 to 10 billion out and pay them in some other way – maybe linked to environment. If we do that, I’m quite sure that India will give more ground. This is where the outlines of a deal are possible.

It has to be handled in a way that meets the concerns of the US congressman. Once these ideas sink in, there is the possibility of a deal – there’s reason for optimism. Where there’s no reason for optimism is in getting this round settled before the US election. It can move quickly after the election though, and it will still have taken less time than the Uruguay trade round, but the point is we’re so close, there are so many people.

The other reason is this: if the US doesn’t go in for Doha, it has to do bilateral trade deals. If it doesn’t do Doha and if it doesn’t have fast-track authority [the power that the US president has to negotiate agreements that Congress can approve or disapprove but cannot amend], they can’t do bilaterals either. But they need fast-track for the complex bilaterals like Cafta. I think the fast-track for Doha will piggyback on the ones for the bilaterals. I’m not worried about fast-track; it’ll come. Self-interest will lead them into doing fast-track. In the end, sense will prevail, and we can actually package a deal together.

When you look at how this can be solved, I think there’s enough there, and a last minute dash is possible. I wasn’t that optimistic before, but you know, once you start looking at the issues and where you can get a movement, I think both India and the US are going to be able to move. They are the main players along with Brazil. India has a better rapport with the US. If the US and India really accommodate each other along those lines and do some more, then we have the possibility of a genuine compromise. I think I see those two as critical players right now. They’re definitely going to be able to do it.

Jagdish Bhagwati, former advisor to the WTO and UN, was in conversation with Taimur Ahmad

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