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Milton Ezrati is a partner, chief economist and market strategist at Lord Abbett & Co., LLC, a money management firm. He has been published in a wide variety of newspapers, magazines, and scholarly journals, including The New York Times, The Financial Times, The Asian Wall Street Journal, The Christian Science Monitor and Foreign Affairs on a broad spectrum of investment management topics.At the end of July, negotiators from 30 countries and trade blocs, meeting at the World Trade Organization (WTO) headquarters in Geneva, declared dead the so-called Doha Round of trade talks. Seven years of off-again, on-again negotiations, often intense, seem to have come to nothing.
This failure may just be one of many other setbacks encountered in the largely successful 60-year effort to reduce trade barriers around the world. But set against the growing sense of protectionism, in both the developed and the developing world, this failure carries an ominous tone. Investors, who already have plenty to worry about, will need to cut long-term growth expectations, unless renewed efforts to reduce trade barriers restart.
This remarkable failure turned on what otherwise seems like a small issue. The developed nations, led by the United States and the European Union (EU), proposed that the rising powers China and India reduce their tariffs on industrial goods to those already prevailing in the developed world, and in exchange, all would reduce the substantial tariff protections and subsidies given to their domestic farmers. China and India agreed, provided they could have what they called a "safeguard" clause to allow them to raise tariffs on key crops, such as cotton, sugar, and rice, if there were a surge in imports. Although the United States, the EU, and other nations agreed to this provision, the talks broke down anyway over the trigger for such a clause. The United States wanted such safeguard tariffs to go into effect only after a 40% jump in such imports. India and China insisted on a 10% jump to trigger the additional tariffs.
There is plenty of blame to go around for this failure. No negotiator, it seems, could see enough longer-term gain from an agreement to compromise his or her nation's immediate interests. India, under considerable domestic political pressure, took the lead on the Indian/Chinese position. Because the existing Indian government has lost a lot of voter support at home by pushing a civil nuclear energy deal with the United States, it could not afford to alienate the country's army of small farmers by making any substantive concession to free trade in agricultural products. Meanwhile, with investment money pouring into India anyway, the country had little to lose from relative intransigence. China's internal political calculations are less transparent, to say the least, but Beijing backed India on every point. Brazil, a major food exporter, had earlier worked hand in glove with India to open markets in the rich countries to poor farmers in the less developed world. But when India and China balked, Brazil parted company with its former allies and sided with the United States and the EU, pushing for the tariff cuts on both industrial and agricultural goods.
Meanwhile, Europe and America were clearly unwilling to risk offending their own respective farm lobbies without opening for them markets in the booming emerging economies.
Whoever carries the greatest blame, the big losers from this failure are the poorest countries, which have little to export but agricultural products. They will have to continue to face substantial trade barriers from the United States, the European Union, most other developed nations, and, of course, China and India, too. The poor within each country also will suffer to the degree that any impediment to the flow of agricultural products will almost certainly tend to hold up food prices.
Given India's long-standing claim as champion of the world's poor, its position at these talks brings to mind that old British expression -- "I'm all right, Jack, pull up the gangplank" -- which is used to describe people who care little for their former fellows once they have their own. This seems to describe China and India's complete lack of regard -- now that they are getting rich -- for the consequences to other, still poor nations. The fact that India and China's position got support from other rich developing nations, such as Venezuela and Saudi Arabia, hardly enhances their image as champions of the world's poor. India's trade and commerce minister Kamal Nath showed his remarkable determination to remain both powerful and a representative of the poor when he summed up the meetings in this way: "This was the round we're supposed to be getting, not giving." Of course, neither the Americans nor the Europeans seem all that concerned about the poorest nations, either.
Beyond the burden on the world's poor and the world's poorest nations, those in the richest countries should also take warning from this failure. If the ability to advance the open trade agenda falters, the world could lose an engine of growth that has successfully promoted global well being since the end of the Second World War. Some would suggest trade promotion has been the main engine of world economic growth. Without the assistance from further trade liberalization, there would be reason to expect slower growth the world over, in the established, rich economies and especially in the emerging economies, including India and China.
There is, fortunately, the chance to press the open trade agenda outside the current problems of the WTO and its Doha Round. The United States and South Korea, for instance, signed an important bilateral trade deal with each other earlier this year. Brazil -- already frustrated about the Doha failure -- has committed itself to seeking bilateral agreements for its agricultural exports in particular and for trade in general. But as is apparent with Brazil, such bilateral agreements will create more acrimony than anything at the WTO might have. As an example, Brazil's Cane Sugar Industry Association (Unica) has already begun to litigate about America's ethanol import tariff of $0.54 a gallon. The world's investors could have justified more confidence had Doha turned up something, even a partial agreement. But in the face of its failure, bilateral efforts are better than nothing. However irritating and disruptive such piecemeal arrangements clearly can be, they are nevertheless essential to sustain the momentum on this important economic growth engine.
Ezrati wrote this analysis as one of his weekly Economic Insights, columns for Lord, Abbett & Co. To read more analysis by him and others at Lord Abbett, click here.
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