Making a Travesty of Free Trade

Business Day (Johannesburg)
COLUMN
July 11, 2006
Posted to the web July 11, 2006

By Joseph E. Stiglitz And Hamidur Rashid
Johannesburg

AS THE "development round" of trade talks moves into its final stages, it is becoming increasingly clear the goal of promoting development will not be served and the multilateral trade system will be undermined. Nowhere is this clearer than in a provision that is supposed to give the least developed countries almost duty-free access to developed countries' markets. A year ago, the leaders of the world's richest countries committed themselves to alleviating the plight of the poorest. At Doha, in November 2001, they pledged to give something more valuable than money: the opportunity for poor countries to sell their goods and earn their way out of poverty. With great fanfare, developed countries seemed for a while to be making good on their promise, as Europe extended the "everything but arms" initiative, under which it was unilaterally to open its markets to the poorest countries of the world.

The opening was less than it seemed. The devil is in the detail, as many less developed countries discovered that the initiative's complex rules of origin, together with supply-side constraints, meant there was little chance for poor countries to export their newly liberalised products.

But the coup de grace was delivered by the world's richest country, the US, which once again demonstrated its hypocrisy. The US ostensibly agreed to a 97% opening of its markets to the poorest countries.

Developing countries were disappointed with the results of Europe's EBA, "everything but arms", initiative, and Europe has responded by committing itself to dealing with at least part of the problem arising from the rules-of-origin tests. The US intention, on the contrary, was to seem to be opening up its markets while doing nothing of the sort, for it appears to allow it to select a different 3% for each country.

The result is what is mockingly called the EBP initiative: developing countries will be allowed freely to export everything but what they produce. They can export jet engines, supercomputers, aeroplanes, computer chips -- just not textiles, agricultural products, or processed foods, the goods they do produce.

Consider Bangladesh. If we go by the most widely used six-digit tariff lines, Bangladesh exported 409 tariff lines to the US in 2004, from which it earned about $2,3bn. But its top 12 tariff lines -- 3% of all tariff lines -- accounted for 59,7% of the total value of its exports to the US. This means the US could erect barriers to almost three-fifths of Bangladeshi exports. For Cambodia, the figure would be about 62%.

The situation is no better if the 3% rule applies to the tariff lines that the US imports from the rest of the world (rather than to the lines individual poor countries export to the US), for then the US can exclude about 300 tariff lines from duty-free and quota-free treatment.

For Bangladesh, this implies that 75% of the tariff lines, accounting for more than 90% of the value of its exports to the US, could be excluded from duty-free treatment. This exclusion could reach 100% for Cambodia, which exported only 277 tariff lines to the US in 2004.

The official argument for the 3% exclusion is it affects "sensitive products". In other words, while the US lectures developing countries on the need to face the pain of rapid adjustment to liberalisation, it refuses to do the same. (Indeed, it has had more than 11 years to adjust to liberalisation of textiles.) But the problem is far worse as the 3% exclusion raises the spectre of an odious policy of divide and conquer, as developing countries are invited to vie with each other to make sure the US does not exclude their vital products under the 3%. The whole exclusion simply undermines the multilateral trading system.

Indeed, there may be a further hidden agenda behind the 97% proposal. At the World Trade Organisation (WTO) meeting in Cancun in 2003, the developing countries stood together and blocked efforts to forge a trade agreement that was almost as unfair as the previous Uruguay round, under which the poorest countries actually became worse off. It was imperative that such unity be destroyed. The US's strategy of bilateral trade agreements was aimed at precisely that, but it enlisted only a few countries, representing a fraction of global trade. The 97% formula holds open the possibility of extending that fragmentation into the WTO.

The US has had some success in pitting the poor against each other. Preferential access under the African Growth and Opportunity Act (Agoa) and more recent initiatives seems to be largely a matter of trade diversion -- taking trade from some poor countries and giving it to others.

For example, Bangladesh's share in US clothing markets declined from 4,6% in 2001 to 3,9% in 2004. During the period, Agoa countries' market share in the US clothing sector increased from 1,6% to 2,6%, and it is likely to increase further when those countries take full advantage of duty-free access.

Agoa had a sunset clause, but if the duty-free access becomes permanent for less developed countries in Africa, as stipulated in Hong Kong, poor Asian countries will continue to lose US market share. The WTO is supposed to prevent these trade diversionary agreements, but no case has been successfully brought.

Even if the US succeeds in dividing the developing countries it may inspire a degree of unity elsewhere. Both those committed to trade liberalisation within a multilateral system and those committed to helping developing countries will look at the new US strategy with abhorrence. Copyright: Project Syndicate, 2006. www.project-syndicate.org

Stiglitz is a professor at Columbia University and was awarded the Nobel Prize in economics in 2001. Dr Rashid is a director in the Bangladeshi foreign affairs ministry and a former student of Prof Stiglitz.