The Custom-House

What went wrong in Cancun

What went wrong in Cancun

Last September the "Doha Round" world trade talks went seriously astray during negotiations in Cancun, Mexico. This Doha Round is also referred to as the "Development Round" since it was advertised as a round of negotiations aimed to a great extent at helping developing countries. (I posted last June on some background to the Doha development round: "A Tale of Three Cities) Jeffrey Schott of the Institute for International Economics explains what went wrong in the Institute paper "Reviving the Doha Round.".

Schott's paper is worthwhile for more than the "old news" of what went wrong in Cancun. He also offers four differences between GATT and WTO negotiations, and a proposals for getting the Doha Round back on track.

His Cancun analysis highlights the practical, rather than philosophical, obstacles to agreement. The European Union (EU) internal agricultural negotiations were out of synch with the Doha process; the US and EU had to cobble together a common position in a very short period of time - the time constraint forced the US away from its own position - the inadequacies in the resulting joint paper generated skepticism about US motives among other parties; a developing country coalition (G-20) which evolved in response to the EU/US paper didn't have time (time constraints again) to pull a complete negotiating posture together (they knew what they wanted, they didn't know what they'd give); the EU didn't make clear what it would need as compensation for farm reforms; developing countries were unwilling to commit to potential concessions in the far future in exchange for real advantages in the present; the promotion of the Doha Round as a "development round" led some developing countries to push for developed country concessions that could not be provided within the WTO negotiations.

"First and foremost was inadequate progress on agriculture...The United States put forward radical proposals in the summer of 2002 that would require it to rewrite its farm bill; the European Union was unable to do anything until it agreed to new farm policies in the summer of 2003. By that point, Geneva negotiators had failed to meet their assigned deadline to agree on "modalities" for farm trade talks; indeed, by the Montreal mini-ministerial in late July 2003 the talks were at an impasse. Countries recognized that the draft ministerial declaration developed by the WTO Council chairman was untenable and would cause the Cancun meeting to be still-born.

As a result, ministers in Montreal turned to the big powers for a new initiative to save Cancun. From the US perspective, it was a no-win situation: working with the European Union probably would produce a bad deal. The two sides had only about 10 days to craft a proposal, and the EU negotiators had little flexibility to deviate from their freshly minted negotiating mandate. Thus any compromise would reflect in large measure the EU position. But not working with the European Union would doom Cancún. So the US strategy, as I see it, was to deal with the Europeans and then hope that other WTO members would push the United States back toward its original proposals on agricultural reform.

Unfortunately, US officials, among others, underestimated the backlash to the US-EU compromise proposal tabled in late August 2003, which created mistrust and provoked the formation of the G-20. This hastily formed alliance of developing countries (led by Brazil, China, India, and South Africa) were united on their demands but couldn't agree to a common position for their own contributions, thus provoking the ire of US officials and others. Interestingly, this did not inhibit Brazil from pushing for substantive discussions in Cancun, but the curtain closed on the show shortly after intermission and the negotiations were not engaged.

The G-20 was founded - and still exists in large measure - to push the United States, Europe, and Japan to liberalize their barriers to agricultural trade. That position is not antithetical to US interests and objectives in the Doha Round�...provided that the large and middle-income developing countries in the group also reduce barriers to trade in their markets.

Second, negotiators were uncertain about what the European Union needed to get from other countries to enable it to follow through on hoped-for farm reforms that would go beyond their limited new mandate. Initially, the Singapore issues seemed to be EU priorities, though it was hard to identify political constituencies that actively promoted these objectives. Japan also strongly supported negotiations on the Singapore issues (particularly investment) for both substantive and tactical reasons. At Cancun, however, Japanese negotiators seemed to be following defensive strategies to avoid decision points on agriculture more than substantive interests in an investment accord.

While the European Union (plus Japan and Korea) wanted comprehensive negotiations on the Singapore issues, almost no one else did. The expected deal would probably have involved negotiations on a narrowly circumscribed set of transparency obligations - but developing countries were worried about opening the door to new obligations on investment policies in subsequent WTO rounds - that is, in talks that might take place 10-15-or even 20 years from now! In essence, developing countries opted to either delay or forego benefits from market access reforms this decade in order to reduce their anxiety about talks that might take place in a decade or two.

Third, many developing countries misconstrued what could be done in a "Development Round" in the WTO. Some officials recognized that political resistance in the major industrial countries to needed reform commitments in agriculture meant that the WTO talks would necessarily be extended well past the stated deadline of January 2005, and thus adopted positions that deepened divisions instead of narrowing gaps on key market access and rulemaking initiatives. Others were less well informed - which is another problem in the WTO - and demanded advance payments on trade reforms and monetary compensation for the Doha Round to proceed - demands that stretched well beyond the jurisdiction of the WTO and exceeded the competence of the ministers involved in the WTO. The fact that this latter group of developing countries are hurt the most by setbacks to the multilateral trading system seemed beyond their comprehension."

Nations wax and nations wane

Nations wax and nations wane

Foreign Affairs editor James Hoge argues that Indian and Chinese economic growth will increase their relative power in the world, while that of the west will decline: "A Global Power Shift in the Making"

Fundamental changes in the relative power of states "occur infrequently, and are rarely peaceful." Hoge sees the rise of China, base on its economic fundamentals, as the key fact, and discusses potential political responses. The U.S. has engaged in a traditional competitive balance of power response:

"Militarily, the United States is hedging its bets with the most extensive realignment of U.S. power in half a century. Part of this realignment is the opening of a second front in Asia. No longer is the United States poised with several large, toehold bases on the Pacific rim of the Asian continent; today, it has made significant moves into the heart of Asia itself, building a network of smaller, jumping-off bases in Central Asia. The ostensible rationale for these bases is the war on terrorism. But Chinese analysts suspect that the unannounced intention behind these new U.S. positions, particularly when coupled with Washington's newly intensified military cooperation with India, is the soft containment of China...

Suspicious Americans have interpreted larger Chinese military budgets as signs of Beijing's intention to roll back America's presence in East Asia. Washington is thus eager to use India, which appears set to grow in economic and military strength, as a counterbalance to China as well as a strong proponent of democracy in its own right..."

Hoge acknowledges the need to be prepared for a competitive relationship, but recommends cooperative engagement as well.

"...The Bush administration's embrace of engagement with China is an improvement over its initial posture, and the change has been reflected in Washington's efforts to work with Beijing in the battle against terrorism and negotiations with North Korea. The change has also been reflected in the reluctance to settle trade and currency differences by imposing duties...

...The United States must also avoid creating a self-fulfilling prophecy of strategic rivalry with China. Such a rivalry may in fact come to pass, and the United States should be prepared for such a turn of events. But it is not inevitable; cooperation could still produce historic advancements.

At the international level, Asia's rising powers must be given more representation in key institutions, starting with the UN Security Council...The same can be said of other key international bodies...

...Canadian Prime Minister Paul Martin has embraced the idea of elevating to heads-of-state level the meetings of the G-20 group, which is composed of 10 industrialized countries and 10 emerging market economies. This could incorporate into global economic governance those countries with large populations and growing economies.

The credibility and effectiveness of international bodies depends on such changes; only then will they be able to contribute significantly to peace among nations. Although hardly foolproof, restructuring institutions to reflect the distribution of power holds out more hope than letting them fade into irrelevance and returning to unrestrained and unpredictable balance-of-power politics and free-for-all economic competition."

Paul Kelly sees economic and population growth driving similar power shifts between Australia and its Asian neighbors, and focuses on potential economic responses in
"Punching Above Our Weight" from Policy magazine.

Kelly's starting point is the argument that "disparity in growth rates between Australia and industrialising East Asia meant that the gap in economic size, technological and industrial sophistication will narrow, and, as a result 'Australia will be able to rely less on its strategic and economic weight in the region to achieve its policy objectives' " [in the last phrase, Kelly quotes from a 1997 Australian gov't white paper- Ben]...

"Hard power" is best defined by population and GDP, and other Asian countries are likely to outcompete Australia on both criteria in coming years.

"The situation is compounded by a series of strategic realities." Australia lives in an increasingly rough neighborhood. "...Australia is in a region where dislocation and conflict are on the rise...Australia will have to assume a greater role within its own neighborhood not just as a security partner but to uphold civil society and check the drift towards failed states...The threat of Islamic terrorism will drive Australia into deeper collaboration with Indonesia, the Philippines and other regional partners..." Nevertheless, Australia has few opportunities to seek increased security through "political or regional economic union" with other states (aside from New Zealand). Finally, "Australia is highly exposed to the impact of globalization."

Kelly focuses on the economic dimensions of Australia's strategic response. Australia has to enhance three strategic assets: GDP, population, and technological change. The response includes: (a) "becoming one of the most open and competitive economies in the world exposed to global markets and the disciplines they demand." (b) investment in education, (c) microeconomic reform to maintain a flexible economy, (d) encourage immigration, and (c) public policy to stabilize the fertility rate.

I learned about Kelly's article from the Arts & Letters Daily.

Revised 6-29-04

More sugar

The Financial Times reports on a proposal to revamp European Union (EU) sugar subsidy and protection programs:

"...According to documents seen by the Financial Times, Mr Fischler [EU Farm Commissioner - Ben] will propose cutting the guaranteed sugar price by one-third between 2005 and 2007. He will also reduce sugar quotas from 17.4m tonnes to 14.6m tonnes a year. Crucially, the amount of subsidised sugar exports will drop from 2.4m tonnes a year to 400,000 tonnes, a move that will boost the prospects of sugar farmers in the developing world."

Peter Gallagher provides an analysis of the impacts on EU sugar producers, and on certain foreign countries which actually benefit from EU subsidies and protection, here: "Proposed EU Sugar Reforms" 

Some foreign countries (76 African, Caribbean and Pacific countries - called the "ACP" countries) benefit from the EU program because the EU gives them preferential access to its domestic market (and the artificially high prices therein) as a sort of foreign aid program.  Gallagher points to a nifty paper by Theodore Levantis, Frank Iotzo and Vivek Tulpule of the Australian Bureau of Agricultural and Resource Economics (ABARE) on the impacts of the preferential access program on one small ACP country - Fiji:  "Ending of EU Sugar Trade Preferences.  Potential Consequences for Fiji". 

The authors use an computable general equilibrium model of Fiji's economy to look at the impacts of three scenarios: (a) eliminating the subsidy with no new foreign aid, (b) eliminating the subsidy and substituting equivalent foreign aid which is then used to reduce Fijian taxes and tariffs, (c) eliminating the subsidy and substituting equivalent foreign aid which is then used for investments in infrastructure. 

All three alternatives move Fiji onto a faster growth path, and (b) and (c) lead to increased GDP (under (a) the increase in growth is small compared to the immediate impact of the loss of the preference, and GDP is below baseline levels for at least 10 years).

"The two principal reasons for the higher growth path [even under Alternative A - Ben] are: factor resources are diverted to sectors of the economy with stronger growth prospects; and factor resources are diverted to sectors providing higher productivity growth. The marginal cost of producing sugar in Fiji is relatively high and exceeds the world market price... Growth in Fiji?s sugar industry is therefore constrained by the fixed volume quota for access to the European market. For this reason, growth in other sectors of the Fijian economy consistently outpace growth in sugar production. And productivity growth in sugar production is constrained by a lack of investment caused by the lack of growth prospects in European sugar markets and the uncertainty about land tenure in Fiji."

It's not all skittles and beer, even under Alternatives (b) and (c).  Unskilled rural labor takes a hit under all three scenarios:

"...Employment in the sugar industry is dominated by rural based unskilled labor, particularly of family based self employment on small scale farms. Consequently, it is this labor that loses out in the event of a loss in sugar trade preferences. Under scenario A, unskilled rural employment drops by 5.2 per cent in the first year and continues to decline marginally thereafter so that, after ten years, the decline reaches 5.5 per cent... Scenario C is the best case but, even then, unskilled rural employment declines sharply. After ten years, the loss in unskilled rural employment will be 3.3 per cent and, initially, the fall will be 6.1 per cent...  For scenario B, the pattern of unskilled rural employment is similar to scenario A ...."

Revised 6-25-04

Running interference for sugar producers

Chris Mooney argues (in Mother Jones) that the U.S. Department of Health and Human Services is trying to get the World Health Organization (WHO) to modify a report tying sugar consumption to obesity and obesity related diseases such as Type II diabetes.  The motive: to be responsive to sugar interests with administration ties.  "Eating Away at Science"

"...The final WHO guidelines are scheduled to be approved this summer, and before drafting them the WHO produced a summary of the scientific research, which finds a connection between obesity and unhealthy diets, including too much consumption of sugar and fatty foods. In April 2003, after this report was released, the Sugar Association and the Corn Refiners Association (which makes high-fructose corn syrup, the leading soft-drink sweetener) mobilized to have the findings revised. Not only did they call on HHS to take action, but the Sugar Association also wrote to the WHO threatening to have its allies in Congress eliminate the organization's U.S. funding if the WHO didn't rethink its anti-obesity work.   

The industry's leaders and representatives are certainly well positioned to make their views known in Washington, particularly to the president and his top advisers. The Bush campaign acknowledges, for instance, that its "Rangers"?fundraisers who bundle at least $200,000 in donations?include the sugar magnate Jose "Pepe" Fanjul Jr.; Richard F. Hohlt, a 2003 lobbyist for Altria, which owns Kraft Foods; and Robert Leebern Jr., a lobbyist who last year represented Coca-Cola. And in the campaign's class of "Pioneers"--bundlers of a minimum of $100,000; there's Robert A. Coker, a United States Sugar Corp. senior vice president; Barclay Resler, Coca-Cola's vice president of Government Relations; and Joe Weller, the chairman and CEO of Nestl� USA..."

The government is providing this service to the industry in addition to jacking its profits up at the expense of U.S. consumers by protecting it from international competition. (Given the health problems associated with sugar consumption, higher prices and reduced consumption may have a positive health benefit.)

Recent posts on "big sugar"

"Trade Protection Can Cost Jobs"

"Cooperation, makes it happen..."

"Big Sugar"

"Candy makers fleeing the country"

"Doha round maneuvers; European sugar"

(I'm taking advantage of Blogger's new search function.)

Clinton Economic Policy Failures Max

Clinton Economic Policy Failures

Max Zawicky posts a list of six Clinton Administration economic policy failures (from the perspective of someone on the left): "BUBBA BUBBA, TOIL AND TRUBBA"

Zawicky spends time getting his failure criteria right. Politicians have to make all sorts of compromises to stay in office, so its not realistic to ding them for every deviation from an ideal policy stance. A policy failure could be the result of compromise; a political failure could be the result of taking risks to do the right thing. But, when something is counterproductive from a partisan point of view, and counterproductive from a policy point of view, you have an unambiguous failure.

The Economist on the underground

The Economist on the underground economy

This week's (June 19) Economist's "Economic Focus" column highlights two studies on the underground or gray economy:"Economics focus: In the shadows"

Friedrich Schneider reports on "Size and Measurement of the Informal Economy in 110 Countries Around the World" According to Schneider's abstract,

"Estimates of the size of the informal economy in 110 developing, transition and OECD countries are presented. The average size of the informal economy, as a percent of official GNI in the year 2000, in developing countries is 41%, in transition countries 38% and in OECD countries 18%. A large burden of taxation and social security contributions combined with government regulations are the main determinants of the size of the informal economy."

Firms enter the underground economy to avoid the costs associated with these.

Diana Farrell of the McKinsey Group points out that high tax rates and regulatory burdens can slow growth by encouraging firms to structure themselves for success in the underground economy in productivity-sapping ways ("The hidden dangers of the informal economy" free registration required for access to the article). As the Economist puts it:

"In Russia, for example, large supermarkets, which have no choice but to obey the tax inspectors, have a 5% cost advantage over small shops. But informal outlets can save 13% by staying in the shadows. In other words, the productivity benefits of greater scale are swamped by higher tax rates. As a result some industries, especially labour-intensive ones such as retailing, stay fragmented and inefficient."

Mead on Chernow on Hamilton

Mead on Chernow on Hamilton

Political scientist Walter Russell Mead likes Ron Chernow's new biography of Alexander Hamilton very much and says so in this review in the new Foreign Affairs.

The Library of America series also has a volume on Hamilton. The volume includes:

"...more than 170 letters, speeches, essays, reports, and memoranda written between 1769 and 1804. Included are all 51 of Hamilton's contributions to The Federalist, as well as subsequent writing calling for a broad construction of federal power under the Constitution; his famous speech to the Constitutional Convention, which gave rise to accusations that he favored monarchy; early writings supporting the Revolutionary cause and a stronger central government; his visionary reports as Treasury secretary on the public credit, a national bank, and the encouragement of American manufactures; the Reynolds Pamphlet, in which Hamilton made a detailed confession of adultery in order to defend himself against charges of official misconduct; and his self-destructive attack on John Adams during the 1800 campaign. An extensive selection of private letters illuminate Hamilton's complex relationship with George Washington, his deep affection for his wife and children, his mounting fears during the 1790s regarding the Jeffersonian opposition and the French Revolution, and his profound distrust of Aaron Burr. Appendix includes conflicting eyewitness accounts of the Hamilton-Burr duel."

The Library of America series covers the revolutionary period and the early republic well, with volumes on Jefferson, Franklin, Washington, Madison, Paine, a volume of collected writings on the Revolution, and two volumes on the debates on the constitution. I'd love to see a volume on John Adams.

Asian dollar purchases Why are

Asian dollar purchases

Why are the Chinese and Japanese central banks loading up on "U.S. dollar denominated securities?" Seven ideas from Tyler Cowen: "Why do Asian central banks buy so many dollars?"

What is variety worth? Freeing

What is variety worth?

Freeing international trade lowers consumer prices. It also gives consumers more products to choose from. Economist's have measured the first benefit, but not the second.

Virginia Postrel highlights an National Bureau of Economic Research (NBER) study addressing the second benefit in her column in today's New York Times:"The Economic Value of Variety".

>>Being able to get exactly the coffee you're in the mood for makes you, in a sense, better off. But this improvement in consumer welfare has tended to go unmeasured. In most economic statistics, coffee is coffee, beer is beer and shoes are shoes.

In a recent working paper for the National Bureau of Economic Research, Professor Weinstein and Christian Broda, an economist with the Federal Reserve Bank of New York, estimate how much international trade has benefited consumers simply by increasing variety. (The paper is available at www.ny.frb.org/research/staff_reports/sr180.html.)

The results are striking. Consumers, they estimate, would be willing to pay $280 billion a year, or about 3 percent of gross domestic product, to have access to the variety of goods that were available in 2001, rather than what they could have bought in 1972...

Outsourcing and state and local

Outsourcing and state and local budgets

State and local governments can save taxpayers a bundle with foreign outsourcing. But they are also vulnerable to political pressure to "do the work at home." Daniel Drezner posts on the conflict: "More cost savings from protectionism".