TCS Daily


WTO = WEO?

By Alan Oxley - April 9, 2003 12:00 AM

The WTO negotiations to open up world trade have stalled. They have been blocked by France and Germany. It looks like a rerun over long standing difference in the WTO about global protection in farm trade. But a more fundamental driver may be at work. Are France and Germany leading Europe into economic isolationism?

Removing farm protection is the toughest call in the WTO. It requires the EU, Japan and US to cut subsidies to farmers, which the OECD values at about US $300 billion annually. It was the key goal when WTO Trade Ministers launched the negotiations to cut global trade barriers when they met in Doha in late 2000. But they did something odd. They set a target that was impossible to meet.

WTO Ministers stipulated that that half way through the negotiations (by 31 March 2003 to be precise), negotiators would settle targets for the size of the cuts to agricultural protection. It is not clear why they did this. Agriculture is the deal breaker in the Doha negotiations. The last thing to be agreed in any trade negotiation will be the size of the cut. It is not surprising that agreement could not be reached at the midway.

Why did Pascal Lamy, the EU Trade Commissioner go along with this at Doha? Maybe he thought it would put pressure on EU Members to agree to reform. At the time Brussels' euorocrats were negotiating the terms of accession to the EU of Poland and the other nine new members, agriculture was a stumbling block. Brussels could not pay the new members subsidies at the same level as existing members unless subsidies to existing members for the EU were substantially cut back.

If that was the plot, Jacques Chirac and Gerhard Schroeder scotched it. When the expansion of the EU was ready to be finalised, they made a deal. They would go along provided EU farm subsidies remained basically unchanged until 2013. They kissed goodbye to the Doha Round. It was supposed to finish in 2005 and reform of agriculture is pivotal; no deal on it, no deal at large.

But something else happened at Doha. Greenpeace sent its sailing ship, the Rainbow Warrior to Doha. With the French elections looming, Pascal Lamy made a show of holding a press conference on the ship. Lamy made it clear at Doha that the EU "had to have something" on the environment. He got it. For the first time, environment was put on the agenda of multilateral trade negotiations.

In Europe, unions and the Greens are against free trade. Both groups delivered power to Chirac in the French election and to Schroeder in the German election a year later.
Lamy and the EU understand the politics. They have made it crystal clear that the results from the Doha negotiations must allow the EU to protect the environment the way it feels fit. It has explicitly stated that its support for reform in global trade in agriculture is contingent on this.

Why has the EU insisted on bringing environment in to the WTO? It is a trade, not an environment organization. A review of what the EU wants tells us why.

The EU wants the right to demand that foreign countries adopt its domestic environmental standards as a condition for trading with it. The EU wants to extend its command and control model of regulation to control trade and it wants to use trade sanctions to enforce environmental standards. The WTO creates a fundamental obstacle to these ambitions. It requires countries to respect free market principles when they trade and not to condition access to markets on acceptance of domestic policies.

Plainly EU philosophy is being shaped by Green domestic politics. It is also driving the EU to pursue an international strategy that will be counterproductive to global efforts to improve the environment and will stunt trade.

It does not work to try to force China, Thailand or Peru to apply environmental standards that are used in Austria or Germany. First, environmental priorities differ. Air pollution and accumulation of garbage do more damage in poor countries than increasing emissions of carbon dioxide and high UV radiation in rich countries.
Second, costs differ. Rich countries can afford the high cost abatement technologies that sophisticated, first world standards require. They are generally not cost effective in the third world and can result in impoverishment.

Finally, and worst of all, the changes the EU wants would gut the WTO. Its agreements were created specifically so countries had the opportunity to produce and trade according to the costs and standards relevant to their own economy. Economists call this comparative advantage.

Europe gained enormously from the opportunity the GATT (the predecessor to the WTO) gave it to increase prosperity to record levels after World War II. That opportunity today has never been more important to developing countries. China's leadership staked the house taking China into the WTO. It did it to shore up the domestic market reform program. Every former Soviet satellite, as well as Russia itself, has joined or applied to join the WTO for the same reason. It is very easy to remove that opportunity. Just insist, as EU policy does, that a pre condition for trade is adoption of the importer's domestic standards.

Does one conclude that it is more important to Europe that the WTO be converted into an instrument to green the world on European standards than to ensure it continues to provide the opportunity for others to use it to raise living standards like Europe did? Greens would call this environmental globalism. But isn't it economic isolationism?

There can be no progress in the WTO until the EU is ready to shift on agriculture. In the meantime, expect Brussels to try to turn the heat up on the environment issue in the WTO. It's a great diversion and it plays well at home.

Alan Oxley is a former Australian Ambassador to the GATT (predecessor of the WTO), former Chairman of GATT and Director of International Trade Strategies.
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