American protectionism threatens global trade negotiations

by Kanes
Free trade is under serious threat. It is being undermined surprisingly by the loudest advocate of free trade — the United States. From the time the WTO was established in 1995 the US has ensured that while the rest of the world complies with the WTO rules, no one questions its own violations. Global trade negotiations initiated at Doha are now under way in Geneva to be completed by January 1, 2005, but the optimistic atmosphere created at Doha has almost disappeared. The new trade negotiations were designed partly to help the poor countries by removing barriers in developed country markets in agriculture and textiles and revising the much misused anti-dumping rules. The poor countries which were given a raw deal at the previous Uruguay Round were given an assurance of a better deal, but now they have come to doubt the intentions and promises of the rich countries, particularly after what the US has done recently to increase its protection of domestic agriculture and industry.

US increases agricultural protectionism

The developing countries have seen President Bush putting politics above principles and begun to suspect America’s commitment to multilateralism and free trade. They are watching with dismay how the US, in addition to raising agricultural subsidies and tariffs on steel imports (which will be discussed in detail in this article) has imposed tariffs on Canadian lumber, Australian lamb meat and Vietnam’s catfish to protect its local industries. They are disappointed with President Bush’s concurrence in Congressional efforts to backtrack on textile trade liberalization that was already agreed with Caribbean countries and his compliance with Congressional demands to make future liberalization harder in sensitive agricultural sectors such as peanuts and citrus fruit. They are convinced that the US is turning its back on trade liberalization/free trade and this state of affairs may result in the failure of the Doha Round.

It was the US which led the charge against agricultural protection in the EU and Japan and it was the US, which was instrumental in putting free trade in agriculture at the heart of the Doha Round. The declared intention of the US was to move towards a subsidy free agriculture as was shown by the cutting of subsidies by the 1996 farm bill. All this has now come to naught, for the US has now rejected free trade in agriculture, which it championed all along and made agricultural protection the cornerstone of its new farm policy.

The new farm bill of 2002 of President Bush, agreed to by the House and Senate will increase government spending on agriculture by 80 per cent — an additional $ 82 billion over 10 years. It increases considerably subsidies on wheat, corn and soyabean, introduces new subsidies for peanuts, lentils, chickpeas and dairy farms and resurrects subsidies for honey, wool and mohair that were killed off in 1996. It is estimated that US subsidies per farm may soon reach three or four times the European levels but about 75 per cent of these will go to the biggest and richest 10 per cent of farmers. The new bill invents new payments for wheat, corn and soyabeans that are related to prices and production and consequently are highly trade distorting.

All countries agreed at the Uruguay Round, mainly as a result of US pressure, to cut and set ceilings on their trade-distorting agricultural subsidies. The current US ceiling is $ 19.1 billion and that of the EU is 69 billion Euros. The Congress passed the Freedom to Farm Act in 1996 to phase out subsidies on most agricultural products and the US’s trade-distorting subsidies which were below the ceiling were expected to fall further.

Developing Countries

When farm prices declined in the late nineties however, farmers were given a series of emergency payments that pushed up the producers subsidy bill to high as about $ 50 billion in 2000 or 22 per cent of agricultural production value. The new farm bill entrenches these subsidies and thereby undoes all the progress made since 1996. It is estimated that trade-distorting subsidies may rise so much as to break the farm support limits set by the Uruguay Round. America’s commitment to free trade looks laughable and the poor countries seem justified for doubting US’s objectives in advocacy for freer trade.

Agriculture is one of the few areas in which the developing countries by virtue of their cheap land and labour, can compete, but the colossal subsidies of the US and EU to support high cost production keep lower cost producers out of the market. Beside subsidies, developed countries also use high tariffs to keep out developing country exports. The US, for example, imposes tariffs of 310 per cent on smoking tobacco, 132 per cent on groundnuts shelled, 91 per cent, on tea preparations, 90 per cent on raw cane sugar, 80 per cent on butter, 66 per cent on milk, 42 per cent on cheese and 27 per cent on coffee preparations. The World Bank concludes that the annual cost to poor countries of developed country trade barriers is six times the amount developed countries spend on aid.

Paradoxically, the US is moving into price and production based subsidies when the EU is trying to move away from them towards direct payments to farmers that have less impact on trade. Over 90 per cent of Europe’s farm subsidies were highly trade distorting a decade ago, but in 2000 the EU spent only about 20 per cent of its total farm support for farmers in this way. Producers’ support declined from about $ 120 billion in 1995 to about $ 90 billion in 2000 or 38 per cent of production value. Now Europeans will be reluctant to liberalize their agricultural policy when they see the Americans doing the reverse.

The poor countries, taken aback by America’s backsliding have now become more suspicious of the multilateral trading system. As The Economist of May 11th 2002 stated: "The signal to the rest of the world is unambiguous. American officials in Geneva may be talking about freer trade in agriculture but Washington politicians are sending American farmers exactly the opposite message. Its trading partners, poor ones in particular, could be forgiven for doubting Washington’s ability to stand up to domestic interests. This doubt threatens the Doha Round.... Seeing America indulge in an orgy of protection will encourage them not to disarm, but to follow suit".

President Bush, a professed free trader, is doing the opposite, not for trade or economic reasons but for political ones. Some of the keenly contested Senate seats this November are in states such as Iowa, South Dakota and Missouri, which have powerful farm lobbies, and the President expects his new farm bill to win him votes in the prairie belt. Thus, it was the political clout of farm states in an election year that led to these subsidies, with lawmakers falling over themselves to dole out cash to farmers. The Economist of May 11th 2002 pointed out: "Mr. Bush hailed the farm bill as offering a "generous and reliable safety net" to American farmers. When the result is a failed Doha Round, it will be the world economy, not the farmers, that needs a safety net".

Steel "War"

The Doha Round of multilateral trade negotiations have now started but it is hardly likely to get off the ground as a result of new protectionist measures being implemented by the champion of free trade — the US. In March 2002, President Bush who is considered as a firm advocate of free trade imposed "safeguard" tariffs up to 30 per cent on foreign steel in addition to increasing farm subsidies. These tariffs are clearly politically motivated and are designed to gather more votes in the forthcoming Senate elections in such states as Pennsylvania, West Virginia and Ohio. The EU, Japan, China and others have formally complained to the WTO against this outrageous violation of WTO rules and the EU is demanding compensation from the US for the cost of steel tariffs. If the US does not offer compensation, EU plans to impose tariffs on up to $ 336 million worth of US products.

The Japanese, in turn are threatening tariff retaliation, but only on a token $ 5 million worth of goods. To make their anger even clearer, the Europeans have imposed the tariffs on products from particular sates to hit Bush where it hurts most — such as textiles (wounding North Carolina) and orange juice (hurting Florida). Further, they too have introduced their own safeguard tariffs to stop any steel diverted from the US from flooding Europe’s markets.

The curious thing is that the US does not see anything wrong with its action. On the contrary, it argues that the steel tariffs are fully consistent with global trade rules and it is the EU, which is disregarding them.

Double Standards

It has even made veiled threats that if the EU imposes any tariffs, it will impose its own tariffs against Europe to retaliate against retaliation, raising the risk of a trade war over steel. There are signs however that the US is now searching for a face-saving formula that offers the Europeans just enough, perhaps by excluding specific European steel products from the tariffs to stop them from retaliating. Many are questioning whether the tariffs will help most of the American steel makers, the more competitive of which are doing quite well without them and meanwhile steel users are suffering.

The steel dispute has exposed the weaknesses in the young and fragile system of multilateral dispute settlement. The WTO dispute settlement mechanism cannot solve deep political differences such as the tax code and consumer health and safety between countries. The steel dispute is already testing it to its limits. There is a big difference between the way trade agreements are first made and the way they are interpreted afterwards by legal experts. The safeguard agreement, for example, is being interpreted in different ways as both the US and EU claim that they have kept to the letter of multilateral trade rules while both sides have in fact undermined it. If disputes accumulate and the WTO gets clogged up as hundreds of inconsistencies and loopholes are taken to litigation, the WTO’s entire dispute settlement system could be undermined.

The steel dispute has also clearly demonstrated that the US is prepared to sacrifice its commitment to free trade, when it runs into political pressure at home. It has also shown the world how the US applies double standards when they suit it best. Countries have noted that the US has exempted America’s free trade partners — Mexico and Canada — from the steel tariffs: apart from violating the WTO rules, this decision has sent a dangerous message to the world which in the words of The Economist is "sign up bilateral deals with the world’s biggest trader and you will avoid its protectionism. That message is particularly pernicious. A web of bilateral trade deals offers far less global liberalization than multilateralism, but it may reduce the political impetus to push for the tougher global trade agreements".

Of course there have been several trade wars in the recent past as those on bananas, genetically modified organisms (GMOs) and tax subsidies. The US’s tariffs on European products in retaliation against discriminatory treatment of banana imports in Europe are worth about $ 191 million.

The WTO has ruled against the system under which US firms get a tax break on their foreign sales and allowed EU to impose tariffs on American goods commensurate with this illegal subsidy. The level permitted is between $ 1 billion and $ 4 billion, but the EU may not impose tariffs if the US revises its taxation laws. The US on the other hand could take the EU to task for imposing a moratorium on any new genetically modified organisms (GMOs) violating the WTO rules. Any escalation in this trade sniping could undermine the political legitimacy of the WTO. Besides, loss of confidence in the WTO and multilateral trade negations on the part of developing countries augurs badly for the Doha Round.