Development Round? What Development Round?

Joseph Stiglitz demonstrates the hypocracy of the Doha Round, and US and EU trade policies:

America’s new trade hypocracy

As the current “development round” of trade talks moves into its final stages, it is becoming increasingly clear that the goal of promoting development will not be served, and that 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 details, as many less developed countries discovered that EBA’s complicated rules of origin, together with supply-side constraints, meant that there was little chance for poor countries to export their newly liberalized products.

But the coup de grace was delivered by the world’s richest country, the United States, which once again decided to demonstrate its hypocrisy. The United States ostensibly agreed to a 97 percent opening of its markets to the poorest countries. The developing countries were disappointed with the results of Europe’s EBA initiative, and Europe has responded by committing itself to dealing with at least part of the problem that arises from the rules of origin tests.

America’s intention was, to the contrary, to seem to be opening up its markets, while doing nothing of the sort, for it appears to allow the United States to select a different 3 percent for each country. The result is what is mockingly coming to be called the EBP initiative: developing countries will be allowed freely to export everything but what they produce. They can export jet engines, supercomputers, airplanes, computer chips of all kinds – just not textiles, agricultural products, or processed foods, the goods they can and do produce.

Consider Bangladesh. If we go by the most widely used six-digit tariff lines, Bangladesh exported 409 tariff lines to the United States in 2004, from which it earned about $2.3 billion. But its top 12 tariff lines – 3 percent of all tariff lines – accounted for 59.7 percent of the total value of its exports to the United States. This means that the United States could erect barriers to almost three-fifths of Bangladeshi exports. For Cambodia, the figure would be about 62 percent.

The situation is no better if the 3 percent rule applies to the tariff lines that the United States imports from the rest of the world (rather than to the lines individual poor countries export to the United States), for then the United States can exclude roughly 300 tariff lines from duty-free and quota-free treatment. For Bangladesh, this implies that 75 percent of the tariff lines, accounting for more than 90 percent of the value of its exports to the United States, could be excluded from duty-free treatment. Exclusion from duty-free treatment could reach 100 percent for Cambodia, which exported only 277 tariff lines to the United States in 2004.

The official argument for the 3 percent exclusion is that it affects “sensitive products.” In other words, while the United States lectures developing countries on the need to face the pain of rapid adjustment to liberalization, it refuses to do the same. (Indeed, it has already had more than 11 years to adjust to liberalization of textiles.)

But the real problem is far worse because the 3 percent exclusion raises the specter of an odious policy of divide and conquer, as developing countries are invited to vie with each other to make sure that America does not exclude their vital products under the 3 percent. The whole exclusion simply undermines the multilateral trading system.

Indeed, there may be a further hidden agenda behind the 97 percent proposal. At the World Trade Organization’s 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. America’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 percent formula holds open the possibility of extending that fragmentation into the WTO itself.

The United States has already had some success in pitting the poor against each other. Preferential access for African countries, under the African Growth and Opportunity Act 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 U.S. clothing markets declined from 4.6 percent in 2001 to 3.9 percent in 2004. During the same period, AGOA countries’ market share in the U.S. clothing sector increased from 1.6 percent to 2.6 percent, and it is likely to increase further when AGOA countries start to 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 – then poor countries in Asia will continue to lose U.S. market share. The WTO is supposed to prevent these trade-diversionary agreements, but so far no case has been successfully brought.

Even if America succeeds in dividing the developing countries, however, it may inspire a degree of unity elsewhere. Both those committed to trade liberalization within a multilateral system and those committed to helping developing countries will look at America’s new strategy with abhorrence.

This column was coauthored by Joseph E. Stiglitz and Hamid Rashid. Stiglitz is a Nobel laureate in economics, professor of economics at Columbia University and was a senior vice president at the World Bank. Rashid is a director in the Bangladesh Ministry of Foreign Affairs and a former student of Stiglitz. – Ed.