Free Trade in Rhetoric, Not in Practice

By Martin Khor, Executive Director of the South Centre, Geneva. Cross-posted from Naked Capitalism

Western countries commonly proclaim the great benefits of free trade and the evils of protectionism.

In reality, many developed countries practise double standards, insisting on free trade in areas where they are strong, whilst using protectionist measures in sectors where they are weak.

In the worst case, within the same sector they have designed rules that impose liberalisation on developing countries but allow themselves to maintain high protectionism.

An outstanding example is in agriculture, in which the rich counties are not competitive.

If “free trade” were to be practised, a large part of global agricultural trade would be dominated by the more efficient developing countries.

But until today, agricultural trade is dominated instead by the major developed countries.

For many decades they got an exemption for agriculture from trade liberalisation rules.

This exemption ended when the World Trade Organisation (WTO) was crea­ted in 1995 and the rich countries were expected to open their agriculture to global competition.

But in reality, WTO’s agriculture agreement allowed them to have both high tariffs and high subsidies.

The subsidies have enabled far­mers to sell their products at low prices, often below production cost, yet allowed them to get adequate revenues (which include the subsidies) that keep them in business.

This has four negative effects on developing countries.

Firstly, those countries that are agri­­culturally competitive cannot pe­­netrate the rich countries’ markets.

Secondly, the developing countries are deprived of other markets because the United States and Europe can export the same farm products at artificially cheap prices. This is a complaint of African cotton-producing countries.

Thirdly, by exporting a product cheaply, the developed country reduces the demand for a competitor substitute product. If the US did not subsidise its soybean, enabling soybean oil to be cheaper, Malaysian or Indonesian palm oil would have a bigger market.

Fourthly, these cheap products (such as chicken from US and Europe) have entered many deve­loping countries, damaging the livelihoods of their local farmers.

In 2001, the WTO launched a Doha development agenda whose chief goal was to liberalise the agriculture of developed countries.

Much energy was spent over many years to devise methods and formulae to liberalise agricultural trade, and a high degree of consensus was reached.

However, the US, backed by Europe, has now made it clear they do not intend to conclude the Doha Round.

Future WTO negotiations have to be on a new basis, and not based on existing texts.

An article by Chris Horseman in the bulletin Agra Europe (May 12) analysed why the US now cannot accept the existing text. A reduction in the maximum limit of one type of allowed subsidies (called de minimis) would have pushed the US to increase by 58% another type of disallowed subsidies (known as AMS).

This partly explains “why the US is keen to move away from the formulae on the table and to negotiate a fresh approach,” said the article.

Due to its powerful farm lobbies, the US will not change its domestic policies (embodied in its 2014 Farm Bill) to meet the Doha agenda’s new limits on the allowed amounts of domestic subsidies.

The same article also shows how the European Union has meanwhile changed the types of subsidies it provides, in order to better comply with WTO rules. This also allowed the EU countries to maintain their total domestic subsidies at around €80bil (RM356bil) annually from 2004 to 2013.

Two decades after the WTO was set up, the rich countries have continued the high level of their agricultural protection.

There is little prospect that they will agree to changes in the trading system that will effectively eliminate or reduce the massive subsidies that keep their farming systems afloat.

The poorer countries simply do not have the money to match the subsidies of the rich

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