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WTO and its impact on
the economy
AMERICA in 1930 enacted the ‘Smoot-Hawley Tariff Act’. It was
meant to reduce imports and stimulate domestic production.
Retaliation with equal high tariffs by afflicted nations
took place leading to a tariff war. International trade
across the globe fell, lowering output, income and
employment levels drastically.
 Economic
historians generally agree that the ‘Smoot-Hawley Tariff
Act’ was a contributing cause of the Great Depression.
Historians on the other hand agree that the Great Depression
was a contributing cause to the World War-II.
The “Reciprocal Trade Agreement Act of 1934”, by the US,
reversed the process and led to the ‘General Agreements on
Tariffs and Trade’, under which the WTO was created, on
January 1, 1995. It was the start of the era of
globalization.
Now, globalization has become a foregone conclusion. We can
only try to regulate its ills. So, leaving globalization and
its spill over costs aside, the exact nature of the way
ahead has to be analyzed so that we are able to maneuver
through them.
The future of our world as we know it and of international
trade depends on who is able to make the rules. The
formation of free trade zones and trade blocs is one of the
major issues facing the world’s trading system – whether it
will lead to increased protectionism or whether the trade
blocs will promote trade liberalization. The world is
increasingly being divided into trade blocs.
The world’s two most powerful economies, the US and the EU,
have each sought to forge links to neighbouring countries,
denying access to rivals. Other major trading countries,
like the fast growing on the Pacific Rim and the big
agricultural exporting nations have also sought to create
looser trade grouping to foster their interests.
The EU has undoubtedly become the most powerful trading
bloc, with a GDP nearly as large as that of United States of
America, though EU has found it difficult to shed its
protectionist past based on the idea of self- -sufficiency
in agriculture.
On the other hand, the US has linked with Canada and Mexico
to form a free trade zone, the North American Free Trade
Agreement or NAFTA. The USA hopes to expand the area to the
rest of Latin America creating a Free Trade Area of the
Americans (FTAA), but key countries like Brazil are
sceptical of its benefits. The USA is, however, separately
signing free trade agreements with Chile and other smaller
American countries.
Another grouping of countries known as the Asia-Pacific
Economic Development Cooperation forum is a loose grouping
of the countries bordering the Pacific Ocean which have
pledged to facilitate free trade. Its 21 members range from
China and Russia to the United States, Japan and Australia
and account for 45 per cent of world trade. China has even
suggested that it would be interested in establishing a
free-trade zone with the growing economies of South East
Asia.
The Cairns group of agricultural exporting nations was
formed in 1986 to lobby at the last round of world talks in
order to free up trade in agricultural products. Recently,
key developing nations have also formed a group of 20 to
campaign for the rights of the developing nations.
In September 2005, the European Unions former Trade
Commissioner Mr Pascal Lamy will take over as the Director
General of the WTO from Dr Supachi Panitchpakdi of Thailand.
Mr Lamy is taking the helm of the organization in turbulent
times. The WTO is coming under mounting pressure to quell an
escalating trade dispute between China, the US and the EU
over textile. The US – EU dispute caused due to the
subsidies being given to Airbus and Boeing has been on ice
since January when both sides agreed to resolve the matter
through bilateral talks. But unless it is completely
resolved as soon as possible, it can lead to what is
promised to be one of the biggest and costliest disputes at
the WTO in this decade.
The World Trade Organization is mired in crisis. The latest
round began nearly four years ago in November 2001, in Doha,
Qatar. This meeting was dubbed as the “Doha Round” of trade
talks and was meant to work towards a system of trade rules
that were fairer to developing countries.
In September 2003, in Cancun, Mexico a summit was held to
hammer out an agreement on the Doha round, and concentrated
on four main areas – agriculture, industrial goods, trade in
services and a new customs code. However, these talks failed
because rich and poor countries could not reach on an
agreement, particularly on agriculture.
A new alliance of developing nations emerged that refused to
sign the proposed agreement which, they felt, favoured the
richer members. After the talks in Geneva last July, key WTO
members accepted proposals to cut subsidies wealthy
countries give to their farmers for exports.
Key nations, including the US, the EU, Brazil and Japan
agreed to eliminate export subsidies at a date set, to limit
other subsidies and to lower tariff barriers including an
immediate 20 per cent cut in maximum permitted payment by
rich nations. While developing countries won the right to
protect “special” products crucial to the well-being of
their economies. In return wealthier nations won better
access to markets in developing nations. The draft deal also
allows for moves to liberalize services and manufactured
goods.
Another meeting in Paris in May 2005 took place to finalize
the draft agreement. A group of five – the US, Australia,
the EU, Brazil, and India – who had managed to get the talks
back on track in July 2004, after they had floundered in
September 2003, failed to agree on how important tariffs
could be expressed in their “ad valorem equivalent”. It is a
technical matter and ministers are now asking themselves how
bigger political issues such as tariff cuts will be dealt
with, if smaller mathematical problems cannot be agreed
upon.
This time, the developing nations – through their
participation in the G20 group of developing and
industrialized nations – are wielding more power. They want
high state subsidies and import tariffs slashed but the rich
nations won’t submit unless developing markets open up their
markets.
If it isn’t ready, the negotiations which are due to be
completed by 2006 are doomed, as analysts believe that it is
vital that any new deal be agreed before 2007, when what is
known as the “fast track legislation” expires in the US.
Without fast track, which limits the power of the US
Congress to alter trade deals negotiated by Washington,
there is little prospect that the US would adopt a new pact.
Developing nations need the trade issues to be sorted out as
fast as possible and may have to make more concessions, to
encourage richer nations to cut tariffs and subsidies.
The failures of the WTO have forced the body to find ways to
make the organization more efficient. Recently a panel
headed by the former Director General of the WTO Peter
Sutherland suggested some major changes. Some of the main
recommendations of the overhaul are as follows:
Ministerial meetings should take place annually, instead of
every two years; a summit involving world leaders should be
held every five years; clarify the role of the Director
General to give the position more weight in the negotiation
process; a “consultative committee” made up of limited
number of members, which could meet quarterly, should be
established; bilateral and regional pacts endanger
multilateral deals promoted by WTO and usually follow
political agenda.
Millions of the world poorest textile trade workers will
lose their jobs under new trade rules to be introduced in
the new year”, a charity warned last December.
Many countries supported the WTO policy but are now fearful
that China will overwhelm the market. Even the US and the EU
have imposed restrictions on Chinese imports in fear of
“market disrupting” surges which they are allowed to do so
until the end of 2008. The US has said that some categories
of Chinese imports have surged 1000 per cent since January
and more than 16,000 jobs have been lost in the US alone.
Countries like Bangladesh, in which textile accounts for
almost 85 per cent of the country’s exports are going to be
the ones most to lose. It is believed that in Bangladesh
alone nearly a million jobs will be axed. Pakistan in which
textile contributes more than two-third of the exports, will
also lose unless radical changes are brought about.
Production costs, like high electricity costs, have to be
reduced to save this industry. Textile exports until
recently continued to grow and earnings were close to $8.5
billion. But failure to secure the special duty – free trade
preference from Europe and further failures of our
government will not only lead to shrinkage of our market
abroad ,it will also cause many industries to close which
were just not able to compete with the low priced Chinese
goods. China, which until recently accounted for about 17
per cent of the world’s textile trade, will in a free trade
environment thought to be able to capture 50 per cent of the
market.
Our automobile industry which is one of the most heavily
protected industries in Pakistan is being subjected to
increasing foreign competition. By the cries of outrage
heard everyday by one manufacturer or another, it is quite
clear that they are as yet not ready for free competition.
On the other hand WTO’s decision to reject Pakistan’s
request to extend the local content requirement condition
raises the question whether our vendor industry is ready for
the WTO era? The answer is clearly ‘No’. But the fault lies
with us because we don’t have a sound backup plan.
If a deal is not reached by 2006, sectors favouring
developing countries such as agriculture and services will
remain out of focus. Current international trade rules are
keeping millions of people in poverty. This situation is
maintained by man made rules that favour the rich. Unless
simultaneous liberalization of cross border mobility of
labour is ensured the poor countries will face more
widespread unemployment and poverty.
It is feared that the developing nations who are in dire
straits might again give in, to reach a deal. The G 20, a
group of developing and industrialized nations is an
important development for the poor nations and might just
give them the backbone to be able to stand up to the
developed nations. There is no single panacea for all our
troubles, but eternal vigilance is the cost of survival in
the opening economic combat.
The DAWN
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Pakissan.com;
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