WORLD TRADE: A LESSON TO AVOID A NEW GREAT DEPRESSION

By Pascal Lamy and - - Reprint | | Print |

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GENEVA, Oct 6 2008 (IPS) - Policy-makers in the United States and across the globe are desperately seeking to avoid the missteps that accentuated the financial crisis of the 1930s. One of the important lessons is that protectionism and economic isolationism do not work, writes Pascal Lamy, Director-General of the World Trade Organisation (WTO). In this article, Lamy writes at this time of economic distress with soaring world food prices, what impoverished consumers desperately need is to see their purchasing power enhanced and not reduced. Shutting borders does exactly the opposite. There is no doubt therefore that the current hurricane that has hit financial markets must not dissuade the international community from pursuing greater economic integration and openness. Despite the setback that the Doha Round of world trade negotiations suffered last July, talks have restarted with the aim of completing a deal on tariff and subsidy reduction by the end of this year. This would be the best contribution the WTO could make to counteract the current world crisis. A comprehensive WTO deal can help soften the impact of high food prices by tackling the current systemic distortions in international agricultural trade that have stifled food production and investment in agriculture for years in many developing countries.

They are all stressing that lessons from the Great Depression have been learned and that the many policy mistakes that were associated with it will be avoided. One of the important lessons is that protectionism and economic isolationism do not work. They are policies of the past, which should have no place in our future.

As tempting as it is in moments of crisis to give our producers comfort and shield them from competition by shutting our borders to imported goods or services, this course of action must not be pursued. In fact, the infamous Smoot-Hawley Tariff Act of the 1930s which raised US tariffs on over 20,000 imported goods to record levels led to nothing but a trade war between nations. In so doing, it ended up impoverishing us all, proving that protectionism, and beggar-thy-neighbour policies, are a dead-end.

In a financial crisis, and at this time of economic distress in particular with soaring world food prices, what impoverished consumers desperately need is to see their purchasing power enhanced and not reduced. What is needed is to enable consumers to purchase more for less. The temptation to shut our borders does exactly the opposite. There is no doubt therefore that the current hurricane that has hit financial markets must not dissuade the international community from pursuing greater economic integration and openness.

Despite the setback that the Doha Round of world trade negotiations suffered last July, talks have once again been restarted with the aim of completing a deal on the parameters for tariff and subsidy reduction by the end of this year. This would be the best contribution that the World Trade Organisation and its members could make to counteract the current world crisis.

What the world has before it today in the Doha Round negotiations is a package that includes: the reduction of unfair agricultural subsidies; the lowering of tariff walls on industrial and agricultural goods and of barriers to trade in critical services, such as banking, energy, and environmental services; and a myriad of new trade measures in areas like trade facilitation, anti-dumping, and fishery subsidies, to name but a few, all calculated to bring the trading system up to speed with new market realities.

One of the most pressing problems facing us today is the current food crisis, which is extremely relevant to growth and poverty reduction. A comprehensive WTO deal can help soften the impact of high food prices by tackling the current systemic distortions in international agricultural trade that have stifled food production and investment in agriculture for years in many developing countries.

If the Round is successfully concluded, the world would reduce by half the amount of imports tariffs paid today, about USD 150 billion in savings. Developing countries would contribute 1/3 of the savings and would benefit from 2/3. Developed countries would contribute with 2/3 of the savings. At the end of the day, developing countries would benefit from 2/3 of the increased market access resulting from the Round, and developed countries would benefit from 1/3. This is truly a development Round.

There is another example related with the epicentre of the world financial crisis: if the Round is concluded with success, the US could see the amount of trade-distorting subsidies it is allowed reduced to USD 14.5 billion. True, this is more than the US currently spends. But if this ceiling is not set, the US will be able to spend push its trade-distorting subsidies far higher as soon as food prices decline. In fact, it has done so in 8 of the last 10 years. It is true that this figure is still high and many would think that the amount should be zero, but without the Round it could reach USD 48 billion.

The reasons why we must conclude the Round are visible to all of us and are becoming more critical as the economic and financial outlook continues to deteriorate. (END/COPYRIGHT IPS)