5 Myths about NAFTA

Sen. Hillary Rodham Clinton often likes to take credit for her husband's achievements as president. But then there's NAFTA. Clinton may have been present at the creation of the North American Free Trade Agreement in 1994, but she wants everybody to know that it's not her baby. She now proposes to "fix" the agreement to make trade "work for working families." Sen. Barack Obama, meanwhile, makes the fallout from NAFTA sound downright nuclear, lamenting that "entire cities . . . have been devastated as a consequence of trade agreements that were not adequately structured to make sure that U.S. workers had a fair deal." Despite the heightened rhetoric, he, too, wishes to "fix" the treaty, not nix it. Only the presumptive Republican nominee, Sen. John McCain, would leave NAFTA untouched; his priority is freeing up global trade.

The Democratic rivals have bought into most of the myths that have been peddled about the agreement and have placed their opposition to NAFTA at the center of their campaigns. Here's some information that could help them update their stump speeches.

1 NAFTA has transformed the U.S. economy.

Hardly. Critics rightly point out that NAFTA's economic benefits were oversold, but they're wrong to heap the blame for all America's woes on it. NAFTA, which expanded the existing Canadian-U.S. free-trade area to Mexico, has had only a marginal effect on the U.S. economy. Yes, exports to Mexico have more than tripled since 1993 -- but at $161 billion last year, they still account for only 1.1 percent of the economy. Considering that total U.S. exports have more than doubled over the same period, to more than $1.6 trillion a year, the boost from NAFTA is just a trifle.

Though imports from Mexico have risen nearly five-fold since 1993 -- potentially threatening some U.S. businesses -- they only amounted to $230 billion in 2007, or less than 1.7 percent of the $14 trillion U.S. economy. That's peanuts. And for all the fears of factories being shipped south on the back of an 18-wheeler, the total U.S. investment in Mexican factories and offices adds up to a mere $75 billion. Mexico received just $19 billion in foreign direct investment in 2006, while the United States attracted $175 billion. Thus, the "giant sucking sound" that Texas businessman and independent presidential candidate H. Ross Perot heard back in the 1990s doesn't sound so giant after all. But the benefits of NAFTA don't seem so remarkable, either.

2 NAFTA has put countless Americans out of work.

Not really. Obama claims that NAFTA has destroyed a million American jobs. Suppose he's right. Total employment still rose by 27 million jobs between 1993 and 2007, to 137.6 million, and the unemployment rate has fallen. At worst, then, NAFTA has cost only a tiny minority of American workers their jobs. And even that is a one-sided view. As Mexico opened its economy to U.S. trade and investment, NAFTA created new American jobs, too.

NAFTA critics also decry the trade deficit with Mexico, but at $70 billion a year, it accounts for only 0.5 percent of the U.S. economy. These figures should quiet NAFTA foes, who point to lost jobs and stagnant manufacturing wages, as well as boosters, who trumpet claims of rising output and record-high exports. The fact is, NAFTA has had only a fractional impact on these trends. Mexico's biggest impact on the U.S. labor market is not through trade, but through immigration. And the money that Mexican migrants send home contributes more to the Mexican economy than foreign direct investment does.

3 "Fixing" NAFTA would be easy and cost-free.

Not so. Any changes would require a lengthy and complex renegotiation with Canada and Mexico. As Canada's prime minister, Stephen Harper, has pointed out, "Of course, if any American government ever chose to make the mistake of opening [NAFTA], we would have some things we would want to talk about as well." Just the threat of pulling out of NAFTA would do some damage, too. Far from boosting America's international reputation -- something all presidential candidates agree is important -- it would fan fears that the United States is an unreliable ally and discourage foreign governments from committing to future agreements with Washington. The slim chance of concluding the World Trade Organization's Doha round of global trade talks would vanish. And if the next president wants, for instance, Mexico's help in dealing with immigration reform and Canada's hand in combating terrorism, then blaming America's friendly neighbors for its perceived woes is hardly the way to start.

4 Making NAFTA's labor and environmental regulations stricter would benefit U.S. workers.

Probably not. Clinton wants to make the treaty's labor and environmental provisions "far tougher and absolutely binding" and to require that all future trade agreements include similar language. The stated purpose is to raise labor and environmental standards around the world and to make it harder for companies to ship jobs to countries where workers have fewer protections than in the United States. But America's trading partners would probably see the move as covert protectionism -- since when have the Teamsters cared about Mexican wildlife? -- and may retaliate. Meanwhile, consumers would probably resent the increased cost of their imports.

In any case, tough social clauses could backfire on the United States. Canada's labor and environmental standards are generally higher than the United States', and Canadians could claim that lax American standards amount to unfair competition. Given that Canada and Mexico have joined global efforts to curb climate change, they might wish to restrict American imports if the United States continues to hold back. And Mexican workers arguably have stronger labor rights than Americans: Unlike the United States, Mexico has ratified most of the International Labor Organization's conventions on core labor standards, including those on freedom of association, collective bargaining and employment discrimination. If the United States bashes Mexican labor practices, what's to stop Mexico from objecting to American imports produced in non-unionized factories?

5 Renegotiating NAFTA should be a priority for the new president.

Absolutely not. With the housing market plunging, the financial system seizing up and the economy apparently shrinking, tinkering with a treaty that governs trade with two of Washington's trading partners is a costly distraction -- whatever your view of NAFTA. The next president will have much bigger things to worry about, such as stopping the economy from going into a tailspin; cushioning the blow for vulnerable Americans who lose their homes, their jobs and their health care in the downturn; and helping frame new regulations that protect the economy against future financial excesses without stifling the market. Compared to all that, changing NAFTA looks like small change.

Like it or hate it, NAFTA is not actually a big deal for the US...

Read my article in the Washington Post here.

How many times can Doha collapse?

World trade talks collapse in acrimony, says the FT. Global trade talks founder, says the WSJ. Latest world trade talks collapse, says the BBC.

What's new? The Doha round collapsed - sorry, was suspended - last summer. It has not got back on its feet again since. At most, it has twitched once or twice. So, dramatic headlines notwithstanding, it has not collapsed again. It simply remains floored.

Not quite the deal of the century

The US's most significant "free-trade agreement" since NAFTA, the first with an Asian country, with "state-of-the-art" chapters and "unique" provisions - the embattled Bush administration was wheeling out the superlatives to describe the bilateral trade deal clinched with South Korea this morning.

It was a last-minute effort too, since it was agreed just in time for President Bush to give Congress the required 90-day notice of his intention to enter into a free-trade agreement before his fast-track authority expires.

The potential benefits - $20bn in extra trade - seem impressive, but free trade it certainly isn't.

Giving American carmakers privileged access to Korea's notoriously closed market is not the same thing as opening it up to global competition - a boon for Detroit, perhaps, less so for Korean drivers.

Nor will the deal do much to lower food prices, which is not surprising considering agriculture is the main blockage in the WTO's Doha Round.

And even this limited deal will face huge opposition in the US Congress, where Democrats with a protectionist bent hold sway, as well as in South Korea's National Assembly, which took three years to approve a trade deal with Chile. A huge breakthrough for free trade this certainly isn't.

War on Want are wrong to claim Bangladeshi garment workers are exploited

War on Want, a British lobby group, on Friday launched a campaign against Primark, Tesco and Asda for selling cheap clothes made by Bangladeshi workers whom the lobby group claim are exploited because they "regularly work 80 hours a week for just 5p an hour".

I debated the charge that such "sweatshops" are harming Bangladeshi workers in a debate with John Hilary of War on Want on BBC Radio 2's Jeremy Vine show: Listen here

EU fails to mend its protectionist ways

Anti-dumping duties, which unfairly penalise imports that are deemed too cheap, are one of the most pernicious protectionist devices. After all, we ought to be cheering if the cost of imports falls, because it makes the money in our pocket stretch further, not taxing consumers in order to try to prop up less efficient domestic producers.

The good news is that governments' use of anti-dumping has halved over the past four years.

The bad news is that two villains have yet to mend their ways. Despite Peter Mandelson's pledge to reform the EU's protectionist anti-dumping laws, Brussels launched more anti-dumping cases in the first half of this year than in the first half of 2005, as did India. Those two are now the world's biggest anti-dumping users.

For more details, see the Global Trade Protection Report 2006 by Cliff Stevenson of antidumpingpublishing.com

Doha Round Failure: What Next?

The Center for International Relations has organised an International Affairs Forum on the future of world trade. They ask:

In the wake of the failure of the Doha round, what does the future hold for world trade? What can, and should be done to get negotiations back on track?

My reply follows. To read the other contributors' answers, click here.

In the short term, the failure of the Doha Round will make little difference: the global economy is booming, and with it world trade. Optimists suggest that talks may resume soon after the US’s Congressional elections in November and that little lasting harm may be done. I hope they are right, but unfortunately that rosy scenario is highly improbable. The Round is unlikely to resume in earnest until a new US president is in office - and who knows when a deal may finally be concluded. In the meanwhile, the multiateral trading system may be stretched to breaking point.

Let me explain. Twelve years have elapsed since the Uruguay Round was completed and since then the WTO has staggered from one failed meeting to another: Seattle, Cancún, Hong Kong and now Geneva. The only exception to this dismal run of failure is the Doha launch in the immediate aftermath of 9/11, when circumstances were truly exceptional. Perhaps the system is broken. The world economy is booming and yet a Doha deal remains elusive. If a deal can’t be done when the going is good, perhaps it can’t be done at all.

Next year hardly looks promising: President Bush is set to lose his "fast-track" power to push through trade deals without Congress unpicking them, precluding US negotiators from striking a credible bargain with other WTO members; a new farm bill that could entrench America’s contentious subsidies is in the offing; and an economic downturn could sharpen fears about trade-related job losses.

But if the round remains on ice for too long, the WTO risks being sidelined, with the benefits of global competition, multilateral rules and impartial adjudication giving way to tit-for-tat protectionism and a web of bilateral arrangements that privilege rich country companies at the expense of the poor.

Already, the EU is looking to conclude bilateral trade deals with countries in Asia, while the US pursues its own bilateral agenda with renewed vigour. These misnamed "free-trade agreements" risk tying the world economy up in knots: how are companies supposed to build an efficient global supply chain if a tangled web of rules-of-origin requirements and other fiendishly complicated protectionist rules distort their operations?

What needs to be done to get the Doha show back on the road? The EU needs to agree to bigger cuts in its farm tariffs, the US needs to make a better offer on agricultural subsidies, and big developing countries, notably India, need to show greater willingness to open up their industrial and service sectors. It isn’t rocket science, and it is in each country’s best interest, but overcoming entrenched political opposition to liberalisation is not easy.

Perhaps the protectionist fallout from a global downturn will scare WTO members to act; or perhaps it will take the prospect of the US losing faith in the WTO, the only multilateral institution which it still wholeheartedly supports, to bring Europe, Japan, India and other recalcitrants back to the negotiating table.

Europe takes a small step forward

Most people think Europe's single market already exists: it was created way back in 1992, wasn't it? Unfortunately not. While goods are traded freely across borders within Europe, services are not  - and since they account for over two-thirds of the EU economy, Europe's single market is in effect far from complete.

It is certainly good news, then, that the European parliament has finally got around to approving the EU services directive, which goes some way towards liberalising services trade. Depressingly, though, the directive has been so watered down - and huge sectoral exceptions carved out of it - that even now Europe will not operate as a single services market.

This not only makes a mockery of one of the EU's defining aims. It is also a huge missed opportunity for Europe's struggling economies. Removing the remaining protectionist shackles from Europe's hidebound service industries could potentially do more to stimulate growth than any other initiative from Brussels.

Indians have reason to cheer

India's drinkers should raise a glass to Peter Mandelson.

Indians who love Scotch whisky, French wine or Spanish sherry have long had to pay through the nose - or make do with watered down local equivalents - because their government imposes punitive taxes and duties that can raise the price of foreign tipples by as much as 300%.

But Europe's trade commissioner is riding to the rescue: he plans to challenge India's discriminatory taxes on wines and spirits at the WTO.

If the EU wins, he will be the toast of town among Mumbai's champagne-starved stockbrokers. And at least officials at the commerce ministry in Delhi will be able to drown their sorrows with a fine Scotch.

Not so lucky number 150

No sooner had Vietnam celebrated its success in becoming the WTO's 150th member than it suffered a setback in its trade relations with Washington: Congress voted against normalising trade relations between the two countries.

A procedural setback, insisted the Bush administration, which had tried to speed the bill through the outgoing Republican-led Congress - the measure mustered a majority, but not the two-thirds majority it needed to be expedited though.

A needless and embarrassing cockup, more like, not least because President Bush was imminently due in Hanoi for the APEC conference.

Thankfully, no lasting harm is likely. The measure is likely to be approved soon on a simple-majority vote. 

The sky war resumes

Here we go again. The US government has today launched yet another salvo in its long-running conflict with the EU over aircraft subsidies, announcing that it is to file a new complaint at the WTO against European subsidies for Airbus. Before you could say "Boeing", Brussels made clear that it would hit back with its own tit-for-tat complaint. So much for the fragile truce that had held since February.

Given how politicised the Airbus-Boeing war has become on both sides of the Atlantic, it is perhaps surprising that the Bush administration did not file a complaint before the mid-term elections, in time to swing come crucial votes to the Republicans. Perhaps, then, the new WTO complaint is a response to the mood of economic populism that the Democrats were so successful at tapping into.

In any case, it is yet another headache for the WTO: a no-win case that will aggravate both sides and resolve nothing. Most likely, the WTO will find fault with both the US and the EU - and then what?

It is surely too much to hope that America and Europe will stop subsidising their national champions simply because of a slap on the wrist from the WTO. The worry is that the war in the sky could broaden into a ground war too, with each side also taking aim, for instance, at their farm subsidies.

An opportunity for the Democrats on immigration and trade

The Democrats have scored a stunning victory in the midterm Congressional elections. It looks like they have captured control of not only the House of Representatives but also the Senate. Both President Bush and Nancy Pelosi, the incoming speaker of the House, have pledged to work together in a spirit of bipartisanship. Pigs might fly, you will say. But in two areas at least - immigration and trade - they would do well to agree on a common agenda that would benefit both of them, as well as America as a whole.

Two years ago, President Bush put forward proposals for immigration reform consisting of tougher border security and a new temporary-worker programme that would provide a legal route for foreigners to come do the jobs that Americans can't or won't do, as well as a path for the 12 million or so illegal immigrants in the US to regularise their situation. Unfortunately, while the outgoing Republican-led Congress agreed to the first part of Bush's package, his temporary-worker plan is still gathering dust. So the workers that America needs continue to have to risk death to get there, and then have to live in a shadow world of illegality, leaving them open to exploitation and undermining the rule of a law.

A Democratic-led Congress can - and should - do better. Not only because it is right for America, but because one of its core constituencies - Hispanic voters - is unsurprisingly keen on more liberal immigration rules. And if Congress can agree on a temporary-worker programme, President Bush is hardly in a position to veto it, since he has proposed one himself. Indeed, he would be doing Republicans a big service by trying to steer them away from their increasingly hardline anti-immigration stance, which doubtless cost them many Hispanic votes.

On immigration, then, the president would do well to reach out to the new Democratic majority. On trade, however, it is the Democrats who ought to reach out to the president. Forgetting Bill Clinton's success in pushing through the Uruguay Round of trade liberalisation and his wise plea to "make change your friend", they are in danger of painting themselves into a corner as the anti-globalisation party. Instead of trying to shape globalisation in the interests of all Americans, they increasingly seek to oppose its many manifestations: offshoring to India, cheap imports from China and so on. Yet the US is more than capable of crafting policies that allow it to reap all the benefits of globalisation while minimising its costs: driving forward the Doha Round at the WTO, for instance, while offering health insurance and job retraining for workers who lose their jobs because of economic change.

In practical terms, the Democrats should throw their weight behind a relaunch of the Doha Round and an extension, when it expires in June 2007, to President Bush's fast-track negotiating authority - a power that an incoming Democratic president would find handy in 2008. Fast-track would give US negotiators the mandate they need to clinch an ambitious Doha deal that reduces farm protectionism, boosts economic growth and helps the world's poor, while still leaving Congress the final say over whether to approve it.

Pie in the sky? Probably - but here's to hoping that Democrats follow the advice of the boy from Hope.

Lucky number 150

The WTO's 149 members have just agreed to admit lucky number 150: Vietnam.

It is a cheering end to a dismal year for the World Trade Organisation. With the Doha Round dead in the water and America and Europe scambling to sign bilateral trade deals with all and sundry, not least Asia's tiger economies, it is a healthy sign that the WTO still has some life in it.

Critics moan that Vietnam has been forced to open up its economy wholesale in order to join the world-trade club, but their arguments are wide of the mark. Nobody forced Vietnam to do anything: it chose to join the WTO; and by agreeing to open its economy further in order to do so, it will reap huge benefits. Next up: Ukraine.

US gambling ban is illegal

Online gambling is immoral and illegal - except when it takes place within US states, of course; oh, and interstate betting on horse races is also OK. That is the essence of the US's new Unlawful Gambling Enforcement Act, as clear-cut a case of protectionism as there is.

The EU ought to challenge the new law at the WTO, on behalf of 888.com, partygaming.com, sportingbet.com and all the other online gambling companies that have been dealt a hammer blow by Congress's unfair law.

For sure, WTO rules allow countries to restrict trade for reasons of morality - but only if the restrictions apply equally to all. So if US legislators deem gambling to be wicked and sinful, they are entitled to ban it - but they cannot simply block Americans from betting on non-US websites.

Congress's new law is hypocritical, protectionist - and illegal.

Brussels votes to raise price of shoes

"Grant me chastity and continence, but not yet" - the words are St Augustine's, but they could just as well have been uttered by Peter Mandelson.

The EU's trade commissioner has pledged to reform Brussels' harmful anti-dumping rules - which penalise imports that are deemed to be " too cheap" - to take account of the fact that many of these imports are in fact produced by European companies with factories abroad. There is also the small matter that European consumers actually benefit from low-price imports, as anyone who has bought cheap Chinese shoes can testify.

A review is great news, then - but don't rejoice too fast. Our enlightened representatives in Brussels have today voted to slap duties of 16.5% on shoes made in China and 10% on footwear from Vietnam. The extra duties will last for two years - less than the five years that Mandelson was proposing, but more than free-traders such as Britain, which opposed the anti-dumping duties altogether, wanted.

Mandelson would doubtless argue that EU politics required him to propose these harmful duties. Perhaps. But slapping an unfair tax on cheap Chinese and Vietnamese shoes is an odd way to launch a liberalising reform of Europe's nonsensical anti-dumping rules.

A transatlantic FTA?

Germany's Chancellor, Angela Markel, is making noises about reviving the well-worn idea of a transatlantic free-trade area (FTA), and Susan Schwab, America's top trade negotiator, has welcomed the idea too. So might the proposal finally get off the ground?

Unlikely. Remember that the European Commission negotiates trade deals on behalf of Germany and the other 24 EU member states, and there is still plenty of bad blood between Brussels and Washington over the collapse of the Doha Round, which the Commission blames on the US. And their main bone of contention - agriculture - is precisely what scuppered previous efforts to create a transatlantic FTA.

Merkel knows all this. Her real aim is probably to strengthen her increasingly embattled domestic position by being seen to take the initiative internationally. And it will certainly do her no harm in Washington, with which she has striven to patch up relations after their near-breakdown under her predecessor, Gerhard Schroder.

Mandelson's weasel words

Doha is not yet dead and buried, but already the European Union is rushing to pursue new bilateral trade agreements instead.

We should go beyond the EU’s existing bilateral free trade agreements, by setting out the case for new free trade agreements designed to deliver more open markets and fairer trading conditions in new areas of growth, particularly in Asia.

says Peter Mandelson, the EU's trade commissioner. India, South Korea and the ASEAN countries are already said to be in his sights.

The EU likes to pretend that it is the champion of multilateralism and the WTO. Indeed, Mandelson insists that "there will be no European retreat from multilateralism".

But this is nonsense. The EU has already signed more bilateral and regional trade agreements than any other country or trade bloc - far more than the US, for instance. With "friends" like the EU, no wonder the WTO is in dire straits.

Inefficient markets

Doha derailed — who to blame?
So much for the lofty rhetoric about freeing trade and aiding development; when it came to the crunch, governments instead bowed to corporate protectionism. Thus the Doha round — launched after 9/11 as WTO members rallied around America in a show of unity — has collapsed in acrimony, with most blaming the US for its demise. This is not fair. America was guilty mainly of being too ambitious: it offered to prune its agricultural subsidies if others sheared their farm tariffs, but India and the EU refused.

Officially the round is indefinitely suspended, but there are already hopes of reviving it early next year. Besides, optimists point out that while 12 years have elapsed since the previous round was completed, globalisation continues apace and the world economy is booming. Such complacency is misplaced. If a deal can’t be done when the going is good, perhaps it can’t be done at all. After all, the only break in the WTO’s run of failure — Seattle, Cancún, Hong Kong and now Geneva — was the Doha launch, when circumstances were truly exceptional.

Next year hardly looks promising: President Bush is set to lose his power to push through trade deals without congress unpicking them, precluding US negotiators from striking a credible bargain with other WTO members; a new farm bill that could entrench America’s contentious subsidies is in the offing; and an economic downturn could sharpen fears about trade-related job losses.

But if the round remains on ice for too long, the WTO risks being sidelined, with the benefits of global competition, multilateral rules and impartial adjudication giving way to tit-for-tat protectionism and a web of bilateral arrangements that privilege rich-country companies at the expense of the poor.

BP’s biggest blunders
If petrol costs over £1 a litre next time you fill up, blame BP. Oil prices spiked to nearly $80 a barrel when it announced it was shutting down America’s biggest oil field — possibly until 2007 — to repair leaky pipes. The lost production from Alaska’s Prudhoe Bay is only a tiny fraction of global output, but oil supplies are so tight — and speculators so frenzied — that the slightest disruption sends prices rocketing. (The terrorist threat to air travel and the fragile ceasefire in Lebanon have since pushed prices down somewhat — at least for now.)

But in any case, the damage to BP could be great. The issue is not so much the financial cost of lower output and higher repair bills; it’s the stain on the company’s carefully polished eco-friendly reputation and, above all, the growing doubts about its competence. Last year, an explosion at its largest refinery, Texas City, killed 15 workers and injured over 100. In March, a corroded BP pipeline caused the biggest ever oil spill on Alaskan soil. In June, regulators charged it with rigging the US propane market.

And the timing of the latest mishap could hardly be worse. The US Congress, which is desperate to deflect some of the fire from voters fuming at soaring petrol prices, is planning a probe into BP’s Prudhoe Bay operations, and angry shareholders are suing BP for compensation. And with Venezuela, Russia and other oil-rich countries feeling flush and questioning why they need foreign help to extract their oil, BP’s bungling is hardly a persuasive sales pitch.

The World Bank and corruption
The World Bank’s controversial new boss, Paul Wolfowitz, has stirred up a huge fuss by making battling graft his top priority. His anti-corruption drivewill be the most hotly debated topic at September’s IMF/World Bank annual meetings in Singapore. He has frozen loans to India, Kenya, Bangladesh and Chad because of concerns about fraud, tightened the strings attached to debt relief for the notoriously kleptocratic Republic of Congo, beefed up the Bank’s anti-graft department, and pledged to spend more on promoting good governance. Wolfowitz is adamant: the Bank will not tolerate corruption.

A crackdown is certainly desirable: it is scandalous if bank funds destined to help the poor are siphoned off by crooked contractors or funnelled into politicians’ Swiss bank accounts. It also erodes rich-country voters’ support for debt relief and aid. More  broadly, corruption impedes development: it stifles business, cuts into spending on public goods such as health and education, and hampers poor people’s efforts to improve their lot. So the Bank should try to ensure its money is well spent, monitor countries’ corruption levels and help them root it out.

But there is only so much the Bank can do, and Wolfowitz appears to be going about it in the wrong way. His actions so far — a cancelled loan here and there—appear arbitrary, when they ought to be transparent and systematic. Nor is the Bank meant to meddle in politics, and although the line is fuzzy, his bolder ambitions — such as fostering freedom of speech — overstep that fuzzy line. The Bank’s mandate is to promote development, not democracy. And while waging war on graft may sound good in Washington, in practice the bank must tolerate some, or stop lending altogether, since no country is whiter than white. Indeed, the bank itself is hardly above reproach. Its boss is appointed not through an open and fair selection process but by the US president — and Wolfowitz, who happens to be one of Bush’s close chums, has since recruited a coterie of neocon cronies with few development credentials.

America alone is not to blame for Doha collapse

The world's trade negotiators cannot seem to agree on much these days, but on one thing there is near-unanimity: the United States is responsible for the collapse of the WTO's Doha Round.

Peter Mandelson, the EU's trade commissioner, told the FT:

“If the US continues to demand dollar-for-dollar compensation in market access [cutting agricultural tariffs] for reducing domestic support, no one in the developing world will ever buy that and the EU will not either.”

Kamal Nath, India's fork-tongued commerce minister, said of the US:

“Everybody put something on the table except one country who said ‘we can’t see anything on the table’.”

This is nonsense. Whenever negotiations fail, all sides must take some of the blame. And the US, for good reasons and bad, is guilty mainly of being too ambitious to free up world trade - which is meant to be what the WTO is about.

For sure, America's agricultural subsidies are harmful and wasteful, but the US was prepared to slash them if other countries were willing to lower their farm tariffs, thereby giving its farmers access to new export markets. Multilateral trade negotiations are never pretty, but they have the potential to harness exporters' interests to overcome the lobbying power of producers that fear foreign competition.

But the likes of Nath were not interested in a meaningful Doha agreement; they just wanted to entrench India's farm and manufacturing protectionism, which hobbles the country rather than helping it. India's new-found success, after all, is in the IT sector, which the government has not yet got round to "protect".   

The flexibility that the EU and India wanted the US to show was a willingness to settle for the status quo rather than pursue the benefits of freer trade. The main culprits for Doha's failure are those who refused to budge on freeing trade, not those who set their aim too high. We may all come to pay the price for their cowardice.

Inefficient markets

Stagflation lite
US interest rates are already 5.25 per cent, euro rates are set to rise again on 3rd August, the next move in British rates looks likely to be up, and as deflation recedes, even Japan has finally raised rates. After years of borrowing cheap to take ever more exotic speculative gambles, investors are rediscovering risk and retrenching. This is not yet a bear market. The Dow, the FTSE and Morgan Stanley's international stock market index remain up so far this year—just. But markets may tumble once people realise that even in a more flexible and globalised economy, higher energy prices eventually feed through into higher inflation and lower growth. To keep a lid on rising prices, interest rates may have to rise much further than previously expected, pricking bubbly house prices and hurting heavily indebted consumers. Though the prospect of higher inflation and slower growth sounds like a rerun of the 1970s, it is unlikely to be that bad—rather what US economist Nouriel Roubini calls "stagflation lite."

20:20:20 vision to save Doha
The leaders of the world's most powerful economies—the US, the EU, Canada, China, India, Brazil and Mexico—have tried to break the deadlock in the Doha round of world trade talks by setting a mid-August deadline for reaching an ambitious and balanced framework agreement. Trade negotiators have been instructed to stop stonewalling and seek compromises instead, while Pascal Lamy, the WTO's boss, has received a mandate to bang heads together in the marathon negotiating sessions that doubtless lie ahead.

The main bones of contention remain the EU's high farm tariffs, the US's hefty agricultural subsidies and the steep industrial import duties of Brazil, India and other developing countries. In June, Lamy floated a 20:20:20 formula for a possible agreement, whereby the US would cap its farm subsidies at $20bn a year, developing countries would limit their industrial goods tariffs to 20 per cent and the EU would accept a proposal by the Group of 20 poor countries to cut its agricultural tariffs by an average of 54 per cent. But now that he has the public backing of all the big players, Lamy should aim higher.

An ambitious deal would not only bring bigger benefits, especially for developing countries; it may also be easier to sell politically. A modest deal would still be tough, since EU and US farmers will fight tooth and nail against any cut in agricultural support, but it would offer little for exporters to get excited about. They might prefer to spend their political capital on more rewarding bilateral trade deals instead. But a more ambitious deal would not only make cuts in US farm subsidies easier to swallow, by giving US farmers new export opportunities in Europe and elsewhere. It would also give US and EU exporters of manufactures and services eyeing up new markets in India and China something to fight for.

EU populism 1: mobile operators
Seldom does the Daily Mail say something positive about Europe, let alone an EU commissioner from Luxembourg who proposes to impose on British business new regulations described by one executive as "close to socialism." Yet the Mail has been singing the praises of Viviane Reding, the EU's telecoms commissioner, for her plans to slash the cost of using mobile phones abroad. It's a pity that Reding's proposals are half-baked. Mobile operators certainly make a packet from the "roaming" fees levied on phone calls made and received abroad, but Britain's mobile telecoms market is generally highly competitive. Prices continue to fall, and new operators, such as Tesco and easymobile, keep established players such as Orange and T-Mobile on their toes. Since most of their customers primarily use their phones within Britain, it is normal, and perfectly legitimate, that operators have until now focused their price-cutting on domestic charges. Besides, even before Reding first announced her plans, Vodafone had started to target customers who use their phone abroad a lot with cheaper prices through its Passport scheme. But despite the evidence that competition is working well, Reding felt compelled to intervene—in a potentially very damaging way. She proposes to set arbitrary caps on both wholesale and retail roaming prices, in effect gumming up the rapidly evolving mobile market by making it a regulated utility. Her plans, which still need the approval of the European parliament and the EU's 25 countries, should be roundly rejected. Where's the Mail when you need it to attack barmy Brussels initiatives?

EU populism 2: Microsoft
Reding is not the only EU commissioner who has succumbed to misguided populism. Neelie Kroes, the formidable competition commissioner, has made a mockery of due process by fining Microsoft €280.5m (£193m) for failing to comply with an antitrust judgement against it, the first such financial penalty the EU has imposed. She is promising even stiffer fines in the future. Kroes may be right that Microsoft has exploited the quasi-monopoly of its Windows operating system to crush competitors in related markets, but she is jumping the gun by fining it. The European court of justice, which has already struck down several high-profile EU antitrust decisions, is still considering Microsoft's appeal. Besides, Microsoft has stuck to the timetable agreed with the commission for handing over the technical information about Windows that rival firms need to write software that works well with it.

Doha disaster!

The WTO's Doha Round has collapsed. After the failure of negotiators to break the deadlock in the world-trade talks over the weekend, the Round has been indefinitely suspended.

The WTO now risks going the way of the League of Nations in the 1930s and becoming an ineffective sideshow. There would be preferential trade instead of free trade, bilateral agreements rather than multilateral ones, free rein for protectionist actions rather than the discipline of international rules and impartial adjudication, the law of the jungle rather than the rule of law.

Shame on the narrow-minded mercantilists who have betrayed their countries' interests and those of the poor by putting the profits of vested interests ahead of the people's. They may come to rue this day.

Doha breakthough?

G8 summits rarely live up to their exalted billing, but on the sidelines of this weekend's meeting in St Petersburg, the US, the EU and the leaders of China, India, Brazil and Mexico all gave their backing for reaching an ambitious and balanced framework Doha Round agreement within a month. The deadlock may finally be broken. Pascal Lamy now has a strong mandate to bang heads together and reach the outlines of a deal to free up world trade by mid-August,

I'm rushing to finish my monthly column for Prospect, so I don't have time to write more now, but I'll add more as soon as I can.

A last, last chance?

As supposedly final deadlines come and go and the Doha Round staggers on, commentators like myself risk sounding like the boy who cried wolf. But July is surely the last chance for WTO members to agree the outlines of a deal - remember that the boy who cried wolf was eventually right. (Despite the high stakes, the chances of trade negotiators cancelling their August holidays are nil.)

This weekend's G8 summit - unfortunately being hosted by Russia, which is not a WTO member and which has other priorities - provides an opportunity for political leaders to break the deadlock. They must grasp it - or risk seeing the WTO go the way of the League of Nations.

Moore sounds Doha rallying cry

My former boss and good friend Mike Moore has written an excellent piece about prospects for the Doha Round, which is unfortunately only available to FT.com subscribers until Mike publishes it on his own website.

Noting that 'If you only read the headlines you would be forgiven for thinking the Doha development trade round had already failed', the man who helped launch the round as WTO director-general argues that 'We can do this'.

He is right. 

Moore argues that although it is a good thing that developing countries are flexing their muscles, especially on agriculture,

this cannot be just an agricultural round if it is to succeed. It will not be without costs or change for developing countries. There are good reasons why they, too, should open their markets. Every bit of economic and historic evidence shows this is good for all sides.

He warns against accepting a modest deal:

When some ministers talk of a minimum deal and lowering of ambitions... What they are really saying is that we need to have minimal change to our agriculture... Some politicians want to cut a tiny deal, call it victory and go home. I hope that is not the case. That is like declaring victory in Iraq and running away, hoping the good headline drowns out the reality of failure

And he concludes:

The multilateral system has underpinned the most successful 50 years of human existence. Failure is not an option for those who still believe in a growing, peaceful world governed by predictable, enforceable, transparent rules. Alas, the populist protesters may claim a non-result is a victory. But does that not just leave the poor exactly where they have always been?

Here here.

The perils of boldness

President Bush rarely intervenes directly in the WTO debate. So it is a sign of how the White House is ratcheting up the pressure for an ambitious Doha Round deal that he talked about it at some length in a speech this week:

Now we're confronted with a really good opportunity, by the way, to deal with global poverty, and that is to complete the Doha Round of the WTO negotiations.  And it's tough sledding right now... The Doha negotiations are at a critical moment.  It is -- in my view, countries in Europe have to make a tough decision on farming.  And the G20 countries have to make a tough decision on manufacturing.  And the United States is prepared to make a tough decision along with them. That's my message to the world.

It's great that the most powerful man on earth appears committed to freeing up world trade - and multilaterally, to boot.  His intervention does indeed come at a  'critical' moment: as I discussed in a recent post, time is running out for the Doha Round. And since the deadline is of the US's making - the expiry of fast-track authority next year - it is particularly fitting that America should be seeking to break the deadlock.

But ironically, America's insistence on an ambitious deal could be preventing agreement on a more modest package. As a top aide to India's commerce minister, Kamil Nath, told Reuters:

The rest of the world could reach an agreement on a modestly ambitious outcome. The real problem is going to be the United States.

But a modest deal may be unsellable in Congress: unless Doha opens up new markets for US exporters (including farmers), it will be nigh on impossible to win support for cuts in farm subsidies.

While no deal might appear preferable to a modest one, the failure of the Doha Round could have devastating consequences:  a potentially fatal weakening of the WTO, and with it efforts to regulate world trade multilaterally and settle disputes fairly; a multiplication of iniquitous and inefficient preferential trade agreements, which harm poor and weak countries and gum up world trade; an upsurge in protectionism - and a question mark over globalisation itself.

The sceptics are wrong: Freeing trade has boosted growth in China and India

In a comment on my recent post on the contribution of trade liberalisation to Asia's success, Jim takes issue with my contention that

China and India are very powerful examples of the benefits of liberalisation: before they started their reforms, growth was slow, but as they have opened up their economies, growth has accelerated.

He argues that growth speeded up before they opened up, and that their growth since they opened up is not due to freer trade.

Jim makes three specific counter-claims:

1. 'Both India and China grew strongly through the 1980s, well before any significant trade liberalisation.'
2. 'While they did eventually liberalise significantly and kept growing, the evidence that the trade opening caused the growth is pretty thin.'
3. 'China is at best middling in terms of trade openness in comparison to other developing countries.'

I'll address each in turn.

1. It is not true that China and, to a lesser extent, India did not undertake any significant trade liberalisation in the 1980s.

In the mid-1970s, all trade was centrally controlled in both countries. But starting from December 1978, China began to open up. In the 1980s:

• The central government's monopoly on foreign trade was broken.
• A large number of foreign trade corporations were established (there were over 5,000 by 1988), with trading rights also granted to big companies.
• Special economic zones and open cities were established.
• Joint ventures with 25% foreign investment were permitted, and these were granted the right to trade directly.
• Companies were allowed to keep some of the foreign currency earned through trade.
• The remninbi's artificially high official rate was devalued from 1.5 to the dollar in 1979 to 8.7 in 1991.

In short, in place of the central government's absolute control over foreign trade, a large number of companies were permitted to trade, with trade regulated through import licences and tariffs instead. Free trade it wasn't, but it was certainly a much more liberal regime than before.

India's trade liberalisation in the 1980s was more modest - by 1990 some 30% of imports, mainly capital and intermediate goods, could be imported without specific licences and import quotas were replaced with less harmful, albeit very high, tariffs - but then so too was its economic growth.

Whereas China's economy grew by an average of over 9% a year in both the 1980s and the 1990s (subject to the caveat that applies to all official Chinese statistics), India's managed only 4.8% in 1981-88.

That was an improvement on the wretched 3.2% recorded in 1965-81, but still pretty poor, especially given the rapid rise in India's population, which meant that living standards rose much more slowly than GDP.

True, India's economy boomed between 1988 and 1991 - but this growth spurt proved unsustainable and ended in financial crisis. Since the economic reforms in 1991, which ended import licensing and slashed tariffs, India's growth has averaged 5.8%.

As Arvind Panagariya quite rightly points out: 

Bradford DeLong and Dani Rodrik have argued that reforms in India cannot be credited with higher growth because the growth rate crossed the 5 percent mark in the 1980s, well before the launch of the July 1991 reforms. This is a wrong reading of the Indian experience for two reasons. First, liberalization was already under way during the 1980s and played a crucial role in stimulating growth during that decade. Second, growth in the 1980s was fragile and unsustainable. The more systematic and systemic reforms of the 1990s... gave rise to more sustainable growth.

In short, Jim's claim is incorrect. A more accurate summary of what happened in the 1980s is: "China made big steps to liberalise its trade and was rewarded with much faster economic growth, while India opened up less and enjoyed only a modest uptick in growth."

2. Trade liberalisation is clearly not the only reform that China and (to a lesser extent) India have undertaken, and it is not responsible for all their growth. But it has certainly boosted both China's and India's rate of growth.

The Ravallion/Chen article that Jim mentions says nothing about the impact of trade liberalisation on growth: it is concerned with poverty and inequality. And its findings do not contradict my contention: although some people may lose from trade liberalisation in the short term, the long-term productivity gains from freeing trade, which boosts competition and innovation, raise long-term growth, thus reducing poverty.

There is a mountain of evidence to support the belief that freeing trade promotes economic growth in developing countries. For instance:

• Studies of nine countries – Chile, Colombia, Egypt, Ghana, Israel, Korea, the Philippines, Turkey, and, yes, India – directed by Anne Krueger and Jagdish Bhagwati for the National Bureau of Economic Research in the late 1970s showed that liberalising trade led to faster economic growth.
• These findings were confirmed by studies of nineteen countries – Argentina, Brazil, Chile, Columbia, Greece, Indonesia, Israel, Korea, New Zealand, Pakistan, Peru, the Philippines, Portugal, Singapore, Spain, Sri Lanka, Turkey, Uruguay, and Yugoslavia – over four decades conducted in the early 1990s by Demetris Papageorgiou, Michael Michaely, and Armeane Choksi of the World Bank.

Just look at China:

• Since 1978, China has gone from a system where trade was wholly controlled by the central government to one where a huge number of private companies engage in foreign trade, import licenses have largely been abolished, industrial tariffs have fallen to single figures and service sectors are being opened up too.
• The volume of China's trade has risen 70-fold, trade’s share in gross domestic product has risen five-fold and the country’s share in world trade has jumped from 0.8% to 7.7%.
• Over the same period, Chinese living standards, as measured by GDP per person at purchasing power parity, have risen five-fold - and the country has witnessed the fastest fall in poverty ever recorded.

Not connected? Hardly. Indeed, Harm Zebregs finds that foreign direct investment alone boosted GDP growth by 3 percentage points a year in the 1990s, even though it accounted for only 5 percent of GDP. 

3. Whatever measure of openness you use, China is more open than most developing countries.

Its weighted average industrial tariff is less than 6%, compared with a developing-country average of 8% (bound) and 12.5% (applied).

Imports account for over a quarter of GDP, a huge figure for a such a large and populous economy.

So is China a fully open economy? Clearly not. Is it much more open than before? Yes. Is it now more open than most developing countries? Most certainly.

So I repeat:

China and India are very powerful examples of the benefits of liberalisation: before they started their reforms, growth was slow, but as they have opened up their economies, growth has accelerated.

Deconstructing Doha

Time is running out for the Doha Round. It's been said so many times, but this time it really is true. To see why, count back from July 2007. That is when President Bush's fast-track authority, which forces Congress to vote on trade deals without the possibility of amending them, is due to expire.

With the president so unpopular, the trade deficit so huge and the prospect of a Democratic majority in Congress by then, the chances of fast-track being renewed are vanishingly slim: it only passed by one vote the last time around.

But without fast-track, Congress could amend any WTO deal to death, unpicking the bargain American negotiators had painstakingly struck with the other 148 WTO countries and thus making it unacceptable to them.

So if July 2007 is the deadline for Congress approving a WTO deal, early 2007 is surely the absolute latest an agreement could be reached if Congress is to have enough time to scrutinise and vote on it.

That in turn means that this July, or at a real push September, is the deadline for reaching the outlines of a deal, with the details hammered out in the final months of this year.

So how near are trade negotiators to striking that big political bargain?

Important elements are in place. The contours of an eventual deal are clear. The grand bargain involves the EU and the US opening their agriculture markets - the EU cutting its farm tariffs, the US its subsidies - in return for greater access to industrial and services markets in developing countries, notably India and Brazil.

The poorest countries also need to be bought off with duty-free access to EU and US markets; in particular, the US has to hack down its cotton subsidies, while the EU has to compensate its ex-colonies for eroding the margin of their preferential access to EU markets. 

Negotiators have a pretty clear idea of each other’s true bottom lines. What is lacking is political will.

The paradox of Doha is that an ambitious deal is an easier sell than a modest one. A "Doha lite" would still involve political pain, since EU and US farmers will object to any cut in agricultural support, while offering little for exporters to get excited about. They might prefer to spend their political capital on securing bilateral trade agreements instead.

But a more ambitious agreement would not only make cuts in US farm subsidies easier to swallow, by giving US farmers new export opportunities in Europe and elsewhere. It would also give US and EU exporters of manufactures and services eyeing up new markets in India and China something to fight for.

The problem, as always, is getting from here to there. Tony Blair is said to be keen to hold a summit to break the logjam. He had better hope that his good friends George Bush and Peter Mandelson are on the same wavelength.

Should the US act against China for violating workers' rights?

The AFL-CIO, America's biggest trade-union federation, is petitioning the Bush administration to impose economic sanctions against China for violations of workers' rights. The unions claim that the exploitation of Chinese workers is not only morally repugnant, but also economically damaging, alleging that it has cost 1.2 million US workers their jobs. They say this amounts to an unfair trade practice to which the US should respond with trade sanctions against China. But their proposed solution is as wrong-headed as their analysis of the problem.

Issue one: Are Chinese workers exploited? No doubt many are - not because they are paid a pittance by Western standards, nor because labour standards in China are lower, but because human-rights violations in China are commonplace. Even so, factory wages are rising fast and Chinese workers are generally richer and freer than five, ten or twenty years ago.

Issue two: Would imposing trade sanctions help Chinese workers? Clearly not. China is too big to be bullied into improving its respect for human rights, but curbing Chinese exports to the US would surely harm the workers who produce them.

Issue three: Is there anything else Americans could do to help Chinese workers? Apart from buying Chinese products, which raises Chinese living standards, not much. The US government can put political pressure on China over human rights, as can groups such as Amnesty International, but this has only a limited impact. Ultimately, in a huge country like China, pressure for reform mostly has to come from within. This may take decades, but there is every reason to believe that as the Chinese get richer they will demand to be freer too - and that the Communist Party will eventually have to succumb to their demands.

Issue four: What about American jobs? The US unemployment rate is a mere 4.6%, so jobs are hardly disappearing because of trade with China. New jobs replace the ones that are lost. The transition from old jobs to new can be traumatic in the US, because it lacks an adequate social safety net - but that is a reason for the government to cushion the blow of adjusting and help workers retrain and find new jobs, not limit international trade. After all, Americans gain a lot from trade with China: cheaper imports, lower interest rates and higher economic growth. The AFL-CIO should be campaigning for more active labour-market policies domestically, not damaging trade sanctions that would harm those they purport to help.

Is Asia's success due to trade protection?

In a thoughtful comment on my recent Doha post, Matthew argues that

It is simply not the case that the enormous growth of the Asia tigers is evidence of the efficacy of free trade because most of those economies were protected behind trade barriers and currency controls for most of their development and still are.

I started replying in a comment, but then I thought the subject was so important that I would start a new post about it instead.

I think that China and India are very powerful examples of the benefits of liberalisation: before they started their reforms, growth was slow, but as they have opened up their economies, growth has accelerated. Just because they still have some tariffs in no way implies that their faster growth stems from this residual protection: if it did, the increase in growth would surely have preceded liberalisation, which it did not. Critics claim that if developing countries lower their tariffs they will be giving up their chances of development – yet China’s markets are already far more open than those of most developing countries and it is thriving. I think China's decision to join the WTO was a powerful signal that its leaders believed that to sustain economic growth, the country needed to liberalise further, as indeed it has done.

But what about South Korea? Undeniably, it has protected some of its export industries. Undeniably too, it has grown in leaps and bounds. The question is: did the trade protection cause the growth?

Not necessarily. South Korea might have succeeded despite the trade protection, or the trade protection might have had little effect at all. Observing that tariff protection preceded development does not in any way demonstrate a causal link. Saudi Arabia has grown rich while protecting its industry behind tariff walls, yet the source of its prosperity is soaring oil prices, not infant-industry protection.

In an exhaustive study of South Korea's experience for the Institute for International Economics, Marcus Noland and Howard Pack find that

the weight of the evidence derived from both econometric and input-output studies… indicates that industrial policy made a minor contribution to growth in Asia... Countries with less dedicated and less competent bureaucracies and policymaking apparatuses that are more amenable to lobbying pressures could expect even smaller net benefits.

They conclude that governments would do better to focus on measures other than selective industry protection to foster development. Along with sound macroeconomic policies,

Growth-enhancing measures in the Asian countries, which did not differentiate among sectors, included large expenditures on primary and secondary education, the building of large and efficient social infrastructure, a favourable attitude towards technology transfer, including both technology licensing and direct foreign investment, and a substantial investment in public technology institutions.

The bottom line is that South Korea’s success does not support the critics’ faith in state-led development through infant-industry protection – and developing countries should not mistakenly try to follow that path today.

Indeed, if a government protects the domestic market, by definition a local company can sell at a higher price in that market that it can abroad. Selling at home becomes much more profitable than selling abroad. So import protection creates a strong incentive to focus on the domestic market instead of exporting on the world market.  Other things equal, then, protecting an industry is unlikely to turn it into a world-beating exporter. South Korea got round this by providing cheap loans and other benefits to exporters - giving companies an offsetting incentive to sell abroad - and by cutting off those loans if the companies were not successful on the world market - thus allowing the market, not the government, to pick winners. In crucial aspects, then, the South Korean system mimicked many of the advantages of a free-trade environment.

Dump anti-dumping duties

Peter Mandelson, the EU's trade commissioner, has announced a review of anti-dumping measures. These seek to protect Europeans from imports that the Commission deems unfairly cheap. Personally, I think low-cost foreign products are one of the boons of globalisation - allowing the pound in your pocket to stretch further - as well as being particularly pro-poor, since the dirt-cheap basic goods that the likes of China produce allow poorer people to enjoy a much higher standard of living. Unfortunately, Mandelson is not questioning the flawed protectionist premise behind anti-dumping duties. He just wants to mitigate the harm they do to European companies with investments abroad.

He has a point. Anti-dumping measures are not only bad for European consumers; they are also increasingly damaging to European companies. The likes of Adidas, for example, make most of their shoes in Asia, so when the EU seeks to protect Italian shoe-makers from competition from cheap Asian footwear, it also hurts the German sportswear company. Anti-dumping duties also hit European retailers that source their stock in affected countries. In fact, the biggest beneficiaries of the EU's anti-dumping measures against China are often China's higher-cost competitors in South-East Asia rather than much-higher-cost manufacturers in, say, Italy.

The Commission is today holding hearings (behind closed doors) on the anti-dumping duties imposed on shoes made in China and Vietnam ahead of Mandelson's trip to China next week. It is surely too much to hope that the EU will finally see sense and consign its absurd battle against cheap imports to the dustbin of history.

Inefficient markets

It’s up to Lamy

Prospects for the Doha round look grim. Over five years in, and the World Trade Organisation’s 149 members still seem as far apart as they were during the 2003 Cancún debacle. Only the massaging down of expectations by WTO boss Pascal Lamy ahead of the Hong Kong summit last December rescued it from disaster. Now another deadline looms: 30th April, by when an outline deal must be reached if a final agreement is to be struck by the end of the year, ahead of the expiry of Bush’s fast-track authority in 2007. 

But while progress has been painfully slow so far, all hope is not lost. Negotiators have a much clearer idea of each other’s true bottom lines. So if the political will is there on all sides, a framework deal could rapidly fall into place. The grand bargain involves the EU and the US opening their agriculture markets—the EU cutting its farm tariffs, the US its subsidies—in return for greater access to industrial and services markets in developing countries, notably India and Brazil. The poorest countries also need to be bought off with duty-free access to EU and US markets; in particular, the US has to hack down its cotton subsidies, while the EU has to compensate its ex-colonies for eroding the margin of their preferential access to EU markets. 

 The key to success does not lie solely in Brussels and Washington. New Delhi and Brasilia must also step up to the mark. They showed in Cancún that they were a force to be reckoned with; now they need to use their power responsibly by making the concessions that will unlock further moves from the EU and the US. India and Brazil have a new-found confidence; if they can overcome their lingering doubts about liberalisation, they have much to gain from a successful Doha round.

Lamy too is vital—not just as an honest broker, but also as a deal-maker. If the talks remain logjammed, he should break the deadlock by publishing his own draft agreement. That will take guts, for sure, but Lamy has plenty of those—and the alternative is failure. 

Gas connections

That unglamorous gas pipeline known as the “interconnector”, which runs between Bacton in Norfolk and Zeebrugge in Belgium, has suddenly become the centre of political attention. Britain has little spare gas capacity, especially since a fire damaged the country’s main gas storage facility, and imports from continental Europe should have flowed down the interconnector in the recent cold snap when British demand surged. But this did not happen because Europe’s monopolistic energy producers had little incentive to compete for British business since their protected home markets are so profitable. The result was that prices soared and Britain paid perhaps £1 billion more for gas than it might have done.

Higher gas prices are not just painful for consumers. They push up inflation, dampening consumers’ spending power and delaying a potential cut in interest rates. And they are also prompting power companies to switch back to dirtier coal—one reason, according to the government, why it will miss its climate-change target of cutting carbon-dioxide emissions by a fifth by 2010. A reminder that competition matters—and that EU governments’ energy protectionism cannot be ignored.

Britain’s productivity puzzle

Despite Gordon Brown’s budget boasts about Britain’s economic performance under his watch, productivity growth has ground to a halt. It was a mere 0.6 per cent in 2005, according to new ONS figures. That did not stop Brown asserting in his budget speech that matters had improved—a statistical sleight of hand achieved by ignoring events since 2001. “After decades behind, Britain has caught up with Germany in productivity… and has halved the gap with France,” the chancellor said. In fact, whereas Britain narrowed the gap with the other G7 rich economies from 19 per cent in 1992 to 6 per cent in 2002, it has since risen to 8 per cent in 2004. The gap with the US and Germany, although lower than in 1992, is 16 per cent, and that with France a whopping 29 per cent. And whereas productivity growth averaged 2.5 per cent a year in the first four years of Brown’s stewardship, it has slumped to just 1.6 per cent a year since then. 

One reason for the recent fall in productivity growth is cyclical: the economy has slowed since the dotcom bubble burst in 2001. But another is the huge expansion of the public sector. It is harder to boost productivity in labour-intensive services like health and education than in manufacturing—and harder still to measure it: does reducing class sizes cut productivity (because more teachers are needed to educate a given number of pupils) or potentially raise it (because skills are increasingly valuable and children learn much more with more personal attention)? The ONS recently had a stab at estimating productivity growth in the NHS since 1999—and came up with six answers ranging from a fall of 1.5 per cent a year to a rise of 1.6 per cent a year.

The failure to reform sufficiently in the public services has not helped: the NHS has improved, but not as much as the extra money warranted. Ironically, this may now be changing. All the noise about job cuts caused by local NHS deficits is politically awkward, but if the government does not bail out underperforming NHS trusts, the cuts will boost productivity since most trusts plan to provide the same service with lower spending.

 

© Prospect

 

A blow for Doha

It's a good day for Rob Portman and a bad one for the Doha Round. After less than a year in the job and just as the WTO negotiations are reaching a crucial juncture, America's top trade negotiator has been promoted to run the White House's budget office. It is understandable that President Bush has turned to a long-time friend and politically savvy former Congressman in his hour of need. But it augurs badly for the Doha Round, since it was precisely because of those qualities that Portman was appointed to clinch (and sell) a deal.

Clearly, trade is no longer a top priority for the embattled president. Portman's replacement, his former deputy Susan Schwab, is certainly a trade expert, but she does not have the same clout and connections. Much as Charlene Barshefsky found when she replaced Mickey Kantor, Clinton's first USTR, Schwab may find it hard to get the president's ear.  A Doha deal can still be done, but today's news has not made the task any easier.

The socialist who can breathe life into free trade

From September 1st, the shaky prospects for freer world trade will rest on the shoulders of a French socialist. With the World Trade Organisation's Doha round deadlocked and little time left to reach agreement, the new man in charge of the WTO, Pascal Lamy, faces a daunting challenge. Unless the former European Union trade commissioner can help break the deadlock and hammer out the outlines of a deal before trade ministers meet in Hong Kong in December, hopes for a successful outcome to the Doha round will fade. That would be a disaster for the world economy and for export-reliant developing countries in particular.

The omens are not good. The potential gains to poor countries from freer world trade dwarf those from debt relief and increased aid. But at the Group of Eight summit in Gleneagles in July, when public pressure for progress in "making poverty history" was intense, the leaders could not even bring themselves to set a date for eliminating rich countries' agricultural export subsidies, a relatively minor but pernicious weapon in the protectionist armoury. If farming lobbies are powerful enough to outgun the Live8 campaign under the global media spotlight and refuse to make even token concessions towards helping the world's poor, the chances of them giving up their subsidies at the WTO look slim.

Talks on freeing up farm trade have reached an impasse. The end-of-July deadline ministers set last year for reaching the outlines of a deal has been missed. The Group of 20 agriculture-exporting developing countries is demanding big cuts in rich-country subsidies and tariffs, but the EU and the US are stalling by quibbling over details. Developing countries are refusing to agree to big cuts in tariffs on industrial goods. Offers to open up to international competition markets for services remain paltry. The lack of progress is partly due to posturing and brinkmanship. But time is running out. Unless Mr Lamy can work some magic when negotiators return later this month, Hong Kong will be a rerun of the Cancún fiasco two years ago.

Optimists argue that President George W. Bush's success in convincing a recalcitrant Congress to approve the Central Ameri