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WTO deal key to recovery

Signing off on Doha is critical for world's poorest countries
COMMENT

Pascal Lamy
Global trade contracted in 2009 at a rate not seen since the Great Depression, and those paying the heaviest price are those who can least afford it.

Driven largely by collapsing domestic demand and production levels, but also by a shortage of affordable trade finance, trade volumes will fall by more than 10 percent this year. Whether they will recover next year is an open question.

Despite some evidence that trade volumes grew over the summer, recovery has been patchy – and so fragile that a sudden shock in equity or currency markets could once again undermine consumer and business confidence.

The world’s poorest countries face the greatest hardship when trade languishes. They do not have the luxury of cobbling together fiscal-stimulus packages or rescuing ailing industries in order to cushion the shock of an economic crisis. For them, trade represents a huge share of overall economic activity and is unquestionably the best avenue for recovery.

The irony is that trade has collapsed just when these countries were becoming increasingly active in global markets, with exports rising by more than 20 percent this decade. The sharp drop in exports this year has been crippling. Since the crisis began, export earnings of the world’s poorest countries are down US$26.8 billion, or 44 percent.

The World Trade Organisation’s ministerial conference in Geneva later this month provides an occasion to consider the best ways to generate growth and alleviate poverty in these countries.

Concluding the Doha round of trade negotiations by the end of 2010 is one of them. Frankly, all of us already know what needs to be done. Yet the Doha round has fallen victim to basic misunderstandings about why countries trade and how.

Countries trade, first and foremost, because it is in their interest to do so. It is in a country’s interest to lower import barriers to allow cheaper access to goods and services that it cannot produce competitively. Trade increases competition and keeps inflation in check. In this way, trade can raise living standards. Moreover, countries that lower their import barriers also end up exporting more.

The reluctance of trade negotiators to pursue what is in their obvious self-interest reflects another, more serious misunderstanding about the manner in which nations trade. Consider United States-China trade in iPods. Every iPod that the US decides not to import means a $150 decline in China’s recorded exports, though only about $4 of that value is actually added in China. Japan, which contributes about $100 in value, suffers far more.

Clearly, the words “made in” mean something very different from what they meant 20 years ago. Our production processes are so globalised that a country’s import tariffs could well penalise imports from one of its own global companies.

Capacity building
For many countries, particularly in the developing world, reducing obstacles to trade is insufficient for fuller participation in the global economy because they also need to build their capacity to trade.

That is the central aim of the Aid for Trade initiative. Despite the economic crisis, Aid for Trade donor contributions to help the less fortunate have risen 10 percent per year since 2005, and major donors are on track to meet or exceed their pledges for future funds. Several major countries have agreed to increase their contributions this year to building infrastructure, productive capacity and know-how in the developing world.

But Aid for Trade is no substitute for the market-opening opportunities and improved rules promised by the Doha round. WTO members have already agreed that rich countries – and developing countries that are in a position to do so – would open their markets completely to 97 percent of exports from the world’s poorest countries, and dramatically reduce duties for those products where barriers remain.

As a result, cotton subsidies, which depress prices and displace African exports, would be sharply curtailed, and cotton exports from poor countries would receive duty-free, quota-free treatment in rich-country markets. All trade-distorting farm subsidies would be slashed by 70 to 80 percent in the major subsidising countries. New rules on streamlining customs procedures would sharply reduce transit times.

What is frustrating is that we are tantalisingly close to a deal that, according to the Washington-based Peterson Institute for International Economics, would deliver global economic benefits of $300 to $700 billion annually. But, to reap these benefits, we must close the deal. The next ministerial conference ought to signal that we are ready to do so.
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Pascal Lamy is Director-General of the World Trade Organisation.

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