Time for crazy ideas: part 1

Albert Einstein defined insanity as "doing the same thing over and over again and expecting different results." One gets the feeling, looking at the progress of multilateral trade negotiations in Geneva, that we are borderline crazy. There are two issues where this seems to be the case -- repeated negotiations circling around the same intractable issues. One set of intractrables involves the importance of agriculture to the overall success of the negotiations, and the other is the role of OECD tariff reductions in determining likely benefits to developing countries from the current set of negotiations at the World Trade Organization (WTO). In both areas, we keep repeating ourselves and expecting a different outcome. Maybe it is time for a change, or at least time to step back from these issues. I will focus on agriculture here, and on OECD tariff concessions in a later posting.

Agriculture has been a thorn in the side of the modern trading system since its inception. Following pressure from the United States in the 1950s, agriculture was largely cut out of the system of rules and disciplines defined by the predecessor to the WTO -- the GATT (General Agreement on Tariffs and Trade). Indeed, until the creation of the WTO at the conclusion of the Uruguay Round of trade negotiations, agriculture remained outside the system. Ironically, it was the EU that exploited these exclusions most, and the U.S. that later regretted their introduction. This exclusion was largely an intra-OECD issue, with high profile disputes between the U.S. and Europe ranging from broiler chickens in the 1960s to soybeans in the 1970s and 1980s. The developing countries did not participate actively in the GATT, and so until the Uruguay Round, launched in the 1980s, this remained largely a source of intra-OECD conflict.

The effort to bring agriculture into the GATT/WTO system almost caused the collapse of the Uruguay Round, as the French threatened to bring the whole temple down around them if the European system of agricultural protection and subsidies (the Common Agricultural Policy or CAP) was compromised by the negotiations. The solution, in the end, involved lying and obfuscation. Commitments were made that were not really commitments, and liberalization was implemented that was not really liberalization. Everyone declared victory and went home. The basic process involved converting non-tariff barriers (licenses, quotas, inspection delays, import bans...) into tariffs that were supposed to reflect the then current level of protection. In reality, in politically sensitive areas the rates set were far above the rates needed, and the process became known as "dirty tariffication." (A good place to start reading on dirty tariffication is here: "WTO: Uruguay Round Agreement on Agriculture".) Indeed, there were worries that the "liberalization" undertaken as part of the Uruguay Round Agreement on Agriculture (known in the land of trade-related acronyms as the URAA) would lead to less trade.

At the time, estimates of the benefits of the Uruguay Round were dominated by agricultural liberalization. I was at the GATT at the time, and agriculture was indeed a large part of our initial assessment of the projected benefits of a successful conclusion to the global trade round. In the end though, as we learned more and more about actual commitments in agriculture (agriculture negotiations had been somewhat secretive even with respect to the rest of the GATT negotiating bodies at the time), our estimates linked to agriculture were dramatically reduced and eventually dropped from the calculus, and in the end trade ministries were reduced to statements like: "we have set the groundwork for future liberalization in agriculture."

In the end, the Uruguay Round did have important implications for agricultural liberalization and developing countries. However, the mechanism was not what was anticipated. In recent years, the new dispute settlement body (the DSB) (the legal underpinnings of the WTO) has led to successful cases against the U.S. and EU (led by Brazil) on cotton and sugar. At the same time, under different dispute mechanisms in the WTO, developing Latin American countries recently won a high-profile case against the EU on bananas. The most difficult issues are being handled through the legal machinery in Geneva, and developing countries are even winning. As it turned out, none of this really hinged on the agriculture negotiations themselves. (A good place to read up on the state of play at the WTO in Geneva on development issues is the Bridges Weekly Digest.)

So where are we now? Not surprisingly, we are now, again, at an impasse. If one looks ahead though, it is not clear to me that we should be stuck here, or that this is even the right road to be on anyway. Maybe it is time to change tack completely. (Warning: for those vested in the last several years of policy negotiations and the supporting policy research industry, the next line may be disturbing.) Maybe we should ignore agriculture for now, drop it as a negotiating issue, and move on to other things in a more streamlined Doha Round. How can I say this? I offer three reasons.

The first reason relates to medium-term policy sustainability in the OECD. The current set of agricultural policies in the U.S. and EU is not sustainable. In the case of the EU, the combination of (i) aging populations and (ii) an Eastern Enlargement that has taken in poor, agricultural economies means that the CAP as we know it is doomed. The European Commission knows this, and EU Members have already launched on a policy reform process that recognizes that future agricultural policy will have to be very different (and much cheaper) if it is to survive the budget constraints brought on by aging populations, and the demands for structural funds from new members. The EU has made a commitment to reform (necessary regardless of how events unfold in Geneva), and we can expect the process to continue. So, why not just wait? We can probably get the same results we would from active negotiation. In the case of the U.S., the budget hole is now so deep, and the looming costs for Medicaid and Medicare with retiring baby boomers is so large, that large farm outlays are likely to be a victim of the storm of budget rationalization that will arrive with the next White House team. So again, why not just wait? We will get rationalization anyway, regardless of whether or not we push this through Geneva.

The second reason also relates to medium-term changes, only in the middle-income and rapidly developing low-income countries. India and China (aka 2.2 BILLION consumers) represent economies growing at 8% to 10% per year. At these rates, changes in consumer demand for foodstuffs will move rapidly toward more expensive (and more grain and soybean intensive) meats and processed food products. This will put rising pressure on food prices. Recent baseline projections from the OECD and FAO build in assumptions about ongoing technical change sufficient to neutralize these demand-side pressures on agricultural prices. Reading between the lines, these technical changes are needed to avoid projections of substantial food price increases. Technical change notwithstanding, it is hard to believe that prices will not rise. Rising prices will make it easier for the U.S. and EU to back off of price and income support programs for farmers, and indeed will change the South-South policy calculus as a wedge is driven between food importers and food exporters.

The third reason involves the toxic soup of oil -- economics, politics, terrorism, and security. A surprise victim of events has been agricultural commodity prices. For reasons that will not go away, the U.S. and EU are both pushing their respective biofuel industries. (The EU just announced a target to replace 10% of vehicle fossil fuel use with biofuels.) This follows Brazil, which has been relying for years on its sugar industry for the same reason. The result has been a surge in prices. In mid-December, the European food industry press was noting that prices had reached highs not seen for ten years. ("Cereal Prices at Highest Levels for a Decade") . The President of Mexico is now making promises to keep tortilla prices low, after price hikes for corn driven by U.S. biofuel demands. And in scenario analysis, the International Food Policy Institute (IFPRI) has projected that an “aggressive biofuel growth scenario shows dramatic increases in world prices for feedstock crops." In addition, "the strong price increases for root crops like cassava in the first aggressive scenario suggest that without the necessary productivity improvements, aggressive growth in biofuels could have adverse effects on well-being in regions like Sub-Saharan Africa, where a large proportion of cassava consumption is for food..." ("Bioenergy and Agriculture: Promises and Challenges"). If global security trends continue, and if the U.S. and EU are on a permanent bent to achieve energy security through renewable energy, then the rules of the game have been rewritten substantially. The poor should probably start worrying about rising food prices, rather than demanding them.

On net, it looks to me like agricultural prices will be rising anyway, and U.S. and EU agricultural support programs will be contracting anyway, whether or not we make a big push on these issues is Geneva. The real problem areas for the poorest producers (sugar, bananas, cotton) are being managed through the international court system. As for the rest, we are doing the same thing, and getting the same results. Maybe it is time to try something else.

Further reading:

A student blog spin on the Doha Round and Africa.

Kymberly Anne Alliot at the Center for Global Development on "Delivering on Doha: Why Agriculture Matters."

Another post, from Biopact, asserting that "Biofuels boom may make WTO accord possible, cut US farming subsidies". This link was supplied by an anonymous post -- thanks.

Arvind Panagariya "The tide of free trade will not float all boats."

My own quantitative paper arguing that South-South liberalization is key to the "development" component of the Doha Round."Trade liberalization in the Doha Development Round."