From the forthcoming Summer 2008 issue of World Policy Journal.
Many of you are presently suffering from sharp increases in food prices. The main cause of this increase is here to stay since it results from structural changes in the demand for farm products. Reducing farm subsidies and tariffs should help create more room for your own farmers to export thus helping raise their revenues. It should also ensure a better connection between supply and demand. If anyone still wonders why agricultural subsidies and production systems need reform and why this is crucial for Africa, just look in the news everyday!
—World Trade Organization Director-General Pascal Lamy, addressing the African Union Conference of Trade and Finance Ministers, April 3, 2008
In mid-July 2008, trade representatives from World Trade Organization (WTO) member states began meeting in Geneva in an attempt to make a breakthrough towards completing what has been seven years of negotiations on the Doha Development Agenda. There had been political commentary on Doha that was skeptical about the success of the agreement; Barack Obama’s economic policy advisor, Jason Furman, for example, has told the media that it is impossible for the candidate to have an opinion on an agreement “that doesn’t exist.” Still, there is a growing consensus among trade representatives such as Peter Mandelson of the European Commission and Susan Schwab, the U.S. Trade Representative, suggesting that while many complex steps still need to be taken in order to complete Doha, a deal in 2008 must be made. Indeed, the need is critical and immediate, not only to help alleviate the pressure brought on by the spike in global commodities—oil and foodstuffs—and lift African economies out of poverty, but also as a symbol that nations can work together to address global issues.
The fundamental purpose of Doha was not just to create clearer and fairer conditions of global trade, but also to open up new opportunities for growth and development in the world’s most impoverished areas. In turn, millions would be lifted from poverty.
Inextricably linked to Doha’s goal of alleviating poverty was the strong desire among WTO members to issue a global response to what were perceived as the imbalances between rich and poor, powerful and powerless, that have been key drivers of terrorism and global conflict. Doha, while idealistic in its goal, set out in 2001 to develop a new platform for global cooperation that would depart from traditional aid and development programs. These have tended to see money simply flowing from rich to poor nations—if at all—usually with strings attached. Instead, this new platform has sought, by liberalizing trade barriers across the globe, to allow impoverished nations a vehicle to develop their own independent economies and stand on their own feet. Doha had, and continues to have, the profound ambition of restoring dignity to the world’s impoverished. Moreover, any Doha trade liberalization also stands to benefit rich nations such as the United States and those that comprise the EU, who are now more than ever relying on exports to maintain economic dynamism and growth.
Catching the World’s Eye
Unfortunately, in the near term, what has caught the eye of many of the world’s trade representatives involved in the Doha negotiations—particularly those of Brazil and India—is the recent approval by the U.S. Congress of the 2008 Farm Bill. This bill includes $289 billion in new food and farm spending over the next five years, with $20 billion of subsidies to U.S. cash-crop farmers. Effectively, Congress has approved precisely those subsidies that Doha is seeking to diminish. The Bush administration has further proposed dropping subsidies to $14.5 billion as a goodwill gesture. While it has been argued that a completed Doha agreement, once it has been ratified by Congress, could eventually render the Farm Bill null and void, the measure has cast doubt on the sincerity of the United States in trade negotiations. More significantly, it has shown that local, parochial American interests can trump both global opportunity—increased exports and market access abroad—and global crises like the recent surge in food prices.
Unfortunately, until a compromise on Doha that equitably alters global trade rules is reached, and until this agreement is accepted by Congress, U.S. consumers and the world’s poor will suffer as a result. For example, American shoppers and domestic food processors pay more than $1 billion annually in unnecessarily high sugar prices thanks to Farm Bill protectionism. U.S. taxpayers shelled out a total of $177.6 billion in subsidies from 1995 to 2006, including $56 billion just for the corn industry, the leading beneficiary of federal assistance. Inexplicably, the 2008 bill ties some of the new subsidy payments to today’s abnormally high export prices, therefore locking the government into additional billions of dollars in potential payments assuming prices dip.
President George W. Bush, in his message to Congress after vetoing the bill containing the farm subsidies, suggested the true cost of the legislation could reach as much as $600 billion over the next ten years. Moreover, Bush pointed out, a net farm-income increase of more than $28 billion was projected for this year.
These profit margins mark a shameful lost opportunity for reform provided by record global commodity prices. As Columbia University’s Jagdish Bhagwati has pointed out, payouts to U.S. farmers vary inversely with market prices, and thus actual delivered subsidies in the next year or two should be virtually nil. Given the robust nature of farm industry profits in the near term, subsidies have no practical meaning at the moment. This phenomenon, according to Bhagwati and many other observers, provides the perfect opening for the United States to soften its stance at the Doha negotiating table.
Beyond the burden on the American taxpayer to support Farm Bill payouts over the next five years, or higher global prices on protected commodities such as sugar, U.S. and European consumers are also experiencing dramatic inflation. While not to the same degree as during the 1973 and 1979 oil crises, both U.S. and EU headline inflation has reached approximately 3.9 percent this year, with price spikes occurring in key commodities like food and oil. In the last few months, according to WTO research, in the United States, wheat prices soared by 113 percent, soy by 83 percent, maize by 24 percent, and rice by 52 percent. WTO officials also suggest these prices will maintain high levels and continue to rise in the medium term. These price jumps are a tribute to a host of trade distortions and gradual shifts in the demand for grains and cereals worldwide, prompted primarily by a surge in the use of maize within the United States for biofuels, and in other cereals to feed cattle for Indian and Chinese markets.
While Americans have the ability to absorb some of these price increases, thepressures of inflation from both food and oil price surges begins to add-up over time. The U.S. Department of Agriculture reports that the consumer price index for “food at home”—essentially, grocery costs—grew by 4 percent in 2007. This compares to a 1.7 percent increase in 2006 and, according to a report by the Urban Institute, represents the steepest one-year rise since 1990. As recently as two years ago, 11 percent of American families were “food insecure”—meaning enough food for a healthy lifestyle was consistently unaffordable. However, we only have to look to the world’s developing nations to see a situation that is much worse.
Josette Sheeran of the World Food Program has called the rise in global food prices a “silent tsunami”: for the first time in 30 years, riots have erupted over food shortages and price hikes in countries that have experienced neither drought nor famine. The impact on the world’s poorest was described starkly by the Economist magazine:
The middle classes in poor countries are giving up health care and cutting out meat so they can eat three meals a day. The middling poor who live on $2 per day are pulling children from school and cutting back on vegetables so they can afford rice. Those on $1 per day are cutting back on meat, vegetables and one or two meals a day. Those that live on 50 cents per day face disaster.
World Bank President Robert Zoellick has also stated that world food prices rising by 20 percent could plunge back into poverty some 100 million people in low-income countries, thereby erasing much of the progress made over the past decade. The cause of all this misery is either improper distribution or trade distorting subsidies—and both fit squarely within the Doha paradigm.
What Doha Could Do to Help
When the Doha Development Round began, the primary reason for cutting subsidies to cash-crop farmers in rich nations (that artificially keep the cost of food-stuffs low), was to provide small-scale farmers in developing nations with a new opportunity to export their produce at a competitive price. Increased competition on agricultural goods within U.S. and EU markets were expected to marginally drive up the price of agriculture, thus allowing farmers from developing nations to earn a decent wage. A successful Doha agreement would help tamp the spike in global food prices, by opening the doors to greater production and more efficient mechanisms for trade, reducing bottlenecks in global food supply, and allowing farmers—small and large alike—to continue to make decent profits. But how would this work?
The WTO has stated that the “key to alleviating the current food crisis is through better distribution of food on the global scale.” According to the Doha formula, trade would not only increase farming within developing nations, but would also lower restrictive tariffs that keep food from entering the global market. For instance, only 7 percent of the world’s rice is actually traded, while 90 percent of exports are controlled by five countries: Thailand, India, Vietnam, the United States, and Pakistan. The same is roughly the case for world wheat production. Only 16 percent of world wheat production is exported, and again 80 percent of exports are controlled by a few countries.
By removing tariff barriers, requiring countries that have an abundance of foodstuffs to share, and allowing more farmers to enter the supply chain, the price of food will not only come down—for those of us in the affluent West—but it will provide greater means and meals for the world’s poor. The World Bank has estimated that a realistic Doha agreement would bring 32 million people out of extreme poverty and raise a further 64 million out of the $2-per-day bracket by 2015.
A successful Doha Round will further change the relationship between wealthy and poor nations, bringing increased economic independence and social stability that will require less foreign aid, and possibly even less military assistance.
Increased trade would also help wealthy nations, allowing expanded access to developing economies and markets for goods and services beyond agriculture. The WTO has calculated that, in 2000, some 12 million jobs in the United States were supported by export relationships; jobs that involve some export component on average pay 13 percent higher than a purely domestic wage. Jobs in the global high-tech or knowledge economy—the workforce of the future—pay 34 percent more than jobs in less-skilled
industries. Similarly, the Institute for International Economics in Washington, DC, reports that the U.S. economy enjoys $1 trillion in extra wealth every year thanks to previous trade liberalization measures and the resulting technological innovations and competitive gains. Doha, in short, promises a win-win scenario.
It should be recalled that the reason “development” was tacked onto the Doha Round’s name was to reflect a global effort of solidarity and goodwill between nations—rich or poor, but all members of the WTO—and thereby increase global security. In Africa alone, a new global tariff system could enable millions to take up work, instead turning to arms.
At the same time, there is the potential threat from individuals within prosperous nations who have lost patience with the global imbalance. Harvard security expert John Henry Clippinger suggests that not only are we on the cusp of confronting continued violence and antagonism in the world, but we are moving to a new level of destructiveness that comes with the advance of sophisticated, compact, and relatively easy-to-use technology:
Technology is closing the distances between peoples, rendering them more interdependent, and hence, vulnerable to one another. Every privileged society has tried to contain their vulnerability to their poorer neighbors—the Romans with Hadrian’s Wall, the Chinese with The Great Wall, and the U.S. with its border walls with Mexico. Such barriers were but futile gestures, signifying a failure to comprehend and come to terms with their changed circumstances. At a time when expertise can circumnavigate the globe at the speed of light, when hobbyists can assemble a cruise missile from readily available consumer components, when college students can hack lethal, highly contagious pathogens, there are no secure ‘security perimeters.’
And as we can no longer build walls, we must now look to build relationships based on the mutual benefits borne of equitable trade. Doha is surely the best way forward. The challenge, of course, is how to ensure equitable conditions of trade, but necessity has provided a first step—or a shove—towards the establishment of greater global coordination and cooperation in the interest of security. The urgency for a successful Doha agreement now cannot be minimized.
Yet a very sober question still remains to be asked: what if the Doha Development Round, after seven long years of negotiation, collapses completely? What next?
The first priority must then be to help the world’s poor—those who would be most affected by a failed attempt at Doha—meet at least their basic food needs. This will require not only a more open and liberal marketplace, but a greater effort from wealthy nations to support and enable countries less well off to develop their own independent economies and means of sustenance. For this to work, however, wealthy nations must make a concerted effort to give back—in the form of infrastructure or education—as much as they take, and build viable, stable local economies.
With or without a Doha accord, we still must grapple with a number of global issues: from climate change to high oil prices to the crippling effects of the liquidity crunch within the banking sector. And as the world becomes increasingly interconnected and interdependent, it is beholden upon us to develop truly global solutions.
Our leaders, or the next generation of leaders, must advance effective and equitable mechanisms that can empower a greater portion of the world, and allow us to work collectively to address future crises. But this can only happen if we work to bring poor and developing nations into global economic, social, and security structures so that they, too, can begin to make a greater contribution. Such efforts will require the ability to adapt rapidly to change, to share knowledge and expertise across borders, and most important, they will require goodwill, on a very personal basis at every level of society and government.
Louise Blouin MacBain is the chairman of the Louise T. Blouin Foundation and the New Globalization Platform, part of the Global Creative Leadership Initiative.