December 13, 2005

December 13, 2005 | WebMemo on Trade, Economic Freedom

WTO Hong Kong Meeting Deserves America's Support

On December 13th, the latest ministerial meeting of the World Trade Organization's (WTO) Doha Round of free trade talks kicks off. The potential for negotiators to achieve significant gains in advancing free trade looks grim. Over the last several weeks, several countries have threatened to pass over any free trade package that may come out of Hong Kong if their negotiators make substantive offers without first receiving concessions from other countries. Even U.S. Members of Congress have stated that "domestic priorities, not the world's trade negotiators" will write the next U.S. farm bill and influence American immigration policy, two issues under consideration. This intransigence is a mistake. Free trade benefits consumers the world over, and strong U.S. leadership is necessary to ensure that the pace of liberalization, which has created so much prosperity, does not slow.


International trade negotiations alone should not determine domestic policies, but there is no reason to ignore ideas about how to improve those policies. America is not bound to the outcome of trade negotiations until Congress debates the merits of the plan and votes to implement the new rules. Along the way, Members of Congress might discover new ideas about how America can benefit from changes in the way it conducts its agricultural and other domestic policies. Such opportunities will be lost if those ideas are never heard.


Unfortunately, the combined effect of the constraints placed on negotiators by the world's governments will be to undermine discussion and negotiation at this meeting of the Doha Round. No country can expect the world to concede to its demands if it is unwilling to offer concessions in return.


The Path to Prosperity

For over fifty years, the U.S. and the world have reaped the economic benefits of gradual liberalization in trade and investment. In November 2001, the WTO embarked on a new round of trade negotiations in Doha, Qatar-the so-called Doha Development Agenda (DDA). The round's agenda includes some of the most politically sensitive and difficult trade issues for member countries, such as agricultural reform, further reductions in non-agriculture tariffs, the expansion of nonagricultural market access, WTO institutional rules and procedures, and developing-country issues.


There is much at stake. Freeing trade would stimulate economic growth, create better jobs, encourage innovation, and improve living standards for millions of Americans.

Failure to successfully conclude the DDA means significant lost economic opportunities for the U.S. and countries around the world. Numerous studies have attempted to measure these gains under various trade liberalization scenarios. While the results and methodologies differ, the studies consistently show real economic gains associated with further trade liberalization. Gary Clyde Hufbauer, at the Institute for International Economics, has calculated that moving from today's trade environment to one characterized by perfectly free trade and investment would generate an additional $500 billion in annual U.S. income, or about $5,000 per household per year. In a November 2005 study, Agricultural Trade Reform and the Doha Development Agenda, the World Bank estimated that the elimination of tariffs, subsidies, and domestic price support programs would boost global welfare by nearly $300 billion per year by 2015.


The Heritage Foundation's Index of Economic Freedom reinforces this evidence by clearly showing that countries implementing freer trade policies experience higher per-capita economic growth than countries maintaining barriers to protect themselves from global trade.


The Burden of Agriculture Protectionism

The primary stumbling block for the WTO Doha Round is the agricultural trade issue. While tariffs, quotas, subsidies, and other distortions in the trade of manufactured goods have been reduced or eliminated since the end of World War II, protectionist agricultural policies were allowed to remain in place until the Uruguay Round (1986-1994).


While the Uruguay Round did reduce agricultural tariffs, market access for agricultural products today remains much more restricted than for manufactured goods. Globally, the trade-weighted average agricultural tariff in 2001 was more than three times the average for other merchandise.


Around the world, subsidies supporting agriculture producers are a significant source of economic distortion. WTO members report subsidies totaling more than $221 billion per year.[1] This amount is a little more than 18 percent of the value that agriculture adds to the world economy.[2]


The most distorting trade barriers are agricultural export subsidies. The European Union relies most heavily on these, accounting for almost 90 percent of all export subsidies by WTO-member countries with reduction commitments.[3]


Trade protection is costly to consumers. Global barriers to agricultural trade artificially prop up domestic prices for food and food products, reducing the value of paychecks for families in distorted markets. According to a 2004 Organisation for Economic Co-operation and Development study, higher food prices due to U.S. farm programs forced American households to hand over more than $16 billion to domestic farmers over and above the cost of direct government farm subsidies.[4] The Office of Management and Budget forecasts that American taxpayers will fund $26 billion in direct agricultural subsidies in 2005.[5]


The burden does not end there. Barriers to agricultural trade also depress world prices of agricultural products, hurting farmers in developing countries by preventing their attempts to rise from poverty and improve their living standards. William Cline, at the Institute for International Economics, estimated that by removing trade barriers, developed countries would convey economic benefits to developing countries worth about double annual foreign aid transfers.[6]


Study after study reveals the price of protectionism is steep for both the U.S. and the rest of the world. Historically, the U.S. has led the charge to reduce trade barriers through the WTO. This gradual liberalization must continue if the world is to reap additional profits from free trade. U.S. leadership in the WTO depends not only on the effectiveness of America's trade negotiators, but also on Congressional support. Domestic priorities like boosting economic growth and jobs, opening foreign markets for American farmers and manufacturers, and increasing living standards all mesh with the priorities of U.S. trade negotiators.


The Way Forward

The U.S. Trade Representative (USTR) has submitted a solid plan for progress in the WTO. Congress needs to bolster the bargaining position and authority of the USTR in the Doha Round by allowing America's negotiators to explore opportunities to remove trade barriers and by remaining open to the results of negotiation. The American economy depends on international trade. Successful conclusion to the current WTO round and implementation of beneficial free trade agreements will give America a brighter future.


Daniella Markheim is a Senior Policy Analyst in the Center for International Trade and Economics at The Heritage Foundation.

[1] Congressional Budget Office, "Policies that Distort World Agricultural Trade: Prevalence and Magnitude," August 2005, Table 12, p. 22.

[2] Based on calculations using data from the World Bank World Development Indicators database, at (October 3, 2005).

[3] Congressional Budget Office, "Policies that Distort World Agricultural Trade: Prevalence and Magnitude," August 2005.

[4] Organisation for Economic Co-operation and Development, "Agricultural Policies in OECD Countries: Monitoring and Evaluation 2005," June 2005.

[5] Office of Management and Budget, Budget of the United States Government: Fiscal Year 2006, p.58.

[6] William R. Cline, "Effective Economic Growth for People: The Role of the Untied States," Center for Global Development, December 2004.

About the Author

Daniella Markheim Jay Van Andel Senior Analyst in Trade Policy
Center for Trade and Economics (CTE)