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Rich Man, poor Man

By Arvind Panagariya

Just prior to the Cancun WTO Ministerial, a compromise on access to medicines for poor countries had raised hopes that the Developed and the Developing could resolve their differences after all-and that the Doha Round might actually move forward. But the talks at Cancun have collapsed and the opportunity is lost. The collapse was in no small measure due to the unwillingness of developing countries to make credible market-opening concessions of their own, to match those they demanded from the rich  countries. This is tragic since such liberalization would have only benefited them-and helped open the markets of their partners.

Of course, Cancun is no Seattle. At Seattle, the WTO members tried and failed to launch a new round whereas at Cancun they have failed to move an ongoing round forward. The more apt analogy is with the failure in Montreal in 1988 when developed and developing countries had failed to advance the Uruguay Round. The round was, however, successfully  completed in 1993.  Ironically, differences between rich and poor countries on agriculture, which led to the collapse of the Cancun talks, were also at the heart of the failure at Montreal 15 years ago.

While the Doha Round is, thus, not in danger of being buried, the costs of the failure in Cancun are large for both developed and developing countries. The biggest cost may turn out to be a further acceleration of bilateral free trade areas. The EU already has so many preferential deals in place that all but six of its trading partners have a preferential rate that is better than the WTO rate. The U.S. has also accelerated the move toward bilateral arrangements: this can only get worse following the failure at Cancun.

The cost of this for some large developing countries-China, India, and Brazil to a degree-could be substantial. Already, they face discrimination in the European and U.S. markets. This will get worse. Progress at Cancun had offered one sure-fire recipe to these countries to put an end to the discrimination by bringing trade barriers down on a world-wide basis, thus killing the preferences within free trade areas at the source. If more bilateral deals get cut now, these countries will face increased discrimination against their products. Brazil may escape this if the Free Trade Area of the Americas is negotiated, but that remains to be seen.

But the failure to keep up the momentum for liberalization hurts all developing countries. Post-World War II experience offers compelling evidence that the countries that have grown rapidly are those that have taken advantage of the world markets by being open themselves. WTO negotiations offer them an opportunity to open the markets of their trading partners at the same time as they open theirs. Rich-country protection even in industrial products today applies with greater potency to products exported by the poor countries. This protection can be eliminated only through a reciprocal bargain within the framework of WTO negotiations.

For the U.S. and EU, the failure means that agricultural subsidies and protection will now take even longer to phase out. While the press has often focused asymmetrically on the cost these subsides impose on poor countries, the truth of the matter is that the greatest burden of these subsidies falls on rich-country taxpayers and consumers. The removal of subsidies is politically charged and a WTO agreement provides the best cover for it. But this will now have to wait longer. Rich-country farmers can, of course, rejoice in the failure.

The events in Cancun also signify a shift in the balance of negotiating power between rich and poor countries. Being at relatively similar levels of income, there has been generally a much greater harmony of interests among rich countries. Moreover, the presence of a few large players-the U.S., the EU and Japan-has made it easier for them to develop joint positions. On the other hand, being at very different levels of development, poor countries have had diverse interests. As a result, their bargaining power is generally diluted. For the first time, in Cancun, the bigger developing countries were able to find a common ground. The Cairns Group, which has been pushing for agricultural liberalization since the Uruguay Round, found two major allies in India and China.

The Cancun failure also points to the limits to pushing an expansive agenda in negotiations. The inclusion of intellectual-property rights in the WTO under the Uruguay Round at U.S. insistence was resented by developing countries. And therefore many of them squarely opposed the inclusion of the "Singapore" issues-investment, competition policy, transparency in government procurement, and trade facilitation (meaning cutting red-tape at the point where goods enter a country and providing information on import/export regulations). These issues found a qualified inclusion in the agenda at Doha at the insistence of the EU but turned into another stumbling block at Cancun.

The experience at Cancun also points to the danger of focusing asymmetrically on protectionism in the rich countries. International financial institutions and NGOs have promoted the view that it is wrong and hypocritical to ask poor countries to liberalize while the rich have high protection. Not only is protection in poor countries still higher than in rich countries in virtually all areas, such advocacy ends up strengthening the hand of the protectionists and weakening the ability of leaders in developing countries to "sell" liberalization to domestic constituencies.

The Wall Streeet Journal, Septemver 16, 2003