Global Trends by Martin Khor

Monday 4 August 2008

Why the WTO talks collapsed

The WTO talks in Geneva collapsed last week, apparently because countries could not agree on the terms of a special safeguard to be used during a surge of farm imports.  But was there another more genuine reason?   And what will happen next?

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After the collapse of the World Trade Organisation’s mini-Ministerial talks in Geneva, government officials and the Secretariat are picking up the pieces so as to save the Doha negotiations or at least salvage some parts of it.

They are still recovering from the shock of the breakdown of the talks that took place on 29 July after a roller-coaster experience of nine days.

Many delegates expressed regret at the failure.  Malaysia’s representative to the WTO, Ambassador Muhamad Noor Yacob said he was disappointed because it meant an opportunity lost for reducing the developed countries’ agricultural subsidies, and also because Malaysia would have had more export opportunities if the tariffs were reduced.

Although some 40 Ministers were invited to the talks, most of the negotiations were conducted by only 7 Ministers (from the United States, European Commission, India, Brazil, China, Australia and Japan) plus WTO Director General Pascal Lamy.

Progress had been made on a number of issues, but on several of the key issues the talks had been stuck. A compromise draft by Lamy to the G7 had a fragile status, with India and China not agreeing to important parts of it. 

Meanwhile, frustration was building up among the 30 or more non-G7 Ministers who were specially invited by Lamy to the WTO, only to find themselves waiting for days in the wayside, while the G7 met.

When the end came, the US and others pinpointed Special Safeguard Mechanism (SSM) as the sticking point of the entire negotiations.  Most developing countries wanted this  mechanism to protect their farmers from sudden surges of agricultural imports.

The SSM would allow them to raise tariffs above the bound rate if import prices of agricultural products fall below or the volume rises above certain levels.

The US Trade Representative Susan Schwab tried to take the high ground by proclaiming that it was preserving the past 30 years’ gains of the trading system from the protectionists led by India and China which it accused of wanting to hike up their tariffs.

It was part of a concerted attempt by the US to shift the blame of any collapse onto India and China, by portraying them as selfishly seeking new protectionist devices.  In fact a strong SSM had the support of about a hundred developing countries.

Insiders at the G7 meeting were surprised at the tenacity of Schwab in insisting on an unreasonably high trigger of 150% (of the base import volume) before the SSM could be allowed to raise duties above the bound levels prevailing now.

Lamy tried to break the SSM deadlock by proposing a new draft, but this was rejected by the US.  On Tuesday morning, officials of the G7 laboured to produce an alternative SSM model, which they presented to their Ministers.  Schwab again rejected the new draft, and this sank the talks.

Many Ministers and diplomats are speculating that the SSM was not the real issue that was irreconciliable.  In the most widespread view, the US really did not want to face the cotton issue, which was next on the agenda once SSM was settled.                  

Since the US had agreed to cut its overall trade distorting farm subsidies by 70%, it would have to reduce cotton subsidies by more than that as it had been agreed that cotton subsidies be cut more deeply than the average rate.

The 2008 US Farm Bill having planned that cotton subsidies be maintained or increased in the next five years, it would have been difficult or impossible for Schwab to offer a plus-70% cotton subsidy cut.

Without a good cut in subsidies, US cotton would continue to be sold at artificially cheap prices, thus depressing the trade and income of poor African cotton growers.

The failure of the WTO talks would then have been placed squarely on the United States, and it would have been seen as a villain protecting the wealth of a few thousand cotton farms while millions of African cotton farmers would continue to languish in poverty.

This suspicion that the US wanted to avoid the cotton embarrassment is the backdrop to the comments made by several Ministers of developing countries in their press conferences that SSM could not have been the real cause of the talks breaking down, but rather the scapegoat picked on by a major player in an attempt to shift the blame on to another issue and on other countries.

After all, despite Schwab’s portrayal of the protectionist potential of the SSM, the US itself is a frequent user of safeguards. It was a case of the pot calling the kettle (or rather the potential future kettle, since the SSM does not even exist yet) black.

As the Indonesian Trade Minister Mari Pangestu, who led the fight for the SSM, put it:  “It is like accusing us of a crime that we did not commit.”

As the dust settles, the diplomats and secretariat officials remaining in Geneva are pondering over the next steps.

What will happen when the WTO comes back from its August break?  No one can tell at this moment.  The speculation is that some meetings will continue.  But the spirit is gone from the talks, because the U.S. will be preoccupied with its Presidential elections.

The expectation is that nothing can happen until the new US President and the new Congress settle in next year.  By then there may also be a change in government and Trade Minister in other countries as well.

It could be difficult for the WTO talks to re-start on the same basis as before, and they could just fade away.  But the WTO and its on-off talks have been resilient in the past.  Who knows, the off button may switch to “on” again one day.