- The Washington Times - Wednesday, December 14, 2005

Tuesday marked the official start of the Hong Kong ministerial of the World Trade Organization’s (WTO) Doha Development Round. The commitments to date are not sufficient to achieve meaningful gains from trade liberalization at Hong Kong. Trade ministers have failed to resolve differences about how to reform various protections for agriculture. This impasse has impeded negotiations in other areas, including manufactured goods and services. Yet, the ministerial is still important because it will set the tone for further progress that must be achieved in 2006.

The potential economic gains to the world from further trade liberalization are enormous. Global free trade in merchandise alone would generate over $290 billion in global income each year, according to a static estimate by the World Bank. While both developed and developing countries would enjoy income gains, the largest benefits would accrue to the developing world, which would find new markets for their agricultural products and raw materials.

Merchandise-trade liberalization would be particularly beneficial for the world’s poor, with the potential to lift hundreds of millions of people out of poverty. Debt relief and foreign aid can help reduce poverty, but trade is a far more powerful tool. The annual payoff to developing countries from merchandise-trade liberalization would be at least $140 billion, which exceeds last year’s record high level of development assistance, including debt relief, of $91.9 billion. Agriculture liberalization is particularly important, since roughly 75 percent of the world’s poor live in rural areas. An open global market for agricultural goods would lead to greater crop specialization, increased agricultural exports, and higher farm incomes in poor countries.

The potential gains from liberalizing trade in services may be even larger. According to the University of Michigan, global free trade in services would generate an additional $1.5 trillion in global income each year. Some of this benefit would accrue to industrial countries that produce a range of high-value services. For example, the United States would enjoy an additional $516 billion in annual income, or over $7,000 for the average American family of four. But large gains would also accrue to the developing world, the potential users of sophisticated banking, educational, financial, transportation and other services.

These immense potential gains partly reflect the fact that services trade has not enjoyed nearly the extent of liberalization achieved for merchandise in past trade rounds. Thus, services face some of the highest remaining trade barriers, such as licensing issues and discriminatory access to distribution networks. The world needs to make progress in liberalizing merchandise trade in the Doha round, not only because of the direct benefits, but because progress here will open the door to liberalizing services, which has the potential to provide the biggest gains of all.

What needs to be done to realize all these gains? A good start would be for negotiators to remember two important lessons of history.

The first lesson is hopeful: Previous decades of trade negotiations, though at times difficult, delivered substantial benefits to the world. Countries that have chosen freer trade, especially in conjunction with other market-oriented policies, have tended to enjoy higher levels of income and economic growth. Some of the greatest achievements to date involved the shift in policy stance among developing countries away from decades of special-interest protection and towards greater openness. Protection tends to inhibit, not develop, the ability of firms to compete in international markets. Exposure to global best practices induces better firm performance through access to technology, access to capital and competitive pressures — in both developed and developing countries alike.

The second lesson is sobering: There is no meaningful alternative to Doha success. Today, it is often argued that information technology is integrating the world so tightly that policy makers can do little to impede the “death of distance.” The same arguments were heard in the early 20th century, with the world drawn closer by railroads, ocean-liners and the telephone. But policy makers turned drastically inward in the late 1920s and early 1930s, with a worldwide wave of tariff increases and competitive currency depreciations. These policy choices contributed to a collapse of global trade volumes by over two thirds and, more broadly, to the Great Depression and increased poverty.

A great deal is at stake in the current WTO round. Particularly in developing countries, the higher incomes that can be earned through enhanced trade will lead to better education, a better environment and other improvements in well-being. The negotiators must not lose sight of the greater goal: rising living standards across the world — for rich and poor alike.

Matt Slaughter is a member of the president’s Council of Economic Advisers.

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