"Nothing is more usual, among states which have made some advances in commerce, than to look on the progress of their neighbours with a suspicious eye, to consider all trading states as their rivals, and to suppose that it is impossible for any of them to flourish, but at their expence."
--David Hume, Of the Jealousy of Trade
These are days of optimism about U.S. and world economic prospects. The U.S. economy is poised for strong recovery, most Wall Street economists say. The optimism seems as misplaced as it was in 1999 when the U.S. economy was generally described in miraculous terms yet was on the verge of downturn and two years short of outright recession.
In many regards, the U.S. economic picture now looks far worse than it did in 1999. In 1999 there was a stock bubble that Federal Reserve Chairman Alan Greenspan had, it appeared, inadvertently allowed to build. Four years on, resorting actively to unsustainable bubbles in asset prices has become the mainstay of U.S. policymaking. What Greenspan refers to as "solid gains" in housing prices are no more than a bubble in the prices of households' most important financial asset. Cheap money has also helped to re-inflate stock prices. Meanwhile, the Bush Administration's fiscal policy, which floods the American consumer with windfall cash, seems just as unsustainable. The counterpart of these policies is the precipitous fall of the dollar.
All the mistakes are part of a general loss of direction in economic policymaking, an abandonment of ideas of sound money and honest reward. The United States is now pursuing a new goal in policymaking: the permanent consumer boom, instant wealth created by windfall. Perhaps this is a true measure of America's decline: immediate gratification has become not just the vice of the couch potato but that of Washington, dc.
This makes a mockery of American attempts to advise other countries on economic policy. The "Washington Consensus" emphasized sound fiscal and monetary policy, privatization and faith in free markets. It is dead because Washington has abandoned these policies. This will harm not only the U.S. economy but the world one as well. The world no longer has a leader in economic policymaking. Nowhere is that lack of leadership more evident than in trade.
The failure of the ministerial summit meeting of the World Trade Organization (WTO) in Cancun, Mexico in September was prepared by the prior positions adopted by the main players: the United States, the European Union and developing countries. The positions of all were characterized by hypocrisy. Perhaps the greatest hypocrisy, however, was that of the United States, which preaches the merits of free trade more strongly than almost any other country and yet spends tens of billions of dollars to prevent its own markets from being free and has taken fresh measures in recent years to discriminate against other countries' producers.
The biggest blow to the Doha Round was struck in 2002 when a new farm bill was passed by the U.S. Congress. The new bill authorized, in the words of the U.S. trade representative, Robert Zoellick, "up to $123 billion in all types of food-stamp, conservation and farm spending over six years."
The U.S. position--and that of the EU--is immoral. Developing countries that depend utterly on agriculture are forced to compete with a U.S. agricultural sector that is hugely subsidized. Yet the United States constantly urges countries to open their own markets and allow freer access to U.S. goods and services. The blatant hypocrisy is doing nothing to win the United States friends and allies and is therefore a political problem as well as an economic one. And there are many other problems with it. The subsidies for the agricultural sector add to the U.S. budget deficit. The protection granted to U.S. producers means consumers pay higher prices. Poor countries that might earn more in exports and therefore be able to import more from the United States remain impoverished--to their detriment and to that of the United States and other countries.
Those who fail to appreciate what harm this is doing might have done well to attend a small meeting of west African cotton producers at the WTO Cancun summit, shortly before the meeting's collapse, in which these producers reacted to the draft text that had then been drawn up. It was hard to judge which was greater: their sense of betrayal or their anger.
One of the delegates pointed out that the cotton farmers he represented earn less than $1 per day; and that, internationally, the argument that these farmers were producing competitively and were the victims of subsidies and restriction of trade in the developed world had been well accepted. And yet, in the view of these delegates, there was nothing in the text to encourage them, no sign that the developed world was ready to give ground. The unhappiness culminated in this lament from a delegate from Senegal: "What is the point of us Africans coming to summits such as this when nothing is going to be done?"
This was an indictment of the hypocrisy of the developed countries, a condemnation of what David Hume called "narrow and malignant policies" which, were they to meet with success,
"should reduce all our neighbouring nations to the same state of sloth and ignorance that prevails in Morocco and the coast of Barbary. But what would be the consequence? They could send us no commodities: They could take none from us."
Two and a half centuries after Hume's essay, how is it possible that the lessons have not been learned; that the agricultural exports of countries such as Senegal and Mali and Togo, or Bangladesh or Brazil, and countless other poor countries, are blocked from world markets so that these countries fail to thrive and can therefore import little from the developed world?
What the United States and the European Union bring to trade meetings at present is not a willingness to do what is right but a determination not to give anything away. The tactic on which the big countries rely is brinkmanship. Gather the countries together, put forward a mean negotiating position, see which countries are most opposed, work individually on countries whose opposition might readily be worn down by a favor here or a favor there; make concessions, as small as possible; bully; use the weight of economic size and geopolitical clout; get a signature on a piece of paper that the developing country will eventually have cause to regret.
In Cancun this approach failed in part because developing countries have become more and more aware of the hypocrisy of the United States and the European Union. They realize that subsidized agriculture in developed countries is now the biggest obstacle to free trade. In addition, they have learned bitter lessons from experience. They have made agreements in the past and been deceived. For example, as part of the Uruguay Round of trade negotiations, completed in 1994, the United States committed itself to opening up its textile sector. But, according to Daniel Ikenson, an expert in trade at the Cato Institute, "80 percent of the products subject to quota in 1994 still are." Tricks, legal maneuvers, and the letter of manipulated laws have been used against developing countries, embittering America's relations with the developing world.
This is not to say that the United States is entirely to blame for the failure of world trade talks. The European Union and the developing countries are also hypocritical. Average tariffs in developing countries are very high; averaging about 30 percent in India, for example, compared with less than 5 percent in developed countries and Indian industry is heavily protected. Indian consumers pay the price. Predictably, Indian industry fails to become competitive enough to export. Moreover, the tariff barriers apply between developing countries as well and help to keep markets small and segmented, strangling the growth of larger, internationally competitive companies.
In Europe, meanwhile, we might see President Jacques Chirac of France as Bush's twin. In late 2002 Chirac persuaded Germany to agree to defer until 2013 any meaningful attempt to reduce the subsidies paid under the European Union's Common Agricultural Policy (cap). In June 2003 a modest reform was undertaken to de-link subsidies from production (this might help to curb EU over-production). But overall subsidy levels were not cut; nor were export subsidies reduced. The cap has a direct annual cost to EU taxpayers of some $40 billion and an indirect cost via higher prices for food that is several times greater. It serves to redirect European taxpayers' money to the agricultural industry while depriving developing countries of a market. The cap is an obscenity. The United States uses it as an excuse to preserve an obscenity of its own: "America will not cut agricultural support unilaterally. But America's farmers and Congress back our proposal that all nations should cut together", wrote Zoellick, in an article in The Economist in December 2002.
The U.S. position on major reform of trade might therefore be described as "after you, Europe." It doesn't say much for Bush's capacity to lead. Yet to picture things in this way would be charitable. Bush has not just failed to lead. He has actively damaged the prospects for world trade and growth.Essay Types: Essay