It is a grotesque irony that the US government and some other developed economies pressure other countries to open their markets while keeping their own closed. By practicing protectionism at home and demanding that other economies be open, there is little wonder that there are so many skeptics about the benefits of free trade.
Distortions introduced into the global system of trade by protectionism impose enormous costs on most of the developing world and on the taxpayers of the developed world. As it is, a United Nations Conference on Trade and Development study reveals that reduced protectionism in developed economies would allow developing economies to export an additional US$700 billion each year. The impact of such momentous changes in trading patterns would do much more than a substantial increase in aid, even combined with total debt relief.
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During his recent visit to Beijing, President George W. Bush urged China to live up to its pledges as a new member of the WTO and promote free trade. He was urging China not to obstruct American farm products using rules on bio-engineered foods or to lag in its promised enforcement of WTO pledges to protect intellectual property rights. China's has proposed rules on bio-engineered foods that threaten US$1 billion in annual US soybean sales.
Meanwhile back at the ranch, the US has decided to impose trade restrictions on steel by hiking duties up to 30 percent. By erecting such barriers, the EU is likely to respond by invoking measures to protect its steel market against an expected surge of imports that would have been denied access to America.
Unsurprisingly, the move has angered most other steel exporting countries. Even so, many of these countries continue to play dirty with steel by providing subsidies and stealth assistance for their steel producers.
The argument that the US steel industry needs temporary tariffs while it reinvests in new technology so it can compete against foreign producers is specious and illogical. Indeed, it is an argument for permanent tariffs since technology improves continuously.
In all events, US restrictions are likely to be deemed illegal under WTO rules because its market has experienced falling imports for several years. The WTO only allows such restrictions when there are sudden sharp increases in imports.
It is true that the larger producers in the US steel industry cannot compete, but it is because of resistance to increasing efficiency to cut costs or closing down of outmoded plants. While US-made steel costs between US$280 and US$310 per tonne, it is produced in Europe for US$270, US$260 in Japan and as low as US$180 in Latin America.
Most of the market share that the large producers have lost in recent years has been due to the US minimills that are smaller and more flexible. More importantly, minimills are more productive and have lower costs, to a considerable degree due to the fact that their labor forces are not unionized. So, it is the producers with high costs arising from union pressures that are demanding tariff protection.
Unfortunately, distortions in global trade do not stop with tariffs on steel. Most governments in the developed economies pay subsidies to certain producers that provide them with artificial cost advantages. Considering only agricultural subsides, farmers in OECD countries receive over US$360 billion a year, almost a US$1 billion each day. In turn, the subsidized commodities account for nearly one-third of global trade in wheat, vegetable oils, and meat products. This pits under-capitalized farmers in the Third World against competitors in rich countries who have access to the most advanced agricultural technologies.
An OECD report indicates that subsidies granted through the CAP in 1998 were a trade barrier that imposed an effective tax of 82 percent on imported foods. This greatly exceeds the average of 59 percent for OECD countries. US agricultural protections act as an implicit tax increase of 28 percent while in New Zealand it amounts to only 1 percent.
Another ruse that is becoming increasingly popular is to invoke "anti-dumping" measures to restrict the inflow of cheap imports, such as in the case of steel in the US mentioned above. Other tactics include quantitative restrictions and using technical standards or scientific justification to exclude imports.
One egregious offense is in the area of protection and subsidies paid to US and European producers of sugar. Since most of the poorest countries in the world grow sugar cane, being closed out of these markets ensures that they will live in continued poverty.
While growers and processors seek protection from imported sugar, their actions do considerable harm to consumers, taxpayers and food producers. For example, US consumers must pay about US$2 billion more each year for products containing sugar. And price supports encourage overproduction that requires US$1.4 million of taxpayers' money each month to store 1 million tonnes of excess sugar.
Unfortunately, politicians in developing economies create similar policies. It turns out that consumers in countries that produce sugar pay the highest prices in the world for the sweet stuff. In the Philippines, there are tariffs of 50 percent to 65 percent on sugar imports. This means that Filipinos pay more than the world price even when there is insufficient domestic production.
Removing distortions from the global trading system could occur by requiring that all trading nations follow a few simple rules like those envisaged under the WTO. Unfortunately, politicians allow international trade to become captive to domestic pressure groups.
It is bad enough that countries that construct protectionist barriers create fewer new local jobs and the living standards for all domestic workers will be lower. At the same time, it inflicts costs on the poorest countries. Politicians in the developed economies should live by their rhetoric about free trade. Ending protectionism will provide an economic stimulus for all countries.
Christopher Lingle is global strategist for eConoLytics.com and author of The Rise and Decline of the Asian Century.
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