Infected by the bilateral bug

By BRIAN FALLOW economics editor

On the long trek to a fairer world for New Zealand exporters, 2003 was a year of one step forward, two steps back.

The step forward was the reform, albeit limited, of the European Union's common agriculture policy (Cap). That gave it some room to manoeuvre in what remains the best hope on the trade liberalisation front, the World Trade Organisation's Doha Round.

But the subsequent abject failure of the talks in Cancun, Mexico, to advance the round at all was a long step backwards.

The other retrograde step has been the proliferation of moves to do bilateral trade deals, especially in Asia.

This noodle bowl of preferential deals could erode the will to pursue multilateral liberalisation, always the best chance of progress on agricultural trade.

WTO economists estimate that world trade expanded little more than 3 per cent last year, less than half the annual growth rates clocked up in the 1990s.

The EU reform package, though festooned with fish-hooks and encrusted with qualifications, carve-outs and delays, largely preserved the central thrust of the reforms sought by the European Commission: decoupling domestic subsidies from production.

The aim is to switch off production that occurs only to garner a subsidy.

In theory that should reduce the amount of produce coming off European farms that either has to be protected from cheaper imports or which is liable to be dumped on world markets, with a further subsidy.

For a while it had looked as though opponents of reform, led by the Cap's largest net beneficiary, France, would prevail, leaving the EU with no negotiating coin to bargain with in the Doha talks in Cancun in September.

Those talks marked the emergence of a new force, the G20, a grouping of developing countries including such heavyweights as China, India and Brazil, to challenge the agricultural protectionism of Europe, Japan and the United States.

The Europeans for their part sought concessions from developing countries on the "Singapore issues" of competition policy, the environment, government procurement and trade facilitation (customs procedures and the like).

Even after the Europeans pulled the first two from the table, the talks broke down in acrimonious failure.

By the end of the year there was little perceptible progress towards restarting the round.

Trade Liberalisation Network executive director Suse Reynolds thinks the Doha Round will just "simmer" through this year because of looming elections in the US and India and a change of European commissioners, including Trade Commissioner Pascal Lamy and Agriculture Commissioner Franz Fischler.

Reflecting on the failure at Cancun, WTO Director-General Supachai Panitchpakdi said it had served as a wake-up call.

"While some non-governmental organisations - and even some delegations - briefly celebrated the collapse in Cancun, I can assure you no one is celebrating now. There is a sharp realisation that the US$1 billion a day spent on farm subsidies in OECD countries will continue unabated," he said.

"The inequities in the trading system that have become apparent will not be addressed."

Bilateral and regional deals were no substitute for global trade liberalisation, Supachai said.

"They are by their very nature discriminatory. None has really succeeded in opening markets in sensitive areas like agriculture.

"They add to the complexities of doing business by creating a multiplicity of rules," he said.

"And the poorest countries tend to get left out in the cold."

But they are proliferating. A count by the OECD's trade directorate identified 142 such agreements, a third of them concluded in the past three years, plus another seven awaiting ratification.

The OECD said another 50 were planned, of which more than 30 involve countries in Asia, including Japan, China, India and Korea, all countries which had previously eschewed regionalism.

By next year, more than half of world trade will be covered by bilateral or regional agreements, the OECD estimates.

As well as closer economic relations with Australia, New Zealand has a bilateral trade agreement with Singapore and is in talks to extend that to a three-way deal with Chile.

Preliminary work on a bilateral agreement with Thailand is under way. China and New Zealand have agreed to exploratory talks.

But Washington has made it clear a bilateral free trade agreement with New Zealand is not on its crowded agenda.

Professor Robert Scollay, a trade policy expert at Auckland University, warns of the emergence of a hub-and-spoke pattern where a lot of small countries seek bilateral agreements with a large one.

"The US is clearly pursuing that kind of agenda," he said.

The bilateral approach presents two problems. One is trade diversion - preferential access to, say, the US or Japanese market for one country disadvantages its competitors (who may be more efficient) while creating a disincentive for the preferred country to develop other markets that might in the long run be more lucrative.

The other problem is that all the bargaining power lies with the hub.

The third-party bilateral negotiations of greatest interest to New Zealand, those between Australia and the US, failed to meet their end-of-year deadline for conclusion.

"What I hear is that the US proposal to Australia does not extend to eventual free trade in agriculture but involves a gradual expansion in quotas," said Scollay.

"'The question for us is, what happens to other quotas? Do they try to compensate for expanding Australian access to their markets by cutting back on other countries' quotas?"

Japan, another hub, refuses to include agriculture in any bilateral trade deals. Its talks with Mexico have broken down on this point.

"If Japan finds it can make progress on bilaterals on a fairly wide front without including agriculture, it is a huge disincentive for them to go anywhere near the WTO," Scollay said.

"On the other hand, if agriculture becomes the sticking point in these negotiations - including the Free Trade Area of the Americas - then the pressure will go back on for something to happen in the WTO."

Bilateral deals could at best provide limited progress on agricultural trade distortions.

"You can resolve market access but if you do that without dealing with domestic support and export subsidies, it can be a very risky arrangement. Mexico is finding that out.

"Under Nafta [the North American Free Trade Agreement] it has opened its market to US agricultural exports but these exports, and the farmers who produce them, are heavily subsidised. So the Mexicans are fighting a very unfair battle."

The "jobless" nature of the US economic recovery and its trade and balance-of-payments deficits have heightened concerns about job losses in manufacturing and increasingly in service industries to low-wage countries.

Scollay said there had been a complete breakdown of consensus in Congress for any kind of trade liberalisation.

"It's going to be very difficult for the US to make any kind of credible offers."

US trade analysts were saying the ball was now in other countries' courts - to make it offers it could not refuse.

"But the mood of developing countries is clearly that they have had enough of one-sided deals and they want the US and EU to be more forthcoming.

"As long as that standoff continues it is hard to see any progress."