Beggar Thy Neighbor
In the WTO, it’s rich versus poor...

...and poor against poor

Posted on May 7, 2007
By Greg Rushford

You could call this my Rip Van Winkle column, with apologies for use of the first-person singular. After eleven years of the monthly grind and deadlines involved with putting out the printed edition of this publication, I called it quits with the December 2005 issue. I mostly took last year off from the world of international trade politics, writing a few magazine and newspaper articles, but mainly reflecting, reading, and traveling. Now, with the launch of the online version of this journal, let's pick up where we left off: zeroing in on why, in the World Trade Organization's ongoing Doha Round of trade liberalizing negotiations, simple proposals to reduce all non-agricultural tariffs to zero turn out to be, well, not so simple.

In the Doha talks, the spats between rich countries -- Europe against America on farm subsidies that distort global trading patterns, to cite the most prominent example -- get most of the publicity. But when talk turns to eliminating tariffs on manufactures, which is the central issue that has divided advocates of free trade from protectionists since the days of Adam Smith and David Ricardo some two centuries ago, the rich countries are pitted against poor countries. Beyond that, poor countries are also at odds with other poor countries. It's a beggar-thy-neighbor world.

The fastest way to get back up-to-speed to see why the Doha process is still struggling is first to look back briefly to December 2005. For six intense days that concluded on Dec. 18, trade ministers from the WTO's 149-member countries -- now 150, with the January 2007 accession of Vietnam -- met in Hong Kong to try to get the contentious Doha talks back on track.

The news from Hong Kong as 2005 drew to a close was that the rich countries pledged to cut tariffs to zero for 97 percent of products that the world's poorest countries export. The headlines drew attention to the fact that when the Doha Round was launched in Doha, Qatar back in November 2001, it promised to be a "Doha Development Round" that would give millions upon millions of workers in impoverished corners of the globe greater incentives to trade their ways out of poverty. So the promises of massive tariff cuts that were made in Hong Kong sure sounded like the world's poor would (finally) be given a decent break. But there was a catch. Enter the U.S. textile lobby, which has its own agenda with three top priorities: protectionism today, protectionism tomorrow, and protectionism the day after that.

Then-U.S. Trade Representative Rob Portman spent most of his days (and long nights) behind closed doors in Hong Kong's Convention and Exhibition Center insisting that the United States of America could not afford to give two of the world's poorest countries, Cambodia and Bangladesh, duty-free access to all of the clothing that they export to rich countries like the USA. The domestic textile crowd basically fears competition from any country where (mostly) women are skilled in sewing clothes -- even women from the likes of Cambodia and Bangladesh.
The United States has very low tariffs that average less than 2 percent on most foreign manufactures. But America maintains high tariffs on clothing that mainly range from some 11- to 36 percent. While cutting tariffs for 97 percent of the products that the poorest countries export sounds fine, the obvious practical problem is that preserving high tariffs on the remaining 3 percent directly penalizes exports that countries like Cambodia and Bangladesh specialize in, such as sweaters, pants, blouses, underwear, and so forth. So the smaller countries left Hong Kong not really knowing whether the Doha Round -- if and when it is finally concluded -- would offer them truly meaningful access to the clothing markets of the economic superpower of the world.

There is an obvious moral case to be made here. As Edward Gresser of the Progressive Policy Institute (the think tank for the pro-trade faction of the Democratic Party) recently noted in testimony before a senate subcommittee, "U.S. tariffs are now minimal for wealthy countries and energy producers, but very high for low-income countries in Asia and the Muslim world."

Gresser had a table that explained how this works to the lawmakers. In 2006, Cambodia's exports of $2.2 billion to America were hit with $367 million in tariffs; that's a 16.9 percent tax. Bangladesh, with $3.3 billion in exports to the U.S., was taxed at 15.2 percent, which brought $496 million into U.S. Treasury coffers. By contrast, France exported $36.8 billion last year to Americans at a tariff rate of 1 percent, which amounted to $367 million -- the same as Cambodia. The United Kingdom's $53.5 billion in exports across the Atlantic were taxed at $430 million, which translated into a 0.8 percent rate. As Gresser told the senators, "the high tariffs on cheap clothes sewn in Cambodia and Bangladesh mean goods from these countries face higher tariff penalties than the much larger volume of imports from their old colonial powers, France and Britain."

So why would Republican U.S. trade officials like Rob Portman and his successor, Susan Schwab -- as did their predecessors in the Democratic administration of Bill Clinton, and as Clinton's Democratic and Republican predecessors did -- defend such an obviously unfair and morally flawed tariff schedule? The answer isn't because any of these people like it (although one has to speak privately with American trade officials about this after they have left office). The bottom line is political: U.S. trade negotiators have only so much political room to maneuver. It may be distasteful to carry political water for the U.S. textile lobby, but every U.S. Trade Representative has to count votes on Capitol Hill to pass any measure that would liberalize trade. And when and if the Doha Round comes to an increasingly protectionist Congress for approval, the votes of textile-state lawmakers from the Carolinas and other southern states will matter.

This explains why the WTO negotiations put mighty America against some of the poorest countries on the planet. But the idea of eliminating tariffs on clothing also divides the poor countries.

In Hong Kong back in December 2005, the American position against extending more tariff generosity toward the likes of Bangladesh was supported by Pakistan (of which Bangladesh was once a part until Dacca wrested its independence in 1971). Although Pakistan is only a notch above Bangladesh in economic development, the Pakistanis fear that giving such truly impoverished countries total duty-free access to U.S. clothing markets would cut into Pakistan's own rising clothing export opportunities.

And when it comes to looking askance at rising exports of other countries, from Africa's vantage point, Bangladesh and Cambodia look more like economic tigers.
In 2005, the U.S. imported $2.4 billion of textiles and apparel from Bangladesh, according to U.S. Commerce Department figures; that figure rose to $2.9 billion last year. Cambodia exported $1.7 billion in the rag trade to the U.S. in 2005, and in 2006 sold Americans $2.9 billion in textiles and apparel. By comparison, all of Sub-Saharan Africa exported $1.4 billion in clothing to America in 2005, and only $1.3 billion last year.

Thanks to the Africa Growth and Opportunity Act, the Africans already enjoy duty-free treatment on the clothes they sell to the United States. From Africa's point of view, extending the same preferences to larger competitors in Asia might be great news for the Asians that are beginning to prosper --- but very bad news for sub-Saharan Africa, which is getting poorer. Namibia's clothing exports to the U.S. in 2005 and 2006, for instance, fell from a miniscule $53.2 million to $33.2 million. In a country where the average life expectancy is 43.11 years, and roughly one fifth of the people are HIV positive, Namibia has enough problems without having to worry about losing any opportunities to trade with America thanks to AGOA preferences.
The story remains the same in other African countries. The Lesotho Textile Exporters Association did not pull punches in a March 15 letter to the office of the U.S. trade representative in reference to demands from Cambodia and Bangladesh for duty-free treatment. "In this regard we are especially concerned with the fact that garment firms in Bangladesh and Cambodia will be now given 0% duty access to the USA," wrote association President Jennifer Chen. "Firms in these countries are already our competitors -- the fact that they could be given 0% will mean that there will be a significant erosion in the value of the AGOA preference."

Jaswinder Bedi, the chairman of the African Cotton & Textile Industries Federation, has argued to the USTR that while U.S. apparel imports from Bangladesh and Cambodia shot up 40.6% and 34.3%, respectively, between 2004 and 2006, Sub-Saharan Africa's exports of clothing to the U.S. fell by 25.5 percent.

Currently there is a certain amount of diplomatic activity throughout the African Union on the future of trade preferences. Part of the Africans' focus is on Africa's position in the multilateral Doha negotiations. The Africans also remain concerned about their future under bilateral preference schemes like AGOA with the U.S. They also are trying to cope with changes in various trading preferences that have been extended by Africa's former European colonial masters -- preferences that often haven't worked as advertised. Moreover, there is new diplomatic interest in new preferences that are being dangled before Africa by China. Beijing is clearly positioning itself as a more trustworthy economic partner that brings no colonial baggage to the table, and one that isn't prone to lecturing about human rights and democracy.

As the evolving diplomacy isn't receiving the close attention in the press that it deserves, I'm flying to southern Africa next week to try to learn more about what's going on.

Stay tuned.