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New trade deal would boost world economy

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PARIS — Governments around the world face weakening economies and soaring food prices. Amid the hand-wringing, an important and immediate step they can take to help would be to agree on a new multilateral trade deal.

Freeing up trade in goods and services can give the world economy a powerful boost in terms of increased innovation and productivity. According to OECD (Organization for Economic Cooperation and Development) estimates, a 50 percent reduction in tariffs and other trade-distorting support in agriculture and manufactured goods alone would generate global welfare gains estimated at an annual $44 billion. Developing countries in particular stand to gain GDP per capita growth of 2 percent a year from full liberalization of tariffs

Yet still governments are hesitating, for all sorts of mistaken reasons. Delaying further trade liberalization will deprive hundreds of millions of people of the chance to build a better life.

Six decades of progressive multilateral trade liberalization under the GATT and WTO systems have brought considerable gains. In the twenty years that OECD has monitored agricultural policies in developed countries, nominal rates of agricultural price protection have more than halved. The volume of world merchandise trade is today 27 times what it was in 1950, compared with just an eightfold increase over the period in the value of world output. Industrial tariffs in developed countries have fallen from an average 40 percent in 1950 to less than 4 percent today.

But there is still more to be done. Curbs on farm output and exports are exacerbating the current food crisis. With prices of agricultural commodities at all-time highs, we have a unique opportunity in both developed and developing countries to cut trade-distorting farm support, open agricultural markets and free up productive capacity.

That route, rather than protectionism, is the way to address soaring food prices and slumping economies. Export restrictions and embargos may provide short-term relief to consumers in a given country, but they discourage farmers from producing more food in response to higher world prices. Similarly, protecting farmers with tariffs and other border restrictions means higher prices for consumers and reduced opportunities for competitive suppliers abroad. Isolating agricultural producers from international price movements makes them less able to adjust to changing market demands, adding to global price volatility.

An old trading adage says “the best cure for high prices is high prices.” Higher oil prices prompt exploration and the exploitation of hitherto marginal resources, as well as increased efforts to develop alternative energy sources. Similarly, higher commodity prices can be expected to lead to higher supply — as long as governments allow price increases to be passed on to farmers.

Of course, crops don’t grow overnight. Governments can help the many millions around the world hit by higher prices and scarce food by providing humanitarian and food aid. In the last few weeks, a number of countries, including the United States and Britain, have announced big cash injections for food aid.

But governments should also take a hard look at other policies affecting food supplies, such as those that have contributed to rising demand for biofuels. OECD analysis suggests that biofuels production based on “first generation” technologies using agricultural commodity feed stocks won’t deliver the energy security, environmental and economic benefits that have been predicted. Other ways of reducing energy demand and greenhouse gas emissions, combined with freer trade in biofuels and their production using new “second generation” technologies that do not rely on commodity feed stocks, offer potentially greater benefits without the unintended impact on food prices.

In parallel, we need to foster growth and development in the world’s poorest countries. OECD analysis shows investment in agriculture, including both research and education and bringing new land into production, to be an important factor in reducing poverty and stimulating economic activity. Improving the environment in which agriculture operates, thanks to better governance systems, macroeconomic policies, infrastructure, technology, education and health, is just as necessary. A tailored approach is needed, building on the capacity and potential of individual countries.

Which brings us back to the Doha Round. WTO negotiations cover all goods and services, and a host of related issues. An agreement now would provide a much-needed endorsement of the rules-based multilateral trading system. It would demonstrate continued international engagement on trade and development issues, and underpin an approach to global governance based on mutually agreed rules and concerted action.

Above all, however, a new trade agreement would bring large and widespread economic gains. In today’s gloomy environment, this is no longer the unnecessary luxury some may have mistakenly considered it to be. It’s a matter of real urgency.

Angel Gurria is secretary general of the Organization for Economic Cooperation and Development.