Globalisation, WTO and the Next Round of Trade Negotiations

Globalisation, WTO, and the Next Round of Trade Negotiations

Economic Briefing Report March 2000 Page 1

Chapter Nine

Globalisation, WTO, and the Next Roundof Trade Negotiations

This chapter examines the extent and causes of globalisation, the role of theWorld Trade Organisation (WTO) in fostering global economic integration, thescope for agricultural reforms under WTO to further that process, and theimplications for Australia as WTO moves towards the next round ofmultilateral trade negotiations. Three technological revolutions have mademajor contributions to globalisation: the steam engine and telegraph lastcentury, the internal combustion engine and telephone during this century,and most recently the digital revolution’s impact on communication andinformation costs. Equally important have been the deregulatory policy reformsmade by national governments. Those have been partly unilateral or regional,but the GATT/WTO has been crucial during the past half century inencouraging economies to open up more and to commit to staying open tointernational trade.

The potential welfare gains from further liberalising markets under WTO arestill huge, but no more so than in agriculture. Should attempts to liberalisefarm trade in the next WTO round follow the same pattern as the UruguayRound, or might a more radical approach be required to bring agriculture moreinto the WTO mainstream? This question is explored in this paper by focusingespecially on the Uruguay Round's 'dirty tariffication' and adoption of 'tariffrate quotas'. The paper also examines new agricultural issues, notably foodsafety and agriculture’s so-called multifunctionality: both were the subject ofcontention in Seattle in late 1999. The WTO's prospective new millenniumround offers the best opportunity yet for seeking faster reform of farm (andtextile) trade by OECD countries. The implications of these developments forAustralia are explored in the final section.

9.1 IntroductionGlobalization could be defined as thedecline in costs of doing businessinternationally. One of its key effects isto enhance the international integrationof markets for goods, services,technology, ideas, capital and labour. Anindicator of its progress is provided bythe reducing differences in prices for

those products and factors across space.That and other effects of globalisationare being felt by all countries of theworld, especially in open economiessuch as Australia's.

As was evident in Seattle late last year,when trade ministers of World Trade



Organisation (WTO) member countriesmet with the intention of launching thenext round of WTO trade negotiations,not everyone favours globalisation!Protestors included trade unionrepresentatives of some low-skilledworkers in rich countries who fear itthreatens their members’ jobs;environmental groups, who believe itcontributes to national and globalenvironmental problems; and otherswho simply prefer their own countriesto be more self-sufficient in producingwhat their citizens consume. Protestorsfrom among such groups weresufficiently mobilised in Seattle as to atleast contribute to the lack of anoutcome from the talks. As a result, thelaunch of the next WTO round haseffectively been postponed until at least2001.

This raises the question: what are theinteractions between globalisation, therole of the WTO and the policies ofmember countries? That question isexplored in this chapter, with a view todrawing out implications for furtheraction by Australia in the lead up towhat, eventually, will be the next WTOround of multilateral trade negotiations.Special emphasis is given to agriculturalpolicies not only because of theirimportance to Australia but also becausethey are among the world’s most trade-distorting policies.

9.2 Definition and Extent ofGlobalization1

For present purposes, globalisation isdefined as the decline in transactionscosts of, or barriers to, doing business orotherwise interacting with people ofother nations around the world. Its effectis to enhance the integration of marketsfor goods, financial and other services,technology, ideas, capital and labour, 1 This part of the chapter draws on Anderson

(2000a).

reducing differences in prices for thoseproducts and factors across space. Fallsin transport costs, the huge decline incommunication and information costs,and cuts in tariff and non-tariffgovernmental barriers to trade in goodsand services combined in the late 20thcentury to accelerate globalisation to anunprecedented speed that shows no signof abating.

The extent of the acceleration inglobalisation cannot be captured in asingle statistic, but several providepartial indications of what is involved. Astandard indicator is the comparisonbetween trade and GDP growth. AsTable 9.1 shows, while merchandisetrade has grown faster than output forall periods except between the twoworld wars, the gap has been larger inthe 1990s than in any earlier period sincethe mid-nineteenth century. More thanone-fifth of global output is nowexported, double the proportion in the1950s. As well, annual outflows offoreign direct investment grew morethan six-fold between 1983 and 1990,and continued to grow more than twiceas fast as goods trade in the 1990s. Intra-firm trade among multinationalcorporations (MNCs) is estimated toaccount for one-third of world trade, andanother one-third is MNC trade withnon-affiliates. During the 1990sinternational portfolio investment hasbeen growing equally as fast as foreigndirect investment. In just the last fiveyears, the annual value of cross-bordermergers and acquisitions has trebled,growing from $100 billion to $300 billion(UNCTAD 1998, p. 21). Daily foreignexchange transactions now exceedglobal currency reserves, withinternational capital flows more than 50times the value of international tradeflows. The 1990s have also seen anexplosion in the world’s capacity forelectronic commerce. Table 9.2 shows adoubling in the number of telephone



Table 9.1Growth in World GDP and Merchandise Exports in Real Terms, 1720 to 1996

(Average Per Annum Per Cent Growth)

1720-1820

1820-1870

1870-1913

1913-1950

1950-1973

1973-1990

1990-1996

Real GDP 0.8 1.9 2.5 1.8 5.4 2.7 2.9Export Volume 1.4 4.5 3.9 0.5 9.8 4.0 5.9

Export Growth/GDP Growth

1.7 2.4 1.6 0.3 1.8 1.5 2.1

Source: WTO (1998a, p. 34).

Table 9.2Growth in Capacity for Electronic Commerce, 1991 to 2001

(Million Units)

1991 1996 2001a

Telephone main lines 545 741 1,000Cellular phone subscribers 16 135 400Personal computers 123 245 450Internet host computers 1 16 110PCs with internet access 5 60 300

Note: a Projected by the International Telecommunications Union, Geneva.Source: WTO (1998b, p. 8).

lines, a 25-fold increase in the number ofcellular phones, a near quadrupling inthe number of personal computers, andan expectation that two-thirds of thosePCs will have internet access by 2001.

9.3 The Technological Dimension ofGlobalization

There have been three technologicalrevolutions in transport andcommunication costs in modern times.The first involved the cost oftransporting goods, which was loweredenormously in the 19th century by theadvent of the steam engine, and hencethe railway and steamship. Steel hullsfor ships and refrigeration furtherlowered the cost of ocean transport latelast century, particularly for perishablegoods. The telegraph helped too(O'Rouke and Williamson 1999).

The second technological revolutionlowered hugely also the cost of movingpeople. It was dominated, in the middlehalf of the 20th century, by the fallingcost of transport by car and aeroplanethanks to mass production of such goodsand associated services. Ocean freightrates (helped by containerisation) andtelephone charges also fell massivelyover this period.2

The third revolution in transport andcommunications technology, whichbegan towards the end of the 20th

century, is digital. Aided byderegulation of telecom markets inmany countries, it is lowering 2 Between 1920 and 1980, the real charge per

tonne for ocean freight fell by almost three-quarters and between 1960 and 1980 the realcost of a telephone call from New York toLondon fell by 90 per cent. Meanwhile, between1930 and 1980 the real cost of air travel fell 85per cent (Hufbauer 1991).



enormously long-distancecommunication costs and especially thecost of rapidly accessing and processingknowledge, information and ideas fromanywhere in the world.3 A side-effect ofthe Internet’s expansion is the growth inthe use of the English language. It hasbeen claimed that there are now morepeople using English as a secondlanguage than there are people forwhom it is a first language (Cairncross1997). This too is lowering costs ofcommunicating between countries.

9.4 The Governmental Contributionto Globalization

The above developments have beenreinforced by government decisions toliberalise trade, currency and investmentregimes. Following the protectionistinter-war period, this began with thelowering of import tariffs on trade inmanufactures between industrialisedeconomies. Within Western Europe thattrade was especially liberal following theTreaty of Rome and the formation of theEuropean Free Trade Area. In the 1980strade reform was followed by extensiveliberalisation of foreign exchangemarkets and of restrictions on capitalflows, leading (with the help of newdigital technologies) to the developmentof new financial instruments. At thesame time many non-OECD countries –including China and ultimately theSoviet bloc - began moving away frominward-looking to outward-orientedtrade and investment policies. The 1980salso saw the deregulation of domesticmarkets in a growing number ofcountries, not least Australia and New 3 Two book titles summarise this 150-year history:

Blainey’s Tyranny of Distance which refers toAustralia’s early isolation from the Old Worldprior to steamships, and Cairncross’ Death ofDistance which refers to the latestcommunications revolution (Blainey 1966;Cairncross 1997). For comparisons of thenineteenth and late twentieth century episodesof globalisation, see Baldwin and Martin (1999)and Bordo, Eichengreen and Irwin (1999).

Zealand, which reinforced the effects ofderegulating transactions at nationalborders.

Such reforms provide most benefit to thecountries making them, but they alsobenefit their trading partners. Hence themore countries who open up andreform, the greater is the gain to othercountries as well. In particular, such aprocess expands the opportunities fordeveloping and transition economies toaccess goods and services markets,investment funds and technologies,thereby raising the pay-off to thoseeconomies from joining the band-wagonof liberalisation. Those that have alreadydone so have grown much faster thanthe rest, and have seen their incomesconverge toward OECD income levels(see, e.g., Dollar 1992; Edwards 1993;Sachs and Warner 1995; and WTO(1998a, pp. 62-63) for a bibliography).The reasons for faster growth of moreopen economies have to do with thedynamics of trade liberalisation,something which is not just an abstractidea from new trade and growth theory(Grossman and Helpman 1991) but onethat is well supported empirically(USITC 1997).

Inter alia, these technological andgovernmental revolutions that havegiven rise to globalisation havecontributed increasingly to the drifttowards urbanisation. The firsttechnological revolution helped launchthe industrial revolution in WesternEurope, and by lowering the cost ofexploiting natural resources abroad alsoallowed primary sectors in less-denselypopulated and tropical countries toexpand. The second technologicalrevolution accelerated industrialisationin the West and its spread to the Far Eastincluding via what has been described asthe product cycle. The currenttechnological revolution is increasing thescope to subdivide the processes of



production and distribution into partsthat can be relocated anywhere in theworld according to ever-increasingchanges in comparative advantages overtime. Such out-sourcing can be via sub-contracting, licensing, joint ventures, ordirect foreign investment bymultinational corporations (Markusen etal. 1996).

The resulting productivity growth inindustrial and service sectors is alteringthe key source of wealth of nations,which is moving ever-faster away fromnatural to human capital (that is, fromraw materials and physical capital perworker to human skills and knowledge).In particular, wealth creation in the 21st

century will depend especially on theability to access and make productiveuse of the expanding stocks ofknowledge and information, and tobuild on them through creative researchand development (World Bank 1998).How well and how quickly people ofdifferent regions are able to do that willincreasingly determine relativeeconomic growth rates. But for allcountries the extent and speed withwhich economic events abroad aretransmitted to domestic markets willincrease inexorably. Governments willhave less and less capacity to isolatetheir economies from such trends - asderivatives and electronic commercehave made clear in the cases ofinternational financial flows and awidening range of traded goods andservices.

9.5 The GATT/WTO’s Contributionto Globalization

History shows that the risk of market-opening being reversed is much morelikely in the absence than in the presenceof international constraints on nationaltrade policy actions. For example, theCobden-Chevalier Treaty of 1860,between England and France, contained

a most-favoured-nation (MFN) clause.This required that the agreed cut in thetariff on each item in their bilateral tradewas to be applied also to their importsfrom other countries. It also meant thatevery European country thatsubsequently signed a trade treaty witheither England or France (and most didby 1867) signed onto MFN. The effectwas a network of treaties that loweredhugely the level of MFN tariff protectionin Europe (Kindleberger 1975), allowingworld output and trade to boom forseveral decades until the First WorldWar intervened.

Following that war, efforts to restoreliberal trade centred on internationalconferences, but did not lead to renewedtrade treaties with binding commitmentsto openness based on MFN. Then whenrecession hit in the late 1920s,governments responded with beggar-my-neighbour protectionist tradepolicies that drove the world economyinto depression. The volume of worldtrade shrunk by one-quarter between1929 and 1932, and its value fell by 40per cent.

Out of the inter-war experience came theconviction that liberal world traderequired a set of rules and bindingcommitments based on non-discriminatory principles. While therewas not enough agreement to create aninternational trade organisation, at leasta General Agreement on Tariffs andTrade (GATT) was signed by 23 largetrading countries in 1947. The GATTprovided not only a set of multilateralrules and disciplines but also a forum tonegotiate tariff reductions and ruleschanges, plus a mechanism to help settletrade disputes. Eight so-called rounds ofnegotiations took place in thesubsequent 46 years, the last one (theUruguay Round) culminating in the‘interim’ GATT Secretariat being



converted into the World TradeOrganisation.

The GATT, and now even more so theWTO, contributes to globalisation inseveral crucial ways. The WTO has fourkey objectives: to set and enforce rulesfor international trade, to provide aforum to negotiate and monitor tradeliberalisation, to improve policytransparency, and to resolve tradedisputes. Apart from the transparencyrole, these were also the key objectives ofits predecessor. However, the WTO ismuch more comprehensive than theGATT. For example, GATT’s productcoverage in practice was confinedmainly to manufactures (effectively notincluding textiles and clothing), whereasthe WTO encompasses all goods(including sensitive farm and textileproducts), services, capital to someextent, and ideas (intellectual property).As well, following the conclusion of theUruguay Round negotiations, theinterim GATT Secretariat was convertedto a permanent WTO Secretariat withgreatly strengthened trade policy reviewand dispute settlement mechanisms. Italso has a new role: cooperating with theIMF and World Bank with a view toachieving greater coherence in globaleconomic policy making.

GATT/WTO rules to governinternational trade serve at least threepurposes. First, they protect the welfareof small and weak nations againstdiscriminatory trade policy actions oflarge and powerful nations. GATTArticles I (most-favoured-nation) and III(national treatment) promise that allWTO members will be given the sameconditions of access to a particularcountry’s market as the most favouredmember, and all foreign suppliers willbe treated the same as domesticsuppliers. These fairness rules arefundamental to instilling confidence inthe world trading system. In particular,

they lower the risks that are associatedwith a nation’s producers andconsumers becoming more inter-dependent with foreigners - risks thatotherwise could be used by a country asan excuse for not fully opening itsborders.

Second, large economies have thepotential to exploit their monopolypower by taxing their trade, but weknow from trade theory that the rest ofthe world and the world as a whole aremade worse off by such trade taxes.Thus while each large economy might betempted to impose trade taxes, the effectof lots of them doing so simultaneouslymay well be to leave most if not all ofthem worse off - not to mention thewelfare reductions that would result inmany smaller countries. Hence the valueof agreeing not to raise trade barriersand instead to ‘bind’ them in a tariffschedule at specified ceiling levels. Thisrule is embodied in GATT Article II,whereby WTO members are expected tolimit trade only with tariffs and areobligated to continue to provide marketaccess never less favourable than thatagreed to in their tariff schedules. Again,the greater certainty which this tariff-binding rule brings to the internationaltrading system adds to the preparednessof countries to become moreinterdependent and of business peopleto invest more.

The third and perhaps most importantcontribution of multilateral rulesdisciplining trade policy is that they canhelp governments ward off domesticinterest groups seeking special favours.This comes about partly via Article II,which outlaws the raising of boundtariffs, as well as via numerous otherarticles aimed at ensuring that non-tariffmeasures are not used as substitutes fortariffs. This benefit of the system issometimes referred to as the ‘Ulysseseffect’: it helps prevent governments



from being tempted to ‘sin’, in this caseto favour special interest groups at theexpense of the rest of their economy.4

While no-one would argue that theGATT rules have been applied withoutexception, the fact that they are thereensures the worst excesses are avoided.They therefore bring greater certaintyand predictability to internationalmarkets, enhancing economic welfare inand reducing political tensions betweennations. More than that, by promotinginterdependence the GATT/WTOindirectly has raised the price and hencereduced the likelihood of going to war.

But why do countries need the WTO tonegotiate freer trade? One of the clearestlessons from trade theory is that aneconomy which is unable to influence itsinternational terms of trade cannotmaximise its national income andeconomic growth without allowing freetrade in all goods and services. Andwhile there may still be a few countrieswho so dominate supply or demand forparticular products that they can affectthe price of these products, it isincreasingly the case that no country cansubstantially determine its internationalterms of trade. The vast majority ofcountries would not even be able toaffect, on an international level, even theprice of single products. Hence, for allcountries, trade barriers meanconsumers lose directly from the higherdomestic prices of importables, whileexporters lose indirectly because import 4 Petersmann (1991, p. 83) goes so far as to say

that “the primary regulatory function of theGATT .... [is] the welfare-increasing resolutionof domestic conflicts of interest within GATTmember countries among individual producers,importers, exporters and consumers .”Similarly, Roessler (1985, p. 298) claims that“the principal function of the GATT as a systemof rules is to resolve conflicts of interest within,not among, countries. The function of the GATTas a negotiating forum is to enable countries todefend the national interest not against thenational interests of other countries but againstsectional interests within their own and othercountries.”

barriers cause the nation’s currency toappreciate (as there is less demand forforeign currency from importers). Inaddition, more-open economies alsogrow faster, thus boosting livingstandards more quickly.

Why, then, do countries restrict theirtrade, and why do they need to gettogether to agree to liberalise thoseprotectionist trade regimesmultilaterally, when it is in theirnational economic interests to do sounilaterally?

Numerous reasons have been suggestedas to why a country imposes tradebarriers in the first place, but almost allof them are found wanting (Corden1997). The most compelling explanationis a political economy one. It has to dowith the national income re-distributivefeature of restrictive trade policies: thegains are concentrated in the hands of afew who are prepared to supportpoliticians who favour protection, whilethe losses are sufficiently small perconsumer and export firm and aredistributed sufficiently widely as tomake it not worthwhile for those losersto get together to provide a counter-lobby (Hillman 1989, Grossman andHelpman 1994, Anderson 1995). Thusthe observed pattern of protection in acountry at a point in time may well bean equilibrium outcome in a nationalpolitical market for policy intervention.

That political equilibrium in two ormore countries might, however, be ableto be altered for the better through anexchange of product market access. Ifcountry A allows more imports it maywell harm its import-competingproducers if there are no compensationmechanisms; but if this liberalisation isdone in return for country A’s tradingpartners lowering their barriers to A’sexports, the producers of those exportswill enjoy this additional benefit. The



latter extra benefit may be sufficientlygreater than the loss to A’s import-competing producers that A’sliberalising politicians too become netgainers in terms of electoral support.Likewise, politicians in the countriestrading with A may well be able to gainfrom this trade in market access, forequal and opposite reasons. That is, anew opportunity for trade negotiationscan stimulate trade liberalisation byaltering the incentives to lobbypoliticians and thereby the politicalequilibrium in trading nations.5

Such gains from trade negotiationsinvolving exchange of market access willtend to be greater, nationally andglobally, the larger the number ofcountries involved and the broader theproduct and issues covered by thenegotiations. Hence the wisdom innegotiating multilaterally with morethan 100 countries over a wide range ofsectors and issues, as in the UruguayRound, despite the process beingcumbersome. Now that there is so muchmore product coverage under the WTOthan under the GATT, and the numberand extent of participation by membercountries keeps growing, the scope forexchange of market access has increaseddramatically. This is especially true forexchanges between more- and less-developed economies, now thatagriculture and textiles and clothing areback in the GATT mainstream, andservices and trade-related intellectualproperty have been added, making awider range of intersectoral tradeoffspossible.

This is not to deny the many challengesstill confronting the achievement of abetter global trading system. In

5 Elaborations of this economists’ perspective can

be found in Grossman and Helpman (1995),Hillman and Moser (1995), Hoekman andKostecki (1995) and Anderson (1996, Ch. 1).Political scientists are beginning to take a similarview. See, for example, Goldstein (1998).

particular, there is the challenge ofactually launching a new round ofmultilateral trade negotiations in thenext year or so, especially given theevents of Seattle and the lack ofagreement on the issues to be includedin the next round of WTO talks.

Another obvious and urgent challenge isthat which has been highlighted by theAsian financial crisis. This crisis hasdemonstrated how volatile short-termprivate capital can be in an integratedglobal capital market, where herdmentality and panic can take hold andspread quickly thanks to the digitalrevolution in communications. Theconsequent risk of contagion to otherregions is thus now greater than in eventhe recent past. Such internationalspillovers magnify the adverseconsequences of the crisis. Clearly,consideration needs to be given as tohow to limit these ‘over-reactions’ and,more significantly, their adverseconsequences.

One danger in the wake of these eventsin Asia is that it multiplies theprobability that affected countries inAsia and elsewhere will slow or reversetheir market opening policy stance –even though the opposite is what isrequired to pull these economies out ofrecession.

The possibility of policy reversalsunderscores the importance of gettinganother comprehensive WTO roundunderway early in this new century.Critical to such a round - and toAustralian interests in particular - willbe the inclusion of agriculture, to whichattention now turns.

9.6 Issues for Reforming Agriculturein the Next WTO Round6

6 This part of the chapter draws on Anderson

(2000b).



One of the great achievements of theUruguay Round of trade negotiationswas the bringing of agricultural policiesunder much greater multilateraldiscipline. The Uruguay RoundAgreement on Agriculture (URAA) ledto the conversion of non-tariff barriers toagricultural imports into bound tariffs,7with those bound tariffs being scheduledfor phased reductions, as were farmproduction and export subsidies,between 1995 and 2000 (with developingcountries having an extra four years).Since the URAA requires members toreturn to the negotiating table in 2000,the question is: what might the nextround of negotiations involve?

This section of the chapter makes severalclaims. One is that agricultural marketaccess issues remain the main priorityfor the next round, because agriculturalprotection rates in OECD countriesremain huge. Large commitments interms of bound tariff cuts and/or quotaexpansions will be needed if agriculturalprotection is to be reduced significantly.Whether that is done in the same way asin the UR (percentage cuts to boundtariffs, export subsidies and domesticsupport, and growth in the share ofconsumption imported), or whether amore radical approach is needed, is amoot point.

Secondly, for several reasons reforms inother sectors also are important foragriculture, not least because havingthem on the negotiating agenda canbring to the table groups that cancounter farm protectionist lobbies.Adding new issues to the agenda cancontribute in a similar way, albeit at therisk of diverting attention away fromtraditional market access issues.

7 This process has been called “tariffication”.

Bound tariff levels are tariff rates above which acountry cannot go in setting its applied rates atany point in time.

Thirdly, among the other issues relatingto agriculture that will be raised in thenext WTO round are assertions thatstricter technical barriers to farm tradeare necessary for food safety reasons,and that agriculture's so-called‘multifunctional’ nature requires that thesector be treated differently from othersectors. These arguments will be putforward by certain high incomecountries as reasons for continuedprotection of their agricultural sectors. Ifthese arguments are handled badly inthe millennium round, then theoutcomes could be detrimental not onlyto developing country agriculture, butalso to developed countries with asignificant agricultural export sector,such as Australia.

9.6.1 The Legacy of the Uruguay RoundAgreement on Agriculture

For most farm products and OECDcountries, actual tariffs will provide noless protection at the beginning of 21st

century than did the non-tariff importbarriers of the late 1980s/early 1990s,according to Ingco (1996). This isbecause in most cases the outcome of theUR was that tariffs were bound wellabove the applied rates (or the tariffequivalents of the quantitativerestrictions) in place at the end of theUruguay Round. That is true in othersectors also, but to a much lesser extent.Table 9.3 suggests that for manufacturesa bound tariff cut just 40 per cent greaterthan in the Uruguay Round would bringthe average bound rate down to theapplied rate average, whereas for



Table 9.3Depth of Uruguay Round Tariff Cuts and Post-UR Bound and Applied Tariffs on Imports, by Sector and Region

Depth of UR Cut inBound Tariff Rate t

(as % of 1+t)

Post-UR BoundTariff Rate (%)

Post-UR AppliedTariff Rate (%)

Depth of Cut Needed inBound Tariff Rate t (as %of 1+t) to Bring it Down

to Sector’s Post-URApplied Rate

AgricultureOECD countries 1.5 15 14Developing economies 4.7 60 18All WTO members 2.6 24 14

Textiles & ClothingOECD countries 1.4 11 8Developing economies 4.1 24 21All WTO members 1.6 12 10

Other ManufacturesOECD countries 1.0 4 3Developing economies 2.7 20 13All WTO members 1.3 6 4

Source: Finger and Schuknecht (1999).



agriculture the depth of cut would needto be three times greater than in theUruguay Round to close the gap(compare columns 1 and 4). The finalcolumn of Table 9.3 shows that a one-third cut in the bound tariffs on ‘othermanufactures’ would bring its averagedown to each region’s applied rateaverage for all goods, whereas fortextiles and clothing a cut of about one-half would be needed, and foragriculture (including processed food)the cut would have to be about four-fifths.

Binding agricultural tariffs well aboveapplied rates has also allowed countriesto vary applied tariffs below the bindingso as to stabilise the domestic market inmuch the same way as the EU has donein the past with its system of variableimport levies and export subsidies. Thismeans there will be little of thereduction in fluctuations in internationalfood markets this decade thattariffication was expected to deliver.

Even getting agricultural (and textile)bound tariffs down to currently appliedrates on those products would requirebig cuts. Yet applied rates for textilesand clothing are 2.5 times, andagriculture’s are 3.5 times, those forother manufactures. Clearly, action isneeded on two tariff fronts: gettingbound rates down to applied rates, andlowering applied rates on these twooutlying industry groups.

As if that weren’t enough, a third frontrequires attention. Agricultural-importing countries agreed also toprovide minimum market accessopportunities, such that the share ofimports in domestic consumption forfarm products subject to importrestrictions rises to at least 5 per cent bythe year 2000 (less in the case ofdeveloping countries). This would takeplace under a so-called tariff rate quota

(TRQ): some imports would come inunder a low or zero tariff (up to thequota restraint) while any above-quotaimports would be subject to a highertariff.

Even though within-quota importsattract a much lower tariff than out-of-quota imports, such tariff rate quotas(TRQs) have several undesirablefeatures: they legitimise a role for statetrading agencies, they generate quotarents, they introduce scope fordiscriminating between countries, andthey can reduce national welfare bymuch more than similarly protectivesingle tariff regimes.

More specifically, the Appendix toAnderson (1999) shows, among otherthings, that:

• in the presence of TRQs thenational welfare cost ofagricultural protection can beconsiderably greater than under asimilarly protective tariff-onlyregime, and that cost tends to risemore when there is (as in the latter1990s) a fall in international foodprices;

• with a TRQ regime, a cut in theout-of-quota bound tariff mayhave only a fraction of the effect onprices and quantities traded (andpossibly none at all) of a cut of thesame size under a tariff-onlyregime, not only when the boundrate exceeds the applied rate butalso when the applied rate is abovethe prohibitive tariff in thepresence of a TRQ;

• the effect of a tariff cut on nationalwelfare, by contrast, may be muchgreater when a TRQ rather than atariff-only regime is in place,depending on how the quota isbeing administered before andafter that reform; and



• an expansion of the market access(quota) commitment need notexpand trade and welfare, for it isalways possible for the quotaadministrator to allocate the quotasso as to ensure under-fill such thatno more or even less imports intotal flow in.

The low in-quota and very high out-of-quota tariffs mean potentially hugebenefits are going to those allocatedquota licenses. In numerous cases quotasare far from being filled however, onepossible reason being that quotas areallocated (inadvertently or deliberately)to imports from high-cost suppliersincapable of making full use of them.And the fact that the quota oftenrepresents a high proportion andsometimes 100 per cent of actual importssuggests some out-of-quota tariffs arevirtually prohibitive.

Another ‘agreement’ from the UR wasthat the aggregate level of domesticsupport (or Aggregate Measure ofSupport (AMS)) for industrial-countryfarmers was to be reduced to four-fifthsof its 1986-88 level by the turn of thecentury. That too required only modestreform in most industrial countries. Theproblem being that there are manyforms of support that need not beincluded in the calculation of the AMS,the most important being directpayments under production-limitingprograms of the sort adopted by the USand EU. A danger is that the use of suchexceptions may spread to othercountries and other commodities as farmincome support via trade and directdomestic price support measures isgradually curtailed through the WTO.

Thus, without underrating the UruguayRound's achievement of establishingrules for agricultural trade and securingsome reform, it has to be recognised thatvery limited progress has been made

over the past five years in reducingagricultural protection and marketinsulation.

9.6.2 The Potential Gains from FurtherTrade Policy Reform

When the implementation of theUruguay Round is complete in 2005what will be the potential for furthergains from reforming agriculturalmarkets of OECD countries comparedwith the gains from protection cuts inother sectors; and how large are thosepotential gains from OECD liberalisationcompared with gains from developingcountry reforms? According to recentestimates using the global economy-wide model known as GTAP, the gainsfrom removing remaining tariffs andsubsidies would be huge (Anderson etal. 2000). Table 9.4 suggests that if allmerchandise trade distortions wereremoved globally, almost half (48 percent) of the estimated global economicwelfare gains (ignoring environmentaleffects) would come from agriculturaland processed food policy reform inOECD countries – even though suchproducts in those countries contributeonly 4 per cent of global GDP and lessthan one-tenth of world trade. Anotherone-sixth would come from reform offarm and food policies of developingcountries.

Textiles and clothing reforms appearpale by comparison with agriculturalreform: their potential global welfarecontribution is barely one-tenth that ofagriculture’s (7 per cent compared with65 per cent). This big difference reflectstwo facts: one is that projecteddistortions to prices (i.e., relative to freemarket prices) for agriculture are morethan twice those for textiles and clothingin 2005; the other is that textiles andclothing contributes only 1.5 per cent tothe value of world production and 5 percent to the value of world trade, roughly



Table 9.4Sectoral and Regional Contributions to the Economic Welfare Gainsa fromCompletely Removing Trade Barriers Globally, Post-Uruguay Round, 2005

LiberalisingRegion

BenefitingRegion

Agriculture& Food

OtherPrimary

Textiles& Clothing

OtherManufactures

Total

In 1995 US$ billions

High Income High Income 110.5 -0.0 -5.7 -8.1 96.6Low Income 11.6 0.1 9.0 22.3 43.1Total 122.1 0.0 3.3 14.2 139.7

Low Income High Income 11.2 0.2 10.5 27.7 49.6Low Income 31.4 2.5 3.6 27.6 65.1Total 42.6 2.7 14.1 55.3 114.7

All Countries High Income 121.7 0.1 4.8 19.6 146.2Low Income 43.0 2.7 12.6 49.9 108.1Total 164.7 2.8 17.4 69.5 254.3

In Per Cent of Total Global Gains

High Income High Income 43.4 0.0 -2.3 -3.2 38.0Low Income 4.6 0.1 3.5 8.8 16.9Total 48.0 0.0 1.3 5.6 54.9

Low Income High Income 4.4 0.1 4.1 10.9 19.5Low Income 12.3 1.0 1.4 10.9 25.6Total 16.7 1.1 5.5 21.7 45.1

All Countries High Income 47.9 0.1 1.9 7.7 57.5Low Income 16.9 1.0 4.9 19.6 42.5Total 64.8 1.1 6.8 27.3 100.0

Note: a No account is taken in these calculations of the welfare effects of environment changesassociated with trade liberalisation, which could be positive or negative depending in part onhow environmental policies are adjusted following trade reforms.

Source: Provisional GTAP modeling results, a revised version of which is to appear in final form in Andersonet al (2000).

half the shares for farm products(Anderson, Hoekman and Strutt 1999).

However, two assumptions are crucial ingenerating the results reported in Table9.4. One is that China and Taiwan areassumed to join the WTO soon and enjoythe same accelerated access to OECDmarkets under the UR Agreement onTextiles and Clothing (ATC) as otherdeveloping countries that already areWTO members. The other crucialassumption is that OECD countries fullyimplement the ATC. The latter is farfrom certain to happen though,particularly if China were to join WTOsoon and phase out its 'voluntary' exportrestraints (VERs) on textiles and clothing

by 2005. Dropping either of thoseassumptions reduces very substantiallythe estimated gains from UruguayRound implementation (Anderson 1997),and therefore would raise the potentialgains from textile and clothing reform inthe next and subsequent WTO rounds.

Even so, agricultural protection wouldremain far more costly to the worldeconomy than barriers to textiles andclothing trade – and more than twice ascostly as protection to othermanufactures, despite the latter havingmuch bigger shares in the value of worldproduction and trade.

Moreover, if OECD governments did



renege on the spirit of the ATC, forexample by using ‘safeguards’ such asanti-dumping measures to limit theirtextile imports after ‘voluntary’ exportrestraints are abolished at the end of2004, the industrialisation of developingcountries as a group would slow downand hence their need to depend on farmproducts to trade their way out ofpoverty would be greater.

The distribution of the gains acrossregions that would result from full tradeliberalisation is clear from Table 9.4. Asalways, most of the gains accrue to theliberalising region. For example, all butone-tenth (12/122) of the gains fromhigh-income countries removingdistortions to their trade in farm andfood products accrues to those countries.As for developing countries liberalisingtheir own farm and food policies, three-quarters of the benefits stay with thedeveloping countries themselves(31/43).

WTO members were right, therefore, toinsist that agricultural reform mustcontinue into the new century without apause. In particular, developingcountries as a group have a major stakein the process of farm policy reformcontinuing: according to the modelresults in Table 9.4, farm and foodpolicies globally contribute 40 per cent(17/43) of the cost to developingeconomies of global goods tradedistortions. Textile and clothing policiesalso harm them greatly, but nowherenear as much as farm policies.

9.6.3 What Should be Done to Furtherthe Agricultural Reform Process?

In terms of farm export subsidies, nothingless than a total ban is needed to bringagriculture into line with non-farmproducts under the GATT. They are,after all, almost exclusively a WesternEuropean phenomenon apart from

sporadic US involvement: five-sixths ofall export subsidies in the mid-1990swere granted by the EU, and all but 2per cent of the rest were accounted forby the US, Norway and Switzerland(Tangermann and Josling 1999, p. 16).

With respect to domestic subsidies,gradual reform of policies of the US andEU, in particular the further de-couplingof farm income support measures fromproduction as with America’s FAIR Actof 1996, may allow further reductioncommitments.

But the most important area requiringattention has to do with import marketaccess. Tariffication appeared to be agreat step forward. However, thecombination of ‘dirty’ tariffication bydeveloped economies (setting boundrates well above applied rates) allowsmany countries still to vary theirprotection as they wish in response tochanges in domestic or internationalfood markets. Reducing bound tariffsfrom the 50-150+ per cent range to the 0-15 per cent range of tariff rates formanufactures is one of the majorchallenges ahead. If the steady rates ofreduction of the past are used, it will beseveral decades before that gap is closed– and some time even before many ofthose bound tariffs reach current appliedrates.

There is also a pressing need to focus onin-quota imports, that is, those that meetthe minimum access requirements in theUR Agreement on Agriculture(generally 5 per cent of domestic sales by2000 for developed economies). Thosequotas were introduced ostensibly toguarantee traditional exporters aminimum level of market access, equalat least to what was available beforetariffication, given that tariffs have beenbound at rates greatly above appliedrates. As many as 36 WTO membercountries listed TRQs in their Uruguay



Round schedules, of which at least halfactively use them. But as the Appendixto Anderson (1999) makes clear, thissystem of tariff rate quotas ensures thatagricultural trade policies continue to bevery complex. In particular, theirexistence reduces the extent to whichfuture tariff cuts will lead to actualimport growth in the medium term, andit is worrying that quotas have onaverage been barely two-thirds filledaccording to the count of notifications tothe WTO Committee on Agricultureduring 1995 and 1996 (Tangermann andJosling 1999, p. 26).

Agricultural-exporting countries areunderstandably reluctant to suggestTRQs be removed, because TRQsprovide at least some market access atlow or zero tariffs. Nor would allowingTRQs to be auctioned be seen by all as asolution, because that would be likeimposing the out-of-quota tariff onquota-restricted trade that the TRQ wasdesigned to avoid. If banning TRQs isnot yet possible, the next-best alternativemay be to expand them, so as tosimultaneously reduce their importance,increase competition, and lessen theimpact of high above-quota tariffs.

One can imagine an outcome from TRQexpansion that is either optimistic orpessimistic from a reformer's viewpoint.On the one hand, optimists may say: ifthe TRQs were to be increased by, say,the equivalent of one per cent ofdomestic consumption per year, itwould not be very long in most casesbefore the quota became non-binding.Expanding the TRQ could thereby bepotentially more liberalising in themedium term than reducing the veryhigh above-quota tariffs. Such anapproach may require binding within-quota tariffs at a reasonable level (suchas that for manufactures).

On the other hand, negotiators familiarwith the tortuous efforts to reform thequota arrangements for textiles andclothing trade point to the fact that theinception of textile quotas, to be phasedout by 2005 for most countries butprobably no earlier than 2008 for China,was around 1960. Will the expectedlifetime of agricultural TRQs similarly befifty or so years?

Those with this more pessimistic viewmay wish to put the case for a moreradical approach to the next round ofagricultural negotiations, namely tobring agriculture much more into linewith the treatment of non-agriculturalgoods in the WTO. For example, theymight call for the total elimination ofagricultural TRQs (along with exportsubsidies and export credits) and amajor reduction in bound (out-of-quota)tariffs.

9.6.4 Why Agriculture Needs OtherSectors in the Next WTO Round

There are at least three reasons whyincluding non-agricultural negotiationsin the next WTO round is relevant toagriculture. One is that the governmentof a WTO member that imports farmproducts and exports non-farm goodsand services will be more interested inlowering its impediments to agriculturalimports if agricultural-exportingmembers lower their impediments tonon-farm imports. This is because itsloss in political support from farmerswill be compensated by political supportfrom non-food exporters (Grossman andHelpman 1995, Hillman and Moser1995). The second reason has to do withthe fact that many non-farm goods andservices are needed by farmers asintermediate inputs or to get farmproducts to the final consumer. Ifbecause of trade impediments those non-farm products are more expensive thanthey need be, costs are raised so net farm



incomes are reduced. Since the WTOnegotiations focus on reciprocalexchange of market access concessions,export-oriented farmers have anegotiating interest not only in betteraccess to food markets abroad but also inmore competition from abroad in theirown economies' markets for non-farmproducts and services. And the thirdreason is that farmers compete with non-farm sectors for mobile factors ofproduction, most notably investmentfunds and labour. To the extent that acountry's non-farm sectors aresupported by trade impediments, so itsfarmers can be disadvantaged by havingto pay higher prices for those factors.

For all these reasons, the probability ofthe next WTO round delivering furtheragricultural reforms will be significantlygreater if negotiations also seek toachieve protection cuts for other sectors,including services.

9.6.5 Agriculture and ‘New’ TradeIssues

Inclusion of new trade agenda issues inthe next round is considered by somenegotiators as undesirable because itwould distract attention from the marketaccess issues that are deemed to be ofgreater importance. However, inclusionof new issues could have the advantagethat more OECD non-agriculturalgroups would take part in the roundwhich, depending on the issue, couldcounter-balance forces favouringagricultural (and other sectoral)protection. As well, better rules on someof those new issues would reduce therisk of farm trade measures beingreplaced or made ineffective by domesticagricultural measures and technicalbarriers to trade that may be almost astrade-distorting— a risk that has grownconsiderably in the past year or so.

Such issues as competition policy andinvestment policy are as relevant foragriculture as for other groups.However, since they may not beincluded in the millennium round, andtheir implications for agriculture are inany case discussed well elsewhere (e.g.,Tangermann and Josling 1999), attentionin the rest of this section is focused ontwo emerging issues that very directlyaffect agriculture. They are the issuessurrounding (a) technical standards,including SPS and food safety in thewake of the new biotechnologies, and (b)agriculture’s so-called multi-functionality.

9.6.6 Technical Standards, IncludingSPS and Food Safety Measures

The inability of the Standards Code thatcame out of the Tokyo Round of the1970s to adequately address sanitary andphytosanitary (SPS) issues, plus thedesire to reduce the risk of re-instrumentation of agricultural supportto SPS measures in response to thereforms committed to under the URAA,gave birth to the SPS Agreement duringthe UR. That agreement defined newcriteria that had to be met if a countrychose to impose regulations moreonerous than those agreed ininternational standards-setting bodies.It, together with the UR’s strengtheningof the dispute settlement procedures atthe WTO, was bound to raise the profileof SPS matters. That profile has beenraised even more dramatically,especially in Europe, with theemergence of several food safety issues:‘mad-cow’ disease, beef hormones, andtransgenic food products or geneticallymodified organisms (GMOs).

Agricultural-exporting countries have acomplex set of interests in thesedevelopments, including in maintainingand increasing access to other members’markets that are protected by SPS



measures. Numerous countries use veryblunt quarantine instruments thatexcessively restrict imports well beyondwhat is necessary for protecting thehealth of their plants and animals, ortheir citizens in the case of food safetyconcerns. Without some form ofnotification requirement on WTOmembers that forces members to disclosethe degree to which trade is restricted bysuch measures, reform in this area islikely to be confined to the very smallproportion of those cases that arebrought before the WTO’s disputesettlement body (DSB). The resourcerequirements of such legal proceedingsensures the pace of reform by thatmeans alone would be glacial, andwould be skewed towards concerns ofthose richer WTO members able toafford to bring such cases to the DSB.

Domestic consumers are unlikely to be asource of pressure for liberalisation ofquarantine barriers. This is not just forthe usual reasons (poor information,high costs of collective action because offree riding, etc.), but also becausecitizens are often concerned aboutpossible risks to the natural environmentfrom importing exotic diseases and/orabout the safety of imported food. Andtheir demands for higher quality, saferfood and for environmental protectionare going to continue to rise with theirper capita incomes.

However, perceptions about the safetyof different foods and food productionand processing methods, and conformityassessment procedures, differ greatly—even among countries with similarincome levels. The WTO DisputeSettlement case brought by theUS/Canada against the EU over its banon imports of beef that had beenproduced with the help of growthhormones, shows that standardsdifferences across countries are difficultto resolve even with a great deal of

scientific advice. So too does thecontroversy over the banning of intra-EU beef trade over the ‘mad-cow’disease scare. How much more, then, aretrade disputes likely to arise over issuesin which the scientific evidence is far lesscomplete?

In the case of policy dialoguessurrounding GMOs, far more heat thanlight has been generated so far.Attempts to promote science-basedassessment of the risks involved havemet with extreme versions of theprecautionary principle, manifest in theform of complete bans on theirproduction, importation and/or sale innumerous markets. Proposed solutionssuch as segregating GMO products andidentifying them via labels on affectedfood items have been rejected by manyconsumer groups; they have also beenresisted by the major producingcountries in North and Latin America,who claim that ‘like’ products areinvolved and so no costly GMO labellingis warranted. The fact that theproduction of some GMO products isless damaging to the environment thanis the production of traditional farmproducts has done little to dissuade civilsociety groups of their opposition toGMOs.

While such agricultural issues will ariseincreasingly under the Uruguay Round’sSPS and Technical Barriers to Trade(TBT) agreements, they will also arise inother, non-agricultural-related contexts.As with state-trading, subsidies andcompetition policies, there is a strongcase for developing common disciplinesfor all types of products, whetheragricultural or not. In the case of TBT,there is nothing special about food ascompared with, say, dangerouschemicals or heavy metals involved inthe production or disposal ofmanufactured goods. A key advantageof having a common set of rules for risk



analysis and risk management is thatinconsistencies in current arrangements,and the problems that will keep causingfor dispute settlement, would bereduced.

9.6.7 Agriculture's So-Called Multi-functionality8

Considerable attention has been given insome OECD countries to the term ‘non-trade concerns’, which appears in Article20(c) of the URAA. WTO membersagreed that, in negotiating thecontinuation of the agricultural policyreform process after 1999, ‘non-tradeconcerns’ would be taken into account.While not spelt out in any detail, thepreamble to the URAA defines thoseconcerns to include security of foodsupplies and protection of theenvironment. A third concern is theviability of rural areas. The governmentsdiscussing these three items arecharacterising them as positiveexternalities and in some cases ‘publicgoods’ that are jointly produced alongwith food and fibre. Hence their use ofthe word ‘multifunctionality’ to describethese features of agricultural production.

These ‘non-trade concerns’ are not reallynew, but they are being packaged a littledifferently than in the past. Despite their‘non-trade’ adjective, these concernsneed to be dealt with in the WTObecause they certainly can affect trade.Ideally they should be handled in thesame way for all sectors (for example,under an expanded Agreement onSubsidies and CountervailingMeasures), but until that is done theycannot be ignored in the up-comingagricultural negotiations.

For a case to be made that farmingshould receive more assistance fromgovernment than other sectors, it needs

8 This sub-section draws on Anderson (1998).

to be demonstrated that agriculturalproduction not only is a net contributorin terms of externalities and publicgoods, but also is more of a netcontributor than other sectors andespecially the sectors that would expandif agricultural supports were to shrink.Demonstrating that is an almostimpossible task, given the difficulties inobtaining estimates of society’s ever-changing (a) evaluation of the myriadexternalities and public goods generatedby the economy’s various sectors and (b)marginal costs of their provision. Hencethe practice of intervening only in themost obvious situations requiring acorrection.

Even if a clear case could be made for anintervention however, the appropriatemeasure is unlikely to be importrestrictions or output price supports fora broad range of marketed farmcommodities. Rather, the mostappropriate response will more likely bea finely tuned measure to encourage theoptimal extra amount of just the public-good or external aspect that has beenunder-supplied (or would be underlaissez faire).

The policy task thus involves severalsteps: to get a sense of society’swillingness to pay for the non-marketableby-product; to determine the mostefficient policy instrument for encouragingfarmers or others to supply that by-product for society; and then todetermine the optimal level ofencouragement so as to equate themarginal social benefit with themarginal social cost of that intervention.

With respect to food security, the mostefficient policy instrument for boostingit above that provided under freemarkets is probably subsidies tostockholding of staple foods. That isalready allowed for in Annex 2 of theURAA. Import restrictions to boost self



sufficiency, far from helping, may evendiminish food security for vulnerablegroups struggling to pay the high priceof protected domestic food. And oncebound tariffs are lowered to appliedrates, greater stability in internationalfood markets will prevail which willboost food security in all parts of theworld.

Environmental protection has manyfacets and so requires a range of policyinstruments. Reducing farm output pricesupports, as under the URAA, probablyprovides the single biggest potentialcontribution to the rural environment inagricultural-protectionist OECDcountries, through lowering the leveland intensity of farm production. Whilethose supports are still in the process ofbeing phased down, there should beadditional taxes, charges or otherregulations on pollution from farminputs to offset the extra damage causedby them via output price supports. Suchinput taxes are of course permittedunder WTO rules. In so far asagriculture provides positiveexternalities or public goods,appropriate policies are de-coupledpayments for their specific provision tothe optimal level in each location(assuming that optimal level is above thelevel that would otherwise prevail,bearing in mind the marginal social costof further provision). Since most of thosegoods can be provided independently offarming per se, de-coupling is not onlypossible but also desirable, because non-farmers may be able to provide some ofthose goods or services at lower costthan farmers. Some provision for suchpayments is made both in the URAAand in the WTO’s Agreement onSubsidies and Countervailing Measures.

Ensuring the viability of rural areas alsois a laudable goal, but again the bluntinstrument of general farm product pricesupports is far from optimal, particularly

since agriculture is not even thedominant source of income in many(particularly near-urban) rural areas. Farmore appropriate are WTO-consistenttargeted adjustment assistance(including re-training) packages andperhaps subsidies to essential servicesthat would otherwise be withdrawnfrom strategic left-behind remote areas.

In short, WTO rules and URAA reformcommitments are not at all incompatiblewith the adoption of efficient measuresfor addressing the so-called ‘non-trade’concerns discussed above. There isplenty of synergy and no need for trade-offs between domestic policy objectivesand agricultural protection reformobjectives as embodied in WTO rules.However, it needs to be recognised thatsome re-instrumentation of farm supportmeasures is inevitable and is alreadyevident as traditional measures (tariffs,export subsidies and domestic pricesupports) are phased down. Getting aparticular measure included on the listof ‘green box’ measures, in order for it tobe excluded when calculating theAggregate Measure of Support, will be amuch sought-after prize by agriculturalprotectionist forces during the nextround of WTO negotiations. Carefulscrutiny of the grounds for suchinclusions is likely to be a high payoffactivity for Australian trade negotiatorsin the period ahead.

Both exporting and import-competingcountries should welcome the call forcloser scrutiny of instruments used foraddressing ‘non-trade’ concerns. This ispartly because once those superiorinstruments are identified and adoptedat closer to optimal levels, greater foodsecurity and environmental protectionwill result. But perhaps equallyimportantly, the current bluntinstruments of support to farm productprices could then be dismantled morerapidly, as there would be even less



reason to maintain them. Consumers,taxpayers and exporters of non-farmproducts in the countries protectingfarmers, together with the world’s more-efficient farmers, could then join withthose anxious to conserve globalresources in celebrating this jointimprovement in the management of oureconomy and environment.

9.7 Implications for AustraliaFor a long time Australia was asomewhat reluctant participant in GATTmatters: the lack of success of its tradenegotiators in getting agriculturalprotection on the negotiations agendaprior to the Uruguay Round caused thegovernment to offer little in the form ofmarket opening prior to the 1980s. Thatchanged dramatically with agriculture’sinclusion on the agenda of the UruguayRound.

However, it is not only agriculturaltrade reform that is of interest toAustralia’s economy. This is so for tworeasons. One is that rural products makeup barely one-fifth of Australia’s exportsof goods and services these days,compared with two-fifths in the early1980s, two-thirds in the early 1960s, andfive-sixths in the early 1950s. The otheris that more than 60 per cent ofAustralia’s exports go to East Asia (upfrom barely 20 per cent prior to the mid-1950s), so growth in those exports isvery much dependent on a return torapid economic growth in Asia. HenceAustralia has a strong interest in theimplementation of the Uruguay Round’sagreement on textiles and clothing:directly, because it could expand exportsof Australian wool to Asia; andindirectly, because freer textile trademeans faster economic growth andstructural change in densely populatedAsia and hence faster growth in theirimports of many other products fromnatural resource-rich economies.

Australia, being geographically on theperiphery, also has a strong interest inopen trade in skill-intensive productswhose production location need notmatter, such as electronic commerce.And being in the East Asian time zonegives it a potential comparativeadvantage in financial services. Hencekeeping trade in services open andliberalising such markets more in thenext WTO round will help to further thetransformation of the Australianeconomy into a high-tech serviceprovider.

As a small economy Australia benefitsgreatly from the reduced uncertaintythat a rules-based trading systemprovides, even if that system took untilrecently to begin prising openagricultural markets. Australia is nowconsidered a very responsible WTOmember, particularly with thesubstantial amount of unilateraleconomic reform it has undertaken inthe past 15 or so years. To keep buildingon that reputation, and thedisproportionately large influence thatallows Australia to have in shaping theWTO’s future path, the remainingvestiges of our protectionist past need tobe removed. The most glaring areas arerestrictions on imports of motor vehiclesand parts and of course textiles andclothing, whose reforms are to be onhold during 2000-2004. But even in theagriculture area Australia may have topolish its image. Its quarantine policiesare being perceived as excessivelyprotectionist (James and Anderson 1998,1999), and the Wheat Board as a single-desk exporter is also being targeted.Even its food quality standards (e.g., forwine) could be subject to challenge,which is why ANZFA is in the processof replacing Australia's Food StandardsCode and the comparable New Zealandcode with a minimalist joint AustraliaNew Zealand Food Standards Code. IfAustralia wishes to again take a leading



role in the next round of WTOnegotiations, accelerating the reforms ithas begun in those areas also would bewise.

The WTOs ‘millennium’ round thusoffers probably the best prospects everfor agricultural-exporting countries ingeneral – and their rural communities inparticular - to secure growth-enhancingreforms abroad. Traditional agriculturalmarket access liberalisation should bethe key priority issue in the next WTOround of multilateral trade negotiations,given the enormous potential for globalwelfare gains from reducing agriculturalprotection.

This next round will, however, beconducted in an environment in whichglobalisation forces (including ever-faster development and internationaltransfers of information, ideas, capital,skills and new technologies) will, byhaving ever-stronger impacts ondomestic markets, simultaneouslytrigger insulationist policy reactions. Forexample, further reductions intraditional measures of farm protectionwill meet significant resistance innumerous OECD countries, as farmgroups join with food safety andenvironmental groups to argue for newforms of agricultural protection. In thesecircumstances the mercantilist nature oftrade negotiations may require that theagenda of the next WTO round includenot only other sectors but also some“new trade agenda” items such asinvestment and competition policies, soas to provide the potential for beneficialissue linkages and tradeoffs.

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Documents

Globalisation, WTO and the Next Round of Trade Negotiations