The Hon. Mark Vaile, MP
The Hon. Mark Vaile, MP
FORMER MINISTER FOR TRADE

Speech

Sydney, 24 October 2005

Liberalising world trade: aid and debt relief are not enough to end world poverty

The Sydney Institute
Sydney, 24 October 2005

Introduction

There was a time when Victoria had a 45 per cent tariff on wigs imported from New South Wales. Its tariff on a ton of wheat was three pounds, five shillings and fourpence, at a time when wheat cost between five and six pounds a ton.

There were customs posts up and down the Murray River. Many people busied themselves as customs inspectors, smugglers - or both at the same time.

These tariffs were all swept away by federation.

You would be laughed at today if you argued that Victoria needed to protect its strategic wig industry from its competitors in Sydney.

You would be mocked if you claimed that Victoria should subsidise its wheat growers and impose high tariffs to protect its unique way of farming.

But I heard similar arguments in Geneva last week.

I went there to meet my counterparts from the United States, the European Union, India and Brazil. I hoped that we would get closer to an agreement on how to cut farm protection, which is a crucial part of the Doha Round of multilateral trade negotiations.

These negotiations are now on the brink of collapse, because the European Union is refusing to make a meaningful offer on reducing its barriers to imported farm products.

The stakes could not be higher. The failure of the Round would have disastrous consequences:

Fifty years of world trade negotiations

Doha is the ninth round of negotiations since the current world trade system was established in the 1940s, first through the General Agreement on Tariffs and Trade and now through the World Trade Organization. The system was created to undo the damage caused by the mad protectionism of the 1930s and to make sure it would not happen again.

The eight previous Rounds have delivered immense benefits. Between 1950 and 2000, the total value of world trade multiplied 22 times. The average tariff imposed by developed countries on industrial products decreased from more than 40 per cent in 1947 to less than 5 per cent after the Uruguay Round, which ended in 1994.

The GATT and the WTO have not just delivered tariff reductions. They have established common, global rules for handling trade disputes. The rules ensure that countries like Australia have the ability to challenge the protectionist measures of the major nations on equal terms.

The negotiations under the Doha Round are unique in their breadth, complexity and ambition.

The first seven Rounds, from the 1940s to the 1970s, focused mainly on industrial tariffs. The Uruguay Round, from 1986 to 1994, was much broader: it included agriculture, textiles and clothing, as well as services and intellectual property.

But in key areas such as agriculture and services, liberalisation in the Uruguay Round was limited.

Doha seeks to build on the framework created by the Uruguay Round. It aims to go much further on liberalisation, including through greater market access.

The Round is also complicated by the expansion of the WTO from the 123 parties who concluded the Uruguay Round to its current 148 members.

The problem of agriculture

The most important outstanding issue in world trade is agriculture. It is the most distorted part of world trade, and those distortions are keeping millions of people in poverty.

Agricultural trade is characterised by very high tariffs. The tariff for beef in the EU is 85 per cent; the tariff on sugar is more than 180 per cent.

Primary producers in the world's developed countries receive about US$280 billion a year in government support. In the European Union, farmers receive a third of their income from government subsidies. Beef and veal producers get more than 70 per cent of their income from subsidies.(Organisation for Economic Co-operation and Development. Agricultural Policies in OECD Countries: Monitoring and Evaluation 2005. Pages 45-46)

A typical cow in the European Union receives a government subsidy of US$2.20 a day. The cow earns more than 1.2 billion of the world's poorest people.

The World Bank has said that real reform could increase the world price of dairy and sugar by 20 to 40 per cent, and the world price of rice by at least 33 per cent.

Developing countries would be the beneficiaries, because of their comparative advantage in agriculture. One estimate is that real reform would lift an additional 140 million people out of poverty.(World Bank. Global Monitoring Report 2004: Policies and actions for achieving the MDGs and Related Outcomes. 25 April 2004. Page 10)

We're not talking about relative poverty here or Henderson poverty lines. We're talking about absolute poverty, about people who earn less than those European cows.

The increased income would enable them to feed their children better and give them a basic education. It would allow them to look up from their mattocks with hope for the first time in their lives.

In his book, In Defense of Global Capitalism, Johan Norberg describes the effect of the trade reforms that have already occurred on one Indian village. He says:

When globalization knocks at the door of Bhagant, an elderly agricultural worker and 'untouchable' in the Indian village of Saijani, it leads to houses being built of bricks instead of mud, to people getting shoes on their feet and clean clothes - not rags - on their backs. Outdoors, the streets now have drains, and the fragrance of tilled earth has replaced the stench of refuse. Thirty years ago Bhagant didn't know he was living in India. Today he watches world news on television.(Norberg, J. In Defense of Global Capitalism. Cato Institute, Washington DC, 2003. Page 13)

We have the chance to deliver these results for another 140 million people, and do even more by increasing aid and relieving third world debt at the same time.

That's why the Australian Government aims to double our overseas aid to about A$4 billion a year by 2010. The increase in aid will be conditional on the recipient countries strengthening their governance arrangements and reducing corruption.

It's an important measure, but it is small compared to the benefits of multilateral trade reform. The official aid received by poor countries from the developed world is less than half the cost imposed on those countries by the developed world's trade barriers.

Australian primary producers would also benefit from trade reform.

It would mean more commercial opportunities in lucrative, high value-added markets which are currently either fully or partially closed - like the European market for dairy products or the Japanese market for rice.

It would mean higher sales, because we would be able to compete without the handicap of high tariffs.

And it would mean better returns, because world prices would not be artificially lowered by the subsidised dumping of surplus product which was not economically produced in the first place.

ABARE has estimated that trade reform would increase the average farm income of grain growers by $26,500 a year; it would increase the average income of dairy farmers by $17,700 a year.(Andrews N. et al "Agricultural Trade Reform: benefits for Australian broadacre agriculture." In Australian Commodities. 10:2. June quarter 2003. Pages 249-259)

We've heard many noble sentiments from world leaders about reforming trade. But now it's time for detailed proposals.

The United States has put forward a plan to cut its agricultural subsidies by 60 per cent. It goes well beyond any previous US offer.

It would significantly change America's farm subsidies and constrain its future spending. It would also cut tariffs by 50 to 90 per cent and set a 75 per cent ceiling on tariffs in developed countries. It's an important step forward, although it could go further.

In contrast, the European Union has put forward a disappointing offer. It has offered to cut tariffs by 20 to 50 per cent.

A tariff cut of 20 to 50 percent is just not enough, because of what is called the 'water' in the tariffs.

The water is the difference between the maximum tariff that you are allowed to impose and the tariff level at which additional imports would start to flow. The EU's tariffs on farm products are so high that it would need to make huge cuts before imports would be even remotely competitive. Our assessment is that the cuts would need to be between 60 and 95 per cent for key traded products.

The EU has said it will develop a new offer by Thursday this week. It will need to come up with a proposal that will lead to a substantial improvement in market access.

Australia's role in the Round

Australia has been at the forefront of the efforts to build an ambitious outcome to the Round. It is our highest trade priority, ahead of the free trade agreements that we have been negotiating.

Australia and the other free trading nations in the Cairns Group have kept the focus on agriculture.

Australia is working to get results through a group called the Five Interested Parties - the group I met in Geneva last week and the week before last. We have been meeting regularly over the last eighteen months in an attempt to establish a consensus on agriculture.

Australia is also an active member of the Fluela Group, a steering group of economies that is working out how we can get the Round to a successful conclusion.

On the whole, Australia's role in the Doha Round is comparable to our efforts in the Uruguay Round, which saw the emergence of the Cairns Group. In particular, our role in FIPs is comparable to our role in what was called the G3, which consisted of the European Union, Australia and the United States.

The outcomes we need

In all of these groups, we have been arguing for three outcomes on agriculture.

We are looking for an agreement that will reduce domestic support for agriculture, with the highest subsidisers, such as the European Union, Japan and the United States making the biggest cuts. These cuts will need to be very large to produce a meaningful outcome.

The Australian Government supports the US proposal to dramatically reduce farm subsidies as an important step in the right direction. Under the US proposal, it would cut its own subsidies that are most distorting by 60 per cent; the EU would have to cut its most-distorting subsidies by 83 per cent.

Australia also wants to see action on what are called 'blue box' subsidies. Blue box subsidies are payments to farmers that are designed to be less trade-distorting than traditional subsidies linked to the amount they produce. Australia is arguing for additional disciplines on blue box subsidies in the negotiations.

We are looking for commitments on tariff reductions that will lead to real market access for Australian farmers, such as beef, dairy and sugar exporters.

The United States, the EU and the core group of interested developing countries have all put forward proposals on market access. Only the US proposal would cut tariffs enough to result in new commercial opportunities for all agricultural exports. 

The outcome on market access will depend critically on how we treat what are called sensitive products, in addition to the depth of the tariff cut.

We agreed last year to provide some flexibility in market access for sensitive products, but only if genuine market opening is achieved. For a limited number of sensitive products, the level of the tariff cuts will be lower than for other products. For all these tariff lines, however, genuine market access must be provided by expanding tariff rate quotas. 

The Australian Government considers that the only fair way to expand these quotas is by a percentage of the product's consumption in the importing country. We believe the increase should vary between 7.5 per cent for products with the lowest existing tariffs, to 10.5 per cent for products with the highest tariffs. These increases would provide real opportunities for Australian exporters.

We need to lock in the current conditional agreement to eliminate export subsidies and parallel export support measures by establishing an agreed deadline for it to be achieved. In Australia's view, it should be three years from the end of the negotiations.

It is a reality of the negotiations that we will only be able to make progress on other areas, such as non-agricultural tariffs and services, if we achieve the necessary breakthroughs in agriculture.

We would like to see an agreement on a formula for further reductions in industrial tariffs. It would create new opportunities for Australian exporters. For example:

In services, we are seeking commitments that will help Australian banks and insurance companies establish themselves in overseas markets as wholly-owned subsidiaries, joint ventures or branches.

We are also seeking agreements on transportation, cargo handling, storage and warehousing that will result in better market access for our goods and make them more competitive internationally.

Conclusion

There are now only fifty days before the start of the Hong Kong ministerial meeting of the World Trade Organization.

The Round is now stalled. The responsibility lies squarely with the European Union and particularly France, one of the world's wealthiest countries. They need to understand that they are threatening the future of global trade and cheating millions of the world's poor out of new hope.

It's not enough for them to provide aid and debt relief when the benefits of liberalising trade are so much greater.

The Director-General of the World Trade Organization has warned that it may be necessary to postpone the Hong Kong ministerial meeting if the European Union does not put forward a better proposal on market access.

I don't believe the meeting should be postponed, even if the EU does not put forward a better proposal. I believe that the European Union and France would need to account for their actions before the parliament of world opinion. They should feel the full force of the world's disappointment at the way they would have destroyed the hopes of millions of people.

The Australian Government will work tirelessly over the next fifty days and beyond to reach an agreement that will not only benefit Australian farmers, but will give the poor a chance to grow and prosper by their own efforts.

Thank you.

 

 

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