Financial Times (June 22, 2010)

Pay to play in trade

When faced with a problem, throw money at it: a prevailing attitude in the US Congress for years. It now extends to trade policy.

Washington said last week it had extended a ceasefire in one of the most high-profile disputes in international trade. In a case brought by Brazil, a World Trade Organisation dispute settlement panel in 2004 declared US cotton subsidies illegal and ordered changes. Since then, the US has stonewalled, wrongly claimed it had complied with the ruling, and generally displayed behaviour likely to undermine the credibility of the WTO.

Last week’s decision prolongs for two years a temporary deal whereby the US gives Brazilian cotton farmers $147.3m a year and Brazil agrees not to apply WTO-authorised trade sanctions. The idea is to postpone cotton subsidy reform until 2012 and the next five-yearly iteration of the “farm bill”, America’s wasteful and distorting agricultural support programme.

While this looks like a mature compromise, in reality it continues a disturbing pattern whereby the US attempts to wriggle out of current obligations arising out of litigation while steadfastly failing to create meaningful new ones through negotiation.

Presently, the US is also defying a North American Free Trade Agreement (Nafta) ruling allowing Mexican trucks to operate in the US, and continues to defy common sense and the WTO in defending “zeroing”, a biased method of calculating anti-dumping duties and hence restricting imports.

Meanwhile, with the multilateral “Doha round” of talks drifting, the US trade representative’s office is wasting its time on a largely symbolic trans-Pacific deal which brings together a few countries, several of which (Australia, Chile, Singapore) already have trade pacts with the US. It has shown even less appetite for taking on the US agricultural lobby than did the Bush administration.

Substituting cash payments for policy changes to comply with WTO rulings, though theoretically possible, has considerable risks. The point of the WTO is to move towards a trading regime where economies exploit comparative advantage, not to create a global protection racket where governments cosset inefficient industries by buying off potential litigants.

In effect, Washington has now included some Brazilian farmers in its support programmes – thus creating another group with a stake in preserving the inefficient status quo. The US must put away the chequebook, confront its farm lobby and stand up for free trade.