Economic policy is characterised by gross disparity between theory and practice. While standard economics textbooks preach that free trade is a virtue in itself and that protectionism only makes an economy worse off, countries by and large have always found it to their advantage to protect their ‘sensitive’ sectors notably agriculture and textiles.This is especially true in the present context in which faced with sluggish economic growth or even recession major economic powers, such as the US and EU countries, are struggling to reduce job losses. In such a scenario, protectionism becomes politically a far more palatable proposition than freer trade Trade in agriculture has remained subject to a very high level of protectionism. The major reasons are: One, food deficiency can have serious social and political consequences. Two, being a labour intensive sector, agriculture is a major source of employment and thus holds much importance for labour abundant developing countries. Three, in developed countries the landed class, though small, is politically very influential. It is in large measures the need to protect the interests of this class that accounts for the high level of protectionism that characterises the agricultural policies of developed countries.
As for textiles, it is a labour intensive sector that holds special importance for both developing and developed countries, especially in periods of recession and job losses.
Textile quotas have gone but developed countries continue to apply rather high tariffs on import of textiles. For instance, while the average tariffs applied by the US on industrial products are only three per cent, those for textiles and clothing are eight and 12 per cent respectively. Maximum applied tariffs for textiles and clothing in the American market are 34 and 32 per cent respectively. In case of Switzerland, tariffs on some textiles exceed 100 per cent
Agriculture accounts for less than six per cent of global trade but has received special treatment in the multilateral trading system. GATT/WTO prohibition of quotas and export subsidies still does not apply to agriculture. Worldwide average applied tariffs on agriculture are above 40 per cent while those on industrial products are less than 10 per cent.
In Switzerland, average applied tariffs on agricultural products are 45 per cent and in some cases maximum tariffs exceed 1,000 per cent. Japan applies 1,000 per cent tariffs on import of rice, while those on dairy products are as high as 600 per cent.
The EU countries apply tariffs of more than 200 per cent on several agricultural products. In case of the US though average applied tariffs on agricultural products are less than six per cent, in many cases tariffs are close to or more than 100 per cent.
It is not that only developed countries have high tariffs, developing economies have also restrictive trade regimes. Take the two largest developing economies, namely China and India. In case of China, though average applied tariffs on manufactures are less than 10 per cent, tariff peaks exist in several sectors, such as textiles and clothing, leather articles, chemicals, electrical and mechanical appliances and the auto sector.
The Chinese economy is also highly subsidised, which makes domestic products cheaper than foreign competing products.
India applies more than 250 per cent tariffs on some textiles products, while in some other sectors, such as clothing, chemicals, fruits and vegetables and beverages, tariffs exceed 100 per cent. In case of Pakistan, the auto sector is the holy cow with tariff protection of up to 100 per cent.
Moreover, in case of developing countries, there is generally a big gap between bound—those committed in the WTO and hence cannot be raised—and applied tariffs. For instance, in case of Pakistan, while average applied tariffs are only 14, average bound tariffs are 60 per cent.
The foregoing also explains in essence the stalemate in the Doha round of multilateral trade negotiations. Countries big or small, developed or developing have highly protected sectors, which they are reluctant to liberalise. Since one country’s sensitive sector is of another’s export interest, the Doha round, launched in 2001 and originally supposed to conclude by 2004, seems to be getting nowhere.
The recent economic crisis in the West and the resultant fears of further job losses has only made things more difficult and made further trade liberalisation harder to sell at home. Since as per the special and differential treatment principle developed countries are required to offer more than they will get, the agreed package may be difficult to sell in some of their domestic constituencies. For instance, the European Union may have to overhaul its agricultural regime, which obviously will evoke intense opposition of the stakeholders.
Then there are the least developed countries (LDCs). Since the LDCs enjoy duty free access in the markets of most of the developed economies, tariff reduction envisaged by the Doha Round will attenuate the tariff preferences enjoyed by them—preference erosion as the problem has been called. Since in the WTO decisions are made by consensus, the LDCs can effectively block a final agreement if preference erosion is not addressed to their satisfaction.
Trade negotiations have expanded into such politically sensitive areas as the services. Developing countries want developed economies to open themselves up to the movement of labour from the latter. But partly because of the new security paradigm and partly because of the fear of losing jobs to cheaper labour from developing countries, the developed economies are reluctant to open up.
Such problems have pushed the principle of ‘flexibility’ into the negotiations. The principle allows WTO members to exempt a select number of products, to be called sensitive products, from the general tariff or subsidy reduction commitments. However, the range of flexibilities has itself become an apple of discord, because the products carrying higher tariffs are likely to be shielded from liberalisation.
In view of the stated factors, trade liberalisation is partly an economic and partly a political question, which cannot be answered by the academicians or the negotiators alone. It requires above all strong political will. But does the political will exist?
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