World Trade Organization

February 17, 2005

Backgrounder
Current political and economic issues succinctly explained.

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What’s on the agenda at the WTO conference?

The central issue being negotiated at the September 10-14 World Trade Organizationmeeting in Cancun, Mexico, is expanding poor countries’ access to global markets and reducing agricultural subsidies in developed countries. Participants will also work on finalizing arrangements to ease the sale of life-saving generic drugs to poor nations and continue discussions about trade rules that would, for the first time, regulate foreign investment and competition policies for member countries.

What is the WTO?

It is the successor to the General Agreement on Tariffs and Trade (GATT). Established in 1995 and based in Geneva, Switzerland, the WTO is a global organization dealing with the rules of trade between nations. At major meetings every two years, such as this week’s in Cancun, member states--there are currently 146--negotiate agreements that set the legal ground rules for international commerce. Decisions are made by consensus.

What was the GATT?

The GATT was created at the end of World War II. GATT rules--some 30,000 pages of them--remain the principal foundation for international trade in goods, and WTO agreements build on them.

What is at issue in the WTO debate over agricultural trade?

The issue pits rich nations against poor ones. Subsidies that developed countries pay to their farmers, many trade experts say, contribute to global poverty by lowering global prices for cotton, sugar, rice, and other crops that are primary income sources for many of the world’s poorest nations. Developing nations want wealthy nations to cut the subsidies; the developed countries say subsidy cuts must be matched by concessions from poor countries, such as lowering tariffs on imports of manufactured goods.

What is the relationship between subsidies and low prices for farm products?

Many of the world’s poorest nations have few exports besides basic agricultural products, says Isaiah Frank, the William L. Clayton Professor of International Economics at the Paul H. Nitze School of Advanced International Studies in Washington. These countries are hard pressed to compete against richer nations, such as the United States, members of the European Union (E.U.), and Japan, that support their farmers with subsidies. This assistance--estimated by the World Bank at some $300 billion annually--increases the supply of basic agricultural goods on the world market, which in turn lowers their prices.

Why do rich nations subsidize their farmers?

Because if they didn’t, many of the farmers would go out of business. Current world market prices can’t sustain an acceptable standard of living for most farmers in the developed world, many experts say. The subsidies supplement farmers’ incomes, which allows them to keep farming. Farmers and corporations that engage in farming have considerable political clout in the United States and other developed nations, and they have convinced lawmakers to maintain the subsidies.

Why don’t poor countries subsidize their farmers?

They generally can’t afford it. Poor countries try to protect their farmers in other ways; for example, tariffs on agricultural goods are often even higher in poor countries than in rich ones, according to the Economist. In addition, many poor countries heavily tax manufactured goods from developed nations in an effort to boost their own young industries. Getting rid of tariffs would help increase agricultural trade between poor nations, free-trade advocates say, just as dropping tariffs in the developed world would expand trade by opening more markets to Third World goods.

Are there other reasons for agricultural subsidies?

Yes. Some governments cite national security concerns, saying they do not want to rely on other nations for food. Others mention cultural concerns, including a desire to keep traditional styles of agriculture alive. This is especially true in parts of Europe, where some farm products--French cheeses, for example--have become entwined with the national cultural identity. Europe’s main subsidy program, the Common Agricultural Policy (CAP), provided $58 billion in support last year; the United States sent $21.4 billion in subsidy checks to farmers. Japan and other wealthy Organization for Economic Cooperation and Development (OECD) nations also subsidize their farmers.

Will the Cancun meetings resolve the farm issue?

Deep divisions between rich and poor countries remain. Negotiators may make limited progress, but most experts believe a final agreement to cut subsidies is far off. Last month the United States and European Union offered a partial, gradual lifting of farm subsidies over five or more years but demanded in return a gradual reduction of tariffs in poor countries and more protection for some products. A coalition of 21 developing nations led by Brazil, India, and China demanded a faster, more dramatic subsidy cut, while maintaining their own protections on agriculture and manufactured goods. "I’m not too sanguine about it," Frank says of the prospects of an agreement. "The United States has just passed a huge, enlarged subsidy bill [that will add $82 billion over 10 years to U.S. agricultural subsidies], and how much give there is in the U.S.-E.U. position, I don’t know." Nigel Purvis, a scholar at The Brookings Institution who was involved in the 1999 WTO talks in Seattle, agrees. "They are nowhere near agreement on the big issue of agriculture," he says.

Is progress on the issue of generic drugs more likely?

Yes, many experts say. In the weeks before the meeting, negotiators agreed on a resolution that appears to pave the way for poor nations to buy generic versions of life-saving drugs to fight AIDS, malaria, and other diseases. Pharmaceutical companies, citing intellectual property rights, have historically resisted such efforts--but global pressure, coupled with significant patent protections built into the law, eased the way to the agreement. The basic elements of the deal--which will allow poor nations to buy generic drugs from Brazil, India, and other producing nations--have been agreed upon, but many technical details remain unresolved. "In my experience, nothing is agreed until everything is agreed," Purvis says.

What about other issues?

Developing nations are still pressing for increased access to developed-nation markets for such products as textiles and footwear. The United States maintains quotas on textile imports, but they are slated to be phased out by 2005. Developed nations, in turn, want developing nations to reduce tariffs and other barriers to their manufactured goods. The E.U. and Japan want to tie trade concessions to progress on trade rules in four new areas: investment policy, competition policy, transparency procedures in government procurement, and trade-facilitating policy, such as customs procedures. Poor nations are worried that expanding the WTO’s reach into these areas would be expensive and could undermine their ability to set sovereign policies more aligned with their local political and economic circumstances.

When are these issues supposed to be decided?

By the end of 2004, according to the ambitious timetable set by the WTO in 2001 at its last major meeting in Doha, Qatar. A main purpose of the Doha round of WTO talks was to create international trade policies that address the issue of global poverty, which is why it is sometimes called the Doha Development round. But since 2001, experts say there has been little progress on most issues, with the exception of the potential breakthrough on pharmaceuticals. Progress at Cancun, many experts say, is necessary to keep this round of talks alive.

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