Lessons of the Trade

I did it.  I survived.  I made it through my International Trade class, and boy, it was just as stressful and time-consuming as I had predicted it to be in the beginning.  That class took my sleep.  It took my sanity.  It took my opportunities to go play.  It tested my faith in humanity.  It made me suspicious of others.  It made me have negative feelings towards people, not because of who they are, but what the game had encouraged them to do.  It pushed me to do things I was uncomfortable with.  It allowed me to make bonds with people who had the same feelings as me.  It allowed me to tell unique and dramatic stories to my co-workers at the DPRU (as some of them have taken the class in the past).  It challenged me to think strategically.  And at the end of the day, I learned a lot.

If you haven’t had the chance to, please read The Cape Town Round before you continue on.

I learned a lot about international trade and the WTO.  I learned about the state of the world as it is, not in just economic terms but in terms of power and influence.  I learned about the dynamics between developed countries, developing countries, and least-developed countries.  I learned about the various trade-related topics from the very contentious agricultural debates to technical barriers to trade to the Dispute Settlement Mechanism to E-Commerce.  We had to read legal texts and agreements.  We had to write legal texts and agreements of our own.  We had to learn to learn the rules of the game and learn how to master the game.  I learned a lot.

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And my 17,000 word trade report proves that I learned a lot.

Let me go into an example of how this class helped me understand dynamics in the world.  For example, one famous WTO dispute is between Brazil and the United States, “Subsidies of Upland Cotton“.  It surrounds the topic of cotton.  Cotton, I’ve learned, is a highly contentious topic in the WTO, and if you go onto the WTO website, you’ll see that “cotton” gets its own subcategory under “Agriculture”.  This is because cotton is an important good and many countries like the US, countries in the EU, and China have very large cotton subsidies in place.  This means that cotton producers in these countries are able to compete in the world market because their governments ensures them a decent price on cotton.  Usually, the world market price of cotton is very low.  (Arguably, subsidies even dampen the price further, especially if some subsidy programs reward farmers for excess production.  More supply decreases the value of the good). This hurts countries that are unable to have large cotton subsidies, like Chad, because farmers are unable to make a living selling their cotton at the world price.  Therefore, Brazil in 2002, a country that does have subsidies but can’t compete with the US’ subsidies, took the US to the Dispute Settlement Mechanism (DSM).

Without getting into too many details, the US was found to be violating international trade law, but the dispute took about a decade to settle.  Throughout the decade, the WTO found that the US agricultural policies were inconsistent to its commitments and authorized Brazil to essentially retaliate with countermeasures.  The US was able to avoid sanctions by paying Brazil’s cotton producers a sum less than it would have cost if Brazil did put up sanctions.  This continued for years until 2014, when US paid Brazil $300,000 to permanently end the dispute, and Brazil also agreed to relinquish their ability to take countermeasures against the US.

It was argued that if the US did not pay Brazil to end the dispute, the US could have faced higher tariffs (raising the price on domestic consumers) or sanctions from Brazil.  But, this is a short-term fix of the dispute.

There are many implications.  First, this once-off pay-off is one part of the end of the dispute, but there’s also another important part.  Under the new US farm bill, cotton will have the lowest subsidies out of all the field crops that the US produces, when it used to be the highest.  Traditional methods of subsidies – direct payments and counter cyclical payments – which was what the WTO deemed as “trade distorting”, are eliminated.  But farmers are still protected because they can receive 70% to 90% of their expected income through the Stacked Income Protection Program (STAX) from the government, without limit.  This is a form of protectionism (which is technically not allowed in the WTO).  This implies that the US is finding clever ways to essentially dispurse subsidies that the dispute cannot address, especially now that Brazil has been paid to not do anything.

Second, Brazil is one of the few countries in the world that could have been able to have the power to take the US to the DSM.  This is because the DSM is very expensive and like in this case, could take a long time.  Poor countries can’t afford to this.  This probably one of the reasons why Chad was only a third-party in the cotton dispute, even though subsidies hurt Chad’s cotton producers more than it hurts Brazil’s.  Chad lacks the financial, institutional, and human capital necessary to effectively make use of the DSM.

Third, even if a country like Chad were to take the US to the DSM, Chad is not a threat to the US economy.  The US is Chad’s biggest trading partner; most of the oil that Chad exports goes towards the United States.  In the case that if Chad took Brazil’s place in the DSM, the DSM would find that yes, the US’ subsidies are “trade distorting”, but Chad would not have the power to ensure that the US complies to countermeasures.  Sanctions against the US would not be effective because even if Chad were to cut the US from its exports, the US would surely find other countries to buy oil from (Saudi Arabia, UAE, Nigeria, Gabon, Angola, etc.).  Chad’s economy would be the one in ruins.

Fourth, this is not to say that the US government shouldn’t ensure that its farmers can make a decent living and not live in poverty.  Farmers are indisputably very important members to society.  But, protecting farmers in the US comes at a cost to many farmers in the world, especially in developing countries.  Oil and cotton are the two biggest industries in Chad, and it’s interesting to think that the US is simultaneously hurting and helping Chad.

Essentially, there needs to be reform.  Reform to subsidy programs across the board, and to the WTO, so that poorer countries have a voice.

I learned in this class that the WTO is really a battleground of power.  At the end of the simulation, the status quo remains unchanged; we even perpetuated it.  One of my allies in the class was with the representative of Benin.  Benin and Chad are members of Cotton-4 (C-4), a African cotton producing coalition.  One of the main goals of the Cotton-4 is the reduction of cotton subsidies and the eventual elimination of them altogether.  However, in real life, these countries rarely get invited to WTO negotiations and nor do they have a lot of power over the powerful countries (like China, who currently spends the most money on cotton subsidies) to make these changes.

In the simulation, Benin was able to get a “reduction of cotton subsidies” motion passed all the to the Ministerial Round.  We would agree to reduce amber box subsidies (which not many countries have) by 50% and reduce decoupled subsidies by 5%.  Yes, 5%!  This reduction would take place within 5 years for developing countries, 7 years for developing countries, and 9 years for LDCs.  Additionally, we would also create a committee of cotton-producing countries that would evaluate how subsidies may be trade distorting and their effects on these economies.  In my opinion, the motion was very fair to developed countries because the reduction is not very high and developed countries have 5 years to figure out how to do it and make the necessary adjustments.  Additionally, the committee provides a buffer for these countries to negotiate the terms if need be.

However, before we could even vote on this motion (which would be beneficial to developing countries and LDCs), Benin withdrew the motion.

Why would Benin withdraw her own motion, especially since it would be beneficial to her country?

Benin called the day before the vote and told me that she was going to withdraw the motion.  She told me that first, she was getting a considerable amount of aid to do so, and it seemed like the US, China, and the EU were going to vote against it.  Therefore, it would be better to receive aid and not vote on the motion at all rather than have the motion fail and not be able to receive aid at all.

At first, I was surprised.  I wanted to try to pull out all the stops, contact anyone and everyone and try to convince countries to vote for her motion.  But, in the end, I was resigned.  She had a good point.  The odds were stacked against us.

This was one example of the skewness of the WTO.  It highly favors developed countries (and China, a very powerful developing country).  In the simulation, countries made it their goal not to reduce subsidies.  Or if they absolutely had to, reduce them by the smallest amount possible.  We passed a motion to reduce subsidies on coffee by 3%.  3%!

This is understandable because reducing subsidies in countries where there are already high subsidies and farmers rely on them for income, is harmful.  I get it.  But, subsidies in place now have been constantly detrimental for developing countries that rely on cotton trade.

Countries needed to make concessions but they refused.  They are the greatest position to make some compromises because as richer nations, they have greater resources to figure something out.  Try something else that doesn’t keep poor countries poor.2  You can do it!

But, really, they didn’t have to.  There was nothing in the rules that said that they had to.  They simply took advantage of the system that was already in their favor and didn’t consider the needs of developing countries.  They only looked out for their best interests, which ultimately led to rent seeking.1  This could shed some light as to why the Doha Development Round of the WTO, which began in 2001, is still not resolved today.  The WTO doesn’t really help develop developing countries or LDCs, if developed countries are only vying for their own interests.

I saw this in class too, and it all the more stressed the importance of wording.  Every time the word “subsidy” came up in a motion, it alerted all the countries with subsidies to vote no.  But, it was also true that delegates often worded a motion vaguely so that people couldn’t understand fully what they were voting on.  Towards the end of the class, there was about 160 motions to vote on, which means you had to understand what the implications are for many of the motions (we only got to about 70 motions).  If your attention is spread to different trade topics, then it is quite impossible to fully understand what certain motions meant to you.  So, it was quite possible for other countries to trick others to vote for a motion that was worded like it would be beneficial, but really isn’t (or if someone persuaded you to think so).  This happened throughout the class.

Furthermore, I was also able to see how countries strategized to bring other countries down.  This simulation was a competition between economies.  Therefore, it was strategic to pass motions that would be explicitly harmful to other countries in order for your country to gain an economic advantage.  There were also cases that both countries would take losses, but your country, a little less.  It was a power struggle between the US and the EU, the US and China, the EU and the Cairns Group.  It was about bring other economies down instead of trying to internally strengthen your own economy or help developing countries.

Is this how it is in the real world?  That the US must maintain their lead, so it would do things to destroy the Chinese economy (you can insert any two competiting economies in the place of China and the US)?

The WTO is a battlefield, where powerful countries compete against each other, while poorer countries are essentially collateral damage.

This is a very exaggerated statement, but as a representative of one of the poorest countries on Earth, I wasn’t able to accomplish much.  It is true that there are strides to consider developing countries and LDCs, but the gamemakers are the most powerful countries.  I was easily pushed around my other countries, up to the point where I didn’t like some people (because of how the played the game, not because of who they are).  Up to the point where I didn’t know who I could trust.

I also learned a lot about myself.

I learned that I do not feel comfortable with lying to others or not telling the whole truth.  I feel like when we are able to work together and negotiate properly, we could achieve mutually benefitting gains (this happened maybe once or twice in the whole simulation).  It is not to say that the results hurt developing countries and LDCs entirely; there were some very positive motions that would benefit them (if they were real).  But, if the focus of the Development Round was development, and I am not so sure that I saw that.

This class was extremely insightful because I learned a lot about trade topics, real world development issues, the WTO, and myself.  But, never again.

Over and out.

 

 

1 These are all exaggerated statements, but I’m trying to make a point.

2 I think one of the problems in the class is that even though we’re learning about many trade topics that effect many aspects of the economy, we’re primarily focused on international trade. However, there are other mechanisms that countries use to boost their economies. A strong domestic policy and smart fiscal policy could easily offset some losses of a developed country, and then, they would be willing to make more compromises for the betterment of the developing world.

 

PS. The title of this post is in referring to the book, “Rules of the Trade“, which, I feel is a very appropriate connection.

PPS. Every time I tell someone about this class, they say, “that sounds so much fun!”  I then proceed to say, “it sounds fun in theory”.

 

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