Reasons behind the failure: unsuccessful Cancun summit puts future of WTO in doubt.

If you took delegates from 146 countries--ranging from the poorest agricultural regions in Africa to the most affluent nations of Europe--and asked them to negotiate a trade agreement that would satisfy everyone, what are the chances they would succeed?

Very slim, as the collapse of the World Trade Organization talks in Cancun in September proved. Despite the recognition that free trade in theory leads to greater global prosperity, participants at Cancun fell into two general, and opposing, camps: The developing countries, who contended that the richer nations' agricultural subsidies clearly give these nations an unfair trading advantage, and the more developed countries, which sought new global rules that would help protect their economic interests.

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Add to these differences a few too many negotiating ploys and on Sept. 14, any hope of agreement dissolved. The developing nations pulled out of the talks before they had begun in earnest, pointing angrily to a last-minute maneuver by the European Union to put investment and antitrust issues at the top of the agenda.

But almost everyone agrees that the 800-pound gorilla at these talks was the issue of farm subsidies, on which the advanced countries said they are willing to compromise, but somehow never have. Failure to reach any agreement in this area suggests that this latest round of talks--begun in Doha, Qatar, in November 2001--has little hope of concluding by the scheduled deadline of December 2004. Negotiations now move back to Geneva, the WTO's headquarters.

Despite the breakdown, most observers note that the Cancun meeting was different from earlier talks in a number of respects.

POLITICS TRUMPS PRUDENCE

The Cancun talks came as the United States gears up for the 2004 presidential elections and the European Union prepares to add 10 new members and deal with some of its unruly members. This means that domestic politics played an unusually large role.

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In the United States, for example, the Republicans--facing criticism over continued job losses and factory closings--are concerned that allowing cheaper foreign manufactured goods into the country will only add to those declines, while concessions on agricultural subsidies will cost them votes in the all-important farm belt. Indeed, the Bush administration recently created a new Unfair Trade Practices Team within the Commerce Department whose purpose seems to be to protect American industry and stop job erosion.

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In this climate, it was unlikely that the developing countries would come away with any significant reductions in agricultural subsidies, despite the fact that they "are a scandal," said Stephen Kobrin, a management professor at University of Pennsylvania's Wharton School of Business. "In the U.S., these subsidies tend to go to large corporate entities that are politically powerful. Many of the developing countries, especially Brazil, are wellplaced to produce agricultural products and export them if they had entry into developed countries' markets. A multilateral trading system, or some sort of integrated economy, will work only to the extent that it is fair. And it certainly isn't fair now."

EVIL SUBSIDIES

Wharton finance professor Richard Herring agreed. "Over several rounds of negotiations, the developed world should have a very heavy conscience for having skirted this whole issue of subsidies, which is so important to the Third World ... There is probably no better policy for the emerging countries than removing barriers to agricultural trade. Is this likely to happen? That's hard to say. In some ways it is being brought to a head more clearly than it has in any of the past rounds. But continuing to put pressure on the advanced nations to rethink their agricultural policies is long overdue.

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"There are very few things you can do for the world economy to try and reignite growth in a way that benefits most players," continued Herring, the director of the Joseph H. Lauder Institute of Management and International Studies. "Trade liberalization is surely one of them."

Europe, he said, has very weak growth prospects, and Japan and the United States are in varying stages of recovery. "But the real engine of growth ought to be the emerging markets. They are going to have a tough time if their markets are blocked."

Why, for example, does the U.S. grow cotton, asked management professor Witold Henisz. "There is no economic rationale. It is political. Why are we growing rice in California? It's subsidized by almost free water and the rice is dropped by plane, because it's too expensive to plant by hand. Protection allows this to happen. The EU and Japan have massive protectionist policies as well. These are exactly the areas--agricultural goods and textiles--that developing countries should be specializing in. We are not allowing them to do that.

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"On a purely moral basis, subsidies are wrong," he said. "But economic policy isn't made based on moral argument; it is made based on votes. From that perspective, both sides [in the trade dispute] are facing constraints that are making it hard to reach any agreement."

The perception among developing countries is that "they have not gotten a fair share of the gains, and they aren't willing to go forward unless they do," Henisz added. "The problem is that the EU recession and political cycles in the U.S. make it impossible for them to get what they perceive as fair.

"In two years, when the global economy is growing at 3-4%, it will be more politically possible to make global compromises on both sides. But when the economy is struggling, there are short-term costs associated with trade liberalization. Gains come in the long term and costs are loaded in the short term," he said.

NEW GUYS ON THE BLOCK

Much of the buzz around the Cancun talks centered on the rise of a new alliance of 22 developing countries--including Brazil, India and China--that successfully challenged the agenda of the industrialized countries and contributed to the eventual stalemate. Yet whether this coalition--known as The Group of 22--can hold together going forward is debatable.

"It remains to be seen whether this is going to be a group that lasts," said Wharton finance professor Armando Gomes. "There are many divergent interests within these 22 countries, and there are some forces that may break them up. For example, the developed countries will try to set up bilateral negotiations [with certain countries now in the coalition]. It is going to be interesting to see if the U.S. offers China some special deal. Countries may be tempted by these deals because the coalition's common interests may not be well aligned in the first place."

According to Kobrin, whether the coalition stays together is less important than the fact that there "has been a power shift. The developing countries have a lot more political power and the ability to throw a monkey wrench into the trade negotiations that they didn't have even 10 years ago in the Uruguay Round. Up until now, the developing countries basically went along" with the agenda of the richer nations.

The coalition was an important development, said Henisz, "in that both the Seattle talks and the Cancun talks broke down because of the sense that the industrialized countries were pushing forward dramatically with their own agendas [and ignoring the needs of the emerging markets]. The formation of this coalition makes it much more difficult for industrial nations to cut a special deal with other countries."

One of the key issues was cotton, he added. The United States and Europe offer protection to their cotton growers, even though "it's a sector in which sub-Saharan Africa has a cost advantage." The coalition nixed U.S. attempts to buy off a few of these African countries by giving them special deals, who said cotton is part of a "bundle of negotiations" and can't be separated out.

The EU sought to put the so-called Singapore issues--a set of rules to protect global trading in such areas as investment, competition (antitrust law), intellectual property (e.g. patents), trade facilitation (e.g. reform of inefficient and corrupt customs practices) and transparency in government procurement--high on the agenda. Many WTO members view these issues as critical because "corruption is one of the single greatest impediments to international trade," said Wharton legal studies professor Philip Nichols.

The Singapore issues further polarized the two camps. Developing countries wanted more progress on textiles and agriculture, while the EU was not willing to move forward without more commitments from the others about how they would treat foreign direct investment, Henisz said. "The issues revolved around ways to make investment laws in emerging countries similar to those in industrialized countries." At the same time, he added, developing countries perceive that these laws are really intended to help multinationals in the wealthier countries more easily enter and compete in their markets."

PUNITIVE U.S. PERSPECTIVE

With the collapse of the talks on September 14, many observers suggest that special deals, in the form of bilateral or regional trade agreements, will be a way for some countries and regions to move ahead with their own agendas. Such agreements, however, bring their own share of criticism.

Kobrin expressed his grave concern regarding the reaction of the U.S. that it can deal with the failure of talks on global trade by arranging bilateral or regional negotiations.

"These initiatives tend to be political. We will reward countries that support us on other issues, such as Iraq, with a bilateral deal," he said. "Also, it is destructive of the whole concept of multilateralism. You can't have different deals and sets of rules with different people."

Bilateral deals, said management professor Gerald McDermott, "are short-term oriented and they tend to benefit the U.S. The trade deal with Chile [to go into affect Jan. 1, 2004], for example, is not the best deal for that country. It helps Chile gain some status in international geopolitics and finance, but it doesn't give them quick access to key markets."

Latin America, he suggests, "needs to tie support for institutional development into trade agreements," including support in areas like education, research and development, and technology advancement. "That is what the EU does in its accession process. It gives countries entering the EU a lot of help with institutions related to labor, law, the environment, technology, etc. The U.S. doesn't offer this to countries it does deals with. But that doesn't surprise me. I don't see the current administration seriously committed to building international frameworks for global free trade. President Bush and his trade officials have nixed a lot of international agreements. Working with developing countries on institutional reforms is completely off their charts."

McDermott used Argentina as an example. "Argentina collapsed in 2002 for a number of reasons, but one of the key ones is that exports accounted for only 10% of GDP in the 1990s. So it wasn't making money to cover its debt. The reaction of the U.S. was. 'It's not our problem that Argentina doesn't know how to export.' It just so happens, however, that the most immediate source of exports for Argentina are exactly the products that have relatively high trade barriers." These include beef, grains, honey and some fruits, all of which face tough restrictions in the United States.

BALANCE OF POWER IN TRADE

That situation may change, as countries in Latin America move aggressively to join forces in a trade group of their own that could offset the clout of the United States. Mercosur, the world's third-largest such group, already includes Brazil, Argentina. Paraguay and Uruguay, and the organization is trying to persuade other Latin American countries to join as well.

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Meanwhile, the United States is moving ahead with its own efforts on several fronts. In addition to individual agreements with Chile, Jordan, Israel and Singapore, it is in negotiations with Morocco, Australia, several Central American countries collectively (Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua) and several Southern African countries collectively (Botswana, Lesotho, Namibia, South Africa and Swaziland). The United States is also continuing efforts to set up a Free Trade Area of the Americas, which would include all of the Western Hemisphere, from Canada down to Argentina.

There is a lot at stake. "If the Latin American countries are able to negotiate together against the U.S., it will be hard for the U.S. to cut these bilateral deals," said Henisz. "It's a key move by Brazilian President Luiz Inacio Lula da Silva and others to see if they can maintain this coalition on a regional basis. It will give them more bargaining power."

FUTURE OF THE WTO

The collapse of the Cancun talks raises the question of how effective the WTO can be in reaching the elusive goal of global free trade.

While anti-trade activists were jubilant over the failed negotiations, reaction worldwide ranged from outrage to disappointment to disgust. An article in the Sept. 20 Economist, for example, suggested that Cancun's collapse "leaves the whole system in peril. It comes less than four years after a similar flop in Seattle in 1999, where efforts to launch trade talks failed amid street violence. After two such abject defeats in four years, the WTO is in enormous trouble. If it becomes entirely irrelevant to the conduct of trade policy ... the developing world will come to regret the consequences bitterly over the coming years."

Some observers, however, are less negative. "Cancun was typical of the way trade talks come and go," said legal studies professor G. Richard Shell. "It wasn't a train wreck: it was more a matter of changing engines. But the stalemate does seem to have clarified a fault line between the developing and developed countries that was there but was never quite so dramatic. The conflict between the have and have-nots in global economic development has been squarely presented."

Before the WTO was created in 1995, there were a number of collapsed rounds, according to Shell.

"Cancun represents a stage in the negotiation process where trade representatives from all the member countries have discovered that there is just not enough consensus to drive an agreement at this time," he said. "For an agreement to happen, you need a magic moment where the domestic political agendas all converge on a single set of terms. It's very difficult to do. It does happen, maybe once a decade. We just aren't there yet."

What happens next, Shell suggested, is that the permanent trade representatives in Geneva will continue to work on the process. Meanwhile, the domestic political agendas in Europe, the United States and elsewhere will evolve, after which everyone will try to set the conditions for change. Hopefully, as time passes, WTO members will be in a better position to offer concessions."

Already, according to the Wall Street Journal, the European Commission in late September offered proposals to cut the prices on four "politically sensitive" products: tobacco, olive oil, cotton and sugar. "European farmers now receive guaranteed prices much higher than world rates for these products," the Journal said. "The high payments encourage overproduction and harm farmers from less-developed nations." The Journal also noted, however, that European farm ministers still "must approve these policies ... and opposition is bound to be fierce."

Nichols analyzes the effectiveness of the WTO--which with the addition of Cambodia and Nepal several days ago now has 148 countries--by comparing it to the United Nations and GATT (General Agreement on Tariffs and Trade), the precursor to the WTO.

"GATT was so effective in reducing the big barriers to trade that we now look at the little barriers and think of them as significant," he said. People who study organizations suggest that the U.N. is not as effective, partly because it is politicized, he added. "The GATT was a one-issue organization. It was relatively unpoliticized. People believed in it; trade negotiators were out of the public eye and they got the job done. That appears not to be the case with the WTO."

DON'T BECOME THE U.N.

Cancun was both a public and a politicized event, Nichols said. Part of the problem is the WTO's structure. The majority rules, and the votes are allocated to anyone who controls a customs territory (which is why Hong Kong and Taiwan are members even though many don't consider them countries). Small countries have the same one vote as large countries.

In the long run, Nichols said. "Cancun won't have a big impact because the underlying mission of the WTO is to facilitate trade. That is something most people want to accomplish ... In addition, there are issues that each side needs the other for" which suggests, he adds, the possibility of significant "horse trading."

As for Kobrin, his concern "is that the WTO will become marginalized. I worry not about the disintegration of the world economy but about an integrated world economy that is dysfunctional, from which there is no escape. We can't go back to independent national economies and we can't make this one work, so we get caught in middle ground."

Any time you have "a breakdown in talks and an increase in acrimony, there is the potential for it to spill over into disputes, whether they are about pharmaceuticals, the diamond trade or agriculture." Henisz said. "But there is no reason we can't come back in two or three years with different leaders and different conditions. I don't view the collapse of the talks as any sort of huge shock. It's more that we lost an opportunity to expand trade, encourage higher growth and address the moral inconsistencies of some subsidies."

The history of subsidies, added Herring, is that they are going to require intervention from much higher up in the political food chain to get things re-energized. It will probably take a major commitment from the U.S. president and Japanese premier. And in Europe, there is always the difficulty of convincing French Prime Minister Jacques Chirac, German Chancellor Gerhard Schroeder and British Prime Minister Tony Blair, and increasingly the other leaders, that they need to put some political weight behind solving these issues.

"It is a reflection of the fact that we have had so many trade rounds that we have plucked all the low-hanging fruit," Herring said. "Most of the remaining issues are hard ones and will lead to important redistributions of income in certain sectors. So it's not surprising that it has been hard to [get an agreement] but it is disappointing that the Cancun conference did not end on a more positive note."

This article is reprinted with permission from knowledge@wharton, an online resource affiliated with the University of Pennsylvania's School of Business.