The top five trade myths

As a "public service'. the FT's world trade editor, Alan Beattie, offers The truth behind the top five trade myths and why it matters. "Buried in these myths are glints of truth" he writes. "....but that does not mean that every story you hear about trade is true."

I present below, in a convenient cut-out and keep form, the current top five myths on the trade negotiations circuit:

1. "Ghana is allowed to sell raw cocoa beans to the European Union, but if it exports finished chocolate it gets hit by big tariffs."

No it does not. Chocolate from Ghana has a zero tariff into the EU. (Some sweetened cocoa powder is taxed but generally only when it contains more sugar than cocoa.) As a member of the poor "Africa-Caribbean-Pacific" grouping of countries, Ghana gets special trade access. Check for yourself at http://export-help.cec.eu.int.

The real, rather banal reason Ghana tends only to export small amounts of high-quality premium chocolate is that it has neither the infrastructure nor the capability to scale up. It does not help that chocolate melts in the tropical heat and maintaining a temperature-controlled manufacturing, trucking and shipping chain is expensive...

2. "Each European Union cow gets $2.40 a day in subsidies, more than what 1bn people each have to live on."

Not really. The $2.40 number comes from taking the "producer support estimate" (PSE) for the dairy industry and dividing it by the number of cows in Europe. The PSE shows how much taxpayers and consumers transfer to farmers because of subsidies or other market-fixing practices. But at present the EU delivers the vast bulk of that support to dairy farmers not by handing out cash but by maintaining artificially high milk prices, mostly by taxing cheaper foreign imports.

This distinction matters for two reasons. One, if we are going to count import tariffs as subsidies, it is only fair to say that sauce for the rich protectionist goose is sauce for the poorer protectionist gander. If Europe's cows have it easy, each Indian grain of rice must also be living the life of Riley.

Second, the myth appears cunningly designed to imply that the "subsidy" money could be better spent elsewhere, perhaps on foreign aid. But that money does not pass through the government's hands. It goes straight from consumer to farmer at the point of purchase. If governments wanted to redirect money from farming to aid they would have to come out and raise taxes or cut other spending to pay for it.

Sadly, I fear I am fighting a losing battle on this one. Misleading though it is, the $2.40 cow is too good a story to give up. Bono, for example, keeps citing it even after I have explained to him why it is wrong.

3. "The World Trade Organisation is undemocratic and secretive."

Yeah, right. The WTO is so democratic it can hardly move. It has 149 member governments, any one of which can block a deal. Imagine the British House of Commons or the Japanese Diet or the US House of Representatives if every member had a veto over every bill.

As for secrecy, the negotiating papers for this weekend's talks, with some blunt commentary from the authors who are chairing the discussions, are right here. ...It is about as secretive as the World Cup final.

4. "No economy ever got rich without using tariffs to industrialise."

This claim, generally used by developing countries to avoid cutting tariffs, has a two-word refutation: Hong Kong. Some say Hong Kong's postwar success was as a port and financial centre for China. Not true. Being the entrepot for a country under US and United Nations embargoes and ruled by an autarkic Communist was not exactly a licence to print money. Hong Kong did the same as the other Asian tigers - starting off with clothing and other labour-intensive manufacturing and moving into more sophisticated products and services later.

5. "Cutting rich countries' farm subsidies and tariffs will be a big boost for the world's poorest."

This is the one that we all really want to be true. Sadly, it is not. The poorest countries, with the important exception of cotton-growers such as those in west Africa, generally do not grow many crops that compete directly with exports from Japan, Europe or the US, and they themselves have pretty good access to those countries' markets through special preference programmes. They do not need new markets as much as they need something to sell and decent roads, ports and airports to help them sell it...

Comments

[Mauro]

I think these arguments are simply wrong.
For instance, they say that "the EU delivers the vast bulk of that support to dairy farmers not by handing out cash but by maintaining artificially high milk prices, mostly by taxing cheaper foreign imports." In fact,the support comes not only from high, very high, tariffs on imports, which makes import virtually imposible. It is important to acknowledge the high subsidies to storage and to export production surplus.
EU is a big exporter of powder milk, butter, and dairy, and all these exports are subsidyed.
India and poor coutries dont export the products on which they impose high tariffs.
This is valid for milk, sugar, and cotton in the USA.

EU giving subsidies to exports and, at the same time, blocking imports, makes, in my view, statements listed as "myths" 1, 2 and 3 to be true.

The reckoning only for cotton, that poor countries would benefit from the end of subsidies is a consequence that EU is a cotton importer.

[Mr Grumpy]

Good article, but point 2 seems to me to be splitting hairs. Isn't the end result much the same as if governments slapped a special tax on milk and handed the proceeds out to dairy farmers?