Editorial

THE COMSTOCK REPORT
Copyright 2006 @ CommStock Investments, Inc. - David Kruse

I didn’t think the basis existed for a successful resolution of the Doha round. I feared that the Bush administration would agree to a bad deal and call it a good deal, but didn’t as they weren’t given enough to work with to make a silk purse out of a sow’s ear. Agriculture and food trade have always held back trade liberalization. The U.S. agreed to a bad deal in the Uruguay round, accepting the promise that they would fix EU subsidies and global tariffs, barring market access to free trade in agriculture, in subsequent new rounds of negotiation. The Bush administration did all it could do. It offered to cut/eliminate U.S. ag subsidies if the EU and emerging nations, Brazil and India, lowered trade barriers to ag markets.

Brazil wants access to U.S. ag markets, but wasn’t willing to open financial and industrial sectors further. Brazil is attracting an avalanche of investment as it is, so is feeling too wealthy to concede. Brazil is also injecting more subsidies into its agriculture than is generally known in ag trade circles. Two meetings between Presidents George W. and Lula da Silva, one in Brazil and the other in the U.S., didn’t produce results.

India too, is experiencing strong economic growth, so the motivation to rock the boat is lacking. Chances are better for a good trade deal when both Brazil and India are hard up. India has a different problem - a few hundred million smaller, inefficient, subsistence farmers employed on the land. They fear an inability to assimilate these farmers into their non ag workforce if displaced by food imports.

Europe could absorb its inefficient farmers but doesn’t have the political license to displace them. Europe has the worst, most expensive food of any major economy, but they raise most of it themselves, staying in the Dark Ages relative to GMO technology. All of these countries practice more extreme protectionism than do we, but expect the U.S. to make more unilateral concessions as the U.S. did in the Uruguay round. Global trade liberalization ebbs and flows in cycles. This cycle of globalization of commerce has likely climaxed for now, needing a period of consolidation or a correction of gains for a number of years to absorb some of the uncomfortable baggage that has occurred with expanded trade agreements.

Trade promotion authority expired for George W. Support for Free Trade agreements has cooled in the U.S. The Free Trade Organization for Economic Cooperation and Development concedes that globalization probably contributed to slow wage growth in the U.S. and Europe in recent years, which in turn, contributed to the widening spread between the highest and lowest paid. Yet for all the jobs globalization has cost in the manufacturing sector of the U.S. economy, jobs are being created so no net decline in employment occurred and the quality and value of mean incomes increased globally.

Hilary Clinton opposes the Korean FTA despite former President Bill having pushed NAFTA through. That symbolizes the change in political support in the U.S. Free Trade agreements have not all been roaring successes. We never required China to adhere to items like importing U.S. corn, agreed to in its WTO entry agreement. With U.S. ag trade proponents having been lied to, this cooled support for future deals. DOHA has collapsed to the point they will have to re-name the next round of trade negotiations. The U.S. will be compelled to pursue bilateral trade deals or lose U.S. competitiveness in markets that have excluded us.

The risk in not moving forward with trade liberalization is that the friction resulting increases risk for a trade war. I hope we have enough sense to fear that, as the repercussions to U.S. agriculture would be enormous. I’ve noted that trade talks likely had to fail, really fail, with all sides looking over the abyss into some economic chasm, until the motivation to make the concessions needed to get a real deal worthy of U.S. agriculture’s support could exist. The protectionists will have to scare everybody first. Right now, they think they have won, but the price we will pay for the victory will be a reduction in economic growth, favoring a few special interests at the expense of us all.

Washington is heaping blame for the failure on Brazil and India. India wanted to exempt so many special commodities from tariff reductions that the agreement couldn’t have held water, even if fed by Noah’s Flood. China already has Brazil’s industry under competitive pressure, and the former head of Brazil’s labor union, now serving as President of Brazil, couldn’t see past the pain to the gain this agreement would have brought Brazil.

Unfortunately, this all ended up like it was likely to end up and it’s too bad that I wasn’t proven wrong. I still view the EU as the source of most evil relative to ag trade protectionism, subsidies, tariffs, GMO’s and other trade barriers, which makes them the biggest protectionist lug in the world. It often amazes me how some American Protectionists think that we should be more like them. Most who think that, have never been to Europe. Trade negotiators will get to keep their jobs as usual. DK

Mr. Kruse is also president of AgriVantage Crop Insurance and Brazil Iowa Farms, an investor owned farming operation in Bahia, Brazil.(Futures Trading involves risk. Past performance is not indicative of future performance.) For information on subscribing to the daily CommStock Report, contact:

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