Owen Hembry: Doha deal vital to quell trade war fears

The Great Depression of the 1930s is burned so strongly into our collective consciousness that people today still nod their heads at grainy old sepia photos of bread-lines and desperate faces.

Instinctively we know how bad things can get.

Many countries adopted protectionist policies in the face of recession, out of an understandable fear to safeguard their own industries and jobs.

But protectionism helped to devastate international trade and create what will be forever remembered as the Great Depression.

Today's generation is better educated, informed and wiser - surely the leaders of the world won't make the same mistakes again?

Unfortunately, history has a tendency to repeat.

The Doha round of World Trade Organisation (WTO) talks aimed at liberalising international trade started in 2001, with an expectation it could be wrapped up in three years, but talks stalled in July last year.

Despite Doha being caught in the doldrums, the leaders of the G20 rich and emerging countries met in Washington in November and agreed not to introduce any new protectionist policies for a year and pledged to try to get Doha completed by the end of last year.

In the midst of the global financial crisis it was a clear message from political leaders: Don't worry we are not going to fall into the traps of the past.

But Russia raised tariffs on cars, India did the same with steel, the European Union in January re-introduced dairy export subsidies and the United States has followed suit.

International dairy prices are bouncing around the bottom of a price cycle after losing more than half their value since late 2007.

The subsidies could create uncertainty, depress prices and send false signals to farmers to make product not needed by the market.

Stephen Jacobi, executive director of the New Zealand International Business Forum, says the commitment was reaffirmed at a G20 meeting in London in April.

"They're [dairy subsidies] not contrary to the letter because they had words in there that they were not going to resort to WTO illegal measures ... but it certainly goes against the spirit," Jacobi says.

The dairy export subsidies used by the EU and US are allowed under World Trade Organisation rules but could have become illegal if the Doha trade talks had been completed.

Jacobi points the initial blame at the Europeans.

"Let's be clear the EU started it, the US didn't have to respond but they have and now we've got to find a way if we can to talk them out of it but the bigger picture is to make it impossible for them to do these sorts of things in the future by finishing Doha."

Both the European Union and the US are committed to completing Doha, he says.

"And I think that there are a lot of others around the place who are dragging the chain and we've go to get the team back together and we've got to start negotiating again," he says.

"Subsidies are not the answer because they prevent industries becoming internationally competitive and they're not the answer because they simply drive prices down which means that industries can't get good returns from the market - we should be trying to open up new markets."

There is an opportunity to sort out the rules for finishing Doha before the end of the Northern Hemisphere summer.

Ministers could meet at the end of the year to seal a deal, Jacobi says.

"I don't think it's possible to do it any quicker than that."

An end-of-year finish would be a brave bet considering the time taken so far.

And so fear is rising of counter retaliation and ultimately trade war - a fear perhaps not unfounded given news last week of European dairy farmers demanding more help, blocking milk plants in France, disrupting traffic in Berlin and protesting at the European Union headquarters in Brussels.

New Zealand ditched subsidies and tariffs in the 1980s.

If the price earned by a farmer here does not cover costs then they have to find ways to be more productive, cut costs, add more value, swap to alternative land use or face the harsh reality for any business and go bust.

However, food is a basic need and last year's food crisis with its soaring prices is still fresh in the memory.

The idea of not being able to feed your own citizens makes nations nervous and so the concerns of farmers in some countries about not being able to turn a profit without state aid perhaps get more consideration than if they were making DVD players.

EU Farm Commissioner Mariann Fischer-Boel has been reported as criticising the United States for using the European Union measures to drive through help for their own farmers, calling it unfair.

You reap what you sow.

Federated Farmers says between 2002 and 2004 the EU's export subsidies averaged $1192 a tonne on milk powder, $2158 on cheese and $3873 on butter.

However, Fonterra managing director of global trade Kelvin Wickham says the EU subsidies reintroduced in January had been controlled and measured.

"Any way you cut it, it's just the US political pandering," Wickham says.

The benefit to US farmers would be minimal but buyers could hold off making purchases on the chance of getting a lower cost because the US are prepared to subsidise the price down, he says.

"It's just showing they're trying to do something to help their farmers when in fact it doesn't really help at all."

There will be increased political pressure on the EU to increase their subsidies, Wickham says.

Trade Minister Tim Groser says his first thought when the EU reintroduced subsidies was: "Oh my god, I wonder what the Americans will now do."

When Groser asked senior EU officials if they had thought about the consequences of their actions he got blank stares.

"This has been a little bit run on autopilot... by the Europeans when it was stunningly obvious that this would lead inevitably to a call on the part of the US dairy industry to match those export subsidies."

The US took time to reply because it was a deeply political decision and they had to wait for the new Obama Administration to be put in place, he says.

Groser says a de-stabilising effect on prices from the US dairy subsidies will be limited, if this is where the action stops.

But what if it doesn't stop?

"Everybody understands that we are facing the world's most severe downturn in world trade since the Great Depression, everyone fully understands how people made this worse in the 1930s through beggar-thy-neighbour policies, there is a huge scope for increased protectionism that is WTO legal."

Groser has seen estimates of an 11 per cent contraction in world trade across all products if nations used legal protectionist measures.

"I just find it extraordinary that these countries which are meant to have the responsibilities of leadership, they come together, they make these commitments in the G20... then the moment they see some political advantage at home to depart from it, they depart from it."

We are better educated, informed and wiser than our ancestors. We have learned from the past and won't make the same mistakes. Right?