by Gary Clyde Hufbauer, Peterson Institute for International Economics
and Jeffrey J. Schott, Peterson Institute for International Economics
and Woan Foong Wong, Peterson Institute for International Economics
Op-ed in Vox-EU.org
February 22, 2010
Fears of protectionism have risen in the wake of the global financial crisis. This column argues that, far from being time to abandon the Doha Round, sustaining political support for the rules-based multilateral trade system is more important than ever. If this column's recommendations are followed, world GDP could gain up to $282.7 billion a year.
Crisis-linked unemployment remains stubbornly high, and protectionist pressures are mounting (Bown 2010, Evenett 2010). Sustaining political support for the rules-based multilateral trade system is more important than ever to the global economy. A key element of this support—concluding the WTO's ongoing multilateral trade talks—is suffering from a lack of political will.
This record of futility has led some observers to propose dropping the whole venture and starting over with a new agenda focused on 21st century issues.
We believe that would be a big mistake. Resurrecting a new WTO negotiation with a different set of negotiating objectives would be difficult to sell to most WTO members; instead, the death of Doha would likely propel a new wave of preferential trade pacts and severely fracture the multilateral trading system. The Doha Round can and should be concluded.
How To Finish the Round
In recent research (Hufbauer, Schott, and Wong 2010), we suggest how the Doha Round can be successfully concluded with a concerted push by the major trading nations. Contrary to the Doha doomsayers, the potential gains from proposals now on the table on agriculture and nonagricultural market access (NAMA) are significant, albeit not sufficient to close a deal. The G-20 members in particular need to "top up" their offers in these areas and substantially expand the scope of prospective services trade reforms. With additional effort by the G-20 countries, WTO countries can put together a Doha package that is both ambitious and balanced between the interests of developed and developing countries.
Our prescription for Doha success requires modest increments in market access commitments by G-20 countries beyond the tariff and subsidy cuts in agriculture and NAMA already written into the current negotiating modalities. We believe the formula cuts can be supplemented with tariff cuts on products and NAMA sectors of priority interest to those countries, and our analysis demonstrates how deeper tariff cuts in chemicals, electronics/electrical goods, and environmental goods would benefit the major trading nations. To be sure, country participation, product coverage, and depth of liberalization in each sector are uncertain. We assume, for the purpose of our calculations, optimistic but plausible scenarios for each of the sectors.
To make any Doha deal work, however, G-20 countries have to produce concrete commitments to liberalize trade in services. To date, these negotiations have not yielded offers that would enhance market access. Our calculations of potential gains in services thus are predicated on a substantial acceleration of the request/offer negotiations among these countries.
Finally, Doha success requires a dose of policy reforms in customs procedures and related areas that slash red tape and cut transactions costs for exporting and importing both goods and services. Fortunately, the trade facilitation negotiations have been among the most productive in the Round. Capturing the gains from improved trade facilitation, however, ultimately depends on faithful implementation of promised reforms.
Our study calculates the trade and GDP impact for 22 WTO participants, which combined represent 88 percent of global GDP output, 73 percent of world exports, and 76 percent of world imports in 2008. We scale up the export data to approximate trade expansion with all trading partners.
For agricultural products, the tariff cuts prescribed by the current negotiating modalities create new market access. US- and EU-applied tariffs would be almost halved (1.3 percent down to 0.7 percent for the United States and 6.0 percent down to 3.4 percent for the European Union). Developing country applied tariffs decline slightly; this is actually a significant accomplishment given the high levels of "water" between bound and applied agricultural tariffs in most developing countries. Agricultural tariff cuts contemplated in the Round, along with new caps on tariff rate quotas, export subsidies, and domestic subsidies, would increase world exports by $17.1 billion.
On the whole, tariffs on NAMA products are low. Pre-Doha average applied tariffs in the European Union, Japan, and the United States are all less than 2 percent. Average applied tariffs are less than 8 percent in Brazil, India, and China. Low initial applied tariffs make the task of creating new market access in NAMA more challenging—the average cut in applied tariffs for our sample countries is only 0.6 percentage points (from an average tariff of 2.4 percent to an average of 1.8 percent). Since NAMA trade is so vast, however, the trade gains are also large despite the small tariff cuts. In total, we estimate world exports would increase by $50.6 billion from the NAMA formula cuts. Moreover, any reduction in bound tariff levels, even if bound rates remain above applied rates, reduces the risk of backsliding into protectionist policies. Potential global GDP gains from trade liberalization in agriculture and NAMA formula cuts amount to around $63 billion.
The potential trade and GDP gains from NAMA sectoral agreements—liberalization that would go above and beyond the NAMA formula cuts—could be much greater. We estimate the impact of eliminating tariffs in electronics/electrical goods and in environmental goods across the 22 countries covered in this study. We also estimate the impact of freer trade (i.e., substantial tariff cuts and tariff harmonization) in chemicals across the same countries. A sectoral agreement in chemicals would increase world exports by $15.8 billion. An electronics/electrical goods sectoral agreement would boost world exports by $49.2 billion and an environmental goods sectoral agreement would boost world exports by $5.9 billion. All told, we estimate the three sectoral agreements would increase annual world exports by an additional $70.9 billion above the trade spurred by the formula cuts. Global GDP gains from the three agreements could amount to $56.4 billion.
In services, the July 2008 "signaling exercise" gave some indication that countries would be willing to liberalize further, but meaningful new offers have not yet been submitted. The potential gains from meaningful liberalization of services barriers are large. We estimate that a 10 percent reduction in the tariff equivalent of applied services barriers would increase annual world exports by an estimated $55 billion. Global GDP gains from this liberalization could be around $45.5 billion.
Trade facilitation negotiations have been championed as one of the most successful subjects in the Doha Round. More than 70 provisions on topics ranging from publication standards to new restrictions on fees connected to importation and exportation have been put forward. These negotiations might go forward even if the Doha Round stalls. Quantifying the possible gains from each of the roughly 70 proposals is difficult, if not impossible, so we turn to an estimate of potential gains from a modestly optimistic trade facilitation improvement scenario made by Wilson, Mann, and Otsuki (2005). Drawing from the work of these authors, we use conservative coefficients to calculate that exports by the 22 sample countries to others in that group could increase by $86.8 billion if underperforming countries are brought up halfway to the global average in selected areas of Trade Facilitation (our "narrow definition" of reform). These trade gains would increase annual global GDP gains by roughly $117.8 billion annually.
Our findings contradict the critics who argue that the world should trash the Doha Round because the payoff is too small. The potential gains are significant, but the current Doha package is neither ambitious enough nor balanced enough to garner political support in major economies. The challenge is to turn the lofty G-20 mandate to conclude the Doha Round into concrete, new offers by the G-20 countries to reform their trade distorting practices. For the United States, this means above all tightening its discipline on farm subsidies, bringing its cotton programs into compliance with WTO obligations, and topping up its offer on duty-free, quota-free treatment for the least developed countries. In a similar fashion, the European Union will have to offer tighter discipline on farm subsidies and deeper cuts in farm tariffs, as well as broader commitments to reform trade and investment in services.
At the same time, major developing countries like Brazil, India, and China will have to up the ante on offers on liberalizing NAMA sectors, services, and trade facilitation. In addition, they will have to place limits on their recourse to special agricultural safeguards, doing so in a way that preserves their ability to support subsistence farmers. Because its rates are already low, China can afford to substantially cut many of its NAMA applied tariffs without harming its competitive position. Brazil and India also can augment their NAMA tariff offers to eliminate "water" in their bindings and create new trade opportunities.
If our recommendations are followed, the Doha Round package would be ambitious and well balanced for all participants, and could yield potential annual world GDP gains of between $164.9 billion and $282.7 billion—but this outcome depends on a rise in negotiating ambition well above the level observed to date. "Topping up" trade reforms along the lines we suggest would generate more than four times the size of trade and GDP gains than those that would accrue from agriculture and NAMA formula cuts alone. Even if only half the sectoral gains we contemplate are achieved, the outcome would be substantial. And, consistent with the goals of the Doha Development Agenda, the GDP gains of developing countries would be greater than for the developed countries (1.3 percent versus 0.3 percent).
While this picture represents optimistic thinking on our part, it is not based on "pie-in-the-sky" scenarios. It may take a decade to reach gains of the magnitude we have sketched once negotiations are concluded, because concessions will be implemented gradually and trade facilitation reforms will take time to become routine. But the scenarios used in our calculations are straightforward. Agriculture and NAMA modality agreements can be translated into binding commitments and topped up with additional tariff cuts resulting from sectoral negotiations. New rules on trade facilitation can set the stage for reform on the ground. Reducing applied services barriers by 10 percent will take long hours at the negotiating table but can be achieved with the right combination of "sticks and carrots." All told, the prize is well worth a major push by world leaders.
Bown, Chad. 2010. Antidumping, safeguards, and protectionism during the crisis: Two new insights from 4th quarter 2009. Available at www.VoxEu.org. (February 18).
Evenett, Simon J. 2010. Will stabilisation limit protectionism? Available at www.VoxEu.org. (February 18).
Hufbauer, Gary C., Jeffrey J Schott, and Woan Foong Wong. Forthcoming, 2010. Figuring Out the Doha Round. Washington: Peterson Institute for International Economics.
Wilson, John S., Catherine L. Mann, and Tsunehiro Otsuki. 2005. Assessing the Benefits of Trade Facilitation: A Global Perspective. The World Economy 28, no. 6: 841–887.
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