Costs of Failure of Global Trade Negotiations Have Been Understated
by Jeffrey J. Schott, Peterson Institute for International Economics
Letter to the editor in the Financial Times
June 23, 2006
© Financial Times
The Doha Round must create substantial new opportunities for trade and investment, or Martin Wolf's dire warnings about the "devastating consequences of failure" for world trade and the World Trade Organization (WTO) may come to pass ("Ten days that could shake the WTO," June 21, 2006). Political leaders should take heed, because Mr. Wolf actually understates the wide-ranging costs of failure—a more comprehensive accounting involves six kinds of losses.
The first loss would be foregone welfare gains from new WTO reforms. For the deal currently on offer in Geneva—with limited cuts in applied tariffs and subsidies and scant regulatory reform freeing up trade and investment in services—the foregone gains would be small but positive.
The second cost would be systemic erosion. The World Trade Organization would not implode but rather begin a slow descent into oblivion. The poorest and weakest members, who benefit the most from a strong multilateral rules-based system, would be the most disadvantaged. To be sure, members still would adhere to obligations under existing agreements. But there would be less confidence in using the WTO as a forum for trade negotiations—why spend the effort when the process yields so little?
The third cost would be increased regionalism, pursued in a way highly corrosive to the WTO system. Leading trading nations would refocus their negotiating efforts on bilateral and regional trade agreements, and the number of such initiatives would proliferate.
Even worse, the trade of developing countries could be severely impaired by preferential pacts between the world's richest countries. In the past, most free trade agreements (FTAs) involved deals among developing countries or between major developed and developing countries. A Doha failure could change that calculus and prompt new FTAs among the major trading nations. Two initiatives seem likely under this scenario: a US-Japan FTA, in response to Chinese trade pacts in the region and the Korea-US talks; and renewed interest in a Transatlantic FTA or TAFTA, which would be seen as a constructive response to growing protectionist pressures on both sides of the Atlantic that is less offensive to labor interests than North-South deals.
The fourth cost would be increased protectionism. Trade rounds act as a buffer against protectionist impulses since blatant new trade barriers or subsidies could disrupt ongoing negotiations. Remove the constraint and countries could well deploy new protectionist measures in the coming years, channelled through practices not subject to WTO disciplines. What's likely? New doses of regulatory protection, via sanitary/phyto-sanitary measures in agriculture and visa restrictions to block trade in services, plus investment restrictions to protect national security or national patrimony (particularly in energy and transportation).
Fifth, the breakdown of the trade talks would likely precipitate adverse shocks in financial markets. Given current global economic imbalances—with the US current account deficit of more than 7 per cent of GDP and a large and growing Chinese surplus—markets are sensitive already to threats of new trade protectionism and their knock-on effects on capital flows. Markets are good at discounting the value of current commitments but less secure in projecting the impact of new protectionism that could sideswipe financial and currency markets.
Finally, and often ignored, is the opportunity cost for developing countries, particularly the least developed, of not being able to use the carrot and stick of multilateral trade negotiations to catalyze their own domestic economic reform. In other words, no help in dealing with the competitive challenge of globalization in general and China in particular.
In sum, the costs of failure in the WTO talks would be substantial. Many developing countries would suffer significant losses, and the process of multilateral negotiation would be devalued, if not discredited.