Unlocking the Benefits of World Trade
by Jeffrey J. Schott, Peterson Institute for International Economics
Special report in The Economist
November 1, 2003
© Copyright 2003 The Economist Newspaper Ltd. Reprinted with permission.
The collapse of the ministerial meeting of the World Trade Organisation (WTO) in September has impeded global trade talks and made their conclusion increasingly difficult and uncertain. Even without the breakdown in Cancún, Mexico, the complexity of the agenda and American and European calendars for rewriting their farm policies led many analysts to expect protracted negotiations. Some ministers left Cancún hoping that the delay was not significant, and that talks would pick up within a year or two.
Such complacency is a mistake. Launched in the Qatari capital, Doha, in November 2001, it will require extensive political effort to put the talks back on the rails. Trade ministers probably will have to engage in a new round of "mini-ministerials". Whether America's trade representative, Robert Zoellick, and the European Commissioner responsible for trade, Pascal Lamy, are willing to devote time to such a task is at best uncertain.
The window for reviving the Doha round of negotiations is small. By spring 2004, the major trading powers will be busy with pressing domestic matters. The 2004 presidential election in America will colour trade politics; protectionist rhetoric already pervades the halls of Congress. Enlargement of the European Union (EU) will further complicate its decision-making process, especially on agricultural reform. If WTO talks are not resumed by then, they are likely to drift rudderless until well after the new American administration and EU Commission take office in 2005.
The Cancún meeting failed on many counts but primarily because of differences over agricultural reform. The Economist succinctly analysed the problems ("The WTO under fire," September 20th). The sudden end of the meeting left undone decisions on how to proceed with talks on agriculture, industrial goods and the so-called "Singapore issues": investment, competition policy, transparency in government procurement and trade facilitation. It also left festering a sharp dispute over American and European farm reforms, led by a new coalition of developing countries (the G22) grouping Brazil, India and others.
More countries may now divert their negotiating energies into bilateral free-trade agreements (FTAs). The United States undoubtedly will push ahead and start new FTA talks with Colombia and Thailand (and maybe Peru and Sri Lanka). These talks were being considered before Cancún, but will be given greater priority. Efforts to deepen North American economic integration, in part for border security, could also advance (especially after the prospective leadership change in Canada). However, negotiation of the Free-Trade Area of the Americas (FTAA), which requires a convergence of American and Brazilian positions and is linked substantively to the Doha round, could be set back.
The EU will probably give more attention to problems of enlargement and trade initiatives with eastern European and Mediterranean countries. The EU also may drop its self-imposed moratorium on new FTA negotiations in order to keep pace with America. Given European sensitivities on agriculture, however, there is a big risk that such new initiatives could focus primarily on manufacturing trade and investment, leaving protection for most farm products untouched. But cutting out agriculture means that the stalled EU negotiations with the Mercosur countries—which have proceeded in parallel with the FTAA—may well continue to drift.
In Asia, countries will engage more aggressively in negotiating FTAs. China is negotiating an FTA with the South-East Asian countries, which Japan and India are trying to emulate. Long-delayed trade talks between Japan and South Korea have just been announced. Both are also pursuing other FTAs, though agriculture remains a stumbling block. However, if China proposes moving forward with a North-East Asia FTA, it will be hard for South Korea and Japan to resist. For now, a FTA involving East Asia's "big three" is a long-term vision, not a negotiating initiative—but that could change quickly if the WTO process remains stalled.
What is worrying about the European and Asian initiatives is that they fudge the notion of both "free" and "trade." Liberalisation commitments are incomplete, with implementation sometimes open-ended, and important sectors, such as agriculture, often largely excluded.
While such limited accords seemingly run foul of WTO obligations regarding regional trading arrangements, the WTO provisions have long been inoperative. Attempts to make them more robust repeatedly falter because of opposition from the large FTA practitioners. But now the cost of inaction is greater. If such deals proliferate, it could become much harder to secure multilateral reforms in agriculture, since a lot of the negotiating capital will have been taken off the table.
The Cancún ministerial meeting was the second black eye for the WTO in four years. But, whereas at its meeting in Seattle, the punches were thrown by the heavyweights, this time developing countries were understandably dissatisfied with the commitment of industrial countries to agricultural reforms. Many demanded concessions on agriculture from America and the EU before talks could move forward, and consequently refused to negotiate—drawing the ire of Mr Zoellick and others, and effectively blocking the consensus required to do anything in the WTO. This is bad news on two counts.
First, international politics has clearly contaminated the WTO process. To be sure, domestic political considerations have always tempered what trade obligations countries could accept in previous trade rounds. But such constraints focused only on the scope of the trade deal. At Cancún, it was clear that some countries wanted to push geopolitical objectives rather than trade reforms.
Interestingly, the country that many feared would use WTO membership to assert its geopolitical ambitions did not contribute to the cacophony. Rather, China recognised that its trading interests were best served by progress. Moreover, its negotiators were smart enough to know that it would not have to make big new concessions on top of its accession commitments. Although China joined the G22 to push for deeper cuts in farm protection and subsidies, it quietly avoided the rancorous debate that followed the tabling of the new negotiating text.
Second, there were some 30 members of the US Congress in Cancún and they surely left with a sour taste in their mouth. First impressions are often lasting; congressional scepticism about the efficacy of the WTO process has increased substantially. Chuck Grassley, who chairs the crucial Senate Finance Committee, has been most vocal in berating countries that opposed America's position on agriculture.
Setback for Farm Reform?
Reducing farm subsidies and protective tariffs and quotas was never going to be an easy job. The rents generated by such protection are deeply embedded in the land values of western and Japanese farmers, who count among the world's most conservative capitalists. Yet those rents account for a substantial share of the prize that can be won by competitive producers in developed and developing countries. Now the task may be even harder.
The failure at Cancún has obviously bolstered the spirits of farmers and environmental guardians in France, Japan, South Korea, Switzerland, Norway and other countries, and will stiffen their resolve to block attempts to reform their own farm policies. Agreement at Cancún on modalities for negotiating reforms would have constrained efforts to roll back reforms in Europe's common agricultural policy, which now could well surface.
Such protectionist impulses are a much more serious threat than the expiration at the end of 2003 of the "peace clause," an agreement which has restrained disputes over farm subsidies. Extension of that moratorium was another victim of the Cancún fiasco. But concerns about a spate of new disputes over American and European farm practices are exaggerated. There are not many new litigation targets.
Cases involving America and the EU seem unlikely—both sides already have enough ammunition to shoot at each other, if rationality fails. There is a Brazilian case—arguably not covered by the peace clause—against American cotton subsidies; and EU export subsidies on dairy products are vulnerable. If cases were brought, however, the lengthy litigation and appeal process would defer final decisions for two years or more, i.e., until the closing days of the Doha round. At that point, panel recommendations could be addressed in the final negotiated accords.
Misconstrued Development Round
The Doha round is formally called the "Doha development agenda" for good reason. The preponderance of the WTO's 148 members rank as medium- to low-income developing countries, and include 31 of the 48 countries classified by the World Bank as least developed countries (LDCs). These nations have the highest trade barriers and the most trouble meeting existing obligations. They will also benefit substantially from liberalisation of the remaining trade barriers in America, Europe and Japan—as well as reform of their own trade barriers.
By labelling the talks this way, however, officials created the impression that the negotiations were solely about what developed countries should do for developing ones--and not what developing countries need to do to promote their own economic development. WTO reforms can yield substantial welfare gains, but countries must complement them with domestic policies that enable their firms and workers to take advantage of the new opportunities abroad. Many of the gains for developing countries come from liberalisation of their own barriers on a most-favoured nation basis.
The Doha development agenda also confused the basic objective of trade negotiation. To oversimplify, countries should liberalise unilaterally to enhance their economic welfare. But in the real world, politics intervenes and countries must negotiate away trade barriers. Countries with excessive protection have implemented unilateral reforms, but the process usually stalls when further tariff cuts would significantly increase competition in the domestic market.
The emphasis on development inspired many developing countries to justify their demands for new concessions by arguing that they paid too much in the previous trade talks (the Uruguay round) and got nothing in return—and now it was payback time. Those countries seemingly believed their own rhetoric and expected Cancún to be a donor conference rather than a trade negotiation.
In fact, developing countries gained a great deal from the Uruguay round and the new WTO. Critics complain about the administrative burden and high costs of compliance with new accords, as well as the slow liberalisation of textiles and clothing. Such analysis ignores three far more important developments: the strengthening of the rules-based multilateral trading system; the inclusion of a binding dispute settlement mechanism, which has virtually eliminated unilateralism using American trade law; and the agreement to phase out the Multi-Fibre Arrangement (MFA) at the end of next year.
In the six years between 1995, when the WTO entered into force, and 2001, developing countries' exports grew almost twice as fast in value terms as total world exports. China accounts for much, but not all, of this; excluding China, developing-country exports still grew 50% faster than world exports over that period. The elimination of MFA quotas will contribute further to growth.
There was—and still is—a good economic case for new trade "concessions" by both developed and developing countries. Similarly, both have a political imperative to pursue reforms. That said, the two groups are not treated alike in the WTO. The LDCs are not required to commit to new reforms. However, the middle-income developing countries can and should do more to liberalise in response to reform commitments by the industrial countries.
Agriculture remains the key variable. Developed countries need to demonstrate their willingness to reduce both the absolute value of subsidies provided to their farmers and the tariffs, quotas and other non-tariff barriers that protect agriculture. Their commitments need not be as radical as the reforms put forward in the initial American proposal of July 2002, but must go beyond a joint American-EU proposal of August 2003. The G22 was formed primarily to attack that, arguing correctly it would not have changed America and European policies very much.
Do WTO procedures need a major overhaul? Yes, argues a frustrated European Commission. However, the knee-jerk European critique of the WTO's "medieval" procedures is overstated and does not justify major institutional reforms. WTO decisions should continue to be taken by consensus, but procedural reforms could reinforce the consensus-building process.1 Similarly, the requirement that all countries sign all Doha round agreements as a "single undertaking" should be maintained, but the pacts should give developing countries help to implement the new rules and temporary exemptions from litigation.
What Needs to be Done?
America—again—holds the key to unlocking the talks' potential. In this case, however, seizing the initiative means taking the first step; it does not mean carrying the load. WTO members need to commit themselves to three distinct actions.
Re-engaging the agricultural negotiations. To mitigate the mistrust at
Cancún, America should call on all countries, including the EU, to support a new framework for farm reforms that agrees on:
Such a framework would mean ending most export subsidies soon after the completion of the Doha round of trade talks, with a commitment to finish the job in the near future; real reductions in domestic subsidy disbursements by the United States and the EU on cotton and other key products; deep cuts in high farm tariffs and in larger import quotas for Japanese and South Korean rice; and meaningful, albeit less comprehensive, reforms by middle-income developing countries of their farm trade restrictions. West African demands for immediate relief from foreign cotton subsidies wouldn't be satisfied; however, the final deal could provide for an accelerated implementation of reforms of those subsidies.
Resuscitating the Derbez Text. The revised declaration tabled at Cancún by Mexico's foreign minister, Luis Ernesto Derbez, should serve as the starting point for renewed ministerial negotiations on the broad-ranging Doha mandate—even though specific provisions are unacceptable to some members and some language was clearly botched (i.e., on investment) and will need to be substantially recast. Asia-Pacific leaders endorsed this idea at their recent meeting in Bangkok. Decisions on all of the Singapore issues remain to be taken, though the text explicitly tilts toward starting negotiations on trade facilitation and transparency in government procurement—arguably the ones that offer the most immediate benefit for developing countries. Accepting the Derbez text also means that developing countries agree to reform their trade-distorting practices in ways consistent with their trade, finance and development needs.
Supporting a rulemaking peace clause. Developing countries faced substantial challenges in administering and enforcing the Uruguay round accords, and had legitimate concerns that violations of those rules could provoke retaliation that blocked access to foreign markets.
However, the Doha round initiatives would probably be limited to commitments to greater transparency of government regulations and policies. More transparency would yield important dividends in terms of combating corruption; reducing uncertainty about rules for gaining access to and competing in national markets; and encouraging investment. Such requirements should not prove onerous for developing countries. Nonetheless, developed countries should offer a time-limited peace clause for developing countries undertaking new rulemaking obligations. This provision would provide a temporary safe harbour, say for five years, from cases brought against alleged violations of new rules, to provide insurance against mischievous litigation.
Together, these commitments would give trade negotiators the political impetus needed to restart the Doha round. Ministers need not reconvene en masse: statements by officials from the main trading nations should suffice. But the powerful need to take the lead. And the weaker countries need to engage constructively as well, recognising they have the most to lose if the talks fail.
1. For more information, see "Decision making in the WTO". By Jeffrey Schott and Jayashree Watal. Published in "The WTO after Seattle". Institute for International Economics.