Failure of the Doha Round of trade talks would be a great loss in many respects. In the absence of widespread calls for unilateral liberalization of trade regimes, it is the best current prospect the world has to secure the significant welfare gains from freer trade. As a proven poverty-buster, freer trade has enormous potential to bring growth and development to poorer countries. The 2001 Economic Freedom of the World report showed that relatively open economies had a GDP more than seven times higher, and grew at a rate more than eight times as fast, than the least open economies.
In addition to the significant welfare gains that would be lost, there is a danger of undermining the rules-based trading system that has served WTO members so well. A greater emphasis on litigation, rather than negotiation, would make for a more fractious and damaging global trading system. It is unclear whether or not litigation will have any effect, as the lack of prospects of further gains in market access through future negotiations will give less incentive to errant members to comply with adverse rulings. The lack of prospects for further improvements in market access through global trade talks would also lessen the incentives sometimes needed for developing countries to undertake liberalizing reforms that are in their own best interest.
An abandonment of the most-favored-nation principle in favor of bilateral and regional agreements would also make for a more complicated global trading system, and likely one with confusing and trade-inhibiting rules of origin, which dictate the terms under which goods can enter a country. Moreover, those bilateral and regional trading arrangements, which are inherently discriminatory, will likely become even more damaging if, as seems likely, they are negotiated between ever bigger players on the world stage. The trade diversion between Oman and the United States seems minimal, but a trade agreement between the United States and, say, Japan, could be hugely disruptive to the world trading system. However unlikely such an agreement appears now, it would be all the more tempting if the WTO forum was “out of service.”
Some commentators have suggested that if Doha failed, the talks could start up again in 2007 or 2008, after various important elections. But with a world economy battling huge imbalances and a likely slowdown—possibly even stagflation—on the horizon, it is doubtful that politicians and the public will be in a liberalizing mood a year or so down the road, even assuming that the U.S. Congress renews President Bush’s Trade Promotion Authority. The U.S. Congress has seen a rise in protectionist sentiment, particularly towards China, and this at a time when unemployment is low and growth impressive. Financial markets, already jittery, would express their displeasure at further signs of protectionism.
For the United States in particular, the failure of Doha would lessen the incentive to voluntarily reform the support given to U.S. farmers. But even if the Doha negotiations failed, the WTO decision on U.S. cotton subsidies has shown that America’s farm programs are vulnerable to litigation. The United States can either choose to reform its farm support through negotiation, and potentially gain reciprocal market access in the process, or it can expect ‘enforced reform’ through WTO disputes.
The reforms of the 1996 U.S. farm bill inspired similar reforms in the EU’s and Japan’s farm sectors, so the back-tracking of the 2002 farm bill has painted the United States as the big holdout. Although its $42.7bn in support of farmers represents only 16 percent of total farm income, compared to the EU’s 32 percent—and is even less than the 56 percent the Japanese government pays to its farmers and the 68 percent paid by the Swiss—a lot of the U.S. support is in the most trade-distorting category. The United States must show some well-timed leadership, unilaterally if necessary, to restore its credibility as a nation committed to free markets and opportunity for all.