Is Trade Liberalization a Product of Domestic or International Processes? Lessons from Doha

From the Tasman Transparency Group’s Conference on Domestic Transparency at the Lowy Institute, Sydney, Australia

The relationship between openness to trade and economic growth over the past 60 years has been documented in study after study. The conclusions are consistent: countries that are more open to trade grow faster than those that are relatively closed.

That fact has not been lost on academics and policy wonks. Countries across the economic spectrum have moved to open their economies in recent decades. Industrialized countries reduced their tariffs from an average of 40 percent in 1948 to 4 percent today. In the 20-year period between 1983 and 2003, developing countries reduced their tariffs by 21 percentage points. The 23 original contracting parties to the GATT in 1948 have been joined in the WTO by an additional 127 countries, bringing the current total to 150. Since 1995, the number of bilateral agreements in place has more than tripled to over 225. All of this suggests that countries recognize the benefits of trade liberalization, which renders the current situation all the more confounding.

Today we find ourselves at a crucial moment in the post-WWII history of trade liberalization. For the first time ever, a multilateral trade negotiating round has failed to produce agreement. Although the WTO bureaucracy in Geneva and ministers in some world capitals might be loath to admit defeat, the fact is that the Doha Round is dead—or, at best, in a cryogenic state, frozen in place, awaiting possible thawing and resuscitation in the future, when the political circumstances are more hospitable (or less hostile) to the goals of trade liberalization.

In any case, the demise of the Doha offers an opportunity for policymakers, stakeholders, observers, and analysts to take stock of the situation, and ask, “What went wrong? What explains this seemingly illogical outcome?” Even though further trade liberalization is in their interests, why do countries appear willing to forego those benefits?

I think the answer is that the process has been botched. In most countries, too little attention was paid to the necessary domestic processes of neutralizing special interest opposition and educating the public about the full benefits of liberalization, while too much attention was focused on the international process of reciprocity and tit-for-tat mercantilist posturing. Successful trade liberalization is a product of both domestic and international processes, but the ratio, timing, and interplay of those processes matter immensely. Negotiators in the Doha Round got the ratio and timing wrong and subsequently lost site of the real objectives of trade liberalization. Where, then, do we go from here?

Demise of Doha - What went Wrong?

As countries throughout the world were implementing their Uruguay Round commitments and undertaking their own unilateral domestic economic reforms, a new multilateral trade negotiating round was launched with the promissory title of “Doha Development Round.” That changed perspectives quickly.

What had been considered domestic economic reform outside of the realm of reciprocity and in fealty only to the fulfillment of domestic objectives suddenly took on new meaning. No longer was domestic welfare improvement the main objective of those reforms. Instead, those reforms became international negotiating chits. The logic became: why continue down the path of reform without first seeing what we can get in return from other countries that also may benefit from our reforms? What was naturally a domestic process suddenly became an international process.

In effect, the launch of multilateral trade negotiations inspired a retreat from reform-mindedness in favor of mercantilist posturing. Trade delegations were out to score concessions from others while conceding as little as possible themselves.

There is a lot of expected finger pointing for Doha’s failure: blame the Europeans for failing to agree deeper cuts in agricultural tariffs; blame the Americans for failing to agree real cuts in farm subsidies; blame the Brazilians for failing to benchmark non-agricultural tariff reduction to applied, rather than bound rates; blame the Indian trade minister for reveling in his role as naysayer to the rich countries.

There’s plenty of blame to go around, if you want to call it blame. The bottom line, however, is that there simply isn’t enough interest across enough countries in real trade liberalization at this point in time. Or perhaps more precisely, there isn’t enough interest in trade liberalization that commits countries to new international rules and requirements. But that is precisely what is needed to secure a successful multilateral trade agreement. It’s basically all or nothing.

But Doha’s failure does not reflect a wholesale rejection of the merits of trade liberalization. It reflects a failure to neutralize trade’s detractors with winning factual arguments. It reflects a failure of adequate attention paid to the domestic processes. In the United States and Europe, in India, Brazil, and South Africa, trade delegations staked out mercantilist positions from which there was little movement.

There are now 150 members in the WTO at disparate levels of economic development, with different negotiating priorities, and asymmetric negotiating resources, attempting (presumably) to reach consensus on a diversity of issues. Add to the mix, the emergence of the anti-globalization movement and all the NGOs it has spawned proliferating sometimes good, but usually bad advice to the developing countries.

The idea that rich country trade barriers are a primary cause of poor country poverty and that poor country barriers are justified and should not be negotiated away not only stokes the flames of an already pronounced (and sometimes justified) sense of victimization among developing countries, but it also provides the wrong prescription. These factors all contributed to the belief among developing countries that they shouldn’t have to do much in the way of opening up their own markets, and in any event, that doing so would be bad for them.

The emergence of China is also proving to be an effective rationalization against trade liberalization. Many members, including Europe and the United States which have both taken actions against Chinese imports, fear the implications of China’s ascent. But if Europe and America worry about import competition from China, think about how every developing country must feel. China does or can produce almost anything the developing countries can produce. Thus, there is an aversion among some countries to agree to tariff cuts in the Doha Round because they want to be freer to respond to Chinese competition. Among U.S. policymakers, China has become synonymous with unfair trade. Interests that seek to stifle trade need only mention China and they’re halfway home.

The unchecked, ubiquitous advice of the well-intentioned but ill-formed (often at the behest of the well-informed but ill-intentioned) has helped to squelch interest in real trade liberalization in the developing countries. One picture that remains indelibly in my mind is that of several developing country trade delegations and various NGOs, upon learning of the collapse of the talks in Cancun, jubilantly embracing, dancing, and slapping hands in the lobby of the Cancun convention center. I couldn’t quite understand why they should be so happy. At that point, there was fear that the whole round might be dead—a round that, if concluded, would bring many benefits to these poor countries. Their reactions, I thought, were antithetical to what they should have been feeling.

The point that this drove home was that some developing country negotiators and their governments get a lot of political mileage back home when they are seen standing up to the rich countries. Reaching an agreement would eliminate that stage, and could probably subject them to criticism that they got duped. Furthermore, I have to believe that some developing country leaders would rather have a deadlock on Doha so that they can continue to blame the rich countries for their woes. Eliminating agricultural subsidies and tariffs (which are egregious but represent only a small part of the broad problems facing developing countries) could expose the domestic problems caused (or not resolved) through their own errors of commission or omission.

Many around the world appreciate the necessity of international engagement. There is just a vast disparity of ambition at this point. I believe many governments don’t want to relinquish their prerogatives to change course, if the political pressure to do so becomes too strong. Such disparities don’t lend themselves well to international processes.

All of these are examples of the triumph of special interests exploiting nascent fears about trade and globalization to render their own protectionist objectives consistent with the national interest. Likewise, they represent failures of domestic processes.

This is a major problem that besets the whole concept of multilateral reciprocity, which is the premise of the Doha Round. When we’re dealing in this construct of a single undertaking, where liberalization in agriculture is conditioned upon liberalization in industrial tariffs, which is conditioned on services liberalization, which is conditioned on changes to antidumping and other rules, there is no escaping an outcome that at best reflects the lowest common denominator of ambition and at worst produces nothing—or worse than nothing, which would be a deterioration in respect for the rules based system of trade and growing disdain for the outcomes of WTO dispute settlement.

Why should more ambitious countries accept an outcome that reflects the lowest common denominator of ambition? And for that matter, why should countries that are reluctant, for whatever reasons, to undertake ambitious liberalization be pressured to do so? Well, it doesn’t have to be that way! It’s not an all or nothing exercise.

Lessons from Doha “We Don’t Need Negotiations!”

Trade negotiators and the governments they represent have perpetuated a myth that continues to dog efforts to liberalize world trade further. The mere existence of “negotiators” gives the false impression that trade liberalization is necessarily an international bargaining process based on reciprocity. That access to your domestic market is a concession that is made grudgingly and only if justified by the amount of access to foreign markets afforded your exporters.

That perception unnecessarily complicates liberalization. The concept of “reciprocity” is a tool of protectionism. It compels policymakers to view export market access gains as the primary or only benefits of trade liberalization. And when policymakers tout only the export-oriented benefits of trade liberalization, and measure success only by the impact of a trade agreement on the trade account, credibility is given to the views of domestic interests that wish only to scuttle the deal. By citing the “disastrous” sectoral trade imbalances that would result, their protectionist objections can be touted as consistent with the fictitious national objective of moving the trade account in a positive direction.

In the Doha Round, the special interests that oppose trade liberalization were effective. Governments were ill-equipped or ill-prepared or unwilling to respond to the misinformation campaigns engineered by their domestic lobbies and non-government organization purporting to act on behalf of developing country interests.

Trade liberalization is first and foremost a domestic process. Support for trade liberalization is bred on the home front. Without reliable domestic support for trade liberalization, there can be no trade liberalization; the domestic process is ultimately a necessary and sufficient condition of trade liberalization.

In reality, we don’t need trade negotiators. We don’t need trade negotiations. Although there are benefits from improved access to other countries’ markets, countries benefit most from liberalizing their own markets.

Unilateral liberalization, even incrementally, can lead to the same outcomes as a big trade negotiating round, particularly if the big economies lead the way. Unilateral liberalization, which pays ultimate respect to the primacy of the domestic over the international process, is not some radical concept. It’s been tried and trued in Australia, New Zealand, Chile, Mexico, China, India, Singapore, Hong Kong, and elsewhere.

Trade barriers and subsidies, while burdensome to foreign firms, are foremost matters of domestic budgetary and economic policy. Domestic reform does not require international trade agreements. As my colleague Dan Griswold expresses it, the United States doesn’t need a permission slip from the Jacques Chirac (or Sarko, for that matter) to dismantle our own wasteful and offensive U.S. farm subsidy programs. We don’t need a Doha Round to achieve many of the objectives of the Doha Round.

Unilateral liberalization increases opportunities for domestic business, greater choice and lower prices for consumers, and greater scope for other countries to follow suit and liberalize sequentially. Tariffs, quotas, and other restrictions on foreign competition are not assets to be relinquished only in exchange for better access abroad. They are not assets at all. They are liabilities that raise the costs of production for domestic producers and the cost of living for consumers, and they are especially burdensome for lower-income families.

Thus, the most compelling case for dismantling protectionist barriers and subsidy programs is not that they are “concessions” that will buy exporters access to foreign markets. The best reason is that it would be incontrovertibly good for the economy, regardless of what other countries do with respect to their own trade barriers.

Spreading the Word About the Economic Benefits of Openness
Much research on the benefits of trade liberalization affirms a conclusion of a 2001 IMF paper, which states: “Although there are benefits from improved access to other countries’ markets, countries benefit most from liberalizing their own markets.”

Import competition boosts productivity and living standards by inspiring a shift in resources away from activities in which people of that country are less productive toward activities in which they are relatively more productive. It also increases real incomes, improves quality and choice, raises average productivity, and reduces the costs of production for domestic manufacturers.

In addition to their suppressing effects on prices, imports allow consumers to benefit from a wider variety and better quality of products and services. People benefit as producers, investors, and workers when access to imports in improved. Producers need imported raw material and components to lower their own costs of production. And competition for their final goods inspires greater efficiencies, exposes them to international best practices, and ultimately helps to raise productivity. When productivity rises, wages and profits tend to follow suit, benefiting workers and investors.

Through all these channels, imports help industries remain competitive at home and abroad and help the economy grow and living standards rise.

The benefit of better access to imports for producers translates into better access to foreign markets. Trade liberalization at home reduces costs in the supply chain, which renders businesses more competitive abroad. And when foreigners have better access to the domestic market, they have greater buying power, which is akin to a reduction in their own barriers. Lower input prices mean lower production costs, which enable domestic companies to sell more competitively abroad to customers who have greater income because of their access to the domestic market.

On the flipside, import restrictions raise the costs of production to domestic producers and are ultimately akin to restrictions on exports. By raising the costs of production and by depriving foreigners of sales opportunities in the domestic market, import barriers force exporters to try and sell at higher prices to foreign customers with less income.

Failing the Domestic Process
Despite relatively strong economic growth the world over, and the role trade has played in fostering that growth, trade’s detractors seem to be gaining ground. In the United States, where the president’s authority to negotiate, sign, and present trade deals to the Congress for an up-or-down vote has just expired, the majority party in Congress is committed to official skepticism, or worse, about trade and its impact.

To too many in Congress, exports are good, imports are bad, and the trade account is the scoreboard. Given the large and growing deficit in the United States, policymakers reckon we are losing at trade. And we are losing at trade because our trade partners are cheating. That focuses U.S. trade policy on enforcement and on reciprocity, which energizes and gives credibility to protection-seeking interests using mercantilist arguments.

And many in Congress hold these views despite overwhelming evidence of the benefits—indeed the necessity—of imports to the U.S. economy. The performance of the U.S. economy is directly correlated with imports: strong and steady GDP and job growth over the past quarter century have occurred as imports have increased six-fold.

Part of the reason for the ascent of those unenlightened views is that the Bush administration has failed to articulate a compelling, comprehensive case for trade liberalization. And that represents poor management of the domestic process. Despite overwhelming sources of evidence to summon, the Bush administration has relied almost exclusively on the traditional, mercantilist catchphrases about net export gains from trade agreements. That reliance has exposed the administration’s trade record to allegations of failure, as the U.S. current account has grown to 6.5 percent of GDP.

And too much focus on the export side has undermined the stronger pillar upon which rests the case for trade liberalization: that it is good for your economy regardless of what others do.

Pros and Cons of Reciprocity
I am not arguing that reciprocity-based agreements have no place. They have obviously played an important role in the story of trade liberalization. Multilateral or bilateral reciprocity can produce widespread benefits. Agreements to dismantle more barriers in more countries can be more liberalizing than the commitment of one country to unilateral reform.

The fewer obstacles there are to the free flow of goods and services throughout the world, the greater the potential for economic growth. Agreements can facilitate the consolidation of domestic reform and lock countries into reforms that become more difficult to reverse. It can tip the balance in favor of reform.

Unilateral trade liberalization can produce a lot of liberalization relatively quickly because the need of international negotiations is virtually eliminated. But multilateral liberalization, if the process isn’t too time-consuming and complex, presents the added benefit of partaking of other countries’ liberalization. Instead of reaping only the benefits of import liberalization, you also get the benefits of trade partners’ liberalization. The more countries involved in the agreement the bigger the benefits. And those reforms get locked in, which provides a greater degree of certainty, which businesses like and is wealth-creating.

They can also help prevent backsliding. Consideration of U.S. WTO commitments, for example, has deterred some of the worst kinds of trade proposals, including the bill to impose a 27.5% tariff against all Chinese imports unless and until China revalues its currency to Congress’s liking.

Also, international trade negotiations can carry a certain gravitas that can be tapped by reform-minded constituencies to overcome resistance to liberalization on the part of entrenched domestic interests. Prospects for reform that are in a country’s best interest, but are opposed by politically powerful domestic constituencies, can improve when external pressure is harnessed and brought to bear. A little bit of Gaiatsu can buffet the standing of advocates of liberalization within their own domestic processes, but it can also work the other way (U.S. public pressure on China to revalue the Yuan and to do other things has probably inhibited Chinese action because they don’t want to be perceived as being pushed around).

But reciprocity-based negotiations are not costless and can run into dead ends, as is the case with Doha. Reciprocity reinforces the fallacy that import barriers are assets to be dispensed with only in exchange for similar measures abroad. That misperception can and does retard the liberalization process in countries that are already inclined toward liberalization.

Although agreements might help to consolidate and buffer domestic reforms from subsequent political motivation to backtrack, negotiations could cause countries to recoil from reforms they might otherwise undertake. Countries may be more willing to liberalize when they do it on their own terms, knowing that if push comes to shove they can reverse course.

Trade negotiations also feature an asymmetry of negotiating power between and among participants. While there are important benefits to having more leverage, there are also responsibilities and burdens. As the world’s largest economy, the United States has a lot of negotiating leverage. But its positions are often perceived—or can be distorted to be perceived—as heavy-handed.

Throughout the Doha negotiations, developing country delegations complained that their interests were ignored or pushed to the margins, and that they had to fight to wring out even the smallest concessions from the rich countries. They alleged that the negotiating process is the exclusive domain of a few rich countries, and that proposals are presented on a take-it-or-leave-it basis. This asymmetry requires—in perception if not in reality—that the United States assume a greater share of the responsibility for the consequences of any agreement. So, if a trade agreement fails to deliver the advertised benefits expeditiously to the smaller, poorer countries—even if that failure may be attributable to purely domestic policy errors unrelated to the agreement, then the agreement, and by extension the United States, bears some blame.

Whether that is a fair conclusion is irrelevant. The point is that by insisting on reciprocity, the United States exposes itself to the fallout from any adverse consequences or short-term adjustment costs in the smaller countries. That is a cost that may be unique to the United States, but it is very important in light of geopolitics.

A Unique Role for the United States?
The United States does not need reciprocal agreements to remedy the costs of its protectionist policies. Even if agreement were reached, it would likely tax U.S. credibility further, as naysayers would inevitably allude—rightly or wrongly—to U.S. arm-twisting and blackmail. The United States should not expose itself to such assertions because it just might get blamed for disruptive adjustments to, or ill effects from, greater import competition in developing countries.

Removing barriers unilaterally could also go a long way toward advancing foreign policy objectives by breaking the links—both real and perceived—between U.S. trade policies and economic hardship in the developing world. Unconditional access to the U.S. market could foster goodwill toward the United States at a time when antipathy toward U.S. policies is growing. As a bonus, it could help to restore waning U.S. credibility abroad.

Trade policy is potentially a shiny carrot in a quiver full of foreign policy sticks. By opening our markets unconditionally, we not only reap the economic rewards but we might engender some good will toward the U.S. But by insisting on even a small degree of reciprocity, trade policy is no longer perceived as that shiny carrot, but rather as another bludgeon through which the U.S. expresses its hegemony.

Rather, if the United States were to take the lead and remove its remaining trade barriers (which are overwhelming applied against developing countries) without demands for reciprocity abroad, not only would it reap the economic benefits of greater openness at home, but others might be inclined to follow suit. It could trigger a reciprocal response, what Jagdish Bhagwati calls “sequential reciprocity.”

Others may be inspired to emulate U.S. policies because they are proven to be successful or simply because they recognize it is in their best interests to do so. In this new world of just-in-time supply chains and relentless competition among developing countries for investment and markets, developing countries really have no alternative but to open up.

Most developing countries already understand this. According to a World Bank study, most comprehensive trade reforms in developing countries were undertaken unilaterally to increase productivity in the domestic economy. Between 1983 and 2003, developing countries reduced their weighted average tariffs by 21 percentage points. Unilateral reforms accounted for 66 percent of the cuts.

More trade liberalization around the world is needed. But countries should be allowed to reform at their own pace. By not insisting on anything in return for its own liberalization, the United States can lead by example, reap the benefits of greater openness, and start rebuilding trust.

The demise of Doha isn’t the end of the world. Its failure will hurt some countries more than others, but trade flows are still growing faster than the world economy. The emergence and continued growth of China, India, and other formerly shackled economies will ensure that trade continues to grow. But we are in uncharted waters in the wake of the first failure of a multilateral trade round. Most important, in my view, is that respect for the rules-based system and its institutions doesn’t waver. While trade liberalization can be achieved largely through domestic processes, the international process is important to securing the permanence of those reforms and discouraging scofflaws.

I end with a question then: What is the best way to allow domestic processes to yield unilateral reforms that can be secured within the international rules-based system?

Daniel Ikenson is associate director of the Center for Trade Policy Studies at the Cato Institute.