The WTO After Hong Kong — Where Do We Go From Here

Lecture at the Friedrich Naumann Foundation.

Introduction

Trade negotiators, policy analysts, media and others interested in the Doha Round of multilateral trade talks have been asking the same question since the end of the ministerial meeting in Hong Kong in December: where do we go from here? The question implies, of course, that the Doha Round is in serious trouble. Well, that may very well be true.

To find a literal answer, though, one is advised to look to the “Hong Kong Declaration,” which is a statement of recommitment by the ministers to the goal of reaching a comprehensive Doha Round agreement by the end of 2006. The Declaration provides the usual diplomatic platitudes about the nobility of the efforts undertaken and the virtuousness of the goals being pursued. But the document also provides some concrete guideposts to success, from which the enormity of the task at hand can be inferred.

The goal is to complete the negotiations by the end of this year. By April 30, “modalities” (framework and formulae) for the agricultural and non-agricultural market access (NAMA) negotiations must be accomplished, and by July 31 the actual numbers to plug into those formulae must be agreed. Meanwhile, all requests for services liberalization are to be made by the end of February, and corresponding offers are to be tabled by July 31.

While no interim deadlines were set for several other items on the Doha Agenda, including the important rules negotiations (which cover the contentious issue of antidumping reform), all of these negotiations will have to produce outcomes that, when considered together, enable 150 trade ministers to agree to the single undertaking that will be known as the Doha Agreement. And all that within 10 months!

WTO Director General Pascal Lamy has been out pounding the pavement, meeting with delegations far and wide, offering encouragement to keep at the negotiations. He says the negotiations are about 60 percent complete, and that the impending deadlines will help “focus minds.” How he calculates the 60 percent figure is a bit mysterious, since most of the contentious decisions have thus far been deferred. While there have been fruitful meetings in the various negotiating committees since Hong Kong, the reports coming out of those meetings show how much still needs to be done.

Meanwhile, EU Trade Commissioner Peter Mandelson and U.S. Trade Representative Rob Portman have been on the diplomatic trail, attempting to convince developing countries that liberalization in their industrial and services industries are in their own interests. That is most certainly true. However, the truth about trade was one of the first victims of the Doha Round. Accordingly, skepticism abounds among trade policymakers and experts in Washington, Brussels, Geneva, and elsewhere regarding prospects for an ambitious outcome to the Doha Development Round. I share that skepticism.

The concept of a Doha-lite, which means a far less ambitious agreement than envisioned when the Round commenced, will have to be embraced. It may be the only way to avert failure of the Round, and the residual damage that could cause the WTO.

Why Are We Stuck?

The question of where do we go from here requires an assessment of why we are at this impasse in the first place. There is plenty of blame to go around.

The most obvious answer is agriculture. For almost four and a half years, the emphasis of the negotiations has been on agricultural. Yet little progress has been registered. Rich country farm supports and agricultural tariffs are egregious and should be dismantled, not only because of their adverse impact on poor countries, but because they constitute a waste of limited resources. Taxpayers in the United States and Europe should not be forced to subsidize their well-to-do farmers, particularly when government budgets have grown out of control. Farm reform is a matter of domestic fiscal necessity more than anything else.

In the months leading up to the Hong Kong ministerial, there was a flurry of activity in the agricultural negotiations. The United States and Europe submitted fairly comprehensive proposals and counter-proposals in an effort to inject some momentum into the discussions before Hong Kong. But any momentum initially created soon subsided after several members concluded that the European proposal was far less ambitious than was the U.S. proposal. Without European willingness to go further–to at least the level of reform reflected on paper in the U.S. proposal–there would be little room for substantive progress in Hong Kong.

If nothing else, Hong Kong constituted a public relations victory for the United States. One of the great failings of the United States in the Doha Round was its willingness to appear in lock step with Europe on the agriculture agenda at the ministerial meeting in Cancun in 2003. The appearance to the developing countries that the rich countries were working to scuttle meaningful reform inspired the creation of the G‑20, and ultimately the collapse of the talks in Cancun.

In my view, the only way to avert a similar disaster in Hong Kong was for a bold agricultural proposal to be on the table. The fact that big differences were observed between the U.S. and European proposal sent an important signal to the developing countries that the rich countries were no longer in lock step. Europe has taken this development on the chin.

Europe was left isolated as the primary villain in the agriculture saga after Hong Kong, and Peter Mandelson has looked nothing but defensive since then. Mandelson has come under a great deal of criticism for his efforts to dismiss U.S. proposals as disingenuous or simply too ambitious to be practicable–and I largely agree that his rhetoric and tactics have been less than diplomatic–but I also agree with Mandelson’s proposition that Europe should go no further on agriculture unless and until it sees movement on NAMA and Services. After all, this is supposed to be a single undertaking where everything is on the table before an agreement can be reached. The problem is that the developing countries (Brazil and India, in particular) don’t see it that way. And it is they who will determine the Doha Round’s fate.

There is a larger context for understanding why progress in the Doha Round has been scant.

First, in the years between 1995 and 2001 (when Doha was launched), there was a lingering sense of betrayal among some developing countries, a perception that the Uruguay Round was a big success for the rich countries, and gave little to the developing countries. Considering that the most significant “concession” from the rich to the developing countries was the Agreement on Textiles and Clothing (ATC), there is a basis for understanding the sense of betrayal.

The ATC was an agreement to end the decades-old quota system, known as the Multifibre Arrangement, which allowed restraints by the United States, Europe, Norway, and Canada on imports of textiles and clothing from almost every developing country. The ATC specified a 10-year phase out of the quotas in four stages. At each stage, a minimum percentage of products subject to quota in 1994 were to be liberalized from quota, and the growth rates in remaining quotas were to be accelerated.

But while the United States and Europe may have adhered to the letter of the Agreement, each certainly violated its spirit. The United States chose to liberalize from quota in the first stage (1995) products such as tents, parachutes, awnings, sails, and other products that had never been subject to quota in the first place! Most meaningful liberalization was deferred until the final two stages in 2002 and 2005. In fact, approximately 80 percent of the products subject to U.S. quota in 1994 remained under quota until the final day, January 1, 2005.

Europe was guilty of “backloading” its liberalization too, but to a lesser degree. Instead, Europe used the special safeguard mechanism to curtail import growth after quotas were removed, oftentimes bringing cases with the flimsiest of evidence. Many developing countries harbor the somewhat justified belief that they were double-crossed by the rich countries in the Uruguay Round. Their seemingly unbending negotiating postures this Round reflect the lessons of the past.

Then, the terrorist attacks hit America in September 2001, which started to focus attention on what might be the root causes of such violent upheaval. Economic stagnation in the developing world was identified as one of the important causes.

Two months after the attacks, in an effort to show solidarity among the world’s leaders and with a virtuous sense of purpose to start tackling the economic problems in the developing world, the Doha Round was launched and dubbed the “Doha Development Agenda.”

But the development emphasis of the round reflects factors beyond the desire to address economic stagnation and to redress perceived and real grievances of the past. It also reflects the reality of the WTO’s composition. Since the WTO was established in 1995, its membership has grown by 25 percent, and each new member is a developing country. The goal of liberalizing trade by cutting tariffs, which dominated the GATT agenda for most of the post-war period, has been transformed into an agenda of development-oriented goals, which have not always been hospitable to trade liberalization.

There are now 150 members in the organization with disparate levels of economic development, 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 somewhat justified) sense of victimization among developing countries, but it also provides the wrong prescription. Furthermore, the bickering between Europe and the United States over the question of who does more for the poor countries lends further credibility to the “victim” position successfully staked out by the developing countries. Why should they offer any market openings when the rich countries tit-for-tat exercise just might excuse any liberalization from the poor countries?

All of these factors considered together have conspired to create a situation where the developing countries feel that they shouldn’t have to do much in the way of opening up their own markets.

On top of these misguided beliefs, the developing countries have an ace in the hole to back up an uncompromising negotiating position: Brazil’s successful complaints in the WTO against the U.S. cotton program and the EU sugar program. Brazil believes it has already achieved some of the cuts in agricultural subsidies that are being negotiated in the Doha Round. Brazil feels that a large chunk of the reforms being offered by the EU and the US are not concessions at all–that the reforms already have to be made or else, Brazil and other countries can litigate them in dispute settlement with precedence to back them up. The United States and Europe know they are vulnerable on this.

There are yet other important reasons for the Doha impasse. The emergence of China may be the most critical. Many members are scared of the implications of China’s growth, including Europe, which will be imposing new antidumping duties on footwear very soon, and the United States, where Congress is threatening some very provocative, reactionary legislation this election year. 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 or even unwillingness among some countries to agree to tariff cuts in the Doha Round because they are afraid of Chinese competition.

Still another reason for Doha’s roadblock: the proliferation of bilateral and regional trade agreements. While these types of trade agreements are not necessarily mutually exclusive with multilateral agreements, the danger is that they can become so.

In 2002, then‑U.S. Trade Representative Robert Zoellick announced a policy that he described as “competitive liberalization,” which meant that the United States would pursue bilateral, regional and multilateral agreements simultaneously. The rationale behind the policy was that trade agreements–particularly multilateral ones–can take a long time to materialize, and possibly might not materialize at all. To insulate U.S. trade policy goals from failure due to the limited ambition of others, and to avoid putting all eggs in one basket, Zoellick announced that the U.S. would pursue several alternatives at the same time.

The Free Trade Area of the Americas was to be the main thrust of U.S. liberalization efforts outside of the Doha Round. Beyond the stated goal of providing options for U.S. trade policy, “competitive liberalization” had the strategic benefit of showing the rest of the world that the United States had viable alternatives outside of Doha. The not so subtle message of competitive liberalization was that within the Doha negotiations the United States should no be pushed too hard for concessions and that U.S. demands should be taken seriously.

But the policy took a major blow when it became apparent that the FTAA was going nowhere, primarily because of resistance from Brazil, which was insisting on the same reforms being demanded in the WTO–agricultural and antidumping reform. So, the United States moved to isolate Brazil by concluding its bilateral agreement with Chile, and then announcing negotiations with Central America and several Andean countries. While these negotiations were underway, the political and economic climate in Latin America began to change for the worse and support for the FTAA all but totally dissipated. The United States no longer had a viable alternative to use as leverage for its Doha agenda.

Meanwhile, other countries, particularly in Asia and the Pacific, embarked on bilateral and regional discussion as well. In many regards, several Asian countries have more to show for their efforts than does the United States. There should be little question that prospects like an ASEAN plus China union or an Australia-China free trade agreement or a U.S.-Korea free trade agreement undercut at least some of the enthusiasm for a multilateral deal. It also stretches limited negotiating resources, perhaps too thin.

A final, but also very significant explanation for the lack of progress in Doha is that there might not be sufficient interest in a deal from 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. There reactions, I thought, were antithetical to what they should have been feeling.

The point that this drove home for me 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 again. 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 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.

There are thus plenty of explanations for the Doha Round’s stasis.

Failure is not an Option

Failure to reach a Doha Agreement by the end of the year could be more severe than simply missing the opportunity to expand trade this go around. In fact, there would likely not be another go around for years to come.

Failure would produce an immediate round of finger pointing, as countries position themselves to deflect blame. This will hasten antagonisms between countries that will have spent 5 years in vain trying to work through difficult issues. It could produce conclusions that there is little real interest in trade liberalization, which could harden perceptions of victimization and distrust. Domestic constituencies that opposed trade liberalization in the first place will be energized by the turn of events, and their views could win favor among a broader cross-section of their populations.

Brazil and others would likely prepare more WTO challenges of U.S. and European agricultural policies. In the United States, where Congress has been outspoken and critical of WTO rulings, more adverse rulings would not have a welcome reception. At a time when U.S. congressional antipathy toward trade is rising, it is possible that there would be more calls than usual to ignore WTO findings. Simultaneously, there would be calls for the United States to bring more cases against China (in particular).

If those unfriendly, even hostile sentiments begin to take root, particularly in the absence of an ongoing trade negotiating round, questions regarding the efficacy of the existing rules and the legitimacy of the WTO itself might not be far behind. Doha failure could lead to an erosion of respect for the rules and institutions that have helped expand international trade and investment and have contributed significantly to the economic growth and rising living standards experienced throughout the world over the past 60 years.

A weakened (or merely the perception of a weakened) rules-based system of trade could invite a resurgence of protectionism, as countries recoil from previously-made commitments. And with international trade and investment flows increasing rapidly on a account of the emergence of China, India, and other formerly smallish economies, politically expedient protectionist policies might prove tempting, as countries grapple with the question of how best to respond to dramatically changing economic circumstances. Fidelity to the rules and institutions will be needed more than ever at a time when temptation to dispense with them is heightening.

Doha’s failure could lead to an increased parceling of the world economy as countries turn more aggressively toward bilateral and regional agreements. While there has been much scholarly debate about the efficacy of bilateral and regional agreements, much of their intellectual support derives from the belief that they are complementary to multilateral deals, and not a substitute for them. Broad, nondiscriminatory trade liberalization under homogenous rules is generally more conducive to producing gains from trade than are discriminatory agreements between subgroups, which could be trade diverting. The so-called spaghetti bowl of rules raises the cost of compliance as well.

Another problem with bilateral and regional agreements is that agricultural and antidumping reform would likely be immune from liberalization–as they have been in the past. Furthermore, developing countries tend to be excluded for these types of arrangements, as richer countries tend to cherry pick their prospective partners.

Thus, Doha failure is not a viable option.

Where do we go from Here?

Efforts must be undertaken to ensure that Doha doesn’t fail (which does not mean that an ambitious outcome is necessary). Brazil, India and other large developing countries are in the driver’s seat, but they are on the verge of overplaying their hand. They, and the other developing countries (G20 and G90, alike), would be hurt more from a Doha collapse than would the rich countries. More pressure has to be put on these bigger developing countries to show greater willingness to reduce applied industrial tariffs, not just bound rates.

Developing countries need to be disabused of the belief that it is their right, and in their interest, to do nothing toward reducing their own tariffs. Unless they can show that their economies are opening and that their rules are transparent and that their country is a good place to do business, they are going to get crushed as globalization advances. In this era of just in time, hub and spoke world supply chains, countries are competing with each other for international investment. Investment flows to regions where there is greater certainty in the business and political environment. And where there are fewer frictions and lower costs of doing business. Protectionist policies are anathema to a business-friendly environment. Without that environment, the investment won’t come. Without investment, you fall farther behind.

All that being said about how doing more, much more, is in the developing countries own interest, the onus remains on the rich countries to get a deal done. Sustained economic growth in the developing world is an objective shared by countries rich and poor. This objective transcends economics too. It is a matter of profound foreign policy and security policy interest for the United States and Europe, as well.

These geopolitical aspects of the Doha Round need to be trumpeted by Peter Mandelson and Rob Portman, as they start to downplay expectations that a Doha Agreement will bring huge short-term benefits to their exporters. The offensive agenda of broadly opening developing country agricultural, non-agricultural, and services markets needs to be downgraded. But there are still important benefits to tout.

First of all, a Doha failure, as I argued earlier, would be worse, far worse, for rich country exporters than a deal that only shows gains on paper for developing countries. A deal that benefits the developing countries disproportionately would improve prospects for U.S. and European exporters by giving their prospective developing country customers greater opportunity to earn foreign exchange. This will increase demand for imports, which could inspire greater sales for American and European businesses. Meanwhile, access of rich country producers to cheaper imports will help lower their own costs of production, which could create opportunities for selling at lower prices and thus competing more effectively in developing countries.

Furthermore, liberalization of rich country markets without any rigid demands that developing countries follow suit could inspire what Jagdish Bhagwati calls “sequential reciprocity.” Without the external pressure of negotiations, countries have in many cases come to the realization that reform and trade liberalization was in their interest. India, China, Mexico, Chile, New Zealand, Australia, Singapore, and Hong Kong, to name a few, have all unilaterally liberalized their trade regimes at one point or another without the external pressure that negotiations bring to bear.

As countries grapple with their own policies to find out how best to compete in this dynamic and increasingly linked world economy, perhaps it is better for them to come to their own conclusions at their own paces.

Certainly, it is important that Lamy, Mandelson, and Portman continue to apply some pressure to the G‑20 to do their part in offering enough in the way of NAMA and services liberalization so that a plausible, face-saving deal can be accomplished. But they shouldn’t push too hard. It could backfire. If developing countries are compelled to accept a level of barrier reduction with which they are not comfortable, then they will be more apt to blame any domestic discontent associated with adjustment on the rich countries for forcing the deal on them. That could inspire a difficult backlash against trade, its institutions, and the countries that advocate it.

The best hope for Doha is an agreement that compels the rich countries to eliminate distorting farm programs and to eliminate or substantially reduce tariffs on products important to the developing countries. Those outcomes are necessary regardless of the other components of the deal. Negotiators should be sure, then, to understand that “Doha Lite” is far preferable to Doha failure.

Thank you.