Doha Round failure: This is the way the round ends…

Joseph Francois 01 August 2008

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Trade negotiators in Geneva have finally admitted the obvious and given up on their efforts to negotiate a new WTO trade agreement. As a result, the Doha Round of trade negotiations has been allowed to collapse. Next comes the blame game, with finger pointing across the Atlantic and across the rich-poor-countries trench.

Negotiations aimed at a world that no longer exists

Neither the collapse of the Round, nor the recriminations to follow, should be taken too seriously. The mandate for negotiations under the auspices of the Doha Round has fallen further and further behind the pace of change in the world economy. At the same time, there never was much overlap between the stated goals of the Round, and the actual room for manoeuvre afforded negotiators. Similarly, there will be little overlap between the real causes of the collapse, and the recriminations to follow. In short, the negotiations:

  • framed issues for a world that no longer exists,
  • required actions that developing countries are unwilling to undertake, and
  • fell victim to a shift in WTO Member composition and behavior that makes Members increasingly hesitant to make concessions in the WTO where the MFN clause means that a concession to relatively small players like Chile or Australia is automatically extended to China and India.

Success requires a different game, with different rules and different players

Consider agriculture – the proximate cause of the Doha collapse. According to World Bank commodity price indexes, in 2001 grain prices were only 70 % of their nominal 1995 levels. In defining the negotiating agenda for the Doha Round, the focus of commodity exporters in the WTO (Brazil, Argentina, Australia, etc.) has been to raise these prices by eliminating price-distorting policies. At the same time, major importers (India, China) have also been concerned about the impact of low prices on their farmers. Reflecting this concern, the policy research program at international organizations -- World Bank, FAO, IFPRI – has highlighted the impact of agricultural trade on poverty. (Hertel and Winters 2005). This set of concerns is also at the root of the game-ending impasse on special safeguards involving China, India, and the US. But this world no longer exists.

A combination of events since 2001 has made these issues moot. Rising incomes in Asia, combined with adverse shifts in growing conditions, have combined to fuel rapid increases in commodity food prices. At the same time, bio-fuels initiatives in the OECD have, somewhat unintentionally, reinforced the process of rising prices (see Stefan Tangermann on this). The role of energy prices in this regard is also a reflection of adverse supply conditions (driven by politics rather than climate) and rapid income growth. The consequence is that commodity grain prices, as of June 2008, are 218% above 2001 levels in real terms (after adjusting for general inflation), and as a consequence we have seen food riots across Asia.

Given this, the Doha Round agenda seems misguided to say the least. Unless there is a dramatic drop in demand conditions (i.e. we somehow unwind recent income growth in India and China and South East Asia and prevent future growth), special safeguards should be a non-issue for developing country farmers growing staple grains, and for OECD exporters. Additionally, the real political risk for the least developed countries is further increases in food prices. Indeed, they are demanding action on this issue from the G8. Yet ironically, if India and Brazil did get what they asked for on farm subsidies, and if the EU and US did eliminate all targeted subsidies, prices would go up even more.

Impasses over agriculture are as much an excuse as a cause of the breakdown

In a sense, developing countries are collectively asking that food prices go up and down at the same time. The inconsistency reflects divergent interests across the newer, non-OECD members of the WTO. It also highlights the fact that remaining impasses over agriculture are as much an excuse as a cause. The problem is irreconcilable differences in views on trade policy, linked to differences in stages of economic development.

Non-agricultural issues

Moving past agriculture to NAMA and services, developing country gains at this point really require South-South dialog and South-South initiatives at liberalization.

This is the message from much of the policy modeling literature. Indeed, model-based analysis of recent NAMA proposals simply reinforces the message from earlier research on the impacts of multilateral trade liberalization, namely: “active developing country participation in terms of market access concessions is critical to their prospects. If developing countries continue for the most part with business as usual after the round, in terms of trade policy, there is little scope for actual benefits accruing to developing countries.” (Francois, van Meijl and van Tongeren 2005).

The most egregious barriers faced by the South are actually in the South, and major developing country players, sitting behind 15% or 20% average tariffs, are a bit disingenuous when howling about the 3% average OECD manufacturing tariff they face across the rich-poor income trench. Yet, for a complex set of reasons, the NAMA modalities for tariff reductions (the proposed rules for tariff reductions) do indeed point in the direction of business as usual. (See Francois and Martin 2003, and Francois et al 2005, regarding "binding overhang."). In the end game, continued rhetoric and name calling directed at the OECD is a signal that developing countries are not yet able or ready to confront this issue. Like the impasse in agriculture, blaming the OECD is cover for further inertia at home in the developing world.

Is the collapse of Doha a bad thing?

Given that the Doha Round was focused on an agenda misaligned with the real world, its collapse may be a good thing. The older WTO Members, the core of the old GATT system, have been firmly committed to a process of deeper integration and ongoing liberalization since the end of the Second World War. The newer Members, brought on board during the Uruguay Round or with the creation of the WTO, do not share the same philosophy. They are at different stages of development, and as a result have different perceptions about the trade off between global markets and national economic interests.

In addition, the MFN clause may now be a problem. It was meant to protect smaller Members like Luxemburg and New Zealand in the negotiating tumble between larger economies like the US, Europe, and Japan. It was also meant to serve as a safeguard against resumption of pre-War preferential colonial trading regimes. Yet we now have large and rapidly growing economies that can in theory get away with refusing to make concessions, while still gaining from any MFN concessions made between OECD countries. (To be blunt, there is hesitation to make indirect concessions to China, whether or not people are willing to name the dragon in the middle of the room.)

Despite MFN, we also have an emerging system of trade preferences that looks uncomfortably similar to the old colonial trading systems. For the OECD and middle income developing countries, plurilateral negotiations may be the only way forward.

OECD nations will move forward, but will it be via the WTO?

We can expect the OECD Members to move forward on a number of fronts, including services, various manufacturing sectors, product standards recognitions, and a range of other issues. The question is whether or not this happens in Geneva. Will they be allowed to take the form of WTO plurilateral agreements ensconced in Geneva and open to new signatories (so developing countries can sign on when ready), or forced to take the form instead of (yet more) variations on the theme of regional agreements.

One option, for example, is a zero-for-zero plurilateral agreement on manufacturing tariffs, perhaps with an agreed common flat rate on third countries to mitigate third country impacts and avoid rules of origin problems. (Francois 2007b. Also see Baldwin 2008 on using regional approaches to reinforce multilateralism). Another possibility is sector agreements on services (possibly on an MFN basis). For agriculture, apart from some narrow issues (cotton, bananas), we really need to wait until the emerging commodity price structure becomes clearer, and the public finance underpinnings of the US and European subsidy schemes start to crumble under the pressure of competing fiscal needs -- like the looming Geriatric Boom that is the echo of the Baby Boom. (Francois 2007a,c).

The Doha Development Round was as much distraction as opportunity, with an agenda focused too much on intractable and outdated issues. Negotiations of some form should and will resume. The questions are "where?" and "between whom?" It is important that (developing) WTO Members allow them to take shape in Geneva, even if they do not have an immediate interest in participation, so that the plurilateral agreements that emerge are open to future accession. This means that WTO Members will need to be flexible in defining and allowing scope for sector level negotiations, or negotiations between a subset of Members, in place of an integrated process involving all Members.

References

Baldwin, R.E., and Thornton, P., eds, Multilateralising Regionalism: Ideas for a WTO Action Plan on Regionalism, CEPR publications, 2008.

Francois, J.F. and W. Martin, "Formula Approaches to Market Access Negotiations," World Economy, Volume 26 Issue 1, Pages 1 - 28, 2003.

Francois, J.F., H.van Meijl, and F. van Tongeren, "Trade Liberalization in the Doha Development Round," Economic Policy, Vol. 20, No. 42, pp. 349-391, April 2005.

Francois, J. "Time for Crazy Ideas part 1 - dropping agriculture from Doha," The Random Economist, January 2007a.

Francois, J. "Time for Crazy Ideas part 2 - spagetti of spiderwebs?" The Random Economist, April 2007b.

Francois, J. "It is time to declare victory and go home," VoxEU, June 2007c.

Hertel, T. and L. A. Winters, eds, Poverty Impacts of a WTO Agreement, World Bank publications, 2005.

World Bank, "Commodity Price Data (Pink Sheets) · Prospects for the Global Economy," various issues.

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Topics:  International trade

Tags:  China, WTO, Doha Round, Commodity prices, food prices, South-South liberalization, MFN, plurilateral agreements, regional agreements

Professor of Economics at Johannes Kepler Universität Linz; CEPR Research Fellow in the CEPR International Trade Programme.

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