The economic crisis, Doha completion, and protectionist pressure

Joseph Francois 17 December 2008

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With a deepening economic crisis and rising calls for public assistance in sectors ranging from finance to autos, there are also signs of growing nervousness about the dangers of protectionism. These include editorials in the financial press and high profile think tank studies on the stumbling Doha Round (Wolf 2008, Bouet and LaBorde 2008, Baldwin and Evenett 2008). While the worry is merited, not all hope is lost. Indeed, this crisis is the kind the trading system was engineered for. By rough calculation, almost 80% of world trade in goods ought to be free from wholesale tariff increases (i.e. Smoot-Hawley wannabees) as long as the system holds.

The WTO system for goods is centred on tariff bindings (Francois and Martin 2003, 2004). These are multilateral treaty commitments not to raise tariffs above a certain level. Among the OECD Members of the WTO, actual or applied tariffs are generally at the bound rate (i.e. there is no scope to raise tariffs), except for free trade agreements, where they are actually locked in at zero. Approximately 30% of world trade is locked in at zero tariffs through various European agreements (the European Union treaties and the EEA), another 8% of trade is under zero tariffs locked in through NAFTA, and another 40% involves OECD importers where tariffs are at or very close to bound rates -- i.e. there is no "binding overhang" (except for the OECD share involving food trade outside free trade blocks, which is roughly 2.5% of world trade).

On top of this, the commitments undertaken by China and Taiwan when they joined the WTO also limit their room for protectionist manoeuvres. If we also include Hong Kong and Singapore as "safe" importers (they are traditionally staunch free traders), this leaves around 20% of trade "at risk." This involves Asian importers, Africa, Latin America, OPEC Members, and components of the former Soviet Union. Their average rates of protection are 15.1% for food and 6.0% for NAMA products. Roughly 60% of their imports come from non-OECD suppliers, while exports from the OECD to these markets represent only 12.5 of total OECD exports. What all this means is that the recent IFPRI study (which has been widely quoted) may greatly overstate the risk of Doha failing. Because of regional and multilateral bindings that really do bind, we will not get a massive unwinding of trade through widespread hikes in applied tariff schedules - unless the EU, NAFTA, and WTO themselves all unwind as well.

So, is the Doha Round really relevant here? Existing WTO bindings mean we should not see systematic increases in OECD tariffs unless they actually withdraw from the WTO, take deliberate steps that violate WTO commitments and invite retaliation, or all agree the crisis justifies temporary suspension of commitments. There are safety valves within the system to handle such pressure - antidumping, countervailing duties, and safeguards -- but they are just that, safety valves. The points stressed in recent Doha Round studies may be important. They are, however,  unrelated to current protectionist dangers. Bindings are valuable (I made this point in a paper with Will Martin a few years ago), and we should be grateful for them now. Even if we finish Doha tomorrow, new ones will not come on-line in time to limit any rising protection in the current crisis.

While the risk is in areas the Doha Round will not affect, we ought to worry about these risks all the same. We need to devote energy to non-Doha issues in Geneva. These include the risk of rising and excessive use of antidumping, countervailing duty, and safeguard protection; misguided public subsidies (though some of the current ones may be justified on retro-Keynesian grounds); rising protection in the poorest countries; and temptation in the US Congress to violate existing treaty commitments. The WTO members should spend energy on these issues, but the Doha Round is not a critical part of the equation.

References

Baldwin, R.E. and S.J. Evenett (2008), The crisis and protectionism: Steps world leaders should take, VOXeu.org.
Bouet, A. and D. Laborde (2008), "The Potential Cost of a Failed Doha Round," International Food Policy Research Institute, Washington.
Brockmeier, M. and J. Pekikan (2008), "Agricultural market access: A moving target in the WTO negotiations?" Food-Policy 33: 250–259.
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. and W. Martin (2004), "Commercial policy variability, bindings, and market access," European Economic Review, Volume 48, Issue 3, June: 665-679.
Francois, J., H. van Meijl and F. van Tongeren (2005), “The Doha Round and Developing Countries,” Economic Policy, 20(42): 349-39
Wolf, Martin (2008), "Global imbalances threaten the survival of liberal trade," Financial Times, 2 December 2008.

Note: trade share calculations are based on the COMTRADE and GTAP databases. Import protection calculations are from Brockmeier and Pelikan (2008), and the WITS, GTAP, and MAcMaps databases.

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Topics:  International trade

Tags:  WTO, Doha Round, protectionism

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

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