The botched Doha Round negotiations on a Special Safeguard Mechanism

Robert Baldwin

11 March 2009

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When the Doha Round negotiations collapsed in July 2008 because of the inability of India and the US to agree on a special safeguard mechanism for the agricultural products of developing countries, there was a widespread belief among WTO negotiators and world political leaders that the lull in negotiations would be short-lived. Because negotiators had already tentatively agreed on dozens of other issues that seemed much more contentious than temporary safeguards designed to protect livelihood and food security conditions for farmers in developing countries, these optimists reasoned that the negotiating failure must be an aberration that could be corrected with a temporary break and renewal of resolve.

The Chair of the Agricultural Committee expressed support for this view by concluding that he saw no alternative “to picking ourselves up, dusting ourselves off, and trying again” (WTO 2008). G20 leaders explicitly supported this approach in their November 15, 2008 declaration on Financial Markets and the World Economy by instructing their Trade Ministers to reach agreement on the key issues in the agricultural and manufacturing negotiations by the end of 2008.1 The Director-General of the WTO, Pascal Lamy, also initiated extensive discussions with high level officials in India, the US and other major trading nations in the negotiations to determine whether there was a reasonable chance these issues could be agreed upon by the end of 2008 if he scheduled new negotiations at the Ministerial level.

Unfortunately, on December 12 Lamy finally announced that he had not found the necessary political will among key members to accommodate the demands of others and thereby complete the essential parts of negotiations on manufactured and agricultural products by the end of the year. However, negotiations on other issues on the Doha Round agenda, e.g., services, WTO rules, disputes settlement, etc., continue, as does work of a technical nature in the manufacturing and agricultural committees
The long-run fate of the Doha Round is unclear. What is very much needed now, however, is a better understanding of just why the special safeguard issue has proved to be so difficult on which to obtain agreement. This column aims to explain the problem.

The flawed decision on safeguards in 2005

In my view the basis for the inability to reach agreement can be traced back to a bungled decision made during the Hong Kong Ministerial Meeting in 2005. The Ministerial Declaration from that meeting states that “Developing country Members will have the right to have recourse to a Special Safeguard Mechanism based on import quantity and price triggers, with precise arrangements to be further defined” (WTO 2005).2 The quantity trigger rule proposed by the Chair of the Agricultural Committee in the draft modalities paper that was considered by Ministers at their July 2008 meeting permits additional duties to be imposed on imports of agricultural products of developing countries if the volume of imports during any year exceeds 110% of a rolling average of imports in the preceding three years.3

Unfortunately, a safeguards rule based solely on changes in the quantity of imports is seriously flawed. It does not, for example, distinguish between import increases due to increases in supply from foreign countries and import increases touched off by a decrease in domestic production and rise in domestic price. In the latter situation, imposing additional duties and thereby raising consumer prices of agricultural products beyond the increases brought about by the decline in domestic production further reduces the living standards of consumers. Providing subsidies to domestic producers to compensate for their income losses is a much preferred policy option.

But even if all import increases were due to increases in the supply curves of foreign exporters, a quantity trigger mechanism would still be seriously flawed. Such a trigger mechanism is by itself unable to distinguish between those instances in which increases in imports do and do not indicate an appreciable worsening of living conditions for farmers in developing countries. To be able to distinguish between these conditions, it is necessary to take account of the size of the domestic market for a product in addition to the increase in imports (see the postscript below for numerical illustrations).

The failure to recognise the flaw or utilise the format of the special Uruguay Round agreement on safeguards

Had at the time of the Hong Kong Ministerial Meeting agricultural exporting nations such as the US used common sense economics and historical data to demonstrate forcefully the absurdity of using only changes in the volume of imports to measure the effects of import surges on the livelihood conditions of farmers in developing countries, the current Doha Round special safeguard rule may never have been adopted. But apparently this was never done. The Agricultural Committee’s Chair’s draft modalities of July 2007 states there is clear agreement that the trigger not be set in such a way to be “literally triggered hundreds or scores of times by developing countries” or be used to disrupt “trade where fluctuations upwards and downwards are the norm.”4 However, in this and other various draft modalities by the Agricultural Chair over the years, there is no indication that any members considered the quantity mechanism to be flawed as a way of distinguishing between import surges that endanger the livelihood of farmers in developing countries and those that do not.

It should be noted that at the outset of the negotiations in 2001, India proposed a special safeguard provision “on the lines of the Special Safeguard provision” included in the Agricultural Agreement of the Uruguay Round.5 This measure covers the agricultural imports of both developing and developed countries that agreed in the Uruguay Round to convert quotas on agricultural imports to equivalent tariffs and then to reduce these tariffs. The trigger level for utilising this provision is “based on market access opportunities defined as imports as a percentage of the corresponding domestic consumption during the three preceding years for data are available.”6 (Italics added.)

It appears that the US and other agricultural exporting nations did not make the case against a quantity trigger at this early stage when the negotiating position of India was more flexible. India and the other developing countries understandably prefer a trigger mechanism based just on changes in the volume of imports because this is more direct and gives them greater scope for raising tariffs. Unfortunately, it now seems too late in the negotiations to be able to replace the current quantity trigger mechanism by one based both on percent increases in imports and the level of import penetration.

The July 2008 collapse in the negotiations

The key issue over which disagreement between the US and India led to the collapse of the July 2008 Ministerial Meeting involved the extent to which developing countries could raise agricultural duties in response to import surges. India wished to have the unencumbered right to raise duties to the level it deemed necessary to protect the livelihood conditions of its farmers. The US was concerned that this freedom of action would lead to tariffs being raised to levels above those agreed on in the Uruguay Round negotiations and thus would represent a step backward from the hard-won liberalisation gains of that Round in agriculture.7

In an effort to break the resulting deadlock, WTO Director-General Pascal Lamy proposed as a compromise that pre-Doha tariff rates could be exceeded if the increase in imports in the current year was at least 40% greater than the average for the preceding three years. Susan Schwab, the US Trade Representative, accepted this figure as a compromise point (Schwab 2008), but Kamal Nath, the Indian Commerce and Industry Minister, summarily rejected it with the remark: “I reject everything. I cannot put the livelihoods of hundreds of millions of people at risk” (Blustein 2008).8

An alternative compromise subsequently put forward would have not limited the ability of developing countries to raise agricultural tariffs above pre-Doha Round levels, provided they could show that imports were causing “demonstrable harm” to their poor farmers, as judged by a panel of neutral experts. India reportedly stated it could go along with this approach but it was rejected by the US on the ground that being “a mechanism to disrupt trade” (Blustein 2008).

An interesting feature of this proposal is that in judging whether poor farmers were being subject to “demonstrable harm”, panels of experts would likely give considerable weight in their decisions to the share of domestic consumption taken by the increased imports. This is one of the measures that the general WTO safeguard article (Article XIX of GATT 1994) specifically states should be considered in determining whether increased imports are causing serious injury. Its use under these circumstances would partly compensate for the flawed quantity trigger mechanism.

Prior to the Director-General’s December 2008 announcement that he would not be calling for a restart of the negotiations at the Ministerial level, the Agricultural Chair issued still another revised draft modalities reflecting his views concerning a possible compromise on the special safeguard mechanism. The key differences from the proposal put forth by the Director-General at the July 2008 Ministerial were a lowering of the percent import increase at which pre-Doha Round tariff rates could be exceeded (from 40% to 20%) and the imposition of a limit on the share of tariff lines on which the trigger mechanism could be applied at any one time (2.5%). However, the Director-General’s subsequent announcement that he would not be calling for a restart of the negotiations at the Ministerial level indicates that this proposal was also rejected as an acceptable compromise.

Obama’s views

The Obama Administration has yet to indicate its views concerning the issues that led to the July 2008 collapse of the Doha Round negotiations. However, given India’s great fear that the livelihoods of its hundreds of millions farmers are endangered by import surges9 and thus its position that its agricultural sector must be protected by a special safeguard mechanism that contains few restrictions on its ability to raise import duties, it does not seem possible to reach an agreement in this sector unless the Indian demands concerning the nature of this mechanism are largely met.

US negotiators, however, recognise that accepting the Indian position would in effect eliminate the credibility of the formula tariff reductions agreed on in the market access negotiations in agriculture and greatly reduce the prospects of significantly increasing agricultural exports to developing countries as their income levels grow. Ambassador Schwab seemed prepared to accept this outcome provided that developing countries such as China were willing to engage in sectoral negotiations in manufacturing that cover such industries as chemicals and machinery. However, China refused to consider further tariff reductions in these industries beyond those already made as part of its WTO accession agreement.10

The looming trade war and the safeguards issue

The development most likely leading to a restart of negotiations at the Ministerial level is the increase in trade-distorting measures adopted by both developed and developing countries as means of stimulating national economic recovery from the current worldwide recession. A number of countries have already provided extensive subsidies for particular industries. An almost inevitable response to these measures will be the imposition of countervailing and antidumping duties by other countries on the grounds that the measures unfairly distort trade. Policies designed to increase domestic employment by favouring the purchase of domestic over foreign goods or domestic over foreign investment are also likely to lead to retaliatory actions.

Because of a fear that this retaliatory process will lead to a worldwide trade war in which all countries lose, the leading developed and developing trading countries are likely to call for a WTO Ministerial meeting to negotiate new sets of international rules aimed at preventing such an outcome. Within this larger framework, the special agricultural safeguard issue of the Doha Round may not appear to be so important in the trade agenda of the key participants and thus be settled more quickly.

References

Paul Blustein, “The Nine-Day Misadventure of the Most Favored Nations: How the WTO’s Doha Round Negotiations Went Awry in July 2008,” Brookings Global Economy and Development, The Brookings Institution, 2008.
Susan Schwab, Press Briefing, July 30, 2008.
WTO website, Doha Round, Report to the Trade Negotiating Committee by the Chairperson of the Agricultural Committee, August 2008.
WTO website, Doha Development Agenda, Hong Kong Ministerial Declaration, 2005

Postscript

This postscript illustrates the logical flaw in the safeguard mechanism using hypothetical data and actual Indian data.

Hypothetical data

Consider, for example, a sector in which production is equals to 95% of consumption, exports are equal to 5% of consumption, and imports are equal to 10% of consumption, i.e., C = P – X + M = .95C - .05C + .1C.11 In these circumstances, a 10% increase in imports represents only a 1% increase in the quantity of the good supplied to the domestic market (0.01 = .1 x .1C/ (.95C - .05C +.1C)). Even with the typically low elasticities of demand for agricultural products, it is unlikely that a 1% shift in supply would affect food security or the livelihood conditions of poor farmers sufficiently to warrant a protectionist response. In contrast, suppose imports initially equal 90% of a good’s domestic consumption, domestic production equals 15 %, and exports equal 5%. In this case a 10% increase in imports represents a 9% increase supply of the good to the domestic market (0.09 = (.1 x .9C) / (.15C - .05C + .9C)) or an increase much more likely to threaten the livelihood of poor farmers. A low trigger level is necessary to ensure that all agricultural sectors deserving of safeguard protection are selected, but this low trigger level will also select many sectors in which the livelihood of farmers is not endangered or threatened by surges in imports. A trigger mechanism based on the change in import penetration in a domestic market, i.e., the increase in imports divided by the level of consumption, would not have this drawback.

Actual Indian data

The unsatisfactory nature of a quantity trigger mechanism can be further illustrated using actual agricultural data for India. Using Indian import data covering 14 products over the period from 2001 to 2007, the ratio of current year imports to the average of imports for the three preceding years can be calculated for the 14 products for the four years, 2007, 2006, 2005 and 2004. The results indicate that 17 of these 56 ratios or 30% covering 11 of the 14 products equalled or exceeded 110%. Thus, had the Special Safeguard Mechanism been in operation during this period, additional import duties could have been imposed on these products for one year.
Since comparably classified production and export data are readily available for the industries covering 8 of the 17 ratios, it is possible to calculate a measure of the livelihood effects of these import increase on farmers by comparing the percent import increases in these 8 cases with their respective levels of domestic consumption.

In 4 of the 8 cases this calculation yields ratios of less than 1% – levels at which it seems doubtful that the import increases could have had much effect on the livelihood conditions of farmers. In the one case where the import surge is an appreciable fraction of domestic supply, 7% for wheat, the import increase was the result of a deliberate government action to increase the country’s stocks of wheat. Thus, if this sample of 8 cases is representative of all 17, one can conclude for India over this period that the safeguard mechanism would have been triggered a number of cases of dubious merit from the standpoint of protecting livelihood conditions of farmers.


1 In addition to the major developed countries, the Group of Twenty includes the more advanced developing countries such as Argentina, Brazil, China, India, Mexico, and South Korea.
2 Disagreement on the safeguard issues has arisen mainly over arrangements with regard to the quantity trigger.
3 The greater the percent by which the import increase exceeds a three years moving average of imports, the greater the permitted increase in the tariff rate.
4 These quotations are from paragraphs 104 and 105 of the July 2007 revised draft modalities of the Chair of the Agricultural Committee.
5 Proposal on Market Access, WTO G/AG/NG/W/102, January 2001. Other developing countries also proposed a special safeguard mechanism for the agricultural products of developing countries.
6 Uruguay Round Agreement on Agriculture, Part II, Article 5, paragraph 4. The provision is written such that the smaller the import penetration ratio for a particular product, the larger the percent increase in imports must be in order to raise import duties on the product.
7 The July 2008 draft modalities by the Agricultural Chair specified that pre-Doha Round bound rates be respected as upper limits of tariff increases.
8 This is an especially valuable account of the December 2008 breakdown because Blustein interviewed key participants in the negotiations and had access to their notes on the meetings.
9 Kamal Nath, the Indian Industry and Commerce Minister, frequently raises the possibility of mass suicide on the part of Indian farmers if imports surges are not curtailed.
10 China and other developing countries also pointed out that participation in sectoral negotiations is voluntary under the Doha Round mandate.
11 Domestic consumption (C) equals domestic production (P) minus exports (X) plus imports (M), i.e., C = P – X + M.

 

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Topics:  International trade

Tags:  Doha Round, negotiations, safeguard mechanism

Hilldale Professor of Economics, Emeritus, at the University of Wisconsin-Madison

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