It is time to declare victory and go home

Joseph Francois

28 June 2007

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We have been here before

We are still negotiating the Uruguay Round. This may come as a surprise to casual observers and negotiators alike. After all, documents were signed in Marrakech in 1994 concluding the Round.

As the Uruguay Round drew to a close, US and EU negotiators were unable to make substantive progress on agriculture, middle-income countries were demanding credit for unilateral liberalisation undertaken outside the GATT, and LDCs were demanding one-sided concession from the OECD. The unelected leaders of the nascent anti-globalisation movement, flush from their first kill with the death of the Multilateral Agreement on Investment, demanded that the representatives of elected governments either give them some control over the process (a “seat at the table”) or end the process entirely. Lester Thurow declared the GATT dead, and attention was focused on unilateralism, US exceptionalism, and regionalism. Yet all parties did manage to stumble their way to a negotiated withdrawal. This required that agriculture be effectively decoupled from the negotiating package, with an agreement to resume negotiations in 2001. This allowed the rest of the Uruguay Round to be closed down. These deferred negotiations, merged with restarted services and manufacturing negotiations, have served as the core for what is now the Doha Round (aka the Doha Development Agenda).

Just as the Doha Round was born out of agreement to declare victory and go home to negotiate another day, the rhetoric circulating today would not have sounded out of place in the 1990s (or 1980s or 1970s …). The list of core agenda items looks uncomfortably familiar and unimaginative. LDCs continue to demand that “rich countries, especially the US… offer deeper farm subsidy cuts; several warn that they would not accept disproportionate demands to reduce their own industrial tariffs.”[1] What if the OECD reduces its tariffs yet again, liberalises agricultural policies, streamlines its own trade procedures, provides technical assistance, and asks nothing in return? This will be good for the OECD. Critically though, will this also be a pro-development outcome? The answer is yes and no.

Agriculture - again

Consider agriculture. The simple view, put forward by NGOs and well-meaning development ministries, is that underdevelopment is a direct consequence of OECD agricultural policies. The underlying premise is that reforming OECD policies will mean higher food prices, and these will lead to significant income growth in the developing world. Computer models from the World Bank have been rolled out to support this claim.[2] Fix these policies, the logic goes, and the development bottleneck is removed. Incomes will rise and inequalities will fall. Kumbaya. Back in the real world, the result has been a huge amount of diplomatic energy focused on a politically impossible set of negotiations. Progress on any other front is held hostage to agriculture. Yet things are not that simple, and the focus on agriculture is misplaced. A combination of Asian income growth and misguided bio-fuel policies in Europe and America means prices will be rising anyway, no matter what happens in Geneva. This is actually bad for LDCs that are net food importers. Since we seem to have forgotten basic consumer theory, I will repeat here a basic result … higher prices are bad when you are buying. We now have Mexican political unrest because of rising tortilla prices.[3] In much of Africa, rising food import bills will reinforce the foreign exchange burden of debt payments. There are also the added complications of demographic pressure on OECD farm budgets from the pending scramble for public pension funding, an upcoming Presidential election in the US, and the looming renegotiation of the CAP within an enlarged EU. We should let these elements sort themselves out. [4]

Additionally, for products closest to the heart of NGOs – bananas, sugar, and cotton – the WTO system is already working. The dispute settlement body (the DSB) has been the venue for successful litigation against the US and EU (led by Brazil) on cotton and sugar, while developing Latin American countries recently won a high-profile case against the EU on bananas. Difficult issues are being handled through the existing legal machinery in Geneva, and developing countries are even winning. None of this hinged on current agriculture negotiations.

Something no one wants to talk about - import protection in the South

Another reason why the development impact of a focus on OECD concessions is not clear-cut is import protection in the South. Like the last round, there is a distinct North vs. South flavour to the current one. If you surf the WTO website, Ministerial declarations, NGO news feeds, and the pronouncements of the alphabet soup of developing country blocks – G20, G33, LDCs, SVEs – you get the distinct impression that what matters is OECD concessions. Yet this focus on the OECD is an exercise in misdirection. Preferential access is not the key to trade-based growth.[5] The literature on openness and growth has seen active (even violent when judged by academic standards) debate on the relative roles of domestic trade policy and institutions. Yet we do not have convincing evidence in the resulting literature on meaningful growth effects linked to third-country trade preferences. Actually, recent research suggests that preferences do not work as advertised, help parties they are not meant to help, and otherwise represent a triumph of form over substance. [6] [7]

Domestic conditions are what matters. India and China (see figure) stand as exemplary poster children in this regard. Both have seen rapid acceleration in growth rates linked to a mix of domestic policy reform and domestic international economic policy reform. China’s acceleration began in 1990-1991, and India’s 10 years later. Over 2.2 billion people, including what was in 1990 a large share of the poorest of the world’s poor, now live in high growth regimes. OECD concessions were irrelevant to these accelerations in trade and output growth.

It is clear that the industrial world benefited greatly from progressive GATT-based liberalisation in the past, with average tariffs negotiated down from 60% in the 1950s to 3% today. [8] Estimates of the potential benefits to developing countries of comparable liberalisation indicate a similar pattern of potential benefit. [9] This means we need to shift attention to South-South negotiations on an MFN basis. This is where further OECD concessions could help. We need to forget about further OECD market access as a development tonic. If the OECD would resign from its role as scapegoat (scrapping industrial protection and then walking away), the South could then move past its post-colonial obsession with OECD import protection and finally take steps to place its own collective house in order.

Getting past the DOUR Round

So how do we finally bring the Doha/Uruguay Round (the DOUR Round?) to a close? A negotiated end to the diplomatic hostilities will be by necessity a muddle. A critical first step is to give up again on further progress in agriculture and decouple completion of the Doha Round from further agricultural concessions. Managing this will require concessions in other areas to the LDCs.[10] In the Uruguay Round, this was accomplished by offering the phaseout of textile and clothing quotas. This time, there may be scope through the trade facilitation (TF) talks for real assistance on trade-related infrastructure (i.e. actual cash payments).[11] In addition, if the OECD scales back on demands for substantive NAMA tariff reductions (perhaps simply settling for a broad resetting of bindings at current applied rates), while making NAMA cuts of its own anyway, the India and Brazil (leading the South) may then go along and allow closure.[12]

It actually is important to the prospects of LDCs that the Round be brought to a close. This is not, however, because it will bring great and immediate pro-development benefits. Rather, we need to shift focus to a more current mix of issues. The world is quite different than it was in the 1980s when the current agenda was given basic shape. Collectively, middle-income countries are the promised land of improved market access for most of the developing world. They offer big, rapidly growing markets. Once we do get past the DOUR Round, we can focus on a medium-term package of issues. Ideally, these could include “simple” things like a folding of intra-OECD FTAs into a Geneva-based plurilateral (combined with an agreement on common rules or origin), critical repair work to the GATS framework for scheduling commitments, a common framework for defining rules of origin, and a real effort to promote South-South dialogue. If closing the Doha Round made medium-term progress on this challenging set of issues possible in subsequent (i.e. post-Doha discussions), then the outcome would indeed be pro-development.


Footnotes

[1] See “G-20, G-33 MINISTERS UNDERLINE PRIORITIES BEFORE "DECISIVE PHASE" IN DOHA TALKS,” Bridges Weekly Digest 11(21), June 2007, http://www.ictsd.org/weekly/07-06-13/story2.htm.

[2] For an example see K. Anderson, W. Martin, and D. van der Mensbrugghe (2005), “Global Impacts of Doha Trade Reform Scenarios on Poverty,” World Bank Policy Research Working Paper No. 3735, October, http://search.ssrn.com/sol3/papers.cfm?abstract_id=822879.

[3] The President of Mexico has found it necessary to make promises to keep tortilla prices low, after price hikes for corn driven by U.S. biofuel demands. See “Mexico leader in tortilla pledge,” BBC, http://news.bbc.co.uk/2/hi/americas/6255781.stm.

[4] For further discussion on this point, see “Time for crazy ideas – part 1,” http://www.intereconomics.com/blogs/jff/2007/01/time-for-crazy-ideas-part-1.html.

[5] For a detailed discussion of this, including the pattern of binding overhang in LDC tariff schedules and the importance of own liberalisation for LDC gains, see Francois, van Meijl, and van Tongeren (2005), “Trade Liberalization in the Doha Development Round,” Economic Policy, Vol. 20, No. 42, pp. 349-391, April.http://papers.ssrn.com/sol3/papers.cfm?abstract_id=701685.

[6] See Brenton and Manchin (2003), “Making EU Trade Agreements Work: The Role of Rules of Origin,” The World Economy, Vol. 26, pp. 755-769, May, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=426005 for discussion of the problem of EU rules of origin under preference schemes. Also see Francois, Hoekman, and Manchin (2006), “Preference Erosion and Multilateral Trade Liberalization,” World Bank Economic Review 20: 197-216, http://ideas.repec.org/a/oup/wbecrv/v20y2006i2p197-216.html on how this translates into serious limits on real scope for preference erosion.

[7] See Under the U.S. AGOA scheme of preferences for African countries, for example, there is evidence that rents actually go to US importers. See Olarreaga, M. and C. Özden. 2005. “AGOA and Apparel: Who Captures the Tariff Rent in the Presence of Preferential Market Access?” World Economy 28(1): 63-77. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=648752.

[8] There has been a recent round of academic name-calling linked to evidence of the impact the GATT/WTO has had on developing countries. As I read this sub-theme in the literature, the point is that the GATT/WTO has failed to promote LDC openness, and does not really question the historic impact of GATT rounds on OECD tariffs since 1947. We have seen rates drop from 50% to 3%. See “Does the WTO Promote Trade?”, the Economist, August 2005. http:[email protected]/msg03021.html for a summary of recent (unresolved) arguments between academic trade economists on what the WTO actually has accomplished vis-à-vis developing countries.

[9] Again, see various studies cited above. Also, though, for balance's sake and truth in advertising, also see Taylor and von Arnim (2007), “Projected Doha Round benefits hinge on misleading trade models,” http://www.twnside.org.sg/title2/wto.info/twninfo040702.htm.

[10] In the Uruguay Round, this also required implicit bribery of OECD Members. The EU, for example, awarded all of its initial butter import quota (i.e. a monopoly on EU butter trade) to New Zealand to win support for the Uruguay Round agriculture agreement.

[11] Promoting infrastructure improvement would have a substantive impact on trade performance. See Francois and Manchin (2007), “Institutions, Infrastructure, and Trade” CEPR discussion paper 6068, http://ideas.repec.org/p/cpr/ceprdp/6068.html.

[12] Services is a different issue. Mutual agreement to further postpone progress in the GATS by reaching an agreement excluding difficult sectors should be possible. The EU is unable to even implement free trade in services within the EU itself. For amusement’s sake, it is worth reading the list of exclusions in the EU’s directive on services in the internal market: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:32006L0123:EN:HTML. Perhaps such an exclusion set would make a Doha agreement on services possible.

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Topics:  International trade

Tags:  Doha Round, Uruguay Round, Agriculture

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

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