VoxEU Column International trade

The elephant in the "green room": China and the Doha Round

With the Doha Round on the brink of failure, the blame game is moving into high gear. This column argues that the political perception of China’s export competitiveness and its exchange-rate policy are a real problem. In effect, the whole basis for exchanging trade policy concessions is being undermined because a de facto trade policy instrument – the exchange rate – is seen as nullifying these concessions while remaining beyond the scope of multilateral negotiations and discipline.

The puzzle about the Doha Round of multilateral trade negotiations is not why it is on life support now but how it has survived as a viable multilateral initiative for so long (Schwab 2011). From the very beginning, it was clear that the Round suffered from a lack of private-sector interest, the engine that had driven previous rounds of successful trade negotiations. At most, Doha promised to secure unilateral liberalisation previously undertaken by countries and deliver some modest incremental market opening (Martin and Mattoo 2009). That the Round had much to be modest about was reflected in the failure of even anti-globalisation protesters to show up for the recent meetings.

Today, though, the dynamic of the Doha Round has changed for one key reason: China. Whereas the private sector's lack of enthusiasm previously debilitated Doha, today it is fear of competition from a dominant China that inhibits progress. In a recent paper (Mattoo et al. 2011), we elaborate on this key new development.

Progress in the Doha Round now hinges critically on greater market opening not in services or agriculture but in manufacturing (non-agricultural market access or NAMA in WTO-speak). Services negotiations have been given insufficient attention and are now widely regarded as too complicated to deliver significant market opening in this Round. In agriculture, with food prices high and expected to remain so, import protectionism has become less salient. Rather, it is the threat of agricultural export restrictions that is more serious. But, despite the efforts of some WTO members, that is not on the Doha agenda anyway. So, Doha today is mostly about the negotiations on market access in manufacturing.

In manufacturing trade, China is a large supplier to all the major markets, and its presence has grown significantly over the course of the Doha Round. More germane to the Doha negotiations, China looms especially large in the markets of major trading partners in sectors where protection is greatest. To illustrate this, we identify for each of the top ten trading partners, the ten most protected sectors (defined at  the 2-digit level of aggregation in the 2009 Harmonised Schedule). Figure 1 depicts China’s share in these sectors in the largest ten traders for 2001 and 2009.

Figure 1. China's share in imports of 10 most protected sectors in 10 largest importers, 2001 and 2009

Source: UN COMTRADE database (trade data) and UNCTAD TRAINS database (tariff data).

Two points are worth highlighting.

  • First, in the most protected sectors, China’s share of imports in 2009 is substantially greater than for overall imports (shown in Figure 1) and dwarfs that of any other supplier in each of these markets. For example, China’s share in these sectors in Japan is over 70%, in Korea over 60%, in Brazil about 55%, in the US, Canada, and the EU about 50% each.
  • Second, even in these protected sectors, China’s share has increased dramatically over the course of the Doha Round. In many of the importing countries (e.g., Brazil, the EU, and the US), China’s share has more than doubled. Also striking is how much market share China has gained even in countries such as Canada, Mexico, and Turkey that have free trade agreements with close and large neighbours. Thus, liberalisation under the Doha agenda today, especially in the politically charged, high-tariff sectors, is increasingly about other countries opening their markets to Chinese exports.

But Chinese dominance per se should not have precluded mutually beneficial bargains. The Chinese market, despite China’s far-reaching WTO accession commitments, remains protected in a number of areas (for example, fertilisers and certain manufacturing items). Moreover, as Laborde et al. (2011) have shown, other countries would also see increased exports from the proposed Doha liberalisation by WTO members. The proposals of the US and others to move further toward free trade in selected sectors could translate into greater export gains.

What then is stymieing the reciprocity mechanism that has delivered negotiating success in the WTO in the past? China’s trade dominance has been achieved in large part by China’s successful growth strategy, which has included an embrace of markets and an unusually-high degree of trade openness. The problem, however, is the strong political perception that China’s export success has been achieved, and continues to be sustained, in part by an undervalued exchange rate.

It seems unlikely and politically unrealistic to expect China’s trading partners to open further their markets to China when China is perceived as de facto (via the undervalued exchange rate) imposing an import tariff and export subsidy not just in selected manufacturing sectors but across the board. The evidence on the existence and extent of undervaluation continues to be debated (Cline and Williamson 2008 and Dunaway et al. 2006). Nevertheless, the fear persists that China will gain even greater market share as a result of any trade liberalisation in the Doha Round – not just in countries’ own markets but also in third markets, in each of which the effects of the exchange rate are likely to be felt.

One sign of this fear is that industrial and especially developing countries are increasingly resorting to contingent protection against imports from China (Bown 2010). For example, the share of developing-country antidumping actions against China (as a share of their total actions) increased from 19% in 2002 to 34% in 2009. The corresponding figures for industrial countries were 11% and 27%, respectively. But recourse to this instrument will become more difficult when China attains market economy status in 2016. Moreover, the product-specific transitional safeguards that were negotiated at the time of China’s WTO accession are due to expire in 2013. This leaves countries even more anxious about competition from China.

The politically-charged problem of trade imbalances with respect to China, especially in manufacturing, is widely felt. All of China’s major trading partners, with the exception of South Korea, have witnessed a substantial widening of the wedge between exports to and imports from China. For example, both the US and the EU have seen the manufacturing trade deficit increase three times to $200 billion and $250 billion, respectively (Figure 2a). But other large emerging markets have also seen sharp increases in their trade deficit with China (Figure 2b). Indian and Brazilian policymakers have expressed serious concerns on this score. From an economic perspective, it is the multilateral trade balance of countries that is important, which could be influenced by the exchange rate. But given China’s large global trade surplus, the bilateral trade imbalance relative to China, which has been attributed in part to China’s currency policy, has become a political problem for many countries.

Figure 2a. China's trade balance in industrial goods with the US and EU

Source: UN COMTRADE database.

Figure 2b. China's trade balance in industrial goods with major trading partners

Source: UN COMTRADE database.

In effect, the whole basis for exchanging trade policy concessions is being undermined because a de facto trade policy instrument – the exchange rate – is seen as nullifying these concessions while remaining beyond the scope of multilateral negotiations and discipline. A major trader is therefore believed to have unrestricted ability to negate a previously struck bargain. This connection between the exchange rate and reciprocal trade liberalisation has not received adequate attention and may be essential to understanding the predicament today.

In short, China is the elephant in the “green room” in Geneva. There is no getting around that. Blaming one or another country for the current impasse serves little purpose. Instead, the reality and basis of Chinese trade dominance needs to be confronted as the world seeks to revive Doha or look beyond it.

Editor’s note: A longer version of this column first appeared on the website of the Peterson Institute of International Economics.

References

Bown, Chad (2010), Taking Stock of Antidumping, Safeguards, and Countervailing Duties, 1990-2009. World Bank Policy Research Working Paper 5436. Washington: World Bank.

Cline, William and John Williamson (2008), “Estimates of the Equilibrium Exchange Rate of the Renminbi: Is There a Consensus or Not?”, in Morris Goldstein and Nicholas Lardy (ed.), Debating China’s Exchange Rate Policy, Peterson Institute for International Economics.

Dunaway, Steven, Lamin Leigh, and Xiangming Li (2006), “How Robust are Estimates of Equilibrium Real Exchange Rates: The Case of China”, IMF Working Paper 06/220..

Laborde, David, Will Martin, and Dominique van der Mennsbrugghe (2011), “Implications of the Doha Market Access Proposals for Developing Countries”, World Bank.

Martin, William J, and Aaditya Mattoo (2009), “The Doha Development Agenda: What’s on the Table”, Journal of International Trade and Development, 19:81-107.

Mattoo, Aaditya, Francis Ng, and Arvind Subramanian (2011), “The Elephant in the “Green Room”: China and the Doha Round”, Peterson Institute for International Economics, Policy Brief 11-3.

Schwab, Susan (2011), “After Doha: Why the negotiations are doomed and what we should do about it”, Foreign Affairs, May/June.

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