The one-trillion-dollar chicken game and the G20

Patrick Messerlin 28 April 2011

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At the end of this week the world will know whether, after ten years of negotiations, the Doha Round negotiators are stuck in a chicken game where the largest countries keep making excessive requests for concessions from their partners. As concluding the Doha Round by 2011 is one the oldest and most repeated pledges of the G20 leaders, a continuing Doha deadlock will also be the most severe blow to the G20 since its creation.

The 2008-2009 financial crisis did not trigger a trade crisis. The world trade regime was remarkably resilient, allowing the emerging economies to continue to grow and softening the blow for the industrial economies. But, a serious deadlock in the Doha Round is almost certain to open the door to severe problems in trade.

Creeping protection and Doha failure

A first scenario would be the collapse of world trade if all the countries start back-pedalling in terms of trade liberalisation. Even if they do that by following WTO rules, such a collapse will come at a permanent cost estimated at one trillion dollars—almost three times the fall of the world GDP in 2009 (Productivity Commission 2009). No country—large or small—will survive unshaken such a shock.

Such a collapse is unlikely to happen immediately. But, it may start with a slow rise of protection during the next few years, as it happened in the 1920s before the explosion of protection in 1929-1930. Political circumstances are favourable. In 2012, the elections at the highest political level in several G20 countries—China, India, the US, and France and Mexico, the current and next hosts of the G20 Summits—open wide the doors to people eager to present trade as the scapegoat for all the unsolved problems, unemployment, and austerity in the US and Europe, and for inflation and inequality in China and India. And the ongoing profound shift in world powers is the perfect cauldron for nurturing such risks for a long time.

Rush to regionalism and Doha failure

An alternative scenario would be a rush to preferential trade agreements. The awkward behaviour of countries rejecting a multilateral deal, but at the same time ready to sign more demanding preferential trade agreements is not new. It happened at a large scale after the failed WTO Ministerial in Cancun in 2003.

In such a scenario, the largest trading partners such as China and the US may feel safe. They should think twice. Many countries are hesitating to sign a Doha deal by fear of the efficient Chinese exporters. If the Doha negotiations fail, they will do their best to keep China at bay, avoiding giving preferential concessions to China, or giving them reluctantly if China exerts strong political pressure. In the US case, the problem is its insistence on imposing labour and environmental provisions in its preferential agreements. After ten years of negotiations, a humiliated Colombia finally agreed to abide by such provisions. Large emerging countries will never do this. In short, China and the US risk to be marginalised by the preferential agreements emerging from the ashes of the Doha Round. Ironically, both countries have particularly strong joint economic and political interests to conclude a Doha deal.

The current package is a good basis for concluding the Round

In 2008, the existing drafts of a Doha agreement in goods were considered as a good basis for a deal. It is hard to see why it would not be the case today. Envisaged concessions are large enough to bring substantial gains—roughly between $300 and $700 billions. They consolidate past liberalisations, providing the most precious virtue—certainty and insurance—in modern economies. And, they bring moderate additional liberalisation spread on a large set of sectors so that the Doha Round will not generate strong shocks to individual sectors risking rocking the boat of economies under high stress since 2008.

Paradoxically, the financial crisis makes such an outcome even more obvious for two reasons. Emerging economies have revealed their willingness not to increase their applied tariffs during the crisis. Such a revealed preference erodes their claim that they make huge concessions when binding their tariffs at their current level. Meanwhile, industrial countries have a strong interest to minimise new economic turbulences. Deeper market access will make emerging economies more—not less—effective, hence attractive, as amply shown by South Korea or China. Such a view should induce developed countries to refrain to request concessions in addition to those envisaged in 2008.

However, some (not all) business people claim today that what is on the table is not enough, and insist on getting additional concessions at any cost. They should ruminate on—and be made accountable of—what will happen to their firms in case of a Doha failure chaos. And, better for them not to complain when they will face the uneven playing field generated by a rush to preferential agreements and the possible marginalisation of their countries in this scenario.

Do more on services liberalisation

That being said, closing the Doha Round requires more negotiations on services. In 2008, trade negotiators have already spotted services offering a large pool of potential concessions. As most of these services have been resilient to the financial crisis, negotiators can and should develop and finalise these discussions, having again in mind consolidation of past liberalisations and moderate additional market access.

Beyond their capacity to offer a nice wrap up of the Doha deal in goods, services have a remarkable feature. They offer a long-term solution to the macroeconomic imbalances which are fuelling international bitterness and frustrations. If it wants to export more, the US should rely on its competitive edge in certain services. If it wants to rebalance its own economy, China should satisfy its huge domestic potential demand in services by importing more of them.

Conclusions and next steps by the G20

If there is a deadlock in Geneva at the end of this week, the whole trade issue will be back in the hands of the G20 leaders, hence of its current Presidency—France. President Sarkozy, alone or teaming with Presidents Lee from South Korea (the previous G20 Presidency) and Calderon from Mexico (the next Presidency), should head to Washington, Beijing and a few other G20 capitals to get the needed political impetus to tell business lobbies in all the capitals to stop fuelling the ongoing deadly chicken game, and negotiators in Geneva to hurry up.

Such an initiative will not be unusual. In the past, multilateral trade have often been successful only after the mediation of medium size countries as brokers.

References

Australian Productivity Commission, 2009, Annual Report 2008-2009, Chapter 1. Reform beyond the Crisis. Productivity Commission. Australian Government. 

 

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Topics:  International trade

Tags:  WTO, Doha Round

Professor of Economics, Sciences Po and Director of the Groupe d'Economie Mondiale de Sciences Po (GEM)

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