Doha's near death experience at Potsdam: why is reciprocal tariff cutting so hard?

The Doha Round came to an impasse last week when four leading trading powers failed to agree terms to liberalise international commerce at their meeting in Potsdam. It is now almost inconceivable that the negotiations can conclude before the next US administration takes office in 2009. Officially the talks aren't dead. India's trade minister said the Doha Round was in intensive care last year; if that was the case then, now it appears to be in terminal decline.

A mismatch in negotiating objectives sunk the negotiations in Potsdam. India and Brazil wanted Europe and the US to commit to greater reforms of their agricultural sectors, while the latter wanted the emerging markets to create more commercial opportunities for exporters by cutting their manufacturing tariffs further. It appears that Europe and the US both signalled some flexibility, but it wasn't enough for India and Brazil. The Brazilian trade minister said it was "useless" to continue negotiating on the proposed terms. Last weekend I argued that the Doha Round talks were unravelling ; Potsdam confirmed that the leading trading powers hardened their negotiating positions. Under these circumstances, an impasse is not a matter of ‘if’, but ‘when’.

Now the negotiations go back to Geneva, but don't bet on this working out. Realistically the only person left who can put a deal on the table is WTO Director-General Pascal Lamy. He should be cautious. If his proposal were rejected, WTO members would probably blame him. The blame for this Round's debacle lies squarely on the shoulders of WTO member governments, Mr. Lamy and the WTO secretariat should not be sacrificial lambs.

Stepping back, why are the negotiations proving so difficult?

One unappreciated reason is the massive unilateral trade reform that WTO members have undertaken over the past decade. Paradoxically, unilateral liberalisation gums up the reciprocal trade-negotiating machinery in the Doha Round.

Unilateral tariff reductions open a gap between the tariff rates that a country applies and the maximum tariff rate that it is committed to respecting (its ‘bound rate’ in WTO jargon). For historical reasons, bound rates are what WTO negotiators talk about. In past WTO negotiations, countries exchanged cuts in their bound rates. Since bound and applied rates were about the same thing, exporters in all nations had something to gain from pushing their governments to sign the deal. But now with so much unilateral reform, the proposals for bound rate cuts attract little support from exporters. Rich country exporters can ask: Why lobby for finishing Doha when you have already got the increased export opportunities for free?

How big is the problem? Table 1 shows that, China aside, the 10 biggest emerging markets have substantial gaps between their bound and applied tariff rates. The gap implies that, for example, Brazil would have to cut its bound tariffs on manufactured imports by at least 59% to create new export opportunities for its trading partners. (Brazil would have to cut its agricultural tariffs by even more – 71% – before any new export opportunities arose.) These numbers demonstrate why the EU and US have demanded substantial tariff cutting in emerging markets in return from slimmed-down Western agricultural policies. But in previous WTO negotiations, bound rates were cut by about 1/3rd, so many developing countries feel they are being asked to undertake an unprecedented amount of liberalisation. Moreover, some feel that they are being punished for cutting their tariffs unilaterally.

Table 1: Except for China, unprecedented cuts in bound rates would be needed to create new trade.

Unilateral trade reform is not confined to developing countries.

In response to budgetary pressures and enlargement, the EU adopted a 10-year plan to reform its agricultural sector in 2003. Because these budgetary pressures have not abated and are expected to persist, many of Europe's trading partners have probably concluded that the 2003 reforms are irreversible and feel no need to offer better access to their own markets in return. Emerging-market governments can ask: Why pay for something you will get anyway?

The across-the-board unwillingness to "pay for" other nations' unilateral reforms goes a long way to explain why the tried-and-tested approach to reciprocal trade negotiations failed in Potsdam. Indeed, while so many have been worrying about how the spread of regionalism and bilateralism in recent years has undermined the multilateral trading system, in fact many of the termites eating away at the Doha Round are associated with unilateral trade reform. Worse still, because there are very good reasons for thinking that unilateral trade reform is desirable, a dilemma emerges.

Table 2: A failed round doesn't cost China or India much; not so for Brazil.

Rapid growth is the second underlying reason why concluding this round has been so difficult. The major emerging markets, like India and China, are growing so quickly that the gains from completing the Doha Round seem, relatively speaking, insignificant.Table 2 reports data from two leading studies on the maximum possible gains that might accrue to Brazil, China, and India if the Doha Round is completed. Using data on national income levels for 2000-2005, I calculated how many days of growth each of these emerging giants would effectively lose if the Doha Round is not completed. The results are pretty striking. If Doha fails and the World Bank estimates (of the gains forgone) are correct, then China effectively loses an amount equivalent to just three days growth! India loses between 18 and 24 days' growth, less than one month's progress. Brazil, on the other hand, would forgo the equivalent of 37-82 days' growth; suggesting that it could pay a high price for its geopolitical alliance with India. These numbers may go a long way to account for China keeping a low profile during this Round and for India's belligerence in Potsdam and elsewhere.

The Doha round is now almost dead. All that remains is for someone to discreetly turn the life support machine off. While some will no doubt blame protectionism, lack of "political will", and the like for Doha's demise, there are other underlying causes. Sustained unilateral trade reform and high levels of economic growth in the leading emerging markets have done much to skew the cost-benefit calculus away from concluding the Doha Round of multilateral trade negotiations. For supporters of trade reform, is there a dilemma here--between unilateral and multilateral reforms--or can trade diplomats better design negotiations to take account of both types of reform?