TCS Daily

The Doha Round: Bang or Whimper?

By Claude Barfield - January 23, 2006 12:00 AM

While there is a solid consensus that the December WTO Hong Kong Ministerial meeting produced only meager results, a cacophony of voices and opinions has emerged regarding the final outcome of the Doha Round -- and, indeed, how soon the negotiations will be completed. What will be assayed here is an overview of some of the leading explanations and predictions, followed by a judgment on the most likely outcomes. (It should also be noted that there is little disagreement regarding the most significant substantive issues: speculation on outcomes is almost entirely based upon political judgments.)

Starting from the top -- that is, the most optimistic predictions -- Jagdish Bhagwati, the dean of U.S. international trade economists, has argued in the Financial Times that the Hong Kong ministerial "took significant steps toward the conclusion of the Doha round," and that "a blend of strong measures puts the trade talks back together."

In explaining the reasons for his optimism, Bhagwati notes that:

(1) The anti-globalist movement failed to derail the talks (in contrast to earlier meetings in Seattle and Cancun) and that indeed it is weakened and divided;

(2) The agreement to eliminate agricultural export subsidies was an important breakthrough and -- more importantly -- no line in the sand was drawn against further liberalization as the talks continue;

(3) India and Brazil, and other large developing economies, are prepared to play a significant role in fashioning tradeoffs between concessions in agriculture and market access for manufactured goods and;

(4) The 50 least developed countries have been "bought off" with duty-free access for almost 100 percent of their products -- and the promise of "aid for trade" from developed countries.

Bhagwati's optimism is echoed by his colleague at Columbia University, Arvind Panagariya. In several academic and journalistic articles, trade economist Panagariya argues that on the central Doha issue of agriculture the "rhetoric and reality" are widely divergent. Specifically, he points out that the press, NGOs and even some WTO members, have greatly overstated the dimensions of the trade-distorting agricultural support around the world. He challenges the claims that rich countries give agricultural producers more than $300 billion annually in subsidies.

First, he notes that lumping together trade-distorting and non-distorting support is one source of inflated figures. He estimates that export subsidies are in the $3-5 billion range and that the domestic subsidies under negotiation in the Doha round are substantially below $100 billion.

Second, applied tariffs in agriculture for most countries are far below bound tariffs agreed to in previous negotiations: for the EU, the gap is about 35 percent; for the US, about 25 percent. Thus, while deep cuts will have to be made in trade-distorting external and internal subsidies (particularly for the EU), hopes for a successful outcome on agriculture are not "pie in the sky."

Panagariya concludes: "Contrary to the impressions conveyed by the media, definite progress has been made toward rationalizing agricultural policy...over the past ten years. Moreover, the differences among the major players are hardly insurmountable." Like Bhagwati, he believes that the "outlines of a successful agreement" have emerged.

Moving on down the optimism/pessimism ladder, several well-known analysts are much less optimistic about the outcome but have advanced tactics to salvage the talks.

Fred Bergsten of the Institute for International Economics, a leading international trade economist, admits in Foreign Affairs that the multilateral negotiations "are faltering badly," and the Doha round may become the "first multilateral trade negotiation to fail since the 1930s." He believes that only a "galvanizing incident," a "policy jolt" can save the talks. Harkening back to events leading to the successful conclusion of the Uruguay Round, Bergsten posits that the "effective weapon" that the United States employed at that time was "the APEC strategy": the commitment to an alternative regional trade arrangement that would encompass the entire trans-Pacific region. This move brought the Europeans and some developing countries to their senses, according to Bergsten. Today, he argues that the United States should adopt a similar tactic: that is, utilize APEC to "fulfill the vision of a decade ago" and start negotiations on a Free Trade Area of the Asia-Pacific ("It may be the only tool available to bring Doha back to life.")

Along similar lines, Ernest Preeg of the U.S. Manufacturers Alliance, and a prolific analyst of trade policy, advances several initiatives to move the talks forward in 2006. He notes at the outset that negotiations stalled in December and that "pessimistic comments about the declining usefulness of the (WTO) permeated the corridors." Like Bergsten, Preeg believes that new strategies and priorities are necessary for a successful conclusion of the round. Not unexpectedly (but not implausibly), he argues for centering the near-term negotiations on manufacturing trade -- pointing out the anomaly that while the WTO negotiators have fixated on agriculture, 75 percent of world merchandise exports are manufacturing goods (as opposed to 9 per cent for agriculture).

Preeq also argues that agreement from the top 15 international exporting nations would cover 90 percent of world manufacturing and that the talks should key on these facts and realities. Specifically, he recommends that, rather than attempting across-the-board reductions in manufacturing tariffs (a tactic that has produced endless spats over the details of a tariff-reduction formula), the negotiators should focus on an agreed number of manufacturing sectors, with chemicals and machinery at the top of the list. In the short term, the aim would be to achieve an agreement for zero tariffs in these areas over a time certain. This would be a substantial achievement, he argues, as the two sectors together make up almost 50 per cent of total world manufacturing exports: "Compared with the four years of arcane debate over alternative formulas and coefficients, the (sectoral) free trade approach is far more likely to achieve quick and tangible results."

Other knowledgeable observers are much less sanguine about a successful "maximalist" outcome, or the ability to complete the negotiations by the end of 2006. Writing in National Journal, Bruce Stokes reviews the options and posits that, despite business objections ("We refuse to accept Doha-lite," states one business executive), the most likely outcome is a "minimalist" agenda, coupled with an extension of the deadline for the U.S. presidential negotiating authority some six months past its current June 2007 date. Stokes' description of Doha-lite would include: phase-out of agricultural export subsidies; WTO members agreeing to reducing tariffs in both agriculture and manufacturing to their current applied rates; and zero tariffs and further liberalization in half a dozen manufacturing and service sectors (viz., chemical, electronics, air express, insurance). In a quite recent column, however, Stokes warned that the results of a just-completed opinion survey may well undercut U.S. negotiators ability to deliver reforms as voters still support subsidies for farmers and are skeptical of drastic industrial tariff reduction in the face of job losses.

Finally, one astute European analyst, Simon Evenett (formerly of the Brookings Institution and now at the University of St. Gallen), focuses on the politics of trade in both the EU and U.S. in the crucial next few years. He finds little to support hopes for important substantive results in Doha in the near future.. For our purposes, his analysis of events and trends in the EU is most significant. After surveying the evolution of EU agricultural policy and politics during 2005, Evenett makes the following points (among others):

(1) while the media has identified France as the culprit in the EU's adamant stand against further agricultural liberalization, other EU nations have persistently supported France in this stance -- including, at key decision points, Spain, Italy, Ireland, Austria, Hungary and Poland;

(2) the operative instructions to the EU trade delegation state flatly that the 2003 agricultural reform constitute "the limit" of EU concessions and will not be changed before 2013; and

(3) the 2007 French presidential elections (like the 2006 U.S. midterm elections) will harden anti-trade liberalization positions and make new concession difficult, if not impossible. All in all, he concludes that "the next window of opportunity for hard wrap up the Doha Round would appear to be 2009."

So there you have it. Regretfully, the opinion here is that the pessimists would seem to have the stronger case. On the hopeful side, Bhagwati's most important point relates to the changed attitude of the large developing countries -- particularly Brazil, India and China. There is solid evidence that, in contrast to the Uruguay Round, both Brazil and India no longer feel alienated from the process. Similarly, Panagariya's telling point about the overstatement of agricultural barriers could make a difference. The problem, though, is that his new estimates are no secret; and countries even with this knowledge have so far refused to move off their hardline positions. Fred Bergsten's call for a threatening movement toward a trans-Pacific FTA defies the current realities of East Asian trade politics. APEC has been moribund since the late 1990s and is being overtaken by the ASEAN + Three (Japan, Korea, China) intra-Asian negotiations.

And at the November 2005 APEC meetings, the trans-Pacific FTA proposal pushed by key business leaders met with a cool brushoff. Preeg's manufacturing sectoral approach makes sense substantively but is narrowly focused and lacks a broad set of concessions for other contending interests. In the end, the view here is that political barriers -- internal EU politics, the necessary renewal of U.S. farm legislation, the US midterm and presidential elections -- combined with the breadth and complexity of the Doha agenda, make it almost certain that Evenett is correct in doubting a result before 2009. And even then, a "maximilist" result is problematical -- particularly if bilateral and regional FTAs have bypassed the multilateral system.

Claude Barfield is a Resident Scholar for the American Enterprise Institute.

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