The Hollow Order
Rebuilding an International System That Works
FREEING TRADE SO FAR
There were eight successful rounds of multilateral trade negotiations (MTN) under the auspices of the General Agreement on Tariffs and Trade (GATT). The first round of talks were held in Geneva, Switzerland, in 1947 and the last was launched in Punta del Este, Uruguay, in 1986. This last round was concluded in 1994 in Marrakesh, Morocco, and led to the creation of the GATT's successor, the World Trade Organization (WTO).
Although they might seem like successes in retrospect, it is important to recall that few of these MTNs went smoothly. Moreover, with each successive round, the negotiators' task has grown more complex, even as their ability to close trade deals has increasingly been impaired by the greater visibility of the process and the growing involvement of a variety of lobbies and stakeholders. The issues have also become more complicated, thanks to the proliferation of non-trade barriers and to sectors such as agriculture that had earlier been shunted aside by waivers. So it is hardly surprising that the Uruguay Round of talks took nearly eight years to complete and suffered midway breakdowns and cascading crises of confidence, whereas the preceding Tokyo Round took five years and the previous rounds took much less.
The current talks -- the Doha Round -- are the first to be conducted under the WTO. Like the recent GATT rounds, this one has been a roller coaster, full of near breakthroughs followed by near breakdowns. Indeed, controversy has beset the talks since their very beginning. Officials had hoped to start the round in November 1999, during the WTO ministerial talks in Seattle, Washington. But that meeting collapsed in the face of unruly street demonstrations, and it was not until the next ministerial meeting, held in Doha, Qatar, in November 2001, that the round was launched. By then, of course, the attacks of September 11 had dramatically changed the international climate, and the negotiators used this tragedy to affirm the importance of democracy and openness to the world economy.
But the controversy persisted. When negotiators next met -- in Cancún, Mexico, in September 2003 -- the anti-globalization protesters were back but were not the problem: their numbers had diminished and their passions were not as disruptive as they had been in Seattle, where they had resulted in tear gas and vandalized storefronts. Still, the Cancún ministerial meeting ended without an agreement, largely thanks to dissension among the member nations. The end of Doha seemed close at hand. Fortunately, the WTO's 148 members returned to the drawing board. Now, after missing several deadlines, the Hong Kong meeting has arrived with no agreement in sight. Nonetheless, there are high hopes for a breakthrough so that the round can conclude before President George W. Bush's fast-track trade negotiating authority expires on June 30, 2007.
Are such expectations justified? Might the WTO's step forward turn into a stumble? No one knows for sure; but there are grounds for cautious optimism about the future of Doha.
DOHA'S HISTORY OF SUCCESS
Although nothing is guaranteed for Doha, all MTN rounds thus far have succeeded in the end. And if one considers the short, four-year history of Doha so far, one can find progress in many directions.
Recall, for example, that before the Cancún meeting, one major bone of contention had been the insistence by the EU and Japan that the four so-called Singapore issues -- on investment, competition policy, transparency, and trade facilitation -- be part of the final accord. Pascal Lamy, who was then the EU's trade commissioner and is now director-general of the WTO, was deeply committed to including the issues, hoping that doing so would provide "reciprocity" for the EU when the union, which has no comparative advantage in agriculture, made concessions. Lamy seemed unmoved by arguments that the time was not yet ripe to include the Singapore issues in a final agreement. But at Cancún, he yielded, and only the innocuous issue of trade facilitation (which largely relates to rationalizing cumbersome administrative customs procedures handicapping trade) was kept on the agenda. Of course, the EU did not give up something for nothing, as Lamy hoped to match agricultural concessions with liberalization in manufactured goods and services, where the EU does have a comparative advantage. But the fact remains that a serious obstacle was overcome.
Then there was the question of intellectual-property protection, and the TRIPS (Trade-Related Aspects of Intellectual Property Rights) agreement -- another potential obstacle. Intellectual property does not belong in the WTO, since protecting it is simply a matter of royalty collection. But the matter was forced onto the WTO's agenda during the Uruguay Round by the pharmaceutical and software industries, even though this risked turning the WTO into a glorified collection agency. The move gave multilateral legitimacy to the use of trade sanctions to replace unilateral means of collecting royalties from developing countries, embodied in the tariff-retaliation provisions of the "special 301" legislation in the 1988 Omnibus Trade and Competitiveness Act. Tough restrictions were enacted under the TRIPS agreement on the manufacture of generic drugs and their sales to poor countries.
During the period between the end of the Uruguay Round and the launching of the Doha Round, the pharmaceutical industry insisted that the TRIPS agreement was a done deal and should not be revisited (except to make intellectual-property protections tighter) -- even though virtually all trade rounds in the past have included renegotiation of issues that had been dealt with before. This game plan backfired, however, when the spread of AIDS in Africa and the widely recognized need for cheaper anti-retroviral drugs created huge pressure on the pharmaceutical industry during the few years preceding the Cancún meeting. The U.S. firms resisted this pressure for a long period. But finally, just prior to Cancún, the firms capitulated in the face of public opprobrium and handouts or threats from the Bush administration and agreed to accept a reduction of restrictions on the production and use of generic drugs. Thus, like the Singapore issues, the TRIPS problem was effectively avoided at the Cancún talks. And intellectual property largely remains off the agenda in Hong Kong, although some key details of a revised agreement (including protection for geographic brand names such as Burgundy wine, Parma ham, Roquefort cheese, and Darjeeling tea) remain to be worked out in a low-key fashion.
As important as these developments were, the central breakthrough at Cancún was the emergence of the Group of 20 (G-20), led by Brazil, India, and South Africa. Seen at first as spoilers, these countries had played a negligible role in earlier negotiating rounds. Press coverage of the MTNs tended to focus almost exclusively on the interplay between the European and the American trade representatives, who were treated as the stars of the trade talks with others sidelined to obscurity. At Cancún, however, this dynamic finally changed. Celso Amorim, Brazil's foreign minister, made a dramatic stand, planting the flag of the developing world on the MTN map and forcing the media to pay attention to its interests. In past years, the Quad -- the United States, the EU, Japan, and Canada -- had set the terms of the negotiations. After Cancún, however, the agenda was set by a new Group of 5, which included the United States, the EU, Brazil, India, and Australia (as a representative of the Cairns Group of 17 agriculture-exporting countries).
Cancún thus represented a triumph for developing countries, which suddenly gained recognition and a political stake in the negotiations. Indeed, the G-20 even managed to demand successfully that the EU and the United States go back to the drawing board and come back with improved offers on agricultural subsidies and trade barriers. This development augurs well for the future, since effective negotiations can occur only among equals; finally, representatives from Washington and Brussels face opponents their own size (or near to it).
Even the fact that the Cancún talks did not wrap up the Doha Round should not be seen as a failure. After all, at the time of Cancún, the Doha Round was only two years old. Both the Tokyo and Uruguay Rounds had taken much longer to close. Finishing Doha so quickly would have taken a miracle, and miracles do not happen in trade.
REASONS FOR PESSIMISM
Despite all these positive developments, there are still reasons for pessimism about what negotiators will accomplish at Hong Kong. The most difficult issue is lowering agricultural protections; in recent months, Washington and Brussels have lobbed related offers and counteroffers at each other without much progress. The EU itself is divided between France and its allies, which oppose making any serious concessions, and the United Kingdom and the Nordic countries, which favor accommodation.
The French opposition to the liberalization of agricultural trade rules seems animated by the popular and populist conviction that reducing such barriers would constitute an attack on both French agriculture and French culture. To its opponents in France, endorsing globalization would mean a surrender to Anglo-Saxon neoliberalism, which stands in contrast to the more equitable French view of how society and the economy should be managed. French opposition is also motivated by the fact that unemployment there is now near the two-digit level (in 2003 and 2004, it hovered around 10 percent when adjusted to a U.S.-comparable estimate). Much of the French public mistakenly attributes this problem to globalization rather than to the government's structural and macroeconomic policies. This non sequitur compounds the fact that high unemployment rates often produce popular opposition to opening markets to foreign competition. Similar problems afflict Germany.
The Bush administration, by contrast, clearly favors trade liberalization through the Doha Round, as the president has unambiguously declared. Yet even in the United States, political support for this position has seriously eroded. In December 2001, Bush managed to get fast-track negotiating authority (now known as trade promotion authority) passed in the House of Representatives by a majority of only one and within a broader trade bill by only three votes in July 2002. Last summer, the Central American Free Trade Agreement (CAFTA) received a similarly narrow majority (of two votes).
Such rhetoric aside, opposition to free trade from within the Democratic party has had two dramatic consequences. first, the number of Democrats in Congress voting for each trade bill has steadily fallen in recent years; this summer, only 15 representatives supported CAFTA. The consequences for those who endorse such measures have also grown; in fact, after losing the CAFTA vote, Representative Nancy Pelosi (D-Calif.), the House minority leader, vowed to work to deny the CAFTA supporters a place on the Democratic ticket in the next election.
Unsuprisingly, those within the Democratic Party who call for "fair trade" have received no support from their intended targets, the developing countries. The larger developing nations, such as Brazil and India, oppose the introduction of non-trade "fair trade" agendas (such as those concerning labor standards) into the WTO. Brazil has taken a similar stance in the negotiations to create a Free Trade Area of the Americas, arguing that the treaty should focus on reducing trade barriers alone. This stance becomes even more interesting when one remembers that President Luiz Inácio da Silva (Lula) of Brazil was also a union leader -- and has a far larger constituency among his workers than his rich-country counterparts.
Thus far, the U.S. response to such opposition to its demands to have trade-unrelated "fair trade" demands accepted in multilateral trade negotiations has been to engage developing countries one by one in negotiations for bilateral free-trade agreements (FTAs). In such talks, Washington is inevitably able to exercise enough pressure to get its immensely less powerful partner to accept almost any "fair trade" demands in exchange for preferential access to the gigantic U.S. market. Recent bilateral agreements have thus included many such obligations.
These bilateral and less-than-multilateral FTAs are therefore dangerous, not merely in constituting a threat to the support for multilateralism that will not indulge the rich-country lobbies' demands for inserting trade-unrelated demands into trade negotiations, but also because they multiply preferences worldwide and create a "spaghetti bowl" of multiple tariffs depending on the source of a product and, in turn, a flood of rules of origin to determine which source is to be assigned to a product. With over 300 such preferential trade agreements in place already, and more coming down the road, nearly all first-rate economists have now begun to tire of them and consider them to be a pox on the trading system. While the disease began in Europe, as the EU commissioners fanned out to negotiate FTAs with all and sundry (outside of the European core, now 25 nations), the United States could have used its immense status at the GATT to stop their spread by providing leadership. Instead, under Secretary of State James Baker and his deputy Robert Zoellick, the United States joined in, and now Asia is following suit. We now have a pandemic.
There are two added reasons why this outbreak of ever more FTAs poses particular danger to Doha. First, the largely reactive Asian FTAs will not necessarily include the United States; this will fuel resentment in the U.S. public against trade because few will know that the blame does not belong in Tokyo or Beijing but in Washington with its trade leadership. This danger is particularly acute since the FTAs between China and other developing countries do not carry any discipline whatsoever. Where a developed country like Japan is involved, Article 24 of the GATT provides some discipline, such as that nearly all tariffs must go to zero within the FTA, so one cannot pick and choose the levels of preferential tariff reduction and the sectors where they will apply for trade partners in the FTA. But if an FTA is among developing countries only, as the Chinese one will be in much of Asia, then it comes under the "enabling clause" of the GATT, which entitles the member countries literally to liberalize preferentially among themselves in whatever manner they wish, with no other WTO members being able to assert any nondiscriminatory MFN rights.
But even more damaging to the U.S. ability to liberalize trade is the fact that, given the widespread fear of freer trade in the population, it is almost insane to present Congress with a string of piffling FTAs and ask representatives to go to bat for trade liberalization again and again. Each time they do so they use up some political goodwill. Increasing resistance is surely the most likely prediction, and if pork were not used liberally, the result would be catastrophic, not just disturbing. Is this a sensible way to run trade policy in the United States?
It is against this backdrop that one must assess the argument that Doha is in real trouble because the U.S. president's fast-track authority expires in July 2007. If we go over that date -- as we will if Hong Kong does not show what Lamy has called "two-thirds" success (a statement the import of which is clear but the full meaning of which is elusive) and the deal is not essentially done by the end of 2006 -- then the renewal of U.S. fast-track authority becomes a real problem. Of course, Doha was declared when there was none. But for all the reasons just stated, a renewal is truly problematic, and the failure to have reached conclusion of Doha might just add to the difficulties in maintaining momentum and progress.
Should we ring the alarm bell by saying that if Doha is not successful by mid-2007, we will have abandoned the multilateral trading system to a cruel fate of neglect and role shrinkage? There is a widespread view that preferential trade agreements, the bilateral and regionals, will break out. But frankly, this is an absurd view. Can anyone seriously hold that, thanks to a blinkered trade leadership in the United States and the EU and now much of Asia, these are not already multiplying at full speed? If the multiplication of FTAs is truly admitted to be an evil, as by now it is in many circles, why are politicians and bureaucrats allowed to get away with their game of enacting bilaterals while pretending to be virtuous in light of all evidence and argumentation? Why are these unnuanced, misguided, and destructive trade leaders not roundly condemned in the elite media?
Would the failure of Doha mean that massive gains from trade will be lost to one and all? The answer to this question depends, of course, on what Doha can reasonably be expected to achieve. As with the Uruguay Round (when different models of trade were used to indicate great gains), one should be skeptical of the huge estimates of the benefits that Doha is predicted to bring. If the talks fail, there will certainly be significant gains lost. But no one profits from exaggeration that often follows the use of big "computable" models that few understand and that obscure a slew of assumptions (such as the predicted responses of farmers in Botswana and Uganda to price changes in response to the removal of price supports in the EU). The economist John Whalley, who arguably makes the most effective use of such large models, had this to say about their use to predict the effects of the tariff cuts on developing countries during the Uruguay Round:
There are substantial, and at times hard to explain inconsistencies across model results. One model shows most of the gains come from agricultural liberalization, another from textiles, and yet another from tariff cuts. ... One model shows developing countries losing from the elimination of the MFA, another shows them as large gainers. ... These differences occur even where similar data sets, and benchmark years are used.
A little skepticism is in order when considering huge estimates of gains from Doha's success. Yes, we will certainly lose substantial gains from trade if Doha fails. But we will also survive.
GETTING TO YES
Yet Doha can still succeed. The obstacles that remain are within what economists call the "policy zone": that is, they can be overcome by appropriate policy decisions.
To begin with, the question of agricultural liberalization is more manageable than is generally assumed. EU subsidies, for example, are always reported as amounting to $1 billion a day. But this number includes both subsidies that are "decoupled" from production and trade and those that are not. In trade negotiations, only the latter matter. The former are a matter of internal politics, and although those in the EU who pay (such as the United Kingdom) and those who receive (such as France) will fight over the matter, there is no reason for the rest of the world to worry about it. The coupled subsidies that have an impact on other countries' trade amount, as Arvind Panagariya notes in this issue, to less than a third of the $1 billion-per-day estimate. And export subsidies represent only a very small fraction of that, ranging in recent years from $3 billion to $5 billion; they surely can be removed with the least difficulty.
Doing so, however, would require debunking the claims of influential nongovernmental organizations such as Oxfam, of the intellectually disappointing World Bank leadership under James Wolfensohn, and of the Cairns Group exporters, who have used the $1 billion-per-day estimate as a propaganda tool.
Such groups have long liked to claim that a cow in the EU gets a subsidy of $2.20 a day, more than what the 1.2 billion poorest people on earth subsist on. But this bovine analogy is asinine. The total EU subsidy goes not to the cows alone but helps pay for fertilizer, pesticides, irrigation, and other inputs that lead to increased production (when the subsidy is coupled to production), or it is spent on whatever the farmer decides to spend it on (when the subsidy is decoupled from production). And it makes no sense to imply that what is generally a domestic transfer payment should be given as aid to poor farmers abroad instead. A half-decent economist would know that you should measure the effect of producer subsidies by looking at their impact on the income of the poorest farmers abroad; doing so, she would realize that such subsidies can actually have a beneficial effect if the poorest farmers consume imported food (since the subsidies lower the world prices). The economist would then compare the subsidy with what economists call the grant-equivalent flows of aid from the EU to the countries where these poor people reside. Ignoring such factors dumbs down the debate and leads to ill-informed policy prescriptions.
As Panagariya notes, not only has the subsidy problem been grossly misstated but tariffs (defining what WTO negotiators call "market access") are also very high, not just in the EU and the United States but also in the Cairns Group countries (where some tariffs are even higher).
Now, the EU has no substantive interest in agricultural reciprocity because it has no comparative advantage in agriculture. So it does not really seek what economists call "sectoral reciprocity" -- that is, it has no real interest in getting the Cairns Group countries to make concessions in agricultural tariffs. But that is not true of the United States, which expects to become a net exporter. So Trade Representative Rob Portman must seek reciprocal tariff cuts from the Cairns Group countries as well. Studies show that concessions from these states would help not merely those nations but also other developing countries. In fact, even if one concentrates on market access, cuts in other countries' tariffs open the doors to their markets. But if your own tariffs create a bias in favor of the home market and against exportation, your potential exporters will not have an incentive to get past your own door.
The EU is right to insist that the huge focus on agriculture in the Doha Round be accompanied immediately by focus on manufactured goods where the EU finds its own balance of reciprocity. In these so-called NAMA (non-agricultural market access) negotiations, Brazil and India can provide immediate leadership. The extent of concessions will be a matter for negotiation, and some concessions are inevitable if the Doha Round is to progress. But it cannot be doubted that trade liberalization in manufactured goods will create efficiency gains for the larger developed countries (such as Brazil and India) that have come of age.
For Doha to succeed, the negotiators will also have to make progress on the question of services. To date, little has been accomplished in this area, since some negotiators have been preoccupied with agriculture while others have remained on the sidelines. Some progress could quickly be made by liberalizing the insurance and banking sectors; this would help improve efficiency in developing countries, and would even enhance their export performance, since these sectors provide essential inputs in the chain of production and trade. Some of the developing countries have made much of "Mode 4" delivery of services; they want greater concessions to be made on the temporary inflow of service providers from their countries. It is not entirely clear, however, that the WTO negotiations should engage this question. As the former UN demographer Joseph Chamie has highlighted, immigration policy in rich countries is increasingly going to shift toward temporary guest-worker programs due to demographic changes. Concessions are therefore inevitable; but they are more likely to be handled with the necessary nuances and political accord if they are dealt with as immigration rather than trade issues.
As the report on the future of the WTO, submitted last January, emphasized, poor countries must overcome their fear of trade liberalization by making sure they have the institutional means to handle the potential side effects. Two issues need to be addressed, in particular. If poor countries that are dependent on tariff revenues for social spending risk losing those revenues by cutting tariffs, international agencies such as the World Bank should stand ready to make up the difference until their tax systems can be fixed to raise revenues in other, more appropriate, ways. Developing countries also need adjustment assistance to cope economically and politically with the effect of import competition in specific industries. Western nations already have such programs; indeed, the United States has had one since 1962, when it was created to provide support for changes stemming from the Kennedy Round. Again, the World Bank is an ideal source for such support to developing countries, both in terms of design and financing. In the absence of such safety nets, poor countries cannot be expected to walk out on the high wire of globalization. Fortunately, the bank has finally started to listen to appeals by trade economists to create such programs, so progress in this direction can be made quickly.
Many of the smaller developing countries have also hesitated because they fear that most-favored-nation (MFN) trade liberalization will erode the value of the one-way preferences they are enjoying under the Generalized Schemes of Preferences and the EU's Everything but Arms initiative. These preferences are relative to MFN tariffs. Many economists had warned the recipients of these preferences that these preferences were wasting assets and that pushing for MFN trade liberalization with coverage for products of interest to these small countries would be a better approach. But neither the donors nor the recipients of the one-way preferences listened. Now, many of these countries want to reduce or eliminate MFN trade liberalization in products where they enjoy preferences. A better approach would be to compensate the countries for the reduced value of their preferences by allocating aid for this purpose to a multilateral agency such as the World Bank.
Lamy has expressed support for these and other uses of "aid for trade." It is now time to advance this agenda with the establishment of a high-powered group, under WTO auspices, composed of informed senior staff from the World Bank and the International Monetary Fund and world-class trade economists. This group could then make concrete suggestions on how the "aid for trade" agenda should be designed and implemented.
A multi-pronged approach along these lines would help surmount the few obstacles that remain. There is little here that is not doable, and Hong Kong will help us concentrate our minds. All it needs now is good vision, traction, and the determination to see it through.