The Pandemic Depression
The Global Economy Will Never Be the Same
It is time for the international community to recognize that the Doha Round is doomed. Started in November 2001 as the ninth multilateral trade negotiation under the auspices of the General Agreement on Tariffs and Trade and its successor, the World Trade Organization (WTO), the talks have sought to promote economic growth and improve living standards across the globe -- especially in developing countries -- through trade liberalization and reforms. Yet after countless attempts to achieve a resolution, the talks have dragged on into their tenth year, with no end in sight.
To be sure, world leaders, negotiators, and commentators have expressed their unanimous support for a successful outcome -- the “balanced” and “ambitious” agreement called for by so many summit statements. But concluding a trade agreement is like pole-vaulting. Everything must come together at once -- after the extensive preparation and the building of momentum, there is that one giant leap -- with the hope that the entire body will sail over the bar. Most trade agreements survive several failed attempts before success is achieved. But the Doha Round keeps crashing into the bar.
To a significant degree, Doha’s failure can be traced to its outdated structure and negotiating dynamic: even the best of intentions are stymied when every negotiator’s concessions are more clear than their potential gains and when the bipolar division between developed and developing countries shortchanges most in the developing world. More fundamental, however, has been the Doha Round’s failure to address the central question facing international economic governance today: What are the relative roles and responsibilities of advanced (or developed), emerging, and developing countries? (Although there are no universally recognized definitions, advanced countries are generally mature economies that have industrialized and attained high levels of per capita income. Emerging-market economies are those that are undergoing rapid rates of growth and industrialization but have not yet reached developed status. Developing countries have not yet experienced these transitions.) World leaders are frustrated that their mandates to negotiators have failed to translate into a successful conclusion to the round. Meanwhile, the negotiators either cannot or prefer not to admit that Doha’s flaws will prevent them from closing the deal, let alone ever addressing that fundamental question.
What this means, simply, is that it is time to give up on trying to “save” Doha. For years, the threat of being blamed for the Doha Round’s collapse has made it too risky for governments to suggest that the talks are dead. Negotiators obsess over how to keep the dead cat from landing on their doorstep. But the pretense that the deal will somehow come together at long last is now a greater threat to the multilateral trading system than acknowledging the truth: prolonging the Doha process will only jeopardize the multilateral trading system and threaten future prospects for WTO-led liberalization and reform.
To avoid that outcome, negotiators should salvage any partial agreements they can from the round and walk away from the rest. World leaders and trade policymakers should then immediately redirect all the energy, initiative, and frequent-flier miles devoted to Doha into launching new multilateral initiatives to restore trust in the WTO and preserve it as a dynamic venue for both improving and enforcing the rules governing international trade.
The initial meetings that led to the Doha Round stumbled before the process could get started, signified by the failed 1999 WTO ministerial summit in Seattle. When the Doha Round finally began in the wake of September 11, 2001, negotiators continued to disagree over its objectives and how to achieve them.
The use of trade liberalization and reform to generate economic growth and help alleviate poverty formed the core of the initiative. Negotiators initially identified 21 subjects for negotiation, including reductions in agricultural trade barriers, the elimination of agricultural export subsidies, cuts in trade-distorting domestic subsidies, major improvements in market access for manufactured goods, and more open trade in services. Although economists have shown that countries would benefit from undertaking such actions unilaterally, most political leaders and negotiators would prefer to trade their own country’s market reforms for better access elsewhere.
Participants originally scheduled the Doha talks to end by early 2005, in time for the Bush administration to use trade promotion authority (TPA), which was set to expire in June 2007, to gain approval of the agreement. TPA is a fast-track mechanism for trade agreements, under which the executive branch commits to extensive consultations with Congress and the range of relevant U.S. constituencies during trade negotiations in exchange for Congress’ agreement to employ procedural rules that move bills through the process faster, ban potentially deal-killing amendments, and mandate timely up-or-down votes. But the talks collapsed in 2003 in Cancún, Mexico, when a bloc of emerging and developing countries expressed their displeasure over a perceived European Union and U.S. effort to impose excessive burdens on them in the form of new issues and obligations. Revived with the 2004 Framework Agreement, which finally established the round’s negotiating parameters, the talks stumbled through a December 2005 ministerial meeting in Hong Kong and suffered further breakdowns at gatherings of trade ministers in 2006, 2007, and 2008.
As the many summits and negotiating sessions held over the last decade can attest, Doha’s failure does not owe to any lack of effort. Former U.S. President George W. Bush attended easily over a hundred such gatherings with foreign leaders and his advisers during the second half of his tenure alone. He made concluding the Doha Round his top trade priority, capping an active and successful trade agenda that secured comprehensive free-trade agreements with 17 countries in Asia, Latin America, and the Middle East.
The Bush administration identified three criteria to define success in the Doha Round. First and foremost, any outcome had to contribute to global economic growth and development through the generation of new trade flows, especially between and among emerging and developing economies. With these economies together representing close to half the world’s GDP and registering twice the growth rate of the developed world, the administration decided that negotiators could not meet Doha’s growth and poverty-alleviation objectives without reducing emerging-market tariffs and nontariff barriers.
Second, the administration resolved that the final agreement should increase market opportunities for U.S. exports of farm products, manufactured goods, and services -- particularly in high-potential, high-growth markets such as Brazil, China, and India. Finally, the administration believed that any Doha agreement should avoid contributing to the growth of economic isolationism, whether in the United States or elsewhere.
ELEPHANTS HIDING BEHIND MICE
When the negotiations collapsed again in the summer of 2008, none of the administration’s criteria had been met. From almost the start of the negotiations, the rapidly evolving nature of the global economy had rendered Doha’s dichotomy between developed and developing countries outdated and its negotiating structure obsolete. And even as it became obvious over the decade that emerging economies had become a dominant force in global economic growth and trade, those nations’ perceptions of their consequent needs and responsibilities had failed to keep pace.
As they currently stand, Doha’s negotiating texts create two main categories of obligations -- one applying to the developed economies and another applying to those characterized as developing countries, which make up the majority of the WTO’s members. In fact, over two-thirds of the countries in the “developing” category have special breaks built into their obligations, so that their obligations are dramatically less than even those of the countries meeting the official developing-country criteria. These include groups such as those designated as “least-developed countries” and “small and vulnerable economies.” To the extent that nations such as Brazil, China, India, and South Africa have taken positions against further market opening in the name of developing countries, they are actually taking positions that go against the group’s interests.
At Doha, these emerging economies have minimized their own difficult market-opening decisions by seeking maximum flexibility for developing countries. And they have found it easier to avoid confronting their own needs for greater access to one another’s markets by focusing on what they can all agree on -- namely, the market-opening obligations of developed countries. The result is what one African ambassador to the WTO once described as “the elephants hiding behind the mice.”
A number of emerging and developing economies -- among them Chile, Colombia, Costa Rica, Hong Kong, Malaysia, Pakistan, and Singapore -- have attempted to advocate for more ambitious emerging-market contributions. Yet these countries have been either ignored or harshly criticized by their peers, particularly Brazil, India, and South Africa. Even when Brazil attempted to break with other developing countries to save the Doha Round in the summer of 2008, it found itself the target of the same kind of criticism it periodically levels against others.
The dilemma facing China’s negotiators has been particularly acute. China’s manufacturing prowess and export drive are a phenomenon never before encountered in a major trade round, and fear of increased imports from China may be the most unacknowledged reason behind Doha’s continued failures. Although Beijing stands to gain tremendously from a successful Doha Round, internal critics resist liberalization by pointing to the significant market opening that the country undertook when it joined the WTO in 2001 as yet another unequal treaty imposed by foreign powers. Combined, these factors have made it difficult for Beijing to break with the other major emerging markets in Doha -- even if it might have meant saving the round.
The developed-versus-developing-country framework itself is increasingly anachronistic. China’s GDP has already overtaken that of Japan and will likely have exceeded that of the United States before any Doha agreement can be fully implemented. Meanwhile, the International Monetary Fund predicts that by mid-decade, in terms of GDP, India will have exceeded Germany, Brazil will have outpaced France and the United Kingdom, Mexico will have passed Canada, and Indonesia and Turkey will have superseded Australia.
To be sure, advanced economies should shoulder a somewhat heavier share of the burden of any multilateral economic agreement, making their contributions consistent with their more dominant positions in the global economy. After all, even when China’s GDP reaches U.S. levels, Chinese citizens will still have just about a third of the yearly income of their U.S. counterparts, and Indians are likely to have one third of that. But the size and growth trajectories of the emerging economies, combined with the fact that some are now leading producers and exporters in key sectors, such as chemicals, information technology, car parts, pharmaceuticals, and environmental goods, set them apart. The inability of Doha’s structure and negotiating dynamic to reflect this evolution has helped ensure its downfall.
The lumping together of all emerging and developing economies in the Doha negotiating structure, and the associated peer pressure, has given leverage in the talks to those emerging economies disinclined to open their markets and taken it away from those advanced, emerging, and developing countries that might have backed a more ambitious outcome to the round.
In addition, the negotiations’ heavy emphasis on rigid formulas for tariff cuts, rather than a looser combination of targets and negotiations over specific openings, has generated “formula and flex” models that undermine both the negotiating dynamic and any potential outcome. This is most evident in the proposed texts associated with the failed July 2008 ministerial gathering in Geneva. Although the formulas appropriately target the highest tariffs for the greatest cuts and place the most significant burden on the developed countries, the developing countries enjoy far shallower cuts and slower implementation. Also, the developing countries have significant flexibilities in the form of exclusions from the formula cuts that they insist on selecting themselves rather than negotiating.
For manufactured goods, these proposals would, by the end of the Doha implementation period, allow the tariffs of most emerging economies, other than China and South Africa, to remain largely unchanged from those in place when the Doha Round began. Based on 2008 calculations, this would result in the developed economies’ delivering over three-quarters of the Doha Round’s market-opening results, well beyond their current 53 percent (and shrinking) share of global GDP.
The framework has also posed problems when it comes to agricultural trade. The current proposals task the developed countries with eliminating export subsidies, cutting trade-distorting domestic subsidies, and reducing tariff and nontariff barriers to imports. The developing countries are also obligated to reduce trade barriers, albeit to a lesser extent. But although exceptions to the formula cuts enable both the developed and the developing countries to protect some items, the extreme flexibilities given to the developing economies will again enable the emerging economies to negate the bulk of their formula cuts. The 2008 package, for example, would allow India to shield close to 90 percent of its current agricultural trade from tariff cuts and permit China to exclude from the cuts commodities of keen interest to both developing and developed countries, including corn, cotton, sugar, rice, and wheat. Moreover, a proposed new agricultural safeguard for the emerging and developing countries anticipated in the agreement raises the prospect that trade barriers in those countries could actually end up being higher than before the Doha talks started.
In an effort to move the Doha Round forward, the WTO leadership has worked to establish key agreement parameters through draft texts. These texts have progressively narrowed and in some cases precluded the negotiation of specific and substantive product concessions -- trapping participants in almost a decade of negotiations about negotiations. In fact, the combination in the framework of rigid formulas and ill-defined, largely nonnegotiable flexibilities put all the negotiators in a defensive posture from the outset, left to assume that their own import-sensitive constituencies would face severe tariff cuts but unable to point to the kind of concrete gains in market access necessary to build domestic support for the trade talks. Finally, the dramatic imbalance in the negotiating flexibilities available to the emerging economies as opposed to the advanced economies has left both sides with little room to maneuver. Even if the emerging countries wanted to put more on the table, their offers today would look like unilateral concessions, since the developed countries have nothing of perceived value left to concede in return.
The uneven negotiating field is not the only structural roadblock that has undermined the negotiations. Multilateral trade talks have traditionally called for the United States and fellow developed countries to take the lead in offering concessions to jump-start flagging negotiations -- the idea being that a significant unilateral initiative by a large economy will encourage others to reciprocate, thus paying dividends to all. Yet during the Doha Round, such efforts by the United States -- even those explicitly conditioned on a meaningful response -- have not been met in kind. And as time has passed, U.S. and EU compromises have effectively been pocketed, forming the base line for the next set of demands.
The challenges posed by the negotiating structure are compounded by the fact that Doha mandates a single undertaking. This means that nothing is considered agreed until everything is agreed. This rule was designed to encourage countries to make tough calls in one sector knowing that they would be able to show gains in other sectors. However, in the context of Doha, the rule has enabled individual countries to play the spoiler and seek lowest-common-denominator outcomes or to free-ride on others’ concessions.
The passage of time has also defeated the Doha Round. Over the years, political and economic windows for a deal have opened and closed. The 2007 expiration of TPA undermined the willingness of U.S. trading partners to take risks because they no longer knew whether the U.S. Congress would attempt to amend the negotiated commitments. Domestic political concerns in India prior to the country’s 2009 elections likely destroyed any potential for a deal in 2008. Brazil has retreated to a defensive crouch when it comes to market access for industrial goods, citing the threat of currency appreciation and Chinese imports. Japan’s frequent shifts in government this past decade have undermined its ability to negotiate. EU member states continue to expend the bulk of their negotiating capital on internal debates about reform, leaving little room for dealing at Doha. And China faces a 2012 leadership transition that appears to have solidified its unwillingness to take risks.
RISKS TO THE MULTILATERAL SYSTEM
Despite all these problems, it is far too soon to give up on multilateral agreements and the global trading system. If any more evidence were needed to demonstrate the WTO’s critical importance to the world economy, one need look no further than the recent global financial crisis. Although countries took protectionist measures in the wake of the crisis, the international community avoided a quick deterioration into a spiral of beggar-thy-neighbor actions to block imports. Previous multilateral agreements that reduced permitted tariff levels, WTO-consistent escape valves and enforcement opportunities, and a high-profile G-20 commitment to avoid discriminatory trade actions helped ensure this outcome. The fact that the independent policy research think tank Global Trade Alert began publishing lists of G-20 trade-pledge violations certainly helped as well.
But with the exception of limiting some of the WTO-consistent tariff increases by emerging countries, the Doha Round agreement currently under negotiation would not have precluded most of the discriminatory actions taken. Similarly, the fact that the Doha Round is still officially in progress has failed to stem the proliferation of low-quality bilateral and regional trade agreements. The number of such agreements in place has doubled to over 200 worldwide since the Doha talks began, with hundreds still in negotiation. They are of uneven quality. Some, such as those negotiated by the Bush administration, eliminate virtually all barriers between signatory countries, while others exclude whole swaths of commerce. Yet they all exclude, and therefore discriminate against, the vast majority of other trading nations, including most developing countries. And they skew commerce and global supply chains through complex rules that dictate how much of a product must be made in a given location to qualify for duty-free treatment.
Although the countries with which the United States has negotiated bilateral and regional trade agreements have almost uniformly advocated for an ambitious conclusion to the Doha talks, the negotiation of often lower-quality bilateral and regional trade agreements has eroded support and political will for the pursuit of a strong multilateral deal among other countries. A robust multilateral trade agreement, involving the vast majority of trading countries, can contribute far more to global economic growth and welfare than even the best bilateral and regional trade agreements. Such an agreement can better address systemic challenges such as subsidies and enjoy the potential to achieve significantly more international market opening, as countries can point to a whole world of new market opportunities gained in exchange for their own concessions.
Granted, the phenomenon of bilateral and regional trade agreements has been the result in part of a vicious cycle. Countries have pursued these agreements because Doha is faltering and bilateral and regional agreements can deliver commercial results; Doha is faltering in part because some countries think they can avoid difficult decisions by opting for easier bilateral or regional talks instead. But as the Doha talks meander, the international community may be reaching a tipping point, where the pursuit of these lesser agreements becomes the preferred option.
ONE LAST TRY?
Even if, in the interest of saving the Doha Round, key emerging economies were inclined to liberalize their markets well beyond what the 2008 proposals explicitly mandate, the current negotiating structure and peer pressure would make doing so exceedingly difficult, if not impossible. But any attempt to salvage Doha on the basis of those proposals would still raise questions about its ultimate benefit -- both in absolute terms and in terms of opportunity costs -- if this is the deal that is to set the global terms of trade for the next two decades or more.
Gary Hufbauer, Jeffrey Schott, and Woan Foong Wong of the Peterson Institute for International Economics estimated in June 2010 that implementing the formula cuts under consideration when the talks collapsed in July 2008 would increase world GDP by $63 billion, or 0.1 percent. This would result from an increase in global trade of $183 billion, an amount less than half the value of U.S. trade with Canada in a single year. The Peterson Institute study then calculated the potential value of a major boost to the 2008 proposals, including additional tariff cuts in certain key industrial sectors, a ten percent reduction in barriers to services trade, and a successful conclusion of the trade facilitation negotiation. The study estimated that these measures -- unlikely to occur in the first place -- would raise global GDP by around $283 billion, or 0.5 percent. The trade gains, slightly higher than the value of U.S. trade with Canada and Mexico in 2009, would require at least a decade to be phased in.
In fact, the only readily measurable benefits of the plan currently on the table come from developed-country tariff cuts, since it remains unclear how emerging economies would choose to allocate their flexibilities. Indeed, the 2008 proposals’ potential commercial benefits would come primarily from tariff savings in mature-country markets, rather than from any meaningful increase in new trade flows in the fastest-growing economies.
To even approach the more optimistic projections of what a successful Doha agreement might contain would require upending the present structure to generate negotiations based on substance and specifics. Not all 153 WTO members would have to increase their commitments. But ultimately, to generate real value for all participants, greater concessions from a dozen or so emerging countries would make a difference.
In the case of manufactured goods, creating a negotiation in which the advanced and the emerging countries both had greater flexibility to cut their tariffs more or less than the levels currently dictated by the formulas would move the process forward. In agriculture, the negotiations should only permit new safeguards if they are limited to temporary responses to damaging import surges. And with regard to market access, the emerging economies would have to accept fewer flexibilities. The developed countries could improve their offers on domestic farm support, but the past ten years have made it clear that cuts to agricultural subsidies deliver little in the way of new agricultural- or industrial-market access. Finally, participants would need to engage in a far more serious negotiation about services than anything contemplated to date.
Variations on these and other ideas, designed to prompt real negotiations over specific trade barriers so as to build momentum and pro-agreement constituencies, have thus far failed to gain traction. As long as the current negotiating dynamic remains, there is little reason for influential countries such as Brazil, China, India, Indonesia, and South Africa to surrender their favorable negotiating positions and risk attack from one another for breaking developing-country solidarity.
HOW TO MOVE FORWARD
The only way for world leaders to advance a healthy multilateral trading system now is to liberate themselves from the stranglehold of the Doha Round. Another series of draft proposals is not the answer.
Participants must close out the Doha Round in 2011. With leadership and goodwill, several smaller agreements could be salvaged from the existing negotiations. A top candidate for rescue is the trade facilitation package, the subject of a serious negotiation among the advanced, emerging, and developing economies. The package would reduce the costs associated with moving goods across borders, and the Peterson Institute has estimated that it could contribute over $100 billion to global GDP.
Other areas that might potentially be saved include the largely completed agricultural-export pillar, comprising proposed agreements on export credits, food aid, state-trading firms, and the elimination of export subsidies. Negotiators should also endeavor to complete two environment-related agreements, one cutting subsidies to industrial fishing fleets guilty of overfishing the world’s oceans and the other ending tariff and nontariff barriers to “green” technologies in major producing and consuming countries.
These smaller elements of the Doha undertaking would deliver tangible near-term results. In theory, world leaders could instruct that they be spun off and concluded this year. In practice, it is possible that in the current environment, not even these smaller deals can be achieved. But it is worth trying, because the Doha Round certainly has not delivered them. And if the effort is made and then blocked, at least the media can shine a spotlight on the spoilers.
Above all, world leaders should not wait to determine whether they can conclude these before laying the groundwork to launch a new series of multilateral negotiations under WTO auspices. The large multilateral trade round format epitomized by Doha’s predecessors need not be obsolete, but WTO members will need a clean break from the current round to reestablish trust and regain momentum before attempting that model again. More narrowly drawn negotiations and small deals with some commercial value may offer the best near-term approach.
One obvious avenue would be to expand the product coverage in the plurilateral Information Technology Agreement, through which every major producer and consumer in the world of information technology products, save for Brazil, has eliminated their tariffs. Nations could initiate a similar multiparty accord for a package that includes pharmaceuticals, medical equipment, and health-care services, designed to reduce the cost of delivering health care. Such negotiations would have to follow WTO rules, and the outcome would have to apply equally to all WTO members, regardless of whether they took part in the negotiations. Yet veto power over any given deal would be granted only to those members who chose to negotiate and contribute, improving the chances of constructive engagement by most interested parties.
The international community could also draw from some of the more practical or innovative elements of existing bilateral or multiparty agreements and seek to multilateralize them. These might include provisions governing investment, transparency, e-commerce, services that contribute to entrepreneurial infrastructure, or even enhanced WTO intellectual property protections. WTO members could also commit to results-based business practice reforms, addressing such international indices as the World Bank’s Ease of Doing Business Index and Transparency International’s Corruption Perceptions Index.
To reduce some of the negative effects of bilateral and regional trade deals, WTO members might consider guidelines to ensure that such agreements have built-in docking provisions that allow like-minded countries to join them. Meanwhile, interested members should consider using focused WTO cases and dispute settlements to target poor-quality bilateral and regional trade agreements that fail to meet the letter and spirit of the WTO’s requirement that such agreements cover “substantially all trade.” This would help reassert the fundamental principles of an open trading system, curb the proliferation of inadequate bilateral and regional trade agreements, and lay the foundation for devising better agreements in the future.
The most significant contribution the United States could make to reestablishing WTO negotiations as a viable enterprise -- and offering a serious new deadline for action -- would be to obtain a renewal of TPA from Congress, even if limited to plurilateral and multilateral trade agreements. Along with an Obama administration push to achieve congressional approval of pending free-trade agreements with Colombia, Panama, and South Korea, a renewed TPA would provide needed credibility and make trading partners far more willing to listen to U.S. proposals and take risks in any future trade talks.
Meanwhile, the United States and other developed countries may want to review whether their trade-preference programs for developing countries are benefiting the developing countries that need the most assistance and not creating a disincentive to swap trade concessions for access.
Once the dust has settled on the Doha Round, the United States and the other WTO members should dispassionately study Doha’s successes and failures to prepare for the next major negotiating exercise. They should explore simpler formulas that can lead to real negotiations on tariffs, nontariff barriers, subsidies, and services, with give-and-take that builds momentum and ignites enthusiasm from pro-trade constituencies. Participants should also begin to address new issues, such as food security and the damaging use of export bans.
No future multilateral negotiation will succeed, however, without addressing the very real differences in economic strength, prospects, and capabilities within the so-called developing world. It is worth recalling that one of the WTO’s most important characteristics is the inclusion of these developing economies in governance and decision-making from its origins as the General Agreement on Tariffs and Trade in 1948. In private, most emerging and developing countries acknowledge that it is in their interest to bridge the increasingly artificial divide between developed and developing nations when it comes to global issues such as trade, international finance, and climate change. Escaping the confines of the Doha Round could hasten the emergence of new models. These might include multilateral negotiations designed to offer a better balance between benefits and obligations, or they could include plurilateral deals that set a high bar but enable like-minded countries to participate.
Doha may be dead, but by accepting what everyone knows and no one wants to admit, the world can actually reinvigorate and strengthen the multilateral trading system. The WTO has served the world well, but it risks losing its relevance as the Doha Round continues to drain its credibility and resources. Now is the time to liberate the would-be trade liberalizers and move on.