Saturday, August 02, 2008

Flawed focus drove Doha talks to collapse

The Doha Development Round is in a deep, deep coma.  A lot of excuses will be made for a failure to reach agreement.  But the real problem is that the round stopped focusing on the World Trade Organisation's primary purpose -- trade liberalisation.

The round was launched shortly after the September 11 terrorist attacks to provide certainty to the underlying framework of the global economy.  The spirit of that moment called for the outcome of the meeting to be coined the Doha "Development" Agenda.

The issue of development became central to WTO agenda to seek maximum cooperation from developing countries and to secure a big commitment to liberalise to help lift millions out of poverty.

The WTO is designed to secure reciprocal reductions in trade barriers.  To prioritise "development" objectives trade ministers agreed to "less than full reciprocity" in reducing tariff barriers by developing countries.

In essence, it gave developing countries the policy space to liberalise less than developed countries.

The goal of the WTO is to "improve the welfare of the peoples of the member countries".  To achieve this goal the WTO is one instrument, with one purpose -- trade liberalisation.

Structurally designing the round around "development" through less than full reciprocity doomed it from the beginning.  Doing so undercut the objective of achieving progressive liberalisation.

Securing an outcome in the WTO requires trade ministers to agree to a liberalisation package deal.  By minimising the obligations on developing countries to cut tariffs, the round has limited the political flexibility developed countries need to secure an agreement.

In the US, the heavily protectionist Democratic Congress was not going to accept a big commitment to liberalise if developing countries were not going to reciprocate at an equivalent rate.  The elevation of Nicholas Sarkozy to the rotating EU Presidency guaranteed the same attitude in Europe.

And ultimately the focus on "development", not trade liberalisation, has been what has brought the round down.

As recent as last Friday it looked as though a breakthrough had been secured to move the Doha Round forward.  The deal was between the EU, US and Brazil on a less than reciprocal reduction of developing country industrial tariffs against developed country agriculture subsidies.

But India and China wanted more "development" policy space through the right to enact temporary tariff increases to protect local producers from a sudden influx of cheap agriculture imports.

China and India's demand was essentially about prioritising perceived "development" interests ahead of trade liberalisation.

Doing so undermines any deal that can be struck.  It is for this reason that there is resistance to include other sensitive policy priorities, such as labour and environmental standards, in the WTO.  Their inclusion would make negotiating a deal almost impossible and shift its focus away from the organisation's core purpose.

China and India's position also ignores the reality of trade liberalisation.  Too many developing countries still believe that erecting tariff barriers and providing subsidies to help infant industries is good for their economy.  Doing so stops countries from getting the best value for their scarce capital and builds a false foundation for their industries to grow from.

Nothing will be achieved in the WTO for at least a few years and willing liberalisers are likely to increase their focus on liberalisation bilateral agreements.  But this will be a poor outcome.

Bilaterals are good for reducing tariffs and barriers for cross-border trade in services.  But they fail to address many of the most egregious protectionist measures, such as agriculture subsidy programs.  Reducing subsidies programs can only come through pressure in multilateral trade negotiations.

Similarly, many bilateral agreements are hard on rhetoric and weak on substance.  Many do not cover all areas of trade and often exclude any sensitive sectors.  Trade ministers have found it too easy to place any sensitive issue in the "too hard basket".

And that is the tragedy of the Doha Round.  Without a focus on "development", developing countries would have seen an increase in their share of global trade through a reduction in subsidy programs and reductions in their own tariff barriers.

Much of the gains from the Doha Round could still be secured by developing countries through unilateral reductions in tariff barriers.  The World Bank has estimated that if developing countries removed agriculture tariff barriers they would be US$110 billion better off.  But it is unlikely they are going to take the lead.

In the absence of a WTO agreement or unilateral liberalisation their economies will stagnate with limited export-led opportunities for growth.  And to survive least developed countries will still be dependent on the international equivalent of the soup kitchen -- foreign aid.

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