European Affairs

Winter 2004

 

The World Trade System after Cancun
The U.S. and the EU Must Lead the Trading System Forward
By Grant Aldonas

 

With the addition of many new members from the developing world, the World Trade Organization must necessarily be responsive to their concerns and their negotiating agenda. The very fact that we launched a “development agenda,” rather than a traditional trade negotiating round in Doha in 2001 reflects that fact.

It is also true that the developing countries can now effectively wield their new power to block action within the WTO. But the power balance has not shifted away from the United States and Europe to the developing countries nearly as much as many supposed in the immediate aftermath of the failed WTO ministerial meeting in Cancun in September 2003. It is still up to the United States and Europe to lead the organization forward.

If the multilateral negotiations that were derailed in Cancun are to get back on track, concessions will certainly be required from the developing countries, but the main initiative will still have to come from the United States and Europe. That would prove true simply by virtue of the fact that agriculture remains the Gordian knot that must be cut in order to succeed with the Doha agenda. The key to that action lies primarily in the hands of political decision makers in Washington, Brussels, and European capitals, although developing countries will have to come to the negotiating table prepared to lower or eliminate their barriers as well.

There is, however, another task on which U.S. and European leadership is clearly required if we are to move forward. One of the first priorities for the United States, perhaps even more than for Europe, must be to present a clearly articulated case in favor of the benefits of a multilateral approach to world trade and reinforce the U.S. commitment to that path. That is certainly the position of President George W. Bush and Robert Zoellick, the U.S. Trade Representative. There remains, however, the need to address concerns raised since Cancun that the United States is planning to pursue a purely bilateral approach to trade at the expense of the multilateral trading system.

The goals of the U.S. pursuit of bilateral agreements have been to stimulate action on the multilateral front and to reap an early harvest in terms of the stimulus that even bilateral trade liberalization can provide to the economies involved. It is also true that bilateral agreements can serve as laboratories in which to work on issues that may not yet be ripe for negotiations in a multilateral setting within the WTO.

Nonetheless, there should be no misunderstanding that both the Administration and the U.S. business community recognize that there are significantly greater advantages to be gained from multilateral agreement in the WTO than from a series of bilateral pacts. For example, eliminating the already low U.S. and European tariffs on industrial goods would save U.S. and European industry about $8 billion a year. Yet, the benefits would obviously be far greater if similar cuts in tariffs were made worldwide. So even in the single area of industrial tariffs, it would be advantageous to resume multilateral negotiations in the WTO.

Given that it is up to the United States and Europe to get the negotiations moving forward again, it is important to understand that U.S.–European relations, at least on the trade front, are going very well. Of course, there are tensions and disputes, as there always will be – that is the nature of the Transatlantic trade relationship. But we have succeeded in handling those frictions much better during the past three years than we did over the previous ten. President Bush really means it when he talks about U.S. commitments to comply with WTO obligations. And there has been significant movement toward compliance in Congress, for example, with respect to the tax treatment of American companies under the Foreign Sales Corporation legislation. The President's commitment to comply with WTO decisions in disputes with Europe has been matched by willingness on the part of the European Commission to try to settle these conflicts.

Quite apart from these efforts to reduce friction, both the European Commission and the U.S. government have been seeking to reinvigorate the Transatlantic Business Dialogue (TABD), and to find ways of strengthening the U.S.–EU relationship. Both Washington and Brussels fully understand that their relations set the tone for most of the rest of the trading system. With that sort of spirit animating the discussions, we have had some very productive talks about how to move ahead, on both the bilateral and the multilateral fronts.

Part of the problem in Cancun was the weakness of the institutional mechanics for making decisions in the WTO. Pascal Lamy, the European Trade Commissioner, was right in saying that the decision making process works against us when we are trying to build consensus. In fact, the tactical positions staked out by many countries in Cancun were hardening at the end, rather than softening and moving toward compromise. There comes a point at which all delegations must abandon their rhetoric and actually start negotiating. That did not happen.

One reason is that not all the countries at the table are equally adroit at knowing the moment when delegations must turn to serious negotiations. Brazilian diplomats, for instance, are a phenomenal group – tactically highly skilled in achieving their aims. But forming a group of 21 developing countries into a cohesive voice, organizing a coherent set of demands, and then turning those demands into practical negotiating positions proved difficult even for our colleagues from Brazil. Once they had mobilized their forces in this way, few of the countries involved were able to change tack as quickly as the nimble diplomats from Brazil and say, “O.K. We have had the chance to make our point, now it is time to negotiate.”

The answer, of course, is that an institution as large as the WTO now is can no longer rely on huge, unwieldy ministerial meetings alone. Mr. Zoellick, Mr. Lamy and their colleagues from Brazil and elsewhere will have to make extraordinary efforts outside of the context of a ministerial meeting to accomplish the goals that all WTO members agreed to in Doha. Fortunately, that process is now well under way.

There is one other area where we seem to be making progress as well. It is always preferable to have created your own domestic political space before actually sitting down to negotiate so you are in a better position to offer compromises on issues that most of the other players regard as your sticking points. First of all, that is how you get paid for offering bargains to your negotiating partners. Second, it is how you establish that you are actually prepared to deal. That is a problem that all delegations face, but it was particularly acute in Cancun where many delegations showed that they did not have enough flexibility to start genuine discussions.

The lesson for Europe and the United States is that we are far more likely to move the WTO forward if we are ready to be flexible. The so–called Singapore issues (because they were first raised at the Ministerial meeting of the WTO in Singapore in 1996) are a case in point. There is not, unfortunately, a consensus in favor of the European Union's efforts to bring these four issues – competition, investment, trade facilitation and government procurement – into the negotiations. International competition policies will ultimately be necessary. Competition policy can be an effective tool in cleaning up malpractices in the domestic economies of developing countries that are often more of an impediment to trade than barriers at the border. But there is no chance that it will be included in the WTO negotiations.

Many developing countries are grappling with how to implement past WTO commitments in areas such as the protection of intellectual property, not to mention trying to deal with corruption. They have to choose how to allocate scarce public funds, when they are also dealing with health crises and natural disasters. It makes no sense that they would want to take on a new set of obligations with respect to something as complicated as the pre-notification of corporate mergers.

It makes more sense to pursue work on an investment agreement, and developing countries have a deep and abiding interest in trying to move ahead on trade facilitation and government procurement. So there is still room for dialogue. More work still needs to be done on investment, but it should be possible to get started on two of the Singapore issues, trade facilitation and government procurement.

As for competition policy, the United States and Europe are going to have to find some other venue if we want to make progress. It might be possible for the United States and the European Union to agree a position and then include a number of developing countries through technical assistance programs, laying a foundation for bringing the issue into the WTO at a later stage. But no progress is going to be made in this field in the current trade round.

The larger question, if Europe and the United States are to exert leadership, is whether there is enough on the table, in the absence of at least some of the Singapore issues, for the Europeans to make the concessions necessary on agriculture and in some other areas. If the European Union is to make concessions on agriculture, it will need to win major reciprocal concessions in other sectors.

In the immediate aftermath of Cancun, there was considerable concern that there may not be enough incentive to bring our European friends back to the table. Although the Europeans have erased many of those concerns with their commitment to restart the Doha Agenda, the basic European political equation is something we can understand from a U.S. perspective as well. Because of the complicated politics of agriculture in both the United States and Europe, there are legitimate questions about how you make sure there are enough other issues on the table to strike bargains. If developing countries are only interested in demanding something from the United States and Europe on agriculture, as well as in non-agricultural markets, and are unwilling to put market access on the table themselves, there will not be a lot of incentive to resume the negotiations, however important they may be.

As in many negotiations, the hardest question is how to develop the incentives to bring everyone back to the table and move beyond the positions articulated thus far and toward actual bargaining. That is going to require the developing countries to retreat from the positions that they staked out at Cancun. All the give cannot be on the part of the United States and Europe. There has to be a true willingness to engage in genuine trade negotiations, which require compromise.

There are two ways, however, in which the United States and Europe can work together to get the negotiations back on track. First, we must reinforce our commitment to the WTO process and to working to resolve the issues, both in terms of the mechanics of the WTO and in terms of the substantive agenda. Second, on the bilateral front, the United States and Europe should unite in making use of all the fora and the tools that we have used in the past to move the trade agenda forward. We have not, for example, made effective use of the Organization for Economic Cooperation and Development (OECD) in Paris in preparing for the latest round of trade negotiations. The fact that international steel negotiations are currently taking place in the OECD could be very helpful.

Europe has been a real partner for the United States in trying to advance the ball in the steel negotiations. But we have not used the analytical tools of the OECD in the way we did in the past to try to reinforce the trade agenda and to shape new ideas about how to tackle the problems of agriculture and other contentious issues. The time has come to launch more such initiatives.

If we are to move ahead where we can on a bilateral basis, it will also be important to make more use of the TABD to try and liberalize trade as much as possible between the United States and Europe. The more we strengthen economic growth in the United States and Europe, the easier it will be to make the difficult political choices that will have to be made on trade. In our bilateral relations, for instance, we should be pursuing discussions about investment, air services, expanding capital markets and working on the new security issues that could become obstacles to trade. Anything that provides opportunities for expanding trade and growth in Europe will make it politically easier to carry the WTO negotiations forward.

So, even on a bilateral basis, we need to be moving ahead. We must make clear to our friends in the developing world that the close trading relationship between the United States and Europe gives us options other than the WTO. We must also, however, make clear that by strengthening Transatlantic ties we can show leadership by demonstrating the direction that the WTO should follow. At the same time, we should be very clear that the Transatlantic area is the heart of the world trading system, and that the world trading system is not going to be moving ahead unless we can find interlocutors inside the WTO who are truly prepared to engage.

The United States and Europe obviously have a great deal at stake in working together. Some argue, however, that they no longer exercise the power over the trading system that they once did, and that there have been great shifts of power to developing countries in the last ten years. China, India and Brazil are flexing their muscles, and U.S. multinational corporations operating there are concerned with those countries’ interests as much as with those of the United States. In my view, it is possible to overplay the notion that fundamental changes are occurring.

The reason has to do with the U.S. and European economic models, which rely on a healthy private sector and competition in the marketplace as the key drivers of economic growth. There is real power in that model. My view is that, unless developing countries are really willing to rely on the market and move toward liberalization, their significance in the world trading system will wane, rather than grow. Full participation in the WTO, which includes a willingness to liberalize, as well as demand concessions, has the capacity to move the developing world in the right direction. China is an excellent example, in the sense that its economy is now essentially running on two tracks. The domestic economy, which is heavily rural, is moving very slowly. The export–led economy is advancing very strongly. In short, that part of the Chinese economy that is most exposed to trade is the part that is growing fastest. Europe, the United States and the whole world have an interest in keeping the Chinese economy moving, because it is one of the few engines of world growth right now. At the same time, China would benefit enormously from opening up further to trade with the United States, Europe, and the developing country members of the WTO as well, precisely because the competition that trade brings is the ultimate source of further economic growth.

Therein lies a broader lesson for other developing countries seeking to emulate China’s growth. I am concerned that many have begun to think that economic liberalization and reliance on the private sector for growth are policies that are somehow tainted by their association with the developed world. But adopting that stance would be to ignore the example that China presents. The Chinese success in becoming a driving force in the restructuring of global manufacturing as a result of the liberalization of the last 20 years, including China's membership in the WTO, not of resistance to such changes.

So, in some respects, there does have to be a shift in the approach of WTO members in the developing world toward economic growth and the use of the WTO negotiations to create the environment that will best attract both domestic and foreign investment. While the developing country members of the WTO may have specific demands they want satisfied in the negotiations, there is just as much to gain from the opening of their own markets through the completion of the Doha Development Agenda. In short, to the extent that power within the WTO has shifted, I sincerely hope that that shift provides a new independence of thinking about the nature of economic development and the extent to which full engagement in the WTO negotiations would contribute to that goal. The fact that liberalization has been the driving force behind the economic success of developing countries should actually encourage them to do the right thing in the WTO, rather than to use the organization to revisit the fruitless debates of the 1970s that should long ago have been resolved.

Grant Aldonas is Under Secretary for International Trade at the U.S. Department of Commerce. He was previously Chief International Trade Counsel to the Chairman of the Senate Finance Committee. Before that he was a partner with the Washington, D.C., law firm of Miller & Chevalier, where he focused on international trade, investment, tax and litigation. He has served as Chair of the American Bar Association’s (ABA) Task Force on Multilateral Investment Agreements, and as Vice Chair of the Committees on Trade and Foreign Investment in the United States of the ABA’s Section of International Law and Practice.