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Foreign Affairs
The Stakes of Doha
Carla A. Hills
Summary: Americans should care deeply about the Doha Round, but many do not understand what it means for them and the rest of the world. With the talks barely moving, it is time for supporters of free trade to educate the American people in order to give Washington the backing it needs to break the deadlock.
CARLA A. HILLS, CEO of Hills & Company, was U.S. Trade Representative during the administration of President George H. W. Bush.
JUMP-STARTING A STALLED PROCESS
At the UN General Assembly last September, President Bush declared: "The United States is ready to eliminate all tariffs, subsidies and other barriers to the free flow of goods and services as other nations do the same." The Doha Round of multilateral trade negotiations aims to do just that. These negotiations hold the promise of raising standards of living worldwide, alleviating global poverty, removing inequities in the trade regime, and enhancing international stability. Yet there is a significant risk that they could collapse or achieve only a fraction of their potential.
Americans should care deeply about the Doha Round and what it means for them and the rest of the world. Yet the lack of concern about these negotiations among members of Congress and the media suggests Americans are unaware of what is at stake. For Americans, a successful conclusion of the trade negotiations would bring higher living standards. For the rest of the world, success would deliver not only higher economic growth but also greater political stability. With the talks barely moving forward, the world needs the United States to lead these negotiations as it has led past trade negotiations.
But anti-trade political pressures at home not only hinder the ability of the U.S. government to lead, they put at risk its ability to secure congressional approval of any agreement it brings home. Only by building a solid base of political support for new trade agreements can the United States capture the very substantial benefits that a Doha agreement could provide. Americans should be better informed about the gains possible from a broad Doha agreement, the status of the negotiations, and the political challenges involved.
WHY DOHA MATTERS
The U.S. experience since World War II proves that increased economic interdependence boosts economic growth and encourages political stability. For more than 50 years, under both Democratic and Republican administrations, the United States has led the world in opening markets. To that end, the United States worked to establish a series of international organizations, including the General Agreement on Tariffs and Trade (GATT) and the World Trade Organization (WTO). In 1947, only 23 nations participated in the first round of trade negotiations. Today, 148 nations are participating in the ninth round, the Doha Round.
The results to date have been spectacular. World trade has exploded and standards of living have soared at home and abroad. Economist Gary Hufbauer, in a comprehensive study published this year by the Institute of International Economics, calculates that 50 years of globalization has made the United States richer by $1 trillion per year (measured in 2003 dollars), or about $9,000 added wealth per year for the average U.S. household. Developing countries have also gained from globalization. On average, poor countries that have opened their markets to trade and investment have grown five times faster than those that kept their markets closed. Studies conducted by World Bank economist David Dollar show that globalization has raised 375 million people out of extreme poverty over the past 20 years.
And the benefits have not been only economic. As governments liberalize their trade regimes, they often liberalize their political regimes. Adherence to a set of trade rules encourages transparency, the rule of law, and a respect for property that contribute to increased stability. Without U.S. leadership in the eight previous rounds of multilateral trade negotiations, the world would look very different today. The Doha Round provides another opportunity to open global markets in ways that will further stimulate economic growth, reduce poverty worldwide, and encourage international stability.
Self-interest alone should persuade Americans to urge their government to push the Doha negotiations to a successful conclusion. Hufbauer's studies calculate that, going forward, open global trade would raise U.S. income by $500 billion per year, making the average U.S. household richer by an additional $4,500 per year. No other policy decision could come close to having such a positive impact on the United States' economic well-being.
In addition to boosting growth, a broad agreement in the Doha Round could help reduce poverty worldwide. The Doha Round is uniquely focused on the need to alleviate poverty by integrating poor nations into the global trading system. Two factors drove this emphasis on poverty reduction. first, trade ministers launched this round of multilateral trade negotiations in Doha, Qatar, two months after the attacks of September 11, 2001, a time when there was widespread agreement that poverty creates conditions hostile to peace. Second, by focusing on poverty alleviation, ministers were able to persuade leaders of developing countries who were skeptical about the benefits of a new trade round to join the negotiations.
In launching the round, trade ministers signed on to the Doha Development Agenda, a document that explicitly recognizes that trade can help poor nations grow their way out of poverty. Today, nearly three billion people, almost half the world's population, live below the international poverty line of $2 per day (at purchasing power parity). According to studies by economist William Cline at the Center for Global Development, removing global trade barriers would yield $200 billion annually in long-term economic benefits for poor countries and lift 500 million people out of such poverty. About half of the benefit would come from opening markets in agricultural goods. U.S. Department of Agriculture studies show that eliminating rich countries' agricultural supports would result in a 24 percent gain in the value of poor countries' farm exports, which account for a quarter of their total exports and represent industries that employ roughly half their population.
Also, the Doha negotiations could remove inequities that distort the international trading system and significantly hinder growth in poor countries. Tariffs are much higher on goods primarily produced by poor countries than on those produced by wealthy countries, in part because most poor countries did not participate in earlier rounds of trade negotiations. Even in the United States, where tariffs average less than two percent, the tariffs on the goods that most poor countries export -- footwear, vegetables, fruit juices, peanuts, and sugar -- range from 40 percent to over 100 percent. The tariffs in other countries are even worse; some levy tariffs of up to 1,000 percent on some farm goods.
And it is not only industrial countries that need to reduce their barriers. World Bank studies point out that more than half of the burden on poor countries' exports results from restrictions imposed by other poor countries. That is because developing countries as a group have higher tariffs than industrial countries, and a substantial number of developing countries mostly trade with other developing countries. These facts underscore the importance of opening markets globally.
Importantly, success in the Doha Round could help strengthen weak and failing states that jeopardize U.S. security. Impoverished states often lack the ability to enforce their laws and secure their borders, making it much more difficult for the U.S. government to deal effectively with transnational problems such as organized crime, narcotics trafficking, money laundering, illegal arms sales, disease pandemics, and environmental degradation. The Cline studies meticulously map global poverty. Three WTO members -- Bangladesh, Indonesia, and Pakistan -- each have roughly 100 million people living below the international poverty line. Six African members -- the Democratic Republic of the Congo, Kenya, Mozambique, Nigeria, Tanzania, and Uganda -- together account for another 200 million people living in poverty. All are located in regions beset by instability. Cline calculates that on average a one percent increase in a country's ratio of trade to output eventually boosts its income by one-half percent, which translates into a one percent reduction in poverty and a concomitant increase in stability.
DOHA STALLED
Despite all that is at stake, progress in these multilateral negotiations has been miserly and slow. A WTO official recently noted the "bizarre disconnect" between the enthusiastic rhetoric on advancing the trade negotiations at July's meeting of the group of eight highly industrialized countries (G-8) and the intransigence of negotiators that has brought the Doha Round almost to a halt. In the four years since the negotiations were launched, trade ministers have repeatedly missed self-imposed deadlines.
The Hong Kong ministerial meeting was initially targeted for concluding the Doha negotiations. However, at the beginning of this year, with negotiations at a standstill, members committed to a revised plan calling for them to agree by August 1, 2005, to a "first approximation" of how liberalization will occur. That schedule was structured to enable them to agree to a final negotiating plan at the Hong Kong ministerial and hopefully complete negotiations over the succeeding 12 to 14 months before the U.S. president's trade negotiating authority expires on June 30, 2007. Ministers are far behind their revised schedule; in November, they had yet to agree on an approximation of how they intend to open the agricultural, industrial, or services sectors.
With respect to agriculture, WTO members agreed in July 2004 to a framework for eliminating export subsidies, cutting domestic support, and increasing market access. But they remain deadlocked on critical issues, such as the time frame for phasing out agricultural export subsidies; the types and quantities of domestic supports to permit; and how to widen market access for farm goods. Of these issues, wider market access has the greatest capacity to reduce poverty. Agricultural tariffs are five times higher than tariffs on industrial goods and account for more distortion in agricultural trade than either export subsidies or domestic supports.
This past October, the United States built on an approach offered three months earlier by the Group of 20 that separates farm tariffs into four descending tiers and makes the largest cuts in the top tier comprising the highest tariffs. [See Footnote #1] Under the U.S. proposal, rich countries would reduce their highest or top-tier tariffs (those of 60 percent and above) by 90 percent over five years and cut their tariffs in the three lower tiers by 55 to 85 percent. The U.S. proposed capping all farm tariffs at 75 percent, but members would be allowed to exempt one percent of tariff lines to protect products deemed sensitive. [See Footnote #2] It also suggested lower cuts and longer phase-in periods for developing countries without specifying percentages or time frames.
In addition, the United States proposed that members such as Japan and the European Union, which under current WTO rules can spend three times more than the United States on trade-distorting domestic farm supports, reduce their spending by roughly 80 percent while the United States would reduce its spending by 60 percent. This would reduce and harmonize the permitted levels of spending on domestic farm supports by industrialized countries.
The Japanese said the U.S. proposal was "not a basis for negotiation." The EU countered with a much less ambitious proposal that would reduce wealthy countries' highest farm tariffs by 60 percent, with no time frame for implementation, and set the maximum tariff at 100 percent with the possibility of exempting eight percent of tariff lines. Others were more enthusiastic. The Group of 20 suggested cuts by industrial countries ranging from 75 percent to 45 percent and by developing countries from 40 to 25 percent. They argued that industrial countries should cap their farm tariffs at 75 percent but proposed that developing countries could cap theirs at 130 percent, and suggested that all members be permitted to exempt a limited but unspecified number of sensitive products from the proposed cuts.
The numbers in all of the proposals sound large, but because cuts are taken from permitted tariff ceilings, not the lower levels governments actually apply, cuts must be at or above 75 percent with strict limits on exemptions to achieve any meaningful increase in market access.
Even if the U.S. proposal becomes the framework for negotiating increased market access for farm goods, members will still face a host of tough decisions. How much are they willing to cut tariffs in their most protected sectors? If most countries insist on exemptions for their politically sensitive sectors, there will be far less market access for a long list of products: beef, dairy, poultry, rice, sugar, peanuts, vegetables, and fruits -- the very markets of greatest interest to poorer countries. And what will be asked of developing countries? Will a low-income developing country such as Bangladesh have the same obligations as those more economically advanced, such as Brazil? Today, all but 24 of the 148 nations participating in the Doha negotiations claim to be "developing countries," up to now a more or less self-proclaimed status. India and China insist that all developing countries be treated the same.
Similar decisions must be made with respect to increasing market access for non-agricultural goods. Although agriculture is regarded as key to the success of the Doha negotiations, manufactured goods still account for three-fourths of world trade in merchandise. Sadly, the negotiations covering manufactured goods lag behind those dealing with agriculture. And most WTO members have not seriously addressed the opening of markets for services, such as banking, insurance, and communications, which are key to industrialized members, including the United States. Last year, the United States ran a $50 billion surplus from its services trade, and eight out of ten U.S. jobs are now in the service sector. Negotiations to open services will require tough decisions: developing countries insist that if they are to open their markets to foreign service providers, such as banking and telecommunications, members must grant temporary entry on a more liberal basis so that their workers can offer their services in sectors like construction and farming, which is an issue of great sensitivity to Congress. The negotiations on services trail all the others; many members have failed to submit an initial offer to start the process.
Lastly, members must agree on rules that deal with dumping, subsidies, and customs that that will both govern and facilitate trade. Here again U.S. negotiators face political pressures. For example, in September, Senator Byron Dorgan (D-N. Dak.), joined by Senator Lindsey Graham (R-S.C.) and Senator Debbie Stabenow (D-Mich.), proposed an amendment to the appropriations bill for the Departments of Commerce, State, and Justice and the Office of the U.S. Trade Representative to prevent any money appropriated by the bill from being used to negotiate trade agreements that would alter U.S. trade-remedy laws, particularly rules dealing with dumping.
A CRISIS OF IMMOBILITY
A solution to these issues is not beyond members' reach, but in the words of former WTO Director-General Supachai Panitchpakdi: "The crisis that threatens is all the more menacing because it is not a crisis in dramatic divergence [in negotiating positions] ... it is a crisis of immobility." All of the eight previous global trade rounds required strong U.S. leadership to succeed.
The U.S. proposal to reform agriculture rules was a splendid step in the right direction. But U.S. negotiators face enormous domestic political pressures that limit their flexibility. A week before the United States made its agriculture proposal, the chairs of the House and Senate Agriculture Committees warned the U.S. Trade Representative not to take any positions that would pre-empt Congress' authority to write the next farm bill. Earlier, the chair of the Senate Agriculture Committee had attempted to put a four-year extension of the existing farm bill into a pending budget measure.
It is ironic that as the benefits and opportunities from globalization have accumulated for Americans over the past decade, political support in the United States for trade liberalization has waned. In 2002, President Bush secured trade promotion authority (which Congress had denied President Clinton) by three votes in the House of Representatives, and only after agreeing to impose steel tariffs and sign a bloated farm bill. [See Footnote #3] Last July, the House of Representatives approved the Central American Free Trade Agreement by a mere two-vote margin only after the president made a rare trip to the Capitol to rally the support of his own party. These struggles reflect a general decline in American voters' support for open trade.
What has caused this erosion? The explanation lies in Americans' growing anxiety about job security and ignorance about the broad and substantial benefits that flow from opening global markets. Americans' worries about job security may seem surprising. Unemployment hovers around five percent, low by historic standards. But the low unemployment figures need to be read in light of the remarkably flexible U.S. labor market in which on average one in five workers lose or gain a job every year. According to economists Lori Kletzer and Robert E. Litan at the Institute of International Economics, even with reemployment, many displaced workers suffer substantial earnings losses. The perception that trade agreements alter the status quo in the labor market ignites genuine worker anxiety. That anxiety is exacerbated by the media's current focus on the export of high-technology jobs to places such as China and India.
THE POLITICAL CHALLENGE
To enable the U.S. government to lead the Doha negotiations to a successful conclusion, America needs to develop a much broader understanding among its citizens -- and their elected representatives -- of the fact that jobs connected to trade pay better wages, provide greater benefits, and offer more security on average than jobs in the overall economy. But those facts, however well presented, will not by themselves change minds. To be credible, trade supporters must admit up-front that open trade does not benefit every citizen. The studies by economists at the Institute of International Economics that show the United States has gained $1 trillion per year from past market openings and could gain an additional $500 billion per year from new market openings also show the lifetime costs of worker displacement to be roughly $50 billion per year.
To win support for freer trade, the U.S. government will need to allocate more of the gains derived from trade to help those who lose their jobs because of change driven by globalization and new technologies. Surveys show that when Americans are asked to respond yes or no to the question "Do you support free trade?," they split 50-50. However, they give a two to one affirmative response when they are told that their government has programs to help workers who lose their jobs.
Currently, the U.S. government spends about $1 billion annually on trade adjustment assistance (TAA), a sum that is expected to increase to $2 billion annually when the reforms Congress passed in 2002 are implemented. TAA as currently structured has a number of limitations. For example, it does not aid service workers (who constitute a majority of the U.S. work force) or workers displaced by manufacturing-plant relocations to countries with which the United States does not have a free-trade agreement.
Expanding the Trade Adjustment Assistance Program of 2002 and the Health Care Tax Program to cover dislocated workers who are now excluded would help build public support for trade. Doing so would be surprisingly affordable. The Institute of International Economics estimates the costs to be $3 to $12 billion annually depending on the amount of benefits and breadth of coverage -- far less than the $1 trillion yearly gains the United States now reaps from open trade and the $500 billion potential gain from further liberalization.
America must also devote more attention and resources to education and skill building. For years, Washington has given tax credits to encourage capital investment. To compete in the knowledge age, policymakers need to find effective ways to encourage similar investment in human capital.
The second obstacle to Washington's taking bold positions in the Doha negotiations is the silence of those who could speak about the benefits that could come from the negotiations. Since the 1999 WTO trade ministerial in Seattle, Washington, protesters against globalization, international capitalism, and open trade have attended every meeting of the WTO, the World Bank, the IMF, and the G-8. We can agree with the antiglobalists that trade liberalization is not a panacea for the world's ills. More trade alone will not educate children or eradicate disease. To address these issues, governments must use some of the gains that trade and investment generate. But trade stimulates the economic growth that creates the resources needed to deal with these social problems, and adherence to the rules of a broad trade agreement encourages rule of law, transparency, and respect for property. That message needs to get out.
A PATH FORWARD
The administration has a key role to play in explaining to members of Congress and the American people why the Doha Round is critical to U.S. national interests. But government cannot, and should not, be expected to do it alone. Universities, think tanks, and particularly the business sector could do so much more. Because businesses have much to gain if the Doha Round succeeds and a great deal to lose if the negotiations collapse, the CEO of every U.S. company with international activities, however small, should invest the time to explain to company employees -- whether they number five, 5,000, or 50,000 -- how globalization expands the company's opportunities, how open markets affect the company's revenues, and how much of the employee's paycheck comes from the company's international activities.
Business leaders are in a position to help change how working Americans think about trade simply by providing them with the facts. For example, very few Americans know that lowering trade barriers even by a third in the Doha Round would boost the average American's annual income by $2,000 (in 2003 dollars). Most Americans have no idea that poor countries are required to pay higher tariffs on their exports than wealthy countries. They would be astonished to learn that last year Mongolia paid the United States $13 million more in tariffs on its $240 million of exports than Norway paid on its $6.5 billion of exports, or that Washington collects roughly the same amount of tariffs from Bangladesh on its $2 billion of exports than it does from France on its $30 billion of exports.
Few Americans are aware of how the Doha Round's goal of opening trade, if achieved, would help to alleviate grinding poverty around the world that puts weak states at risk. Most Americans do not know how the huge subsidies that wealthy countries (including the United States) pay their farmers force more efficient producers in poor countries out of the market, nor do they know that 80 percent of U.S. farm subsidies go to large agribusinesses, not to small family farmers. They would be surprised to learn that the United States, Europe, and Japan together give over $7 billion each year to their uncompetitive sugar farmers, a sum greater than the total annual export revenues earned by more efficient sugar producers in developing countries. They do not know that sugar subsidies deprive poor countries such as Guatemala, Kenya, Malawi, Mozambique, Sudan, Tanzania, Zambia, and Zimbabwe of desperately needed revenues, working against the U.S. national interest to bolster their economic stability. And few are aware that one million jobs would be created in developing countries if just 15 million additional tons of sugar could be imported into the highly protected markets of the United States, the EU, Japan, India, and Indonesia, with no adverse affect on either the U.S. domestic market or the global economy. Most Americans have no idea that these issues are at stake in Doha's agricultural negotiations.
By explaining such facts, business leaders could help their employees understand that trade is the best tool the United States has to generate economic growth at home and abroad, alleviate poverty, and encourage global stability. Trade facts could be presented to workers through closed-circuit TV, Web sites, meetings in cafeterias, messages in pay envelopes, notices with income-tax forms, and a host of other means that fit the company's circumstances. If every CEO in the United States gave as much attention to explaining why open trade matters as to enhancing company productivity, political support for the Doha Round would soar. That would increase the odds that the United States could bring the Doha negotiations to a successful conclusion and the likelihood that Congress would approve a strong Doha agreement.
It is no exaggeration to say that the Doha Round could do more to stimulate the global economy and to alleviate world poverty over the next quarter century than any other policy initiative the 148 WTO member governments could undertake together. Whether the world can achieve the "big bang" that could come from a successful Doha negotiation will depend in large measure on whether the United States can generate the necessary political support at home so that it can lead the world to more open trade as it has for half a century. The prize is worth a huge effort by all of us.
[Footnote #1] The Group of 20 is an informal group of nations that comprises Argentina, Bolivia, Brazil, Chile, China, Cuba, Egypt, Guatemala, India, Indonesia, Mexico, Nigeria, Pakistan, Paraguay, the Philippines, South Africa, Tanzania, Thailand, Venezuela, and Zimbabwe.
[Footnote #2] The U.S. Harmonized Tariff Code contains over 9,000 tariff lines. Goods are allocated to a particular line, each of which carries a specific tariff, which determines what tariff will be applied to a particular imported product.
[Footnote #3] Trade promotion authority is a legislative commitment by Congress authorizing the president to negotiate a trade agreement and to present it to Congress for an up or down vote without amendments. Prior to 2002, it was called "fast track authority."