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Foreign Affairs
Correcting Misperceptions
Peter D. Sutherland
Summary: If trade talks were founded on a rational analysis of economic interests, they would be much easier to conduct and conclude. But most are not, and the Doha Round is no different. The key to ensuring that something worthwhile does emerge from it is to distinguish narrow political agendas from the broader public interest.
PETER D. SUTHERLAND is Chairman of BP p.l.c. and of the Advisory Board on the Future of the World Trade Organization. He was Director-General of the General Agreement on Tariffs and Trade from 1993 to 1995 and the founding Director-General of the WTO.
WINDING UP, WINDING DOWN
Concluding multilateral trade negotiations has never been easy (I still bear the scars from the end of the Uruguay Round), and the Doha Round will be no different. Much depends on the compatibility among negotiators, between the dossiers they negotiate and their real commercial interests, and among an ever-widening circle of stakeholders. Separating politics from true economic interest is nearly impossible, and yet it must be done if Doha is to achieve something worthwhile and especially its development goals.
Perhaps the Doha Development Agenda was launched at the wrong time, with the wrong agenda, and partly for the wrong reasons. That question is for the history books. In the meantime, the ministerial conference of the World Trade Organization in December will determine whether something valuable can be secured from the initiative. I believe such an outcome is possible, but to achieve it many governments will have to display an uncommon measure of will and foresight.
One trusts that WTO members will finally do the right thing because they know that a failure of the Doha Round would do much damage. That such failure would hinder growth and development is self-evident, but it would also do long-term damage to the notion of multilateralism. There is also a more down-to-earth cause for hope: the changing geopolitics of international trade negotiations. More than two years ago, the WTO ministerial conference in Cancún failed, not only because of differences over substance but also because of inadequate negotiating structures and poor chemistry among participants. Just prior to that meeting and since, new groups better suited to multilateral negotiations have emerged informally within the WTO.
Furthermore, for many months now, government ministers have taken the lead in the negotiations. This is an appropriate development as the talks have moved away from preparatory phases to actual deal-making. It is especially appropriate since the process is designed to extract from states new commitments that will require significant domestic reform. These will have to be defended in national legislatures.
Yet, although the geopolitics may be changing, a vision supporting an ambitious result to the Doha Round is still lacking. In particular, there is no credible consensus view of how trade reform can inspire development.
THE OLD GUARD
Despite some recent changes in the balance of international economic power, the transatlantic relationship remains crucial to the WTO's progress. There have been calls throughout the Doha Round for the United States and the EU to lead, despite contradictory fears that the two elephants of world trade might present a tightly drawn agreement on a take-it-or-leave-it basis.
Sensibly, Washington and Brussels have carried on talking to each other but seldom seek to broach their differences directly, or at least not in public. They have put a ring fence around disputes pending before the WTO's dispute-settlement system. Any one of their high-profile disagreements over, for example, subsidies to Airbus and Boeing, the EU's rules on genetically modified organisms and beef hormones, or U.S. corporate tax breaks could easily poison the environment for the Doha Round. Fortunately, these disputes have been quarantined.
Nevertheless, there is considerable misunderstanding on both sides of the Atlantic about the political structures, traditions, and habits that influence negotiating mandates in the Doha Round. Europeans have trouble understanding the way Washington works, especially when it comes to trade policy. Congress writes trade laws and sets the limits for U.S. negotiators in Geneva. Sometimes, the system veers dangerously toward protectionism. Yet for the most part, the Bush administration and its free-trade allies in Congress seem able to do business. Occasionally, too, Washington stuns everyone, as it did in mid-October, when it tabled a remarkably forthcoming offer on agriculture.
Many trade watchers in Washington are just as unclear about the way things work in Europe. The European Commission wields significant powers in determining the EU's negotiating strategy, but it still operates within broad mandates set by the ministers of the union's 25 members and takes account of the views of the European Parliament. The trade commissioner must perform a daunting balancing act every time he sets foot inside a WTO meeting. That task has become even more complex with the EU's recent expansion from 15 to 25 members, which has meant that a vastly larger number of relatively poor farmers must be considered in EU budget equations and the Common Agricultural Policy. It is not widely recognized, for example, that until 2012 the EU will have to rely on the same budget to support farmers from 25 nations as the one it has used to support farmers from 15 countries. Nor is it understood that recent reform of the cap, while far from ideal, has already changed the face of farm-support programs in Europe. By funding farmers' income directly, irrespective of their production, the EU will substantially reduce the distortions of global trade that cap critics had rightly condemned in the past. The U.S. Congress moved in the opposite direction with new farm-support programs in the Farm Bill of 2002, but one hopes that it will reverse course in the near future.
In the meantime, one thing is sure: the end of farm-trade bargaining in the Doha Round is nowhere near. Both Washington and Brussels are expected to move further. The Hong Kong meeting should set targets and rules for liberalization for all WTO members. For that to happen, other key negotiating partners must be prepared to contribute as well.
THE NEW WAVE
Enter the new Quad, which has been important in preparing the Hong Kong meeting. Like the old quad it replaces, this group includes the United States and the EU. But instead of two important industrial countries -- Canada and Japan -- it also counts two important developing countries -- Brazil and India. The new quad makes sense given the current geopolitics of WTO negotiations. Brazil and India have been influential in the past: both countries, which send some of their brightest diplomats to negotiate in Geneva, were crucial players in the Uruguay Round of the General Agreement on Tariffs and Trade between 1986 and 1993. They have a much greater stake in the global economy now than they did two decades ago -- and presumably a greater interest in ensuring the success of WTO negotiations. One would hope that by being at the helm of the Doha Round, they now feel a responsibility to find solutions to benefit all developing countries, including those less fortunate in global trade than themselves.
So far, however, advanced developing countries have paid little attention to the poorest countries, which desperately need new market opportunities, even though trade among developing nations is likely to be a major driver of economic growth in the future. Developing countries that already are growing players in global trade, such as Brazil and India, understandably play hardball at the WTO. They know well that the major economies that protect their agricultural sectors to the detriment of the rest of the world -- as well as their own consumers and taxpayers -- will make meaningful concessions only under duress and after seeking, by every device, to create rules and exceptions that insulate them from serious political pain at home. But since the price of intransigence may spell the failure of the Doha Round -- and undermine the multilateral trading system -- countries such as Brazil and India will need to calibrate their strategy carefully. After all, globalization is central to their future, too.
Not, of course, that Brazil, India, and other large developing economies are expected to take on heavy commitments requiring substantial reform in the Doha Round. The negotiations were launched in 2001 under terms that envisaged only limited concessions from developing WTO members and none at all from the poorest countries. (Such conditions may not be in the best interests of the nations concerned, but such was the original bargain.) Yet major economies will take on significant commitments, especially in agriculture, only if they can sell them to their domestic constituencies. This means that countries with growing economies will have to make commitments, too, most likely to reduce barriers to imports of industrial goods and through concessions that favor investment by foreign services firms.
The Quad is not the only new negotiating structure in place. The group is expanded to the five Interested Parties with the addition of Australia to talk about agriculture. As necessary, it is expanded to include either big exporters of agricultural products, such as Argentina and Canada, or countries seeking to maintain heavy farm protection, such as Japan and Switzerland.
The most noteworthy new group may be the G-20, which was established in 2003 and, thanks to some major developing countries in its midst, has extracted big agricultural concessions out of Washington and Brussels. The G-20 is also remarkable for including both China and India, countries with very different farming interests from those of Argentina, Brazil, and South Africa.
China seems to see the G-20 as a convenient shelter for the time being. Having made an enormous effort to qualify for WTO membership in 2001, China was initially unwilling to make significant new commitments in the Doha Round, but now, with the negotiations running years behind schedule, it probably understands that that position has dwindling credibility. At the same time, there is a view in Beijing that China's concessions will ultimately depend on just how badly the country is treated. Multiple safeguard and antidumping measures seeking to undermine the competitiveness of Chinese goods will clearly weigh heavily in the scales.
The G-20 has spurred the establishment of yet other groups, some with more defensive interests. A group of the world's richest nations -- including Japan, Norway, South Korea, and Switzerland -- has formed the G-10 in the hope of minimizing interference with the extremely high protection they provide their farmers. (In doing so, they provide moral support to the EU, several of whose members want the same thing.) The G-33 group of poor WTO members also seeks to protect their agricultural sectors from the impact of a tariff-cutting deal. And then there are the African, Caribbean, and Pacific nations (known as ACP countries), which worry that they may lose some long-standing trade preferences -- notably those provided by the EU -- as general duties on merchandise imported into the countries that have traditionally favored them fall.
These and other new groups generally are more in harmony with the real economic interests of their members than was the case with the somewhat doctrinaire developing-nation groups in the Uruguay Round. Above all, the once-common notion that "the South" is locked in combat with "the North" is now antiquated. The varied interests and perspectives of the WTO's members are now easier to detect than before, and such clarity can only help in reaching a final settlement of the Doha Round.
STAY IN THE FAMILY
That does not mean there are not, among these groups, alliances of political convenience. Why, for instance, are China, India, and Brazil all pretending to similar interests in the G-20? Nor does it mean that the positions represented are well founded. Indeed, no group can be said to represent any overarching truth or fundamental right. WTO gatherings are formed on the basis of members' perceptions of their economic interest, embroidered with notions of solidarity. As in previous rounds, however, there is in the Doha Round a difference between such perceptions of interest and reality. That is especially the case regarding matters of development.
Three issues stand out. First, the talks are based on the (incomplete) assumption that the future exporting success of poor countries lies almost exclusively in their access to the markets of industrial nations. Second, many developing countries are caught in a contradiction between the extent to which they have already liberalized their economies and their unwillingness to commit to reforms in the WTO. Third is the problem of lost trade preferences.
The first assumption flies in the face of much evidence showing that the economic future of many developing countries lies in their trading with other developing countries. According to WTO statistics, trade among developing countries (sometimes referred to as "South-South" trade) reached 12.4 percent of world trade in merchandise in 2004. Between 1990 and 2004, South-South trade expanded significantly faster than did world trade, increasing from $219 billion to $1,100 billion. Whereas in 1990 the dollar value of exchanges among developing countries was equivalent to 41 percent of their exports to industrialized markets, 14 years later the share had risen to 70 percent.
In 2004, more than two-thirds of trade among developing countries was concentrated in Asia. In recent years, however, African and Latin American countries have been growing as much as Asian nations -- both as traders within their regions and as exporters to developing countries beyond them. And although one might have expected China to be a major player in such trade, the exports of Brazil and India to developing countries have grown just as quickly as those of China in the past several years.
Manufactured goods have provided the biggest spur to trade among developing countries in recent years, growing at an average annual rate of 14 percent from 1990 to 2004. Whereas trade in agricultural commodities expanded at 8 percent annually, it has grown at much higher levels in the past two years. Mineral exports (largely of fossil fuels) among developing countries increased by 11 percent per year between 1990 and 2004. The sectors that saw most growth were office and telecom equipment (especially in Asia), automotive products (notably in Latin America), and chemicals.
The potential for more trade among poorer nations has long been recognized, but the WTO has never effectively promoted it. Instead, developing countries have attempted to set up preference schemes at bilateral, regional, and global levels. The initiatives have made little headway. And regional trade agreements among developing countries did little to spur trade, at least in the 1990-2001 period.
Although the expansion of trade among developing countries is hindered by many factors -- expensive financing, high costs of transport and storage, lack of product diversification, and poor marketing and distribution -- tariffs play an important part. As the WTO secretariat has noted, developing countries collected about $83 billion in customs duties on merchandise imports in 2000 -- about 60 percent of total customs duties collected worldwide. This is not conducive to expanding trade among poor countries.
GIVE AND TAKE
There also seems to be a contradiction between the autonomous trade liberalization that many developing countries are achieving and the legal commitments they are willing (or unwilling) to undertake in the WTO. With no country is that tension more perplexing than with India. After more than a decade of economic opening, most Indian customs duties actually applied on imports are now at 15 percent, down from 29 percent in 2002-3. Some duties on agricultural products still hover at 30 percent or higher. In the WTO, however, India still maintains almost 30 percent of its customs tariffs "unbound," even though much poorer countries have bound 100 percent of theirs. In other words, India has retained the right to raise tariffs at will on almost 30 percent of its imports, leaving no means of redress to the WTO members such a hike would affect. According to the WTO, the 70 percent of Indian tariffs that are bound include tariffs on agricultural products (which average 115 percent) and on industrial products (about 38 percent). Thus, there is a large gap between the maximum allowable, or bound, rates and the rates actually applied -- a disparity that can unsettle domestic and foreign investors by leaving them unsure whether a future government might reverse the direction of reform.
India argues that it has already suffered sufficient political pain in reducing tariffs and should not be required to go further in the WTO. But the remarkable reductions in customs duties that the country has already managed have paid off handsomely, in terms of both economic growth (which has exceeded 6 percent for the past two years) and export growth (around 20 percent a year). And there is little reason to believe that binding tariffs at or near their applied rates, and perhaps reducing them further, would cause a political earthquake. If anything, such a move would boost investor confidence. It would certainly help poor Indian consumers. Yet such arguments are hardly ever heard. The name of the game for the Doha Development Agenda has always been for developing nations -- and many besides India -- to avoid new commitments, an approach that has turned the whole endeavor into something of a contradiction in terms.
MORE IS LESS
Some developing countries are also concerned about the "erosion of preferences": they fear that if a Doha deal generally brings down tariffs, the value of special low or zero tariffs from which they benefit will drop. As products subject to normal customs duties become more competitive, the thinking goes, the beneficiaries of preferential tariffs will get squeezed out.
Many industrial countries offer preferences under the Generalized System of Preferences (GSP) and go further under more limited arrangements. The European Union provides ACP nations special duty advantages, and least-developed countries (LDCs) enjoy zero-duty access through the Everything but Arms initiative. The ACP preferences are now being renegotiated into reciprocal Economic Partnership Agreements. And the United States has developed a targeted preference scheme for some African countries through the Africa Growth and Opportunity Act.
The Doha Declaration committed all WTO members to offer duty-free, quota-free access to LDCs. The EU has done so. Other countries should follow suit since such access can provide a small, but worthwhile, impetus to the integration of very poor countries into the global economy.
That said, the value of preferences should not be exaggerated. Economists have noted that the benefits of preferences do not necessarily accrue to poor producers; that preferences are often awarded in exchange for costly concessions, such as the observance of labor standards; and that they discourage industrial or agricultural diversification and sometimes liberalization, too. More important, many preferences are not worth much, with or without the Doha Round. In the EU, the difference between a GSP average tariff rate of 3.6 percent and a 7.4 percent average most-favored-nation rate is rarely likely to be an overwhelming competitive advantage. And in the United States, the difference is between an average 5 percent MFN duty and a 2.4 percent GSP rate -- hardly a significant spread. The margin on zero-duty schemes is more favorable, but it cannot guarantee export success for beneficiaries -- and it certainly cannot be relied on for the long term.
Still, even if the majority of preference beneficiaries ought to be able to adjust, the LDCs will face some loss if the value of their special preferences is undermined in the Doha Round. The problem has been recognized, and a proposal has been tabled to provide temporary financial compensation. The International Monetary Fund has shown that the outlay would probably not be very large.
There are 49 LDCs in the world, as defined by the UN; 18 of them are not WTO members. For about half of them, exports of a single product -- usually an unprocessed natural resource -- account for more than 50 percent of their export earnings. For six of them, a single product accounts for more than 80 percent of their export earnings.
The IMF has calculated that if the main preference-givers agree in the Doha Round to reduce both agricultural and industrial tariffs by 40 percent, then losses to LDCs through preference erosion will amount to $530 million, or 1.7 percent of total LDC exports. Bangladesh would account for almost half the total loss ($222 million), but that amount would represent only 4.4 percent of the country's total exports. Only five countries would see their total exports decline by more than 5 percent: Cape Verde, Haiti, Malawi, Mauritania, and São Tomé and Prìncipe.
In this sense, at least, the problem of preference erosion is very limited -- to a handful of poor countries that could be compensated without great financial strain. Certainly, the issue should not drain the resolve of developing countries to draw something positive from the Doha Round.
CORRECTIVE VISION
Although some of these issues have been identified, for the moment they are treated in a piecemeal fashion within and outside the WTO. Yet for the Doha Round to succeed, it needs to be driven by a broad vision. Not all of that vision can be secured in the WTO. In parallel, to ensure that poor countries can implement new WTO obligations, industrialized countries should also put forward a generous "aid-for-trade" financial package.
Furthermore, particular attention should be paid to the supply-side capacity of developing countries -- an area amenable to private-sector involvement. Major companies, including a growing number in developing countries, benefit enormously from the global economy and the rules-based multilateral trading system on which it depends. These companies should consider working with struggling, would-be exporters in the world's poorest nations. Such involvement would not be an initiative with any short-term payback but an exercise in solidarity for the future.
If multilateral trade negotiations were founded on a rational analysis of current trade interests, future prospects, and potential opportunities, then they would probably be a lot easier to conduct and conclude. The Doha Round is no different from other rounds in being a hodgepodge of real and imagined interests distorted, exaggerated, or ignored under the influence of hyperactive political imaginations. It is to be hoped that at the Hong Kong meeting, ministers and their advisers will take greater care to distinguish their narrow political agendas from the broader public interest.