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After the Doha Débâcle: What Next for the Global Trade System?

Experts' Comment - 5 August 2008

Guy de Jonquières, Senior Research Fellow, International Economics Programme

The collapse late last month of World Trade Organisation talks, widely billed as the last chance for the Doha world trade round, is not only a severe - quite possibly fatal - setback for the six-year-old project. It also raises profound longer-term questions about the role of the WTO and its ability to set a clear direction at a time of rapid shifts and tensions in the complex balance of power between its 153 members.

The round has not been declared dead, and efforts may yet be made to revive it. But the prospects do not look promising. First, US presidential elections rule out resumption of the talks until next spring at the earliest. By then India, an increasingly pivotal player in the WTO, must hold elections and in November there will be a new European Commission, which may not share the broadly liberal outlook of the current one. The international economic environment will almost certainly have evolved, for better or worse. All this makes it improbable that the Doha talks could simply be picked up where they broke off. Nor, if they were, are there overwhelming reasons to believe that they would yield decisive breakthroughs.

Second, the package on the table is hardly compelling economically. Pascal Lamy, the WTO's director-general, puts the prospective gains from the round at about $130bn annually - roughly 0.2 per cent of global GDP - and some independent estimates are much lower. The reason is that, despite years of intensive bargaining, few offers on the table would lead to fresh trade liberalisation: much of this round would simply commit governments to lowering legally enforceable WTO ceilings on tariffs and farm subsidies to closer to the levels actually in effect today.

Such 'binding' would be a valuable safeguard against the risk of a wave of protectionism, especially at a time of heightened global economic uncertainty. However, it has not been enough to galvanise enthusiasm among exporters and multinational companies, whose support and lobbying are crucial to pushing the round forward and getting an eventual deal ratified by national legislatures. Conspicuously, some pro-trade business groups that have regularly attended WTO meetings did not bother to show up at this month's talks.

Third, it is unclear that enough governments have their heart in the effort. The ostensible cause of the breakdown was US objections to a mechanism sought by China and India for protecting their farmers from 'surges' in agricultural imports. Not only was the point at issue fairly technical; it also related to a situation that looks hypothetical at a time when world food prices have been rising rapidly.

The three countries' willingness to let such an apparently minor dispute jeopardise the entire round inevitably raises questions about how much they really care about the success of the endeavour. Washington has been negotiating in recent months with one hand tied behind its back. Its legal authority to negotiate new trade deals lapsed some time ago and the US Congress, which grants it, is increasingly sceptical about the virtues of trade deals of every variety. For China and India, the costs of failure are trivial, because neither stands to gain much from the round: by some estimates, it would add only three days' growth to the former and 21 days' to the latter.

That partly reflects the two countries' reluctance to engage aggressively in the negotiations. China has made few demands of other members, while balking at going beyond the sweeping commitments to open its market that it accepted when it joined the WTO in 2001. For Beijing, the purpose of membership had more to do with locking in its own domestic reforms than with safeguarding its exporters' access to other countries' markets. Now that the pace of reforms has slowed, the perceived need to subject its policies to external disciplines is less urgent.

Except for some categories of services, India has consistently adopted a mainly defensive and sometimes intransigent stance in the Doha talks: it has seemed more interested in preserving the right to maintain its own trade barriers than in fighting hard to dismantle those in other countries. The failure of previous WTO meetings has often earned Indian trade ministers a rapturous reception on their return home.

But these are not the only members to have exhibited limited ambitions and inflexibility. Japan, the world's second largest economy, has played a passive backseat role since the Doha talks began. The European Union has been hamstrung both by differences between its 27 members and by a Catch-22 dilemma over agriculture. Politically, the EU is constrained to offer in the WTO only liberalisation that it has already agreed internally. This has severely limited its ability to use the 2003 reforms of its farm subsidy regime as a bargaining chip to obtain reciprocal concessions, for example on industrial tariffs, from other countries. The latter see little reason to 'pay' in the WTO for benefits that they are receiving anyway.

Nonetheless, the willingness of China and India to push their dispute over import safeguards to - and beyond - the limit is noteworthy. It is a striking symptom of the self-confidence born of their growing weight in the global economy. It also underlines just how far the influence once exercised by the US and Europe over the multilateral trade system has shifted in favour of larger emerging economies, and how the active co-operation and involvement of the latter is now crucial to hopes of making progress in the future.

What now lies ahead? This month's debacle has already prompted suggestions that it is time to call a halt to the long-winded, cumbersome and politically exhausting trade rounds through which the multilateral trade system has traditionally advanced over the past 60 years. Even Mr Lamy, while not writing off the Doha talks, has conceded that they have become excessively complex. Susan Schwab, US trade representative, has suggested that rounds may have out-lived their usefulness and that a different approach to multilateral liberalisation is needed.

Trade experts, policy analysts and commentators are already canvassing proposals for alternatives. These would replace the far-ranging agendas of trade rounds with less ambitious, incremental deals. Most of the options, however, suffer from drawbacks that could severely limit their practicability. They include:

  • Holding a series of separate negotiations, each focused on a single sector or a single issue. In theory, that would avoid the problem of intricate cross-linkages between different sets of talks that has bogged down the Doha round, as countries have made their agreement in one area conditional on getting satisfaction in others.

However, such an approach could be a double-edged sword. WTO members' economic interests and trade patterns vary widely. To make agreements politically acceptable at home, governments habitually seek to match 'concessions' they make by lowering their own barriers in one sector with 'gains' achieved by getting other countries to liberalise different categories of trade. It is inconceivable, in particular, that the US and European Union would agree to tougher WTO disciplines on their contentious farm subsidies unless other members undertook in return to lower their barriers to trade in areas such as industrial goods and services.

In any case, the single-track approach has already been tried and found wanting. During the 1990s, WTO members held separate negotiations on agriculture and services that ended in deadlock. Their failure was one of the arguments used for launching the Doha round, in the hope that it would lead to a broader 'package deal'.

  • 'Coalitions of the willing'. Seven WTO members (counting the EU as one) account for 80 per cent of world trade. There have been suggestions that they, and other interested parties, should push ahead and negotiate liberalisation agreements between themselves and extend the benefits unconditionally to all other members. However, it is uncertain that the formula would be accepted by the rest of the WTO, especially by small and poor developing countries, which are acutely suspicious of any hints that big ones are trying to cut deals among themselves.

This model would depend critically on the participation of China and India. The former is now the world's second largest exporter and third largest importer; if it and India stayed out, the talks could lack credibility. Furthermore, in that event, the US and EU would almost certainly refuse to grant the two countries access to their own markets on a non-reciprocal basis. To do so would invite strong objections in Washington and Brussels that China and India were 'free-riding' on others' liberalisation of their markets.

  • 'Critical mass' agreements. This option would combine features of the two other approaches and is inspired by the success of WTO negotiations in the 1990s on information technology tariffs, telecommunications and financial services. The deals were negotiated by a limited number of WTO members, accounting collectively for much of the world trade in the three sectors, and the results were extended, with some limited strings attached, to the rest.

Here again, the feasibility of the approach would hinge on whether China and India and, probably, Brazil and South Africa, were ready to be involved. It is also questionable whether the three sets of earlier talks succeeded because they were limited to self-selecting participants, or because of the particular circumstances then prevailing in the sectors concerned.

The telecommunications and IT industries were in the grip of accelerating structural change that made the maintenance of long-standing trade barriers counter-productive, prohibitively costly or unsustainable in developing as well as developed economies. The financial services agreement was struck at the height of Asia's 1997 economic crisis. Not only would failure have delivered a severe blow to already shaky market confidence; many Asian countries were in a weak position to resist western pressure to open their markets.

Given the limitations of these proposed alternatives, what is likely to happen? Once WTO members recover from the shock of this month's failure, three scenarios seem possible. One would be to regroup and try to soldier on with the round. The second would be to shelve the talks and to embark on a fundamental reappraisal of the organisation's mandate, agenda, operating methods and management, with a view to charting a new roadmap.

The chequered history of the Doha talks suggests that the WTO is in serious need of reforms, in response to changes in the geo-political and economic environment. The General Agreement on Tariffs and Trade, out of which the WTO grew, was essentially the creation of benign American hegemony. But the US is no longer able or willing to exercise leadership of the multilateral system. and no other country or group of countries appears equipped to take its place. Meanwhile, the WTO's membership has expanded rapidly to include many, predominantly poorer, countries, which often disagree among themselves, as well as increasingly assertive and important emerging economies, led by China and India.

The success of past trade rounds, and of unilateral liberalisation, in cutting tariffs has left the WTO facing new and difficult challenges that its members are divided over how - and in some cases, whether - to address. Many of these challenges are in areas once shielded from international competition, such as services, and where multilateral agreements on further market opening requires an acceptance of international disciplines on national policy that many countries appear reluctant to concede.

The third scenario is indefinite drift. Right now, this looks the most likely outcome in the foreseeable future. Chances of bringing the Doha talks to a successful conclusion look slim, while re-engineering the WTO would require a sustained high-level political commitment by governments. There is little sign at present that any are ready to invest the necessary resources.

However, drift may not mean calm. If the Doha round finally fizzles out, some countries may seek to obtain through litigation what they failed to achieve through negotiation. Brazil has already said it is considering challenging the legality of US and EU farm subsidies in the WTO. Others may follow. That could sting Washington and Brussels into retaliating with a volley of tit-for-tat counter-suits.

The result would be to place immense pressure on the WTO's quasi-judicial mechanisms for settling trade disputes - the organisation's one indisputable success story and the bedrock of its authority. The mechanisms have functioned well so far because enough countries believe it is in their national interest to make them work. But it would take only one decision by a larger member to ignore an unfavourable ruling gravely to weaken the effectiveness and credibility of the machinery. A succession of such breaches could lead to the gradual undermining of the rules at the heart of the global trade system.

Yet, perversely, perhaps something of that kind is needed to jolt the organisation's members into tackling the challenges confronting it. The prospect of securing economic gains in the Doha round may not have been powerful enough to impel governments to make the compromises needed to achieve them. But none of the WTO's members would be likely to contemplate with equanimity the crumbling away of one of the principal foundations of the global economic order.

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