Prospects for the Doha Trade Round

Prospects for the Doha Trade Round

Theme: The current round of trade negotiations that began in Doha in 2001 is struggling to find a way to balance the demands of the developing world with the doubts of Europe and the United States.

Summary: The ninth round of talks aimed at bringing about greater freedom in world trade began with fanfare in Qatar late in 2001. With trade in the doldrums and the World Trade Organization under fire from poorer countries and NGOs, Spain and other nations present at the meeting agreed to begin a process of negotiations aimed at dismantling the rich world’s trade barriers, particularly in agriculture, and bringing the developing world into the heart of the global trade circuits while allowing them special treatment in a number of areas. The run-up to the ministerial meeting in Cancún in September, however, has been plagued with discord between the European Union and the United States, and uncertainty in the rich world over reforms to the rules on generic medication and farm trade. In the meantime, the obstacles to agreement between the WTO’s 146 member-states have coincided with a surge of regional trade agreements. What chances do multilateral trade talks now have of reaching a breakthrough?

Analysis: Hailed in November 2001, at the end of its inaugural conference in Qatar, as a ground-breaking attempt to extend the benefits of global free trade, the Doha round – the ninth in a series of international negotiations aimed at multilateral trade liberalization – appears to be approaching its next rendezvous in Cancún (September 10 to 14) in somewhat poor health. Far from abating, the divisions between the European Union, the United States and the developing world on key issues such as market access (particularly for agricultural goods), intellectual property and special treatment for the least developed countries have remained, and in many cases intensified; meanwhile, the last two years have witnessed a boom in preferential trading areas, trading spats, and the sort of domestic protection that the delegates at Doha had consigned to the past in their declaration of intent.

Little of this is new when compared to the chequered history of multilateral trade talks. Indeed, since the onset of negotiations under the auspices of the General Agreement on Trade and Tariffs (GATT) in Geneva, 1947, the rounds have grown progressively longer, to the extent that the most recent Uruguay Round took eight years to finish – with a three-year hiatus in the middle. Yet the immediate fate of the Doha Round is in many ways more significant than that of any other set of talks: whereas other rounds focused almost exclusively on multilateral deals aimed at lowering tariffs, Doha assumed major strategic objectives beyond a simple boost to commercial volumes.

For developing countries, led as ever by Brazil and India, the round would cement their full and free access to rich world markets, notably for agricultural goods and textiles. For the industrialized world, the round would provide a boost to a depressed global economy (world trade fell 1.5 percent in 2001, the first such decline in years), and serve the broader strategic goal of what Spanish Economy Minister Rodrigo Rato termed a “more pacific and integrated international environment.” Held in the wake of the World Trade Organization (WTO) Seattle fiasco in 1999, the September 11 attacks, and the ensuing war in Afghanistan (which ended just days before the summit began), Doha was widely seen as a route to greater global equity, and thus security. “The terrorists attacked the World Trade Center, and we will defeat them by expanding and encouraging world trade,” US President George W. Bush declared.

Economic forecasts, meanwhile, have unequivocally supported the case for enhanced free trade: according to the World Bank, ending all trade obstacles would add $2.8 trillion to global income and pull 320 million people out of poverty by 2015. Even so, Doha is stumbling. The distributive and strategic security objectives that conjoined in Qatar – aligning the interests of rich and poor nations – seem to have lost their impetus amid the practical business of trade talks, and the influences of domestic constituencies. Differences and disputes have flowered in a host of areas. The US and the EU are divided over how to abrogate pharmaceutical patents in the case of public health crises in the developing world, with Washington proving more sensitive to the concerns of corporations over the impact of mass generic medicine production. Agriculture talks remain at an impasse, despite constant fluctuations in negotiating gambits: the European Union, which accounts for 36 percent of total world agricultural subsidies of $327 billion, insists its latest proposals for the Common Agricultural Policy (a further decoupling of subsidies from output, continuing the MacSharry reforms initiated in 1992) are sufficient as a bargaining chip for Cancún; the United States, fresh from expanding its own agricultural subsidies by $20 billion a year in May 2002, tabled a proposal at the WTO just two months later calling for the total elimination of agricultural export subsidies, cuts in domestic subsidies to no more than five percent of production value, and a tariff ceiling. Unsurprisingly, denunciation of the rich world’s “hypocrisy” has proved a staple feature of the developing world’s complaints over trade liberalization.

The phenomenon of “backsliding” with regard to commitments made at the international level, largely propelled by interest groups within nations, is a common ailment of multilateral agreements. Trade negotiations, however, are particularly propitious for such reverses. Many of the difficulties faced by the Doha round can be accounted for by the mismatch between the traditional nature of multilateral liberalization, and the distributive or geopolitical goals set out in Qatar: in particular, the round appears to call for action well beyond the reciprocal bargains that have dominated all previous rounds.

Though established with the aim of generating non-discriminatory global trade arrangements, GATT rapidly became a forum dominated by the quest for mutual market access by the United States, the European Community and Japan. As a result, the major advances – notably those of the Kennedy Round (1964-1967),  which brought about a 36 percent cut in all duties in over 80 countries – reduced tariffs to historically unprecedented lows, while including certain derogations of the rules in the main players’ interests, first in agriculture (enabling the EC to build the Common Agricultural Policy), later in textiles and discriminatory Voluntary Export Restraints (applied at various times to steel, autos, footwear and computer chips).

The Uruguay Round (1986-1994), however, marked a major change in the extent and character of trade liberalization. In the first place, the simultaneous crumbling of the Soviet bloc and the post-war protectionist strategies of many developing countries significantly increased the number of participating states (which rose to 117); many of these had already embarked on substantial tariff cuts and trade opening, either voluntarily or through the prescriptions of international lending bodies. Secondly, the outcome of the talks proved a watershed in terms of establishing rules, prospects and institutions for future trade liberalization: huge numbers of protective measures were converted into tariffs (which in the case of industrial products were cut at an average of 35 percent, with higher reductions for developed countries); new frameworks for rules on intellectual property, trade in services and foreign investment were introduced; and the Geneva-based WTO was established. In short, the round laid the groundwork for a continuous future process of liberalization, guided by a rule-based system beyond national or regional control.

These expectations, however, were soon confounded by a global trade regime that continued to reflect disparities in power and a half-hearted multilateral spirit. As ever, agriculture proved the main culprit. Promises by Europe, the United States and Japan to make substantial reductions (20 to 30 percent) to their domestic and export subsidies have only been partially met, while their tariff regimes still feature prominent obstacles (referred to in the jargon as tariff “peaks” and “escalation”) to certain products, notably processed food. Despite housing 96 percent of the world’s farmers, agricultural exports from the developing world rose only slightly in the 1990s (from 40.5 percent to 43 percent of total world agricultural trade). Likewise, a pledge by developed countries to phase out restrictions on textile imports by 2005 has been flatly ignored: the US Congress approved presidential fast-track authority to sign trade treaties in 2002 only once free access for textile products from Central America and the Caribbean had been reversed.

In contrast, the developing countries that now predominate among the WTO’s 146 members – and whose complaints (together with street protests) scuppered the Seattle summit – have been inflamed by the application of novel rules introduced during the Uruguay Round. Both the agreement on intellectual property (TRIPS) and that on services (GATS) contain significant concessions to poor countries and voluntary clauses; their implementation, however, has been characterized by the overbearing influence of rich nations and international lending bodies. The 2002 WTO annual report, for instance, points out that service liberalization has proceeded apace in those Asian countries (notably Indonesia, South Korea and Thailand) subject to highly unpopular International Monetary Fund intervention after the 1997 financial crisis. TRIPS, meanwhile, has become synonymous with the power of pharmaceutical corporations, even though it is in fact agnostic with respect to special measures taken during health emergencies. India for its part has expressed profound scepticism over all rules affecting domestic policies that impinge on trade, and threatened to walk out of Doha if any issues touching on investment, competition or government procurement were involved.

In light of this perceived bias in the implementation of the Uruguay Round, the success of Doha negotiations have been intimately tied to a preferential treatment of the developing world: the declaration, for instance, promises poor countries “less than full reciprocity in (tariff) reduction commitments.” In truth, this clause is not new: differential tariff commitments have been the norm in previous rounds (US wishes notwithstanding). But the crucial question for Doha revolves around the precise dimensions of broader reciprocal negotiation in trade negotiations. Whereas rounds prior to Uruguay sought greater market access through deals between countries and blocs with relatively similar income levels, the Doha Round makes access to rich countries’ markets for developing country producers its primary objective. This, of course, does not mean there are no benefits for richer nations: reducing subsidies and barriers will improve international economic efficiency, lower food prices, and possibly serve global security goals. But given the traditional mercantilist give-and-take mechanisms of trade talks, and given the need to cushion affected domestic interests, it is a fallible method for maintaining the round’s momentum.

Spain, for instance, could expect to be affected in a number of ways by Doha if the round’s somewhat ambiguous pledges are met entirely. The sectors that would be most immediately affected are agriculture and textiles, the former of which is a source of regular paid employment to 399,000 people in Spain (representing four percent of GDP) while the latter employs 278,000 (constituting 2.2 percent GDP and nine percent of exports). Most other areas of the economy, whether in services or industry, are liberalized according to relatively open common EU standards (compared, say, to tariffs on industrial goods entering Brazil, India or Indonesia, if not China), while the pharmaceutical sector is modest in size; a more significant overall impact on the economy is likely to result from EU enlargement in 2004. The Spanish government, however, would more than likely wish to compensate the envisaged disruption to two sizeable sectors by gains or outright privileges in other commercial areas. In this respect, it might push alongside the EU for lower trade tariffs, greater access for European service industries (two-thirds of the entire bloc’s GDP), more environmental regulation by trade partners, or greater transparency in government procurement methods in the developing world.

Resistance to such reforms by various developing powers in South America and Asia is likely to be firm given the scepticism that has been fostered by the results of previous trade rounds. Yet the intransigence of these countries is sure to be accentuated by the difficulty in making viable linkages between negotiations on such disparate issues as tariff reform and domestic trade-related regulation. In previous rounds, the two have been treated separately: just one of the 15 negotiating groups in the Uruguay Round featured tariff-cutting to any great extent. Current negotiating strategies would nevertheless appear to suggest that talks on the rules governing national economies will be combined with, or informed by, progress in the liberalization of trade. In light of the number of countries and regional groupings involved, the sheer diversity of perspectives (for instance, 105 out of 148 developing countries are net food importers, and might suffer major disruption in the agricultural sector from free trade; India has no wish to reform its farm price subsidies), and the need for consensus agreement in the drafting of new rules, this appears to be a perilous, if not doomed way to reach consensus.

One ploy to deal with these problems has been to establish “opt-in” agreements, in which the basic rules are far from onerous, while more specific obligations are voluntary and tend to be made on the basis of mutual concessions (such as GATS, which imposed on signatory states the sole obligation of not extending their restrictions). But these difficulties in establishing multilateral mechanisms for reciprocity in trade deals are now being compensated to an increasing extent by an outright alternative to the WTO: preferential trading areas. Trade economist Jagdish Bhagwati has estimated that there are currently 200 bilateral trading agreements in existence, while the WTO holds that trade within regional blocs could soon constitute 50 percent of world trade. The EU is regarded as the pioneer of such constructions, both in itself, and in arrangements such as the planned Euro-Mediterranean Free Trade Area and the various preferential treaties with the 77-member Africa Caribbean Pacific (ACP) bloc. Nowadays, however, the practice is ubiquitous and intensive. In Asia, China is seeking a Southeast Asia free trade area, Japan has shelved its exclusive commitment to multilateral trade deals, and India has begun negotiations with Singapore and Thailand. Both Latin America and Africa, meanwhile, have been carved up into regional groupings, while Mexico and others are courting Pacific nations. But it is the United States that has turned most earnestly to the formation of such blocs: having recently signed treaties with Singapore and Chile, it is now seeking deals with Central America, Australia, Morocco and South African states – not to mention the Free Trade Areas of the Americas, scheduled for 2005. “I have gotten you fast track, now go out and get me some trade agreements,” President Bush is reported to have told his trade representative, Robert Zoellick, at a summit last year.

Economists’ opinions are divided over whether such groupings hinder wider trade liberalization or spur it. There is no doubt that certain blocs, notably NAFTA and the EU, have served to speed the process of general tariff reduction in certain areas, though it is rational to suppose that members of preferential areas would wish to block, or at least slow down multilateral liberalization in order to maintain their trading privileges. In any case, it is apparent that such blocs afford more powerful economies the opportunity to determine to a much greater degree of precision trade-related regulations in the partner country. The recent trade treaty between Chile and the United States is a fine example: it determines that Chile will loosen its capital controls, respect the intellectual property of US corporations, and qualify for preferential treatment of its textile exports so long as it uses US fabric (a clause also applied by the Africa Growth and Opportunity Act in 2000). In return, Chile is assured greater market access, at very little political cost to the administration in Washington.

The temptations of relying on such treaties to achieve reciprocal trade bargains, without the promises of special and differential treatment for the developing world or the maelstrom of multilateral negotiations, are doubtless great. Current evidence would suggest such treaties are, for these reasons, the primary option for rich nations if the Doha round proves deadlocked. The most straightforward alternative proposal for the WTO, currently being touted in Washington, is an across-the-board elimination of industrial tariffs in all participating countries, a measure that would of course bite more deeply in those states which now have higher trade barriers, such as Indonesia (36.9 percent industrial tariff) and India (32.4), than in the EU (3.6 percent), the United States (3.5 percent) and Japan (1.7 percent). Needless to say, the prospects that such a plan will be approved are remote, and the fear in developed and developing world alike is that regional groupings might eventually derail the whole multilateral agenda and prompt the sort of trade protectionism which flourished during the Great Depression of the 1930s –  a fear that has been fleetingly rekindled by high-profile trade disputes between the EU and the US over steel and genetically-modified foods.

For transnational business and financial interests, therefore, success in the Doha Round is of paramount long-term significance. According to the UN, international trade conducted within the structure of a multinational firm – serving, for example, geographically dispersed production processes – now represents 30 percent of world exports. Major clothing retailers, in Spain and elsewhere, have already based much of their production in non-European countries, enabling them to lower costs and prices with little impact on quality: 30 percent of Spanish clothing production, for example, is now carried out in Morocco. Similarly, Spanish telecommunications, financial, tourism and food processing industries could all profit from lower tariffs and stricter multilateral rules on investment and services. Once again, however, the specific liberalizing policy demands these firms might lodge with their governments will be hard to balance with developing countries’ objectives in the round; Southern suspicion of the benefits of transnational business has already been aroused by the marginal increases to their manufacturing value-added from assembly-line foreign investment.

Conclusions: In conclusion, the strategic objectives of the Doha round – greater global equity, better international security, or a simple incentive to worldwide economic recovery – have currently lost their sway over the main participants in WTO talks. The bargain-oriented nature of trade negotiations, and the need for concessions to placate anxious domestic interests, have drawn the United States and the EU, both key players in the process, away from a multilateral approach based on an implicit understanding of the asymmetries in international power and wealth. Instead, the customary give-and-take of trade talks, grounded on the assumption of a level playing field between participating states, has been restored. In light of the current impasse, it will take a major act of reform on the part of the rich world, or a substantial set of concessions to the developing world, to generate some dynamism in the Doha Round. Should this not occur, the regional alternative will continue to win more recruits.

Ivan Briscoe
Specialist in international political economy

Iván Briscoe

Written by Iván Briscoe