The Future of World Trade: Doha or Regionalism and Bilateralism? (ARI)

The Future of World Trade: Doha or Regionalism and Bilateralism? (ARI)

Resumen en Inglés

Theme: This ARI analyses the prospects for world trade following the collapse of the Doha Round of talks within the World Trade Organisation (WTO), paying special attention to the expansion of bilateral and regional trade agreements.

Summary: The suspension of the Doha Round of WTO negotiations means that there will be no progress on certain fronts in which there are clear potential gains to be made from trade liberalisation, especially in some farm products and services. But it will not mean an increase in protectionism over the short term, or a collapse of the multilateral trade system. At the same time, it might encourage new regional trade accords whose real economic impact will be limited, although it will favour the more advanced countries and hurt the poorest ones in particular.

Analysis: In July 2007, the Doha Round of the WTO talks ground to a halt because the authorisation given by the US Congress to President Bush in 2002 to negotiate block trade agreements without amendments (the so-called Trade Promotion Authority or Fast Track) expired with no agreement having been reached by the main countries (as trade policy in the US falls under the jurisdiction of Congress, in order to negotiate trade deals the executive branch needs fast-track authority).

A last-ditch attempt to reach an accord was made in June 2007. But the offers that the EU and the US presented in the area of liberalisation of agricultural products came up short for the emerging countries. At the same time the latter refused to lower their manufacturing tariffs by the amount sought by the industrialised nations and demanded that WTO regulations not deprive them of the room for manoeuvre to implement active industrial policies (what is known in academic literature as ‘policy space for development’).

The collapse of the negotiations does not necessarily mean the end of the Doha Round, much less the demise of the WTO. The round could resume in 2008 when the next US President tries to obtain another grant of fast-track authority from a Democrat-controlled Congress (or even earlier, although this is highly unlikely). Furthermore, WTO rules remain in force and its dispute-resolution system is effective. So world trade should continue to grow at rates above GDP, especially in the service sector.

But the fact that the negotiations have deadlocked is a problem for the consolidation of a multilateral trade regime based on transparent and predictable rules. It will also hinder the prospects for progress in certain initiatives aimed at helping the poorest countries, who were promised at the Doha round that the talks would provide them with nothing but benefits (in terms of markets for their exports and trade assistance). Therefore, the danger lies in the possibility of this breakdown undermining the credibility of the system of governance of world trade, reducing the opportunities for growth (especially for developing countries) and give rise to a new spiral of discriminatory bilateral and regional trade accords.

This paper analyses the future prospects of the Doha Round, discusses who has suffered the most from its collapse and evaluates to what extent there is a real risk that regionalism might replace multilateralism in international trade relations.

The Impasse in the Negotiations and Prospects for the Doha Round
The Doha Round began in November 2001, after the 9-11 terror attacks in New York and Washington. Led by the US and the EU, the goal was to strengthen multilateralism in a context of deep international geopolitical uncertainty. In order to win the support of the emerging countries, the talks were presented as negotiations to promote the development of poor nations and to achieve a greater balance in North-South economic relations.

However, the round has evolved slowly and has yielded no significant accords on practically any of the key issues (see ‘The Doha Round at the Crossroads’, ARI nr 85/2006; ‘The Hong Kong Accord and the Future of the Doha Round’, ARI 158/2005; and ‘The Failure of the Cancún Summit and the Future of Trade Multilateralism’, ARI 107/2003).

Throughout the negotiations, the most controversial issues were gradually excluded –those in which it was clear that no consensus was possible, such as competition policy or the treatment of investments and public acquisitions–. This meant that starting in 2004 the talks were limited to agriculture, manufacturing and services, where in was possible to expect a reciprocal accord –based on some give and take– that would be politically acceptable to the main countries.

But even with this stripped-down agenda focusing solely on market access, it was impossible to conclude the round before President Bush lost his fast-track authority. The current impasse stems from the developed countries’ opposition to reducing their agricultural protectionism (both tariffs and subsidies) and the reluctance of the emerging countries –under the G-20 umbrella– to cut their maximum allowed tariffs for manufactured goods and to deregulate further their service sectors. Both sides were willing to yield in some areas, but they could not agree on how much, and this blocked an overall agreement that would have concluded the talks.

It is not easy to evaluate the impact of the lack of accord. The many simulation studies that have been carried out estimate the total net gains of trade liberalisation over a wide range running from US$44 billion a year (the most conservative scenario) to more than US$600 billion a year (if one considers liberalisation of services, including mobility of workers). In every case, three quarters of the gains would go to rich countries. The problem is that these simulations are very sensitive to arbitrary parameters used in the models and even hide the fact that some countries and sectors would come out losing with liberalisation if some kind of policy to compensate them is not instituted.

Furthermore, these figures mean little to public opinion, especially because they involve potential gains. Hence, if the gains do not materialise it does not have such a great impact on public opinion as it would in the case of real losses. For this reason there is no generalised perception that the collapse of the Doha round of talks involves a loss of revenue for consumers, even though in fact it does. And lobby groups hammer away at consumers with the idea that by not liberalising, countries are avoiding assuming the costs involved in adjusting to greater trade openness (loss of jobs, industrial relocation, outsourcing of services, etc) which in some countries are significant.

Keeping these factors in mind, it is important to stress that the collapse of the negotiations will not increase the level of protectionism over the short term because what is being negotiated at the WTO is a reduction of maximum allowed tariffs and subsidies, not a cut in those that are actually applied. As in recent decades (and especially in the 1990s in developing countries) almost all the members of the WTO liberalised their trading practices in order to join the globalisation movement, in practice the majority of the tariffs they apply are below the maximums allowed by the WTO (known as bound tariffs). Thus, as shown in Table 1, manufacturing trade is practically liberalised in the advanced countries, which only retain somewhat higher tariffs on textiles. Meanwhile, developing countries still maintain higher tariffs, but always within relatively low levels on average (especially compared with figures from any other period of the last 100 years). Agricultural tariffs remain high, both in advanced and developing countries.

Table 1. Average tariffs applied to trade, 2006

(%)Advanced countriesDeveloping countries
Manufactured goods1.99
Total goods2.99.9

Source: Kym Anderson & Will Martin, Agricultural Trade Reform and the Doha Development Agenda, Palgrave Macmillan & World Bank, 2006.

But these figures mask the fact that some products are protected by peak tariffs, those which are way above average because they are designed to protect ‘sensitive products’, in other words products for which a lobby group succeeded in obtaining government protection. These tend to be agricultural products and textiles in wealthy countries and agricultural products and some manufactured goods of average added-value in the emerging ones. For instance, rice has a 110% tariff duty in the EU and of 886% in Japan, and the tariff applied to sugar is 90% in the EU, 227% in Japan and 24% in the US. For its part, the average tariff applied to all manufactured goods in India exceeds 30%, that of China is 20% and that of Brazil 18%. And for industrial goods that enjoy special protection, such as automobiles and steel, there are tariffs of over 50%.

Another important distortion in agricultural trade comes from production and export subsidies, on which the countries of the OECD spend more than US$350 billion a year. These subsidies give rise to overproduction and lower prices on world markets and do not allow for a level playing field for developing countries. This aid goes directly to a small group of producers in wealthy countries, a practice which amounts to an inefficient use of public resources which cannot be invested in activities that would be of greater use to society in general.

The ones hurt by agricultural protectionism are farmers in countries that have a competitive advantage in primary products. They include major farm exporters such as Brazil and Argentina, and even small countries that depend on exporting just one product, such as Malawi with its tobacco, and Chad, Burkina Faso, Benin and Mali with cotton. It is hard for these nations to gain access to the lucrative markets of wealthy countries and compete with their subsidised exports.

Throughout the world’s developing countries, nearly 900 million farmers live in extreme poverty. Their revenue would grow with a liberalisation of the farm sector because they would thus be able to produce for overseas markets. They are the big losers in the failure of the Doha round because many of the measures agreed at the Hong Kong summit in 2005 were meant to help them and if the round is not completed most of these measures could end up in limbo.

Still, it must be noted that agricultural liberalisation could also hurt some farmers in developing countries, mainly in Africa. In this case it is the ones who have preferential access to European markets who would suffer an erosion of this advantage, or those who produce mainly for local markets and are not able to export. They would see their subsistence jeopardised by increased competition. It would be necessary to find some system to compensate them.

Another protectionist instrument that is particularly harmful for developing countries are progressive tariffs –those which rise according to the level of added-value of imports entering wealthy countries–. This means that raw materials and some farm products and basic manufactured goods that are exported by developing countries face low tariffs in wealthy nations but that the duties rise quickly for goods that are more sophisticated, such as processed foods, for instance. This kind of protection hinders development because it discourages innovation to raise the added value of exports, making it difficult for emerging countries to diversify their range of products.

The only sector that Table 1 does not address is services, the area in which the developed countries stand to gain the most and the one with the largest number of practices that remain to be deregulated, mainly in fields such as telecommunications, basic or universal services (eg, water, electricity), banking, finance, legal services, insurance, health care, etc. But services are also the area that is most difficult to liberalise because in order to open them up it is not enough to simply reduce tariffs and subsidies. Rather, it is necessary to modify internal State regulations, with all the political sensitivity this carries with it. For this reason, since it was so hard to reach agreements, the Doha negotiations did not try to open up new areas of trade in services. Instead, it sought to consolidate within the WTO framework the liberalisation that many emerging economies carried out unilaterally in recent years. Therefore, since the Doha round did not reach an overall agreement it is possible that liberalisation measures which have been enacted might be reversed in the future. As a result there has been no increase in legal security.

All in all, the suspension of the negotiations will not allow for progress to be made on some fronts in which there are clear potential gains to be made from trade liberalisation, mainly in certain farm products and services. But it will not mean an increase in protectionism over the short term, or a collapse of the multilateral trade system. Furthermore, the negotiations might resume if the next US President elected in 2008 obtains new fast-track authority from Congress. But this will depend on there not being a severe recession that encourages protectionist tensions and on the Democrat-controlled Congress (such a legislature is traditionally more protectionist than one controlled by Republicans), not continuing to fuel economic neo-nationalism that is based on the high US current account deficit, mainly with China.

For all of these reasons, one must not dramatise the collapse of the negotiations. If we keep in mind that the two earlier rounds of negotiations under the General Agreement on Tariffs and Trade, or GATT, (the Uruguay and Tokyo rounds) lasted eight and six years respectively and ended four years behind schedule, delaying the Doha round until the end of the decade should not be considered out of the ordinary. In fact, as shown in Graph 1, the more members that belong to GATT/WTO, the harder it has been to reach agreements and the longer the rounds have lasted.

Regional and Bilateral Agreements: A Threat to the WTO?
When multilateral negotiations drag on or hit a deadlock, countries with strong export sectors have an incentive to seek bilateral and regional trade accords. This kind of agreement tends to be easier to reach because they involve a smaller number of countries. Furthermore, developing countries, especially the smaller ones, see these agreements as a way to strengthen their diplomatic relations with developed countries and a quick route to achieving access to their markets. Developing countries have often used them as stepping stone towards multilateral integration as well. Wealthy countries, meanwhile, use such deals to exercise regional leadership or form geo-strategic alliances.

But these accords pose various problems. In the first place, they are discriminatory because they grant preference to the exports of one country over those of another, a practice which violates the principle of most-favoured-nation status (the lynchpin of the WTO’s multilateral system) and leads to an artificial and inefficient diversion of trade. Secondly, these accords tend to benefit relatively richer countries, which capitalise on relatively poorer countries’ interest in gaining access to their markets and extract concessions in areas that are not strictly trade-related, such as labour standards and protection of intellectual property rights and investments, among others. Third, in most cases these accords tend to have motivations that are more geopolitical than economic. Thus, they are an inefficient way to use the benefits of integration and consume precious and scarce diplomatic resources that cannot be dedicated to multilateral negotiation. Finally, they create a complex web of preferential systems that spawn confusing bureaucracy, enhance asymmetries of power in the international system and give rise to perverse incentives for advancing in multilateral liberalisation.

In the end, only in those few cases in which these accords aim to achieve integration that is broader and deeper than that which the WTO allows have the deals helped boost (rather than weaken) the multilateral trading system. The clearest example is the EU, whose regional integration establishes common regulations in many more areas than those covered by the WTO, plus a supranational framework that has served to strengthen multilateralism and incorporates complex compensatory systems to ease the adjustment costs associated with economic integration.

The GATT/WTO authorises the creation of free-trade areas through article XXIV of the GATT (goods), the GATS (services) and the enabling clause of preferences for developing countries, so long as the net effect of the areas is to create new trade rather than divert it. But the organisations require that they be notified of such accords, which allows them to be monitored (in practice, the WTO does not verify that regional accords involve a net creation of trade, it simply accepts those of which it is notified). As shown in Graph 2 more than 360 notifications of regional trade accords have been received from the time GATT was created up until 2006. Of these, nearly 250 were reached after the creation of the WTO in 1995 and more than 100 while the Doha round of talks was under way.

These data show that regionalism is more and more linked to the process of globalisation. Evidence of this is that nearly 60% of world trade takes place among regional trading blocs and for some countries 90% of their trade occurs under preferential systems (Mongolia is the only country in the WTO which has not signed a regional trade accord). Furthermore, in recent years some major agreements have been sealed: the EU’s enlargement from 15 to 27 members (2004 and 2007) and its free trade accords with Mexico (2000), Chile (2002), South Africa (2000) and the countries of the Mediterranean basin; the US agreements with South Korea (2007), Central America (2006), Australia (2005) and a large number of countries in Latin America, Asia and the Maghreb region of North Africa; the expansion of MERCOSUR with the possible incorporation of Venezuela; and the boom in regional integration in Asia through the strengthening of ASEAN (the Association of South-East Asian Nations) and the expansion of India and China, which links up with the integration of the US west coast through APEC (Asia-Pacific Economic Cooperation). (A complete and updated list of trade accords and their scope can be found in Richard Pomfret, ‘Is Regionalism an Increasing Feature of the World Economy?’, World Economy, vol. 30, nr 6, June 2007).

This situation, along with the slow pace of the Doha round, has triggered fears that regionalisation of world trade might give rise to closed, opposing blocs that might jeopardise decades of multilateral trade expansion. However, a more thorough analysis indicates that the phenomenon of regionalism, while important, does not constitute a real threat to the WTO, at least not for the time being.

In the first place, in actual practice most of the regional trade accords that are reported to the WTO, especially those undertaken by developing countries for political reasons, become inactive or never materialise in the first place (even if they do exist on paper). Secondly, many free trade accords are signed when members’ tariffs are already very low, so their actual effect on trade is minimal (consider, for instance, the fact that all trade between the EU-15 and its 12 new members or trade between the US and Canada is reported under regional accords, but these accords have not generated diversion of trade, nor have they increased exchanges significantly because trade was already liberalised for the most part before these agreements were signed). Finally, many emerging economies which in recent years have signed regional accords had already liberalised their trade unilaterally. So it is difficult to determine to what extent the regional accords have boosted their trade above and beyond what it would have been had it been governed by WTO norms. It is misleading to stress a figure that says a large percentage of world trade takes place under regional accords because the effect of these accords is minimal in most cases.

The greatest real impact from regional trade accords takes place when they try to lower non-tariff barriers, increase investment, reduce legal insecurityand harmonise national regulations. But when this is the true motive of an accord (as in the case of the EU), it does not threaten multilateralism but rather, in most cases, strengthens the WTO system by serving as a laboratory to test policies that can later be elevated to the multilateral level. Only in the case of asymmetrical accords in which wealthy countries manage to extract concessions from developing ones can it be said these agreements help rich nations break up the coalitions that poor countries can form within the WTO, thus undermining one of the main advantages of multilateralism: strengthening developing countries. But in practice, developing countries are proving themselves able to withstand the temptation to sign this kind of accord when they benefit rich countries disproportionately (the clearest example is that both the negotiations between the EU and Mercosur and those aimed at creating the Free Trade Area of the Americas are blocked because of Latin American countries’ refusal to sign what they see as asymmetrical deals).

In short, thenew regionalism does not pose a serious threat to multilateralism because in most cases the new agreements either have a limited economic effect or serve to integrate markets beyond what the WTO could achieve.

Conclusions: Thegoal of the WTO is not just to expand free trade. Basically, its task is to facilitate negotiations to create an international regulatory framework that allows companies in the participating countries to seek opportunities in some markets at the same time as they protect others, always on the assumption that expanding free trade raises living standards.

Over the course of the negotiations at the Doha round, the influence of groups that want to protect themselves from foreign competition (mainly farmers in rich countries and manufacturers in emerging ones) seems to have been greater than that of those who sought more integration. This made it impossible to strike a deal acceptable for the main countries of the WTO.

Although the impasse at the Doha round does not contribute to consolidating the WTO or expanding world economic integration, the deadlock is not expected to hinder trade over the short or mid-term. At the same time, the round could resume in 2008 when a new US president is elected, which would allow the round to be concluded around 2010. Finally, as we have shown, the expansion of bilateral and regional trade agreements is not endangering the multilateral trading system, at least for now.

Federico Steinberg
Analyst in International Economy at the Elcano Royal Institute and Professor at the Autonomous University of Madrid