On July 24, the World Trade Organization (WTO) agreed to the de facto suspension of the Doha Round of multilateral trade negotiations. What are the chances of getting these negotiations moving again, and what are the implications of a breakdown? The IMF’s Natalie Hairfield discusses the issue with Hans Peter Lankes, Chief of the Fund’s Trade Policy Division.
Lankes: In view of the lead time needed to conclude negotiations once the key parameters have been settled, the talks must be rescued right away—say, by September—or we are looking at months and perhaps years of drift. This is because there are elections in the United States and Brazil later this year and uncertainties over U.S. trade promotion authority, which expires in mid-2007.
Domestic political pressures for a deal have been weak everywhere, and only inspired statesmanship could produce results in the short term. The more likely scenario is a lengthy pause. This may provide some time for the pro-trade lobbies to organize themselves, and the IMF should join in making the intellectual case for the Round. But I fear the strongest force that could propel a deeper rethink over time will be the failure of the alternatives and perhaps a rise in protectionism once the global economy slows down.
Lankes: A lengthy breakdown would be a missed opportunity to strengthen the global economy over the medium term and provide a boost to developing countries. In some areas, negotiating positions were no longer far apart. We estimate, for instance, that [WTO Director-General Pascal] Lamy’s middle-of-the-road proposal for tariff cuts in industrial products would have reduced applied tariffs by 45 percent, on average, in developed countries while eliminating peak tariffs, and by 13.5 percent in developing countries. This is more than the Uruguay Round achieved and would have opened vast new opportunities for trade.
Now what? The breakdown weakens multilateralism, at least temporarily. It will trigger an even more pronounced shift toward bilateral deals. The result, even with well-designed free trade agreements—and most aren’t—is diminishing transparency, mounting trade discrimination, and increasing administrative red tape that will hamper cross-border production chains. Another risk is that litigation will take the place of negotiation, especially in agricultural trade.
Lankes: On the face of it, the breakdown was a classic clash between EU [European Union] and U.S. agriculture. The United States wanted more market access than the EU was willing to give and then felt politically constrained from offering deeper cuts in subsidies. Some developing countries were unhelpful, too. They converted the Doha development man-date into a series of gigantic loopholes—all exceptions and no access.
But the political economy is more complicated. None of the main players saw much political value in a deal. Lobbying from manufacturers—traditionally pro-trade—was weak, which limited the scope for political trade-offs. The EU had hoped to leverage the services lobby to confront the farmers, but nothing happened—partly because the services talks became so technically complicated that the services industries retreated in frustration. The U.S. farm lobby—a motor of past rounds—has become evenly split between pro-traders and protectionists, primarily because of the competitive strength of countries like Brazil in this sector. And everyone, especially developing countries, is afraid of China. This undermined the willingness to offer more attractive industrial tariffs, which might have brought the agriculture negotiators to their senses.
Lankes: The AFT proposals, which are meant to facilitate the integration of poor countries into the global economy, are not formally part of the Doha Round. Developed and many developing countries differed on how to achieve development through trade instruments, but all could agree on a parallel process, led by development institutions and the IMF, that would provide technical assistance, project finance, and adjustment support.
AFT commitments have been made by development institutions and not trade ministries, and some of the financial pledges are already budgeted. The IMF certainly has no intention of abolishing its Trade Integration Mechanism or its customs reform technical assistance. Later this month, the IMF’s Executive Board will consider a paper that reviews AFT activities to date and contains World Bank proposals to address the needs of regional cooperation.