News and Analysis • Volume 10 • Number 7 • November 2006

US Elections, Trade and the WTO

While speculation is rife on the trade policy implications of the Democratic victory in the US midterm elections, trade diplomats in Geneva are gearing up to restarting the suspended the Doha Round negotiations early next year.

The US Congress faces two major, and interlinked, decisions with multilateral trade implications in the coming months: redrafting or prolonging the 2001 Farm Bill, and whether or not to extend the president’s trade promotion authority (TPA) beyond July 2007.

The TPA allows the administration to negotiate trade agreements that Congress can only approve or reject, but not change. Most WTO Members believe that its expiry in July would eliminate the slim chance that currently exists to conclude the struggling Doha Round by end-2007. Many Democrats, however, are reluctant to extend the TPA, largely due to concerns over what they see as insufficient environmental and labour protections in bilateral trade agreements (see below). One option available to the government would thus be to seek TPA extension for the Doha Round only, although some analysts predict that Congress would only grant one if a ‘real deal’ for US exporters appears to be in the offing.

Democratic leaders have stressed their desire to take a more bipartisan approach than that pursued by the Republicans over the last 12 years, and US Trade Representative Schwab was quick to assert that the change of guard in Congress would not affect the US position on the Doha Round. She argued in a 9 November article in the Wall Street Journal that commitments beyond current positions would be needed in four key areas to end the stalemate: ‘substantial improvements’ by the EU, Japan and other G-10 countries in agricultural tariff cuts, especially for ‘sensitive products’ that would be exempted from full formula reductions; deeper cuts in agricultural tariffs by ‘major developing countries’, including those for ‘special products’; deeper EU and US reductions in trade-distorting support; and cuts in industrial tariffs in developed and major developing countries.

This affirmation of a long-held position contrasts with the statement issued at the recent APEC Summit, where leaders of the 21 member states, including the US, agreed to “explore every avenue to achieve the necessary breakthroughs at the earliest opportunity and to put the Doha work on a path towards an ambitious and balanced outcome in 2007.” The statement also said that APEC leaders were “ready to break the current deadlock: each of us is committed to move beyond our current positions.”

Bilateral Activity May Slow Down

While multilateral trade liberalisation and rule-making have historically attracted support from both sides of the aisle, bilateral trade agreements – particularly with small low-wage economies that have poor labour standards – are another matter. On the campaign trail, many Democrats severely criticised the bilateral free trade agreements (FTAs) the Bush administration is negotiating or has already concluded. Half of those voted in on 7 November made the US-Central America FTA an election issue, citing US job losses, unfair trade and weak labour and environmental provisions as major concerns. Senior Democrats have already indicated that they will vote against the ratification of the US-Peru FTA unless its labour provisions are renegotiated. There is, however, bipartisan support for extending current trade preferences for Andean countries, see page 20.

Simon Evenett and Michael Meier, both researchers at the University of St Gallen in Switzerland, have predicted that any future TPA extension is likely to come with labour and environmental strings attached, and that “uncertainties over Congressional ratification may well cause US trade negotiators to be even tougher on potential FTA partners, and those partners may well be discouraged by the extra concessions sought and the growing likelihood that any deal will never come into force.”1

Rewriting the Farm Bill?

The Democrats’ trade policy will also be shaped by the need to hold onto their new supporters from rural districts in view of the presidential elections in 2008. Like Republicans, they are unlikely to call for a significant reduction in agricultural spending, and may well support Agriculture Secretary Mike Johanns’ suggestion to rewrite – rather than extend – the current Farm Bill, which will expire in July 2007.

Since Brazil’s successful WTO challenge of US cotton subsidies, Secretary Johanns has stressed the importance of restructuring agricultural subsidies in order to avoid a repeat performance targeting other heavily subsidised crops such as rice. Among the options he has put forward are increasing direct payments decoupled from production and greater use of conservation programmes, both of which would qualify as Green Box support on which there is no spending limit. Some trade-distorting subsidies might perhaps be increased as well, since current US Amber Box payments amount to roughly two-thirds of its bound ceiling.

US trade analysts have long linked any potential extension of the trade promotion authority with a parallel prolongation of the Farm Bill as it currently stands. Many see a potential bipartisan agreement to rewrite agricultural spending legislation as an implicit acknowledgement that legislators no longer believe that enough progress can be made in the Doha Round negotiations to warrant the maintenance of the administration’s power to conclude take-it-or leave- it trade deals.

Informal WTO Talks to Resume Across the Board

Brazil’s Foreign Minister Celso Amorim predicted in September that while the elections would not change the US position in multilateral trade talks, the fact that they would be over would be helpful. Indeed, just nine days after election Tuesday, WTO ambassadors agreed to restart informal discussions in the Doha Round negotiating committees in order to explore the way forward. Trade sources said the move responded to Members’ desire to move ahead in hopes that formal negotiations could resume early next year and make enough progress to convince the US Congress to extend the TPA for long enough to clinch a deal.

At a 16 November informal meeting of the Trade Negotiations Committee, WTO Director- General Pascal Lamy described the situation as one “somewhere between the quiet diplomacy of the last months and the fully-fledged negotiations, which will only come when Members are prepared to put numbers to the flexibilities they have expressed in general terms on key issues in particular on agriculture market access and domestic support. While I believe we are ready to start technical work at the level of experts, it would be, in my view, premature to move on to ministerial negotiations. What I am suggesting to you we do is prepare the ground for fully-fledged negotiations to take place when the conditions are right.”

Mr Lamy said his consultations had revealed widespread support for ‘multilateralising’ the contacts that had taken place since the suspension of the negotiations in July. The informal talks in Geneva will take place in all negotiating groups, with the ambassadors chairing them determining “the way ahead in each area and the speed with which the work should take place in consultation with delegations.” Agriculture, as ever, is expected to be a main focus of the talks. Informal contacts involving all Members have already resumed (see page 4).

ENDNOTE

1 Evenett, Simon and Meier, Michael. 9 November 2006. The US Congressional Elections in 2006: What Implications for US Trade Policy? University of St Gallen

Facts and Figures

In 2005, trade in manufactured goods increased by 7 percent, while exports of agricultural products expanded by 5.5 percent in real terms. Agriculture also recorded the largest excess margin of trade over output growth.

Merchandise trade expanded faster than commercial services trade for the third year in a row. The dollar value of world merchandise exports rose by 13 percent to US$10.16 trillion and commercial services exports rose by 10 percent to US$2.41 trillion in 2005. China’s merchandise exports increased by 28 percent.

The phase-out of the WTO Agreement on Textiles and Clothing had a major impact on trade flows in 2005. China, India and Pakistan enhanced their role in global exports of textiles and clothing while suppliers from South and Central America and Africa lost market shares.