Bridges Weekly Trade News Digest • Volume 12 • Number 27 • 7th August 2008

Doha: Close, but Not Enough

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For the third summer in a row, a push for breakthrough WTO accords on agriculture and manufacturing trade has ended in failure.

The collapse of talks among trade ministers on 29 July makes it virtually impossible for governments to conclude a deal in the Doha Round of trade talks in the foreseeable future. The road ahead for the multilateral trade negotiations is uncertain, with elections in the US this fall and India next year. Political interest in Washington for pursuing WTO agreements — whether on the part of Congress or the next presidential administration — is far from clear.

From a technical standpoint, striking a deal this year should have been easier than in the past two, after incremental progress by trade negotiators in lower-profile technical work at the WTO since last September left governments with a clearer idea of what they stood to gain in the complex agriculture talks.

Nevertheless, hopes for an agreement were low going into the ‘mini-ministerial’ meeting, which started 21 July. Not only did substantial differences persist on cuts to industrial tariff ceilings and allowable spending on trade-distorting farm subsidies, political conditions in some of the principal players were not propitious. The Bush administration was deeply unpopular and lacked a negotiating mandate from Congress. France and other EU member states were loudly proclaiming that Trade Commissioner Peter Mandelson did not have the support he claimed. The Indian government faced a parliamentary confidence vote during the deliberations in Geneva.

A potent symbol of the expectations for the summit was the complete absence of protesters outside the WTO’s lakeside headquarters. Even the indefatigable Korean farmers seemed to have concluded that nothing at all — good or bad — was going to emerge.

In hindsight, therefore, perhaps the most surprising thing about the summit was not that it broke down, but rather how close ministers came to reaching an agreement. By WTO Director-General Pascal Lamy’s reckoning, they made it “80-85 percent of the way” to ‘modalities’ deals with formulae and figures for future subsidy and tariff ceilings during the nine days of gruelling discussions — the longest such meeting in the WTO’s history. Of some 20 issues in the talks on agriculture and non-agricultural market access (NAMA), he said that positions had converged on 18. Differences on the ease with which developing countries should be allowed to raise tariffs beyond current legal limits to protect farmers from import surges under a ’special safeguard mechanism’ (SSM) proved “irreconcilable,” Lamy conceded. The twentieth issue, cotton, was never discussed, to the irritation of African countries in particular, some of which have seen already-meagre earnings severely hit by the effects of US cotton subsidies in particular.

A set of potential compromise parameters floated by the WTO chief on 25 July, after governments had failed to make significant headway during the first few days of talks, played a major role in furthering what convergence was achieved. Notably, governments appeared to substantially narrow gaps on the seemingly intractable issue of what constituted a fair ‘exchange rate’ between concessions on agriculture by rich countries and on the NAMA tariff reduction formula and related flexibilities by developing nations, albeit with major misgivings from Members such as South Africa and Argentina.

Officials made significant progress towards reconciling the concerns of Latin American countries seeking expedited liberalisation for tropical agricultural products and the former European colonies that feared the erosion of longstanding trade preferences. They also moved towards agreement on issues related to tariff rate quotas for farm commodities, demands from Bolivia, Venezuela, and Mongolia for special tariff treatment in the NAMA negotiations, on preference erosion for certain textiles and clothing products, and on ‘modalities’ language for participation in sector-specific industrial tariff liberalisation initiatives.

“Negotiators were prepared to reach out beyond their entrenched positions to seek compromise,” Lamy told WTO Members after the meeting.

But there is an axiom at the WTO that “nothing is agreed until everything is agreed.” Not everything was agreed last week, and so, in the end, nothing was.

That disagreements over the trigger for a subset of remedies under the SSM emerged as the proximate cause of the breakdown left many trade diplomats professing disbelief. The ‘G-7′ group of seven leading trade powers that came to be at the centre of the Geneva summit proved unable to find common ground on the issue despite dozens of hours of talks. The US reportedly refused to budge from Lamy’s proposal that imports of a farm commodity must surge by 40 percent or more before safeguard remedies can surpass current (i.e, pre -Doha) tariff ceilings in a limited number of cases. India, and less vocally, China, insisted that the threshold must be set lower, at 10 or 15 percent, for the SSM to fulfil its objective of protecting farmers. Several developing countries, including the G-33 group, expressed similar views. “An irresistible force met an unmovable object in the negotiating room, and the rest is history,” said Mandelson of the clash.

US Trade Representative Susan Schwab warned that setting too low a threshold would roll back decades of trade liberalisation, giving rise to a “free-for-all where developing countries were raising barriers every year.” Indian officials countered that fears of misuse of the SSM were overblown, since developing countries fighting inflation would hardly impose safeguard duties on foods for which prices were rising.

Political optics in Washington and New Delhi might have factored into the impasse. US farm groups wanted guaranteed market access elsewhere as the price for accepting lower spending limits on trade-distorting subsidies. On the other hand, the Indian government needed political cover for allowing the US to come out of the Doha Round with a cap on trade-distorting subsidies about twice as high as current spending, said Commerce Secretary GK Pillai — cover that would have been provided by an SSM promising protection against potential floods of subsidised farm imports.

The SSM trigger may have become a proxy for dissatisfaction with the broader package on the table. Many trade diplomats expressed resentment about how some countries, notably the US, were presenting Lamy’s proposed compromise as a “sacrosanct”, “take-it-or-leave-it” package that was not subject to negotiation. Some speculated that the US took such a firm stance on the SSM — even declining to set the issue aside and return to it later — because it did not want a spotlight trained on its cotton subsidies.

Carin Smaller, of the Institute for Agriculture and Trade Policy, suggested that the SSM debate was rooted in far more fundamental divisions. “I think this small technical issue exposed an ideological divide between the Members, between a belief that free markets will solve everything, and a view that sometimes, protection mechanisms are necessary to stop disruptions to local markets and domestic farmers,” she said.

A defence of the latter perspective came from the Carnegie Endowment for International Peace’s Sandra Polaski, who said that in times of low or volatile commodity prices, “tariffs may be the only policy tool available to resource-constrained governments in low income countries to assure poor farmers that they will not be wiped out and thus to encourage more planting and attract desperately needed agricultural investment.”

Before the meeting in Geneva, many believed that high food prices that had pushed down subsidy payments to farmers would facilitate a WTO deal, by enabling the US and the EU to accept lower spending limits. However, the opposite seems to have been the case, according to Kim Elliott, a senior fellow with the Centre for Global Development and the Peterson Institute in Washington. As a result of food security concerns, even countries that are frantically cutting tariffs to combat inflation “wanted to maximise their flexibility and not take any risks with committing to increased market access at all,” especially India and China, she said.

Going forward

In their initial reactions to the summit’s collapse, governments largely refrained from the acrimonious blame game that has marked similar breakdowns in the past. Subsequent exchanges became tetchier, with the US and India trading insinuations and open accusations about intransigence on the SSM. Even the EU pointed out that it had sought to balance farm subsidy cuts with access to developing countries’ industrial and services sectors, not to their farm markets (unlike Washington, was the clear implication). Nevertheless, all agreed that the talks had come very close to agreement.

“No one is throwing in the towel,” Lamy insisted at the end of July, saying that Members’ had indicated that they believed that the deal under consideration “is worth fighting for.” He said that the chairs of the agriculture and NAMA negotiating committees would produce papers “capturing the work” done during the mini-ministerial. These would accompany his own report on the services sector market-opening that several countries indicated that they would be prepared to provide under a Doha deal during a widely-praised ’signalling conference’ on 26 July.

But whether countries can pick up where they left off remains to be seen. Despite various pledges and pleas to retain what is currently on the table, governments have no obligation to honour non-binding commitments offered in the course of the negotiations.

Kim Elliott suggested that the breakdown of the talks in Geneva meant that Members did not accomplish enough to allow a new US president to simply put the finishing touches on a Doha agreement, and then try to push it through Congress. Elliott suggested that either Barack Obama or John McCain would probably “want to do something” at the WTO — but the question would be whether they would want to continue with the Doha agenda, or “declare it dead…and start over.”

A change of administration in the US need not be fatal even to a struggling multilateral negotiation, noted Gary Horlick, a well-known trade lawyer based in Washington. The then-faltering Uruguay Round survived the transition from George H. W. Bush’s administration to Bill Clinton’s at the beginning of 1993; Clinton’s trade representative was briskly confirmed by Congress, and the accord that gave birth to the WTO was concluded just over a year later. “It has happened one time before, and it worked,” he told Bridges.

Horlick said that Members could start trying to work out their differences on the SSM and other issues “if enough people realise how much stands to be lost,” but that it remained too early to say whether they would. He also downplayed the significance of US campaign rhetoric about trade and economic globalisation, noting that the debate had centred on bilateral trade agreements. “No one’s actually discussed the Doha Round yet,” he said. Horlick did not rule out the possibility that a new administration could take an active interest in trade policy. One of the first things on the new president’s agenda would be “to reach out to the rest of the world,” he suggested — trade could be one way of doing so.

Appetite in much of the rest of the world for a WTO deal also seems in doubt. Several developing countries were never convinced about the need for a new trade round in the first place, and only agreed to the launch of talks in Doha in November 2001 — two months after the September 11 attacks on the US — when promised that the “development round” would help rebalance a set of multilateral trade rules that they felt were tilted against them. Apart from a de facto circumstance-based differentiation among developing countries, which would, for instance, accord laxer tariff treatment to groups such as ’small and vulnerable economies’, many of their requests for tweaking WTO rules in order to help them better participate in international trade have been sidelined, or subsumed into an ‘aid for trade’ initiative.

The EU’s interest in the Doha Round talks diminished as issues such as rules governing foreign investment and competition policy have fallen from the table in the face of developing country objections.

Part of the apathy might result from the steadily declining projected welfare gains from concluding a Doha Round deal. Lamy’s estimate — some $130 billion in duties forgone — is less than one percent of the value of global merchandise exports in 2007.

Business groups in the US and the EU, so active during the Uruguay Round when pursuing global rules on intellectual property and services trade, have not been similarly enthusiastic about the Doha Round, complaining that the manufacturing tariff cuts on offer in the developing world would not entail major reductions in currently applied duties.

These views miss the point, argues Patrick Messerlin, an economics professor at the Institut d’Etudes Politiques in Paris. Under their current legal commitments at the WTO, developing countries like Brazil and India could double or even triple average industrial tariffs without penalty. ‘Binding’ these tariffs at the current low applied rates would provide certainty that duties would not be raised from 11 or 12 percent to over 30 percent. The real value in the Doha negotiations, he concludes, would be in preventing backsliding, particularly in the event of a serious global economic crisis.

Tariff certainty aside, the failure to strike a deal last week risked further injury to “the credibility of the WTO, which is already losing its place as the central rule-maker and dispute settler” in global trade, according to Paul Blustein, a trade specialist at the Brookings Institution who is writing a book about the WTO. “Looking back in history, we might see this as a big blow to the multilateral trading system,” he said.

Many governments, with the notable inclusion of heretofore WTO-focused Brazil, have already vowed to step up their pursuit of bilateral trade agreements.

Gary Horlick was less concerned that countries might slowly start ignoring WTO dispute rulings if the institution is seen as unable to deliver further trade liberalisation, even though politicians, particularly in the US, have vociferously questioned the legitimacy of some WTO decisions. “I don’t think the rate of compliance will change,” Horlick said. “The US wins as many cases as it loses, and doesn’t complain about about the ones it wins.” The US derives major economic benefits from WTO rules, he added, and has an interest in their enforcement.

Questions about the future of trade rule-making

As after every collapse of talks at the WTO, there has been new spate of questions about the viability of rule-making under the institution’s system of all-encompassing rounds. Some trade analysts have suggested that it may be more practical to try to make rules in specific areas, outside the scope of a trade round.

However, sector-specific approaches have their limits too, particularly when it comes to agricultural reform. Although WTO Members managed to finalise agreements on financial services and telecommunications in the mid-1990s, a ‘built-in agenda’ in the Uruguay Round agreements for Members to negotiate further cuts to farm subsidies and tariffs proved more problematic. Indeed, part of the reason that the EU in particular pushed for the start of a new round was to obtain trade-offs in other sectors for the mandated agricultural liberalisation.

The shifting balance of global economic power has also dramatically altered the crafting of trade rules. The fact that the talks foundered over the SSM was another confirmation of this, wrote the Carnegie Endowment’s Polaski : “The seven-year old negotiations coincided with the full emergence and rapid growth of China, India, and other developing economies as important exporters, import markets and self-assured negotiators. They now insist that matters affecting their own development and incomes of their poor must be taken into account. Any agreement that is reached will be substantially different from the current trade regime, and it will offer a better deal to developing countries. If not, there will be no deal at all, as these countries have effective blocking power.”

Developing countries, and even least-developed countries, have varied trade interests. Some of these differences were underlined during the mini-ministerial: giving Bangladesh unrestricted access to the US garment market could hurt Lesotho’s exports there. Brazil could live with Lamy’s figures for the SSM; fellow G-20 members India and China could not.

When asked whether the G-20 was splintering, Brazil’s Amorim and India’s Nath pointed out that the developing country group, which came together in opposition to a joint EU-US position on agriculture in 2003, never had a common position on parameters for the SSM. Both stressed that the broad contours of the current agriculture package, from percentage cuts to trade-distorting subsidy spending to the tiered tariff reduction formulae for developed and developing countries, largely corresponded to the G-20’s joint proposal. “It’s because of the positions of the G-20 that we’ve been able to get this far,” said Nath.

“One thing that we can celebrate is that rules here are no longer made by the rich countries,” said Amorim, speaking to reporters alongside the Indian minister at WTO headquarters on 30 July. “They have to take us into account, and that will continue to be so.”

“That’s the difference with the Uruguay Round,” said Nath.

Patrick Messerlin’s paper is available at http://www.gmfus.org//doc/GMF_MesserlinBrief_NAMA_Final.pdf.

ICTSD reporting.