Essentials of trade multilateralism
The News, Pakistan, May 22, 2011
Time is ripe to close the Doha trade deal
Shanghai Daily, May 19, 2011
Three essentials of trade multilateralism
The Financial Express, Bangladesh, May 19, 2011
By Pradeep S Mehta
With the US making it position clear and Obama’s popularity, it’s time to break the trade deadlock
Osama bin Laden’s death is an opportunity to close the Doha deal , argued the hugely optimistic Jagdish Bhagwati in the Financial Times. He was reacting to an editorial in FT which called for giving up on the Doha Round of the WTO due to an impasse. In fact, the Doha Round was launched soon after the 9/11 tragedy to send a message to the world, that we are together and will not be fazed by the horrendous attack on the symbolic World Trade Center in New York about 10 years ago.
“By a strange irony, bin Laden’s assassination nearly 10 years later presents an opportunity to close the round, again in affirmation of the same values. What a glorious opportunity this presents to a much-strengthened President Barack Obama finally to emerge from his eloquent silence on Doha…”.
For far too long Obama has been silent on the US’s approach to the Doha Round, with his aides arguing that there is not enough on the table, while developing countries have countered that the Doha Round is a development round, which seeks to correct the imbalance which resulted from the Uruguay Round agreements.
On the other hand, all countries are investing a significant amount of political and negotiating capital in negotiating preferential trade agreements which are second or third best options of trade liberalisation. There are three essential virtues of trade multilateralism: non-discrimination, gradual liberalisation of tariff and non-tariff barriers, and binding commitments to rules.
None of these essentials is guaranteed in preferential trade agreements. They are, by definition, discriminatory. Not only that, they provide better market access to parties to preferential trade agreements but also (and for some countries this is very important) they divert trade to the detriment of other countries (non-parties).
A seminal work by Sussex economists showed other South Asian countries as “Innocent Bystanders” as a consequence of a likely free trade agreement between the European Union and India.
Contrary to multilateral trade liberalisation, preferential trade agreements can erode a country’s policy space in a much bigger way. This is because preferential trade agreements are negotiated at the level of applied tariffs; on the other hand, multilateral trade liberalisation talks are focused on reducing bound tariff levels.
It is true that the higher the bound level the higher will be the actual cut in tariffs but for countries like India, which has consistently maintained a large gap between bound and applied rates, there will not be much erosion of its policy space. In any case, maintaining bound rates four-five times higher than average applied rate (e.g. some agricultural commodities in India) does defy economic logic.
Furthermore, all new generation preferential trade agreements (particularly those with the EU and the US) have chapters which are WTO Plus in nature. The US-Colombia FTA is an interesting case. A recent research by Kevin Gallagher of Tufts University has proved how detrimental the provisions would be in undermining Colombia’s ability to take policy measures for capital control, particularly in times of financial crisis, which Colombia had successfully done while weathering the recent financial crisis.
Thirdly, there are certain disciplines of trade rules to which countries can be bound only through multilateral agreements.
The only way to discipline the scandalous nature of agricultural subsidies as practised by the US and the EU is the WTO forum. The other part of this paradigm lies in the fact that businesses are not pushing for conclusion of the Doha Round. Because, the nature of world trade has changed hugely over the last couple of decades or so.
Governments do not trade, firms do. Today more than 60% of world trade is intra-industry. This is expected to rise steadily as more and more sectors are enjoying increasing returns to scale aided by technological developments and innovations.
The role of sovereign governments is to facilitate trade by reducing costs. And this can best be done by adhering to three essentials of trade multilateralism. Taking part in a recent debate on Doha on the CUTS Trade Forum, Bernard Hoekman of the World Bank commented that “It (the Doha Round) would still be a significant achievement if WTO members were to agree to reduce the water in tariff bindings, lower the ceiling on permissible production subsidies, and expand the coverage of services commitments. This is of value even if there is no additional liberalisation at all”.
Fortunately, a clear landing zone (to conclude the Doha Round) was there on the horizon until some time ago. From the WTO Director General’s note to the Trade Negotiations Committee of April, 2011, on the current state of negotiations on industrial tariffs it was clear what the US wants – substantial market access from emerging economies like India, Brazil and China in select industrial sectors, which ended in a gridlock.
Given the fear that lack of progress will dirty the waters, some movement on the Doha Round has happened, when major trading powers met at the Big Sky APEC summit and last week’s OECD Ministerial Meeting. They have now have concluded that the original plan for Doha will not work out- certainly not for this year-and therefore a Plan B needs to be worked by the negotiators at Geneva. Other than hearing the traditional noises on helping the poor countries, we do not know what Plan B will entail.
(The author is the Secretary General, CUTS International. Bipul Chaterjee of CUTS contributed to this article)