From Seattle to Hong Kong

Jagdish Bhagwati

From Foreign Affairs, December 2005 -- WTO Special Edition

Summary:  There have been eight rounds of multilateral trade negotiations prior to Doha. Although they all ended well, it is important to remember that few went smoothly. Negotiators in Hong Kong now face real obstacles, but there is reason for hope -- if, that is, they have the will and courage to do what is necessary to succeed.

JAGDISH BHAGWATI is Senior Fellow in International Economics at the Council on Foreign Relations and University Professor in Economics and Law at Columbia University. He was Economic Policy Adviser to the director-general of the GATT and a member of the expert group that recently reported on the future of the WTO. His latest book is In Defense of Globalization.

Unsuprisingly, those within the Democratic Party who call for "fair trade" have received no support from their intended targets, the developing countries. The larger developing nations, such as Brazil and India, oppose the introduction of non-trade "fair trade" agendas (such as those concerning labor standards) into the WTO. Brazil has taken a similar stance in the negotiations to create a Free Trade Area of the Americas, arguing that the treaty should focus on reducing trade barriers alone. This stance becomes even more interesting when one remembers that President Luiz Inácio da Silva (Lula) of Brazil was also a union leader -- and has a far larger constituency among his workers than his rich-country counterparts.

Thus far, the U.S. response to such opposition to its demands to have trade-unrelated "fair trade" demands accepted in multilateral trade negotiations has been to engage developing countries one by one in negotiations for bilateral free-trade agreements (FTAs). In such talks, Washington is inevitably able to exercise enough pressure to get its immensely less powerful partner to accept almost any "fair trade" demands in exchange for preferential access to the gigantic U.S. market. Recent bilateral agreements have thus included many such obligations.

These bilateral and less-than-multilateral FTAs are therefore dangerous, not merely in constituting a threat to the support for multilateralism that will not indulge the rich-country lobbies' demands for inserting trade-unrelated demands into trade negotiations, but also because they multiply preferences worldwide and create a "spaghetti bowl" of multiple tariffs depending on the source of a product and, in turn, a flood of rules of origin to determine which source is to be assigned to a product. With over 300 such preferential trade agreements in place already, and more coming down the road, nearly all first-rate economists have now begun to tire of them and consider them to be a pox on the trading system. While the disease began in Europe, as the EU commissioners fanned out to negotiate FTAs with all and sundry (outside of the European core, now 25 nations), the United States could have used its immense status at the GATT to stop their spread by providing leadership. Instead, under Secretary of State James Baker and his deputy Robert Zoellick, the United States joined in, and now Asia is following suit. We now have a pandemic.

There are two added reasons why this outbreak of ever more FTAs poses particular danger to Doha. First, the largely reactive Asian FTAs will not necessarily include the United States; this will fuel resentment in the U.S. public against trade because few will know that the blame does not belong in Tokyo or Beijing but in Washington with its trade leadership. This danger is particularly acute since the FTAs between China and other developing countries do not carry any discipline whatsoever. Where a developed country like Japan is involved, Article 24 of the GATT provides some discipline, such as that nearly all tariffs must go to zero within the FTA, so one cannot pick and choose the levels of preferential tariff reduction and the sectors where they will apply for trade partners in the FTA. But if an FTA is among developing countries only, as the Chinese one will be in much of Asia, then it comes under the "enabling clause" of the GATT, which entitles the member countries literally to liberalize preferentially among themselves in whatever manner they wish, with no other WTO members being able to assert any nondiscriminatory MFN rights.

But even more damaging to the U.S. ability to liberalize trade is the fact that, given the widespread fear of freer trade in the population, it is almost insane to present Congress with a string of piffling FTAs and ask representatives to go to bat for trade liberalization again and again. Each time they do so they use up some political goodwill. Increasing resistance is surely the most likely prediction, and if pork were not used liberally, the result would be catastrophic, not just disturbing. Is this a sensible way to run trade policy in the United States?

It is against this backdrop that one must assess the argument that Doha is in real trouble because the U.S. president's fast-track authority expires in July 2007. If we go over that date -- as we will if Hong Kong does not show what Lamy has called "two-thirds" success (a statement the import of which is clear but the full meaning of which is elusive) and the deal is not essentially done by the end of 2006 -- then the renewal of U.S. fast-track authority becomes a real problem. Of course, Doha was declared when there was none. But for all the reasons just stated, a renewal is truly problematic, and the failure to have reached conclusion of Doha might just add to the difficulties in maintaining momentum and progress.

Should we ring the alarm bell by saying that if Doha is not successful by mid-2007, we will have abandoned the multilateral trading system to a cruel fate of neglect and role shrinkage? There is a widespread view that preferential trade agreements, the bilateral and regionals, will break out. But frankly, this is an absurd view. Can anyone seriously hold that, thanks to a blinkered trade leadership in the United States and the EU and now much of Asia, these are not already multiplying at full speed? If the multiplication of FTAs is truly admitted to be an evil, as by now it is in many circles, why are politicians and bureaucrats allowed to get away with their game of enacting bilaterals while pretending to be virtuous in light of all evidence and argumentation? Why are these unnuanced, misguided, and destructive trade leaders not roundly condemned in the elite media?

Would the failure of Doha mean that massive gains from trade will be lost to one and all? The answer to this question depends, of course, on what Doha can reasonably be expected to achieve. As with the Uruguay Round (when different models of trade were used to indicate great gains), one should be skeptical of the huge estimates of the benefits that Doha is predicted to bring. If the talks fail, there will certainly be significant gains lost. But no one profits from exaggeration that often follows the use of big "computable" models that few understand and that obscure a slew of assumptions (such as the predicted responses of farmers in Botswana and Uganda to price changes in response to the removal of price supports in the EU). The economist John Whalley, who arguably makes the most effective use of such large models, had this to say about their use to predict the effects of the tariff cuts on developing countries during the Uruguay Round:

There are substantial, and at times hard to explain inconsistencies across model results. One model shows most of the gains come from agricultural liberalization, another from textiles, and yet another from tariff cuts. ... One model shows developing countries losing from the elimination of the MFA, another shows them as large gainers. ... These differences occur even where similar data sets, and benchmark years are used.

A little skepticism is in order when considering huge estimates of gains from Doha's success. Yes, we will certainly lose substantial gains from trade if Doha fails. But we will also survive.