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.

GETTING TO YES

Yet Doha can still succeed. The obstacles that remain are within what economists call the "policy zone": that is, they can be overcome by appropriate policy decisions.

To begin with, the question of agricultural liberalization is more manageable than is generally assumed. EU subsidies, for example, are always reported as amounting to $1 billion a day. But this number includes both subsidies that are "decoupled" from production and trade and those that are not. In trade negotiations, only the latter matter. The former are a matter of internal politics, and although those in the EU who pay (such as the United Kingdom) and those who receive (such as France) will fight over the matter, there is no reason for the rest of the world to worry about it. The coupled subsidies that have an impact on other countries' trade amount, as Arvind Panagariya notes in this issue, to less than a third of the $1 billion-per-day estimate. And export subsidies represent only a very small fraction of that, ranging in recent years from $3 billion to $5 billion; they surely can be removed with the least difficulty.

Doing so, however, would require debunking the claims of influential nongovernmental organizations such as Oxfam, of the intellectually disappointing World Bank leadership under James Wolfensohn, and of the Cairns Group exporters, who have used the $1 billion-per-day estimate as a propaganda tool.

Such groups have long liked to claim that a cow in the EU gets a subsidy of $2.20 a day, more than what the 1.2 billion poorest people on earth subsist on. But this bovine analogy is asinine. The total EU subsidy goes not to the cows alone but helps pay for fertilizer, pesticides, irrigation, and other inputs that lead to increased production (when the subsidy is coupled to production), or it is spent on whatever the farmer decides to spend it on (when the subsidy is decoupled from production). And it makes no sense to imply that what is generally a domestic transfer payment should be given as aid to poor farmers abroad instead. A half-decent economist would know that you should measure the effect of producer subsidies by looking at their impact on the income of the poorest farmers abroad; doing so, she would realize that such subsidies can actually have a beneficial effect if the poorest farmers consume imported food (since the subsidies lower the world prices). The economist would then compare the subsidy with what economists call the grant-equivalent flows of aid from the EU to the countries where these poor people reside. Ignoring such factors dumbs down the debate and leads to ill-informed policy prescriptions.

As Panagariya notes, not only has the subsidy problem been grossly misstated but tariffs (defining what WTO negotiators call "market access") are also very high, not just in the EU and the United States but also in the Cairns Group countries (where some tariffs are even higher).

Now, the EU has no substantive interest in agricultural reciprocity because it has no comparative advantage in agriculture. So it does not really seek what economists call "sectoral reciprocity" -- that is, it has no real interest in getting the Cairns Group countries to make concessions in agricultural tariffs. But that is not true of the United States, which expects to become a net exporter. So Trade Representative Rob Portman must seek reciprocal tariff cuts from the Cairns Group countries as well. Studies show that concessions from these states would help not merely those nations but also other developing countries. In fact, even if one concentrates on market access, cuts in other countries' tariffs open the doors to their markets. But if your own tariffs create a bias in favor of the home market and against exportation, your potential exporters will not have an incentive to get past your own door.

The EU is right to insist that the huge focus on agriculture in the Doha Round be accompanied immediately by focus on manufactured goods where the EU finds its own balance of reciprocity. In these so-called NAMA (non-agricultural market access) negotiations, Brazil and India can provide immediate leadership. The extent of concessions will be a matter for negotiation, and some concessions are inevitable if the Doha Round is to progress. But it cannot be doubted that trade liberalization in manufactured goods will create efficiency gains for the larger developed countries (such as Brazil and India) that have come of age.

For Doha to succeed, the negotiators will also have to make progress on the question of services. To date, little has been accomplished in this area, since some negotiators have been preoccupied with agriculture while others have remained on the sidelines. Some progress could quickly be made by liberalizing the insurance and banking sectors; this would help improve efficiency in developing countries, and would even enhance their export performance, since these sectors provide essential inputs in the chain of production and trade. Some of the developing countries have made much of "Mode 4" delivery of services; they want greater concessions to be made on the temporary inflow of service providers from their countries. It is not entirely clear, however, that the WTO negotiations should engage this question. As the former UN demographer Joseph Chamie has highlighted, immigration policy in rich countries is increasingly going to shift toward temporary guest-worker programs due to demographic changes. Concessions are therefore inevitable; but they are more likely to be handled with the necessary nuances and political accord if they are dealt with as immigration rather than trade issues.

As the report on the future of the WTO, submitted last January, emphasized, poor countries must overcome their fear of trade liberalization by making sure they have the institutional means to handle the potential side effects. Two issues need to be addressed, in particular. If poor countries that are dependent on tariff revenues for social spending risk losing those revenues by cutting tariffs, international agencies such as the World Bank should stand ready to make up the difference until their tax systems can be fixed to raise revenues in other, more appropriate, ways. Developing countries also need adjustment assistance to cope economically and politically with the effect of import competition in specific industries. Western nations already have such programs; indeed, the United States has had one since 1962, when it was created to provide support for changes stemming from the Kennedy Round. Again, the World Bank is an ideal source for such support to developing countries, both in terms of design and financing. In the absence of such safety nets, poor countries cannot be expected to walk out on the high wire of globalization. Fortunately, the bank has finally started to listen to appeals by trade economists to create such programs, so progress in this direction can be made quickly.