Rescuing the Doha Round

C. Fred Bergsten

From Foreign Affairs, December 2005 -- WTO Special Edition

Summary:  The Doha Round could become the first major multilateral trade talks to fail since the 1930s. To prevent a collapse, policymakers in the G-8 and key developing countries must resolve global monetary and current account imbalances, counter the backlash against globalization, and find a way to jolt the talks back to life.

C. FRED BERGSTEN is Director of the Institute for International Economics. He was formerly Assistant Secretary of the Treasury for International Affairs and Assistant for International Economic Affairs to the National Security Council. His latest book is The United States and the World Economy: Foreign Economic Policy for the Next Decade. Copyright 2005, Institute for International Economics.

Unfortunately, all of these measures have been very limited. Trade negotiators will need a great deal of help from elsewhere in their governments if they are to have a fighting chance. Agriculture ministers are, as usual, central to the equation. To restore at least a modicum of global equilibrium, finance ministers and central-bank governors must promote an orderly adjustment of the currency misalignments and the adoption of needed economic policies. Labor ministers must adopt reforms to help workers adjust more smoothly in the United States and more effectively in Europe.

These policy changes are deeply political, however, and so must ultimately be decided and implemented by heads of government. If the major industrial nations are serious about Doha, they will have to devote important parts of their domestic policy agendas to these issues over the next few years. They will also have to use their G-8 summit in 2006 to create an environment within which it can succeed. The "finance G-7" (comprising finance ministers and central-bank governors from the G-8, usually not including Russia) has repeatedly issued calls for a successful Doha and will now have to deliver policies that will enable this to happen.

But the G-8 cannot do it all. Key developing countries must participate actively in any effective effort to bring Doha to a successful conclusion. Already, an informal steering committee brings together the top trade negotiators from Brazil, the EU, India, and the United States (and sometimes Australia). In addition, China and several other Asian countries are central to resolving the global imbalances that are a prerequisite for trade progress. Hence the time has come to realize the idea, championed by Canadian Prime Minister Paul Martin, of holding ad hoc summits of the leaders of key industrial and developing countries to address global problems that can be resolved only with their personal and collective attention. The G-8 has been inviting the main developing countries to its annual summits for several years. It should convert next year's conclave into an event at which this broader group can rescue the Doha Round.

Even if all this were done, completing a successful Doha Round by early 2007 (to enable implementation before the U.S. president's fast-track negotiating authority expires) would still be a herculean task. Enacting the requisite policy changes, ranging from agricultural policy to exchange rates to labor-market reforms, will take time. This strategy will thus probably have to include an extension of all the deadlines for at least six months (as occurred at the end of the Uruguay Round in 1993), or, more likely, until the end of President Bush's second term.

A TRADE POLICY JOLT

What could galvanize such an admittedly ambitious set of high-level meetings and policy changes? The prospect of the Doha Round's failure might itself be enough. Despite hurdles that seemed daunting at the time, the major industrial countries did not permit any of the prior multilateral rounds to collapse. The summits of the G-5, G-7, and G-8 have addressed this issue more consistently and more successfully than any other over the groups' thirty-year history. There is a widespread recognition that failure to keep the trading system moving toward further liberalization could trigger a sharp reversal into protectionism and bilateralism and perhaps erode the WTO itself, causing substantial problems for the economies and foreign policies of all countries involved. The price could be especially high for those viewed as precipitating the failure, as the United States and EU discovered when they were blamed (correctly) for the collapse of the Cancún ministerial meeting in 2003.

More likely, however, a direct and explicit threat to the interests of major holdout countries (on monetary as well as trade issues) will be needed to spark the wide range of policy changes required. Passage of sweeping protectionist legislation in the United States, or pre-emptive steps similar to those taken by Presidents Nixon and Reagan in 1971 and 1985, would be just such a "policy jolt."

A more constructive precedent can be found in the endgame of the Uruguay Round in 1993. That round was originally set to conclude in 1990, but the EU refused to adopt the changes needed in its Common Agricultural Policy to put a final package together. The United States responded with a "shot across the bow" by negotiating the North American Free Trade Agreement with Canada and Mexico to demonstrate that it was prepared to pursue a regional path to trade liberalization if the global track were blocked. But that was inadequate to restore impetus to Uruguay, since the United States and Canada already had a bilateral free-trade agreement, and Mexico and Canada were both U.S. neighbors and relatively modest players in world trade.

The United States then found a more effective weapon when it hosted the first Asia-Pacific Economic Cooperation (APEC) summit in Seattle in November 1993. That gathering stunned the world as Pacific Rim leaders, meeting for the first time, agreed to pursue "free and open trade and investment in the Asia Pacific region." One month later, the EU agreed to an agricultural package that brought the Uruguay Round to a successful conclusion. When asked why Europe had reversed itself so abruptly, its chief negotiators testified without hesitation that "your Seattle summit showed us that you had an alternative that we did not." The risk that fully half of world trade and economic output would go its own preferential way was decisive.