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.

WHAT AILS DOHA?

Virtually all observers concur that the Doha Round of multilateral trade negotiations in the World Trade Organization is faltering badly. Agreement may have been reached on the principle (although not the date) of eliminating export subsidies for agriculture, but very little else has been resolved since the talks were launched four years ago. Almost nothing of note has been proposed, let alone settled, in the crucial services sector. Even the necessary procedures for handling integral parts of the negotiations, including agriculture and non-agricultural market access, have yet to be worked out, although the target date for finishing the round is only a year away. Deep uncertainty prevails despite the decision in 2003 to ease the negotiations by removing two critical issues, investment and competition policy, from the agenda. Moreover, the round has never even attempted to seriously address the two largest problems facing today's global trading system: security concerns since the attacks of September 11, 2001, especially the risk that world trade would seize up in the wake of another major terrorist attack, and the absence of effective control over the increasing number of preferential pacts involving many of the world's largest trading nations.

The Doha Round may thus become the first major multilateral trade negotiation to fail since the 1930s. The collapse could even take place, or be clearly heralded, at the ministerial meeting in Hong Kong. Such an outcome could mark a historic reversal in the irregular but steady progress toward liberalizing world trade over the past sixty years. Since history clearly shows that trade policy must move forward continuously or risk sliding backward into protectionism and mercantilism (which at present also means accelerating the tendency toward bilateralism), the consequences of Doha's failure for international security as well as economic relations around the world could be enormous. At this point, the best possible outcome would be a mini-package that would achieve modest real liberalization; by nature of its small impact, however, it might not sufficiently motivate a coalition able to overcome entrenched local interests, and so could fail to win ratification in many countries, including the United States. But even such a modest package is not guaranteed. It is thus critical to analyze the causes of the Doha malaise and devise a rescue strategy that can be implemented in time.

All major global trade negotiations flirt with collapse and succeed only at the last possible moment. Doha, however, is much more difficult than its three multilateral predecessors (the Kennedy, Tokyo, and Uruguay Rounds). The WTO now has many more members (148 at present) and is constantly expanding. The consensus-decision rule means that all of them must accept the outcome of discussions, and now a larger and more diverse group of developing nations has veto power at every stage of the process. The remaining barriers to trade, having resisted liberalization for a half century, are by definition the hardest to tackle. The proper new focus of much of the talks, behind-the-border distortions such as subsidies, raise more complex issues than do traditional tariffs and quotas. The key actors, the United States and the European Union, face even more formidable domestic obstacles to making essential concessions than they did in the past: fierce congressional hostility to any relaxation of U.S. antidumping and immigration laws and deep popular unwillingness to significantly alter the EU's protective agricultural regime.

The main problems that undermine the prospects for a successful Doha Round, however, lie outside the negotiations themselves. Three factors stand out: the massive current account imbalances and currency misalignments pushing trade politics in dangerously protectionist directions in both the United States and Europe; the strong and growing antiglobalization sentiments that stalemate virtually every trade debate on both sides of the Atlantic and elsewhere; and the absence of a compelling reason for the political leaders of the chief holdout countries to make the necessary concessions to reach an agreement. Progress on each front is necessary for the Doha negotiators to have a chance of succeeding.

CURRENCY IMBALANCES AND PROTECTIONISM

The U.S. current account deficit reached an annual rate of almost $800 billion in the first half of 2005. At more than 6 percent of GDP, this is almost twice the previous record of the mid-1980s, after which the dollar fell by about 50 percent in two years. The deficit, moreover, is climbing by about $100 billion per year, a pace even more unsustainable than its level. To finance the current account deficit and its own foreign investments, the United States must now borrow $6 billion from the rest of the world every business day. Its international debt exceeds $3 trillion and will rise to at least 50 percent of GDP, well beyond all traditional danger thresholds, before it could possibly stabilize. The dollar remains overvalued by a trade-weighted average of at least 25 percent even if the goal is only to cut the United States' external imbalance to about half its current magnitude.

Most commentary on this well-known imbalance emphasizes its unsustainability in international financial terms, and this is indeed a severe risk to the U.S. and other economies. But there is a second unsustainability that relates even more directly to Doha and other trade-policy issues: the situation's domestic political impact. The history of U.S. trade policy amply demonstrates that dollar overvaluation, and the huge and growing trade deficits that it spawns, are by far the most accurate predictors of U.S. protectionism. When currency misalignments provide sizable advantages to their competitors, more industries look for relief from imports. When their goods and services are priced out of global markets, meanwhile, fewer exporters are credibly able, or even willing, to fight for liberalization.

The United States has already imposed extensive restraints on Chinese imports in six widely varying sectors, indicating the breadth and depth of the problem. Despite low unemployment and the U.S. economy's robust growth, last spring the Senate supported by a two-to-one margin a substantial across-the-board import surcharge on all Chinese products. In July, the House of Representatives passed its own anti-China trade bill. The strong congressional opposition to the proposed takeover of Unocal by the China National Offshore Oil Company (also known as CNOOC) was a startling indication of the intensity of these sentiments.

It was impossible to even launch the Uruguay Round in the General Agreement on Trade and Tariffs, Doha's immediate predecessor, until after the imbalances of the mid-1980s had been corrected by the 1985 Plaza Agreement on exchange rates and the Reagan administration's simultaneous adoption of tough new trade policies against Japan. Nor could serious negotiations commence in the 1970s in the Tokyo Round, which preceded Uruguay, until protectionist pressures in the United States were quieted by several substantial currency realignments, forced by President Richard Nixon's import surcharge and the de-linking of the dollar from gold in 1971. In both instances, large, indeed historic, monetary adjustments were required to clear the decks for global trade liberalization.