Correcting Misperceptions

Peter D. Sutherland

From Foreign Affairs, December 2005 -- WTO Special Edition

Summary:  If trade talks were founded on a rational analysis of economic interests, they would be much easier to conduct and conclude. But most are not, and the Doha Round is no different. The key to ensuring that something worthwhile does emerge from it is to distinguish narrow political agendas from the broader public interest.

PETER D. SUTHERLAND is Chairman of BP p.l.c. and of the Advisory Board on the Future of the World Trade Organization. He was Director-General of the General Agreement on Tariffs and Trade from 1993 to 1995 and the founding Director-General of the WTO.

There also seems to be a contradiction between the autonomous trade liberalization that many developing countries are achieving and the legal commitments they are willing (or unwilling) to undertake in the WTO. With no country is that tension more perplexing than with India. After more than a decade of economic opening, most Indian customs duties actually applied on imports are now at 15 percent, down from 29 percent in 2002-3. Some duties on agricultural products still hover at 30 percent or higher. In the WTO, however, India still maintains almost 30 percent of its customs tariffs "unbound," even though much poorer countries have bound 100 percent of theirs. In other words, India has retained the right to raise tariffs at will on almost 30 percent of its imports, leaving no means of redress to the WTO members such a hike would affect. According to the WTO, the 70 percent of Indian tariffs that are bound include tariffs on agricultural products (which average 115 percent) and on industrial products (about 38 percent). Thus, there is a large gap between the maximum allowable, or bound, rates and the rates actually applied -- a disparity that can unsettle domestic and foreign investors by leaving them unsure whether a future government might reverse the direction of reform.

India argues that it has already suffered sufficient political pain in reducing tariffs and should not be required to go further in the WTO. But the remarkable reductions in customs duties that the country has already managed have paid off handsomely, in terms of both economic growth (which has exceeded 6 percent for the past two years) and export growth (around 20 percent a year). And there is little reason to believe that binding tariffs at or near their applied rates, and perhaps reducing them further, would cause a political earthquake. If anything, such a move would boost investor confidence. It would certainly help poor Indian consumers. Yet such arguments are hardly ever heard. The name of the game for the Doha Development Agenda has always been for developing nations -- and many besides India -- to avoid new commitments, an approach that has turned the whole endeavor into something of a contradiction in terms.

MORE IS LESS

Some developing countries are also concerned about the "erosion of preferences": they fear that if a Doha deal generally brings down tariffs, the value of special low or zero tariffs from which they benefit will drop. As products subject to normal customs duties become more competitive, the thinking goes, the beneficiaries of preferential tariffs will get squeezed out.

Many industrial countries offer preferences under the Generalized System of Preferences (GSP) and go further under more limited arrangements. The European Union provides ACP nations special duty advantages, and least-developed countries (LDCs) enjoy zero-duty access through the Everything but Arms initiative. The ACP preferences are now being renegotiated into reciprocal Economic Partnership Agreements. And the United States has developed a targeted preference scheme for some African countries through the Africa Growth and Opportunity Act.

The Doha Declaration committed all WTO members to offer duty-free, quota-free access to LDCs. The EU has done so. Other countries should follow suit since such access can provide a small, but worthwhile, impetus to the integration of very poor countries into the global economy.

That said, the value of preferences should not be exaggerated. Economists have noted that the benefits of preferences do not necessarily accrue to poor producers; that preferences are often awarded in exchange for costly concessions, such as the observance of labor standards; and that they discourage industrial or agricultural diversification and sometimes liberalization, too. More important, many preferences are not worth much, with or without the Doha Round. In the EU, the difference between a GSP average tariff rate of 3.6 percent and a 7.4 percent average most-favored-nation rate is rarely likely to be an overwhelming competitive advantage. And in the United States, the difference is between an average 5 percent MFN duty and a 2.4 percent GSP rate -- hardly a significant spread. The margin on zero-duty schemes is more favorable, but it cannot guarantee export success for beneficiaries -- and it certainly cannot be relied on for the long term.

Still, even if the majority of preference beneficiaries ought to be able to adjust, the LDCs will face some loss if the value of their special preferences is undermined in the Doha Round. The problem has been recognized, and a proposal has been tabled to provide temporary financial compensation. The International Monetary Fund has shown that the outlay would probably not be very large.

There are 49 LDCs in the world, as defined by the UN; 18 of them are not WTO members. For about half of them, exports of a single product -- usually an unprocessed natural resource -- account for more than 50 percent of their export earnings. For six of them, a single product accounts for more than 80 percent of their export earnings.

The IMF has calculated that if the main preference-givers agree in the Doha Round to reduce both agricultural and industrial tariffs by 40 percent, then losses to LDCs through preference erosion will amount to $530 million, or 1.7 percent of total LDC exports. Bangladesh would account for almost half the total loss ($222 million), but that amount would represent only 4.4 percent of the country's total exports. Only five countries would see their total exports decline by more than 5 percent: Cape Verde, Haiti, Malawi, Mauritania, and São Tomé and Prìncipe.