Why the Doha Round is failing

The usually well-informed ITSCD Bridges Newsletter tries to explain it with a bit of tabloid alliteration: ‘Political Paralysis Poisons WTO Agriculture Talks’. Nah! It’s a political choice to put the talks on life-support and it will be a political choice to pull the tubes. It’s Doha that’s in rigor, not the pollies.

The Doha Round fizzer is an embarrassment. The past sixty years of GATT and WTO negotiations have seen a lot of rocky moments but talks have never died. Governments dont’t want to damage the brand, so they go on resurrecting their ‘determination’ in press releases from the G-8 or the G-20. But they’ve privately calculated the Doha plan doesn’t warrant the political effort and attention required to get it done.

Guess what? They’re right (yes, the politicians know their own business)! Doha has run out of demand.

Forget what the economic modellers say about the big potential of a Doha deal. The problem is not that we can’t imagine big returns from a deal, but that traders and governments have to make choices (see the Sidebar) about how to improve trade returns and, right now, a trade agreement like Doha is not the most attractive option . That’s especially true in agricultural markets, but it’s also true in services markets.

“But where’s the beef?”

The “surprising” lack of government interest in Doha has a pretty simple explanation: commercial demand for a big, complex, one-size-fits-all, multi-sector agreement is just not there. Traders are not hammering on Ministers’ doors; they’re just not that worried about market access barriers (and probably weren’t that worried in 2001 when the talks were launched).

This picture (from the IMF) partly explains why. The essential, but hardest, part of the Doha negotiations is about agricultural trade. Trade barriers are not, however, the biggest problem that importers and exporters face in agricultural markets. Prices on world markets reached record levels in the past decade and, even as the effects of the 2008-9 economic recession linger, prices are rebounding. Sure there is still a lot of room to cut barriers, and; sure production subsidies in the rich countries are still completely crazy. But, when world market prices are bullish, import-dependent countries are don’t jack up barriers and export-dependent producers are worried most about meeting demand. A trade agreement to open markets is not even on their list, right now.

Nor is there much commercial enthusiasm for a services deal. Like agricultural markets, services markets are already much more open than the WTO Members’ commitments show. As in agriculture, you’d have to take-on big additional commitments before you started to cut into actual protection, especially in developing countries (the chart showing the gap between actual policies and what’s on offer in Doha is quoted in the World Bank modellers’ paper referenced above).

USGoodsServicesImports2009_tmb.png

In fact, in services, many markets are open without commitment but there’s no great anxiety that governments are going to change their minds in future and that’s because… Services trade has proved very resilient during the recent global recession (the chart showing USA 2009 services imports and exports is from this paper, also by World Bank researchers); some key services trades grew while goods trade shrunk, and that’s because… Importing services by outsourcing your back-office procedures or opening the mobile phone market or allowing foreign retailers or engineers to compete in your market keeps costs down; precisely what firms need when times are hard.

Yes, but…

Yes…but aren’t there other reasons for a trade agreement to open markets? Even if traders don’t care right now? What about the billions of poor people who are only consumers of agriculture? Wouldn’t they be better-off with lower barriers?

Yes, very likely. But the ugly mess of the draft Doha agreement is not the way to do that. The crucial market-access parts of the draft have been corrupted by the otherwise-noble idea of giving trade preferences to low-income countries. The proposed agreement actually preserves protection in most low-income countries. That’s not going to help the poor.

Yes…but what about an agreement to end the subsidies to rich-country farmers? Wouldn’t that help the poor?

Yes it would; although not as much as you might think (90% of what they could gain from an agreement would come from lower trade barriers) and not as much as it would help budget balances in rich countries. But, again, the draft Doha agreement doesn’t do that; it doesn’t really make any changes to the plans of the main susbsidisers, the USA and the EU.

Yes…but is Doha really dead forever? Don’t you agree it could come back if markets turn sour in a ‘double dip’ recession, or Obama wins a second term, or…?

Completely. Nothing is forever…except maybe The King.

Sidebar: why trade agreements?

The choice that firms and governments make about market opening strategies is implicit and even unconscious; there’s no committee or public enquiry. We have to turn to political theory for a moment to understand it. There are two enduring reasons to choose trade agreements as a means of cutting protection. One is often called the ‘terms-of-trade’ argument and the other, the ‘political economy’ argument.

The terms-of-trade motive operates when trade-exposed producers in an economy—especially a medium-sized or small economy with little or no leverage on world prices—decide that their trade accounts would look a lot better (bigger revenue, lower input costs) if they could induce potential customers to cut their import barriers. They understand that one way to do this is to offer to cut import barriers at home. This idea for a reciprocal bargain is the commercial engine of trade negotiation. Absent an economic crisis of some kind, commercial demand is necessary for every trade agreement; but it’s not sufficient.

Governments are also driven by the second calculation. Ministers know, or learn soon enough, that the economy will be more productive and grow faster if protected local firm are shaken up by a bit of imported commercial competition. But dealing with the opposition of the protected sectors to this idea is usually a big problem and making the changes stick can be even harder. Trade agreements help governments deal with this political economy problem by putting the protection changes in the framework of an “international obligation”. The agreements give governments some leverage on politically powerful interest groups that want to cling to the status quo.

The two moti ves for agreements are linked; without strong commercial demand for agreements (the terms-of-trade motive)—or, perhaps, an economic crisis—governments can always find more comfortable ways to spend their time in office than bargaining about market access on two fronts (at home and abroad).

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