Take a “Time Out on Trade Deals”: no basis for renewed Doha negotiations

Negotiators continue to work desperately to achieve a breakthrough in the World Trade Organization’s Doha Round. Their goal is to get an agreement by the end of 2008. Developing countries should pull the plug on this moribund round until rich countries can agree to a new framework that lives up to Doha’s promise to be a “development round” that favors poorer countries.As rich country leaders try to rally negotiators for yet another “make-or-break” deadline in what has become the most imminent agreement in history, developing country negotiators should remember why the proposals on the table deserve to be sent back to the drawing board. Here, we review the economic projections, from the World Bank and other institutions, showing how limited the gains are for most developing countries and how high the hidden costs of an agreement could be. With projected gains of less than 0.2%, poverty reduction of just 2.5 million people (less than 1%), tariff losses of at least $63 billion, and projected declines in the relative value of exports, developing countries have little to gain from rushing to conclude Doha.

Given the proliferation of lofty rhetoric about Doha and poverty reduction, the public can be excused for thinking this agreement is all about poverty and development. The World Bank modeled the gains from a “likely” Doha deal. Under this scenario (which is more ambitious than the proposals now on the table), global gains projected for 2015 are just $96 billion, with only $16 billion going to the developing world. Other projections of Doha have come up with different estimates, but all are of the same order of magnitude.

Of the benefits projected for developing countries, only a few see most of the gains. According to the World Bank, half of all benefits to developing countries are expected to flow to just eight countries: Argentina, Brazil (which stands to receive 23 percent of the developing country benefit), China, India, Mexico, Thailand, Turkey, and Vietnam.

Some researchers have argued that these numbers are underestimates, in part because they don’t include liberalization in services trade. But previous Bank modeling suggests this would add very little for developing countries. The “likely scenario” in these models of partial liberalization -50 percent reduction in services trade barriers- project gains of just $6.9 billion for the developing world, with rich countries getting 71 percent of the total benefits. Adding liberalization of goods and services trade together, the projected benefits for developing countries amounts to $28.7 billion under a likely Doha scenario.

If the projected gains are smaller than advertised, the losses are mostly hidden in such modeling exercises. They are considerable.

Total tariff losses for developing countries under the “non-agricultural market access” -or manufactured goods- aspect of the negotiations could be $63.4 billion, or almost four times the level of benefits. For many developing countries, slashing tariffs will not only restrict the ability of these countries to foster new industries so that they may integrate into the world economy, but it will also limit government funds to support such infant industries and to maintain social programs for the poor. A majority of developing countries rely on tariffs for more than one-quarter of their tax revenue. For smaller nations with little diversification in their economies, tariff revenues provide the core of government budgets. According to the Geneva-based South Centre, tariffs account for more than 40 percent of all tax revenue in the Dominican Republic, Guinea, Madagascar, Sierra Leone, Swaziland, and Uganda.

A likely deal will also contribute to declining terms of trade for developing countries, the ratio of export to import prices. This measure is considered a crucial estimate of the extent to which a developing country is moving up the value chain in the global economy, away from primary production and into manufacturing or knowledge-based economic activities. Since the First World War many developing countries saw their terms of trade deteriorate. Declining terms of trade can accentuate balance of payments problems in countries and make the need to diversify into other export products ever more urgent.

Under a likely deal world prices for agricultural products increase and manufacturing prices decrease slightly or remain unchanged. According to the Carnegie Endowment for International Peace these price changes negatively affect the terms of trade for developing countries. The report explains that for many countries the rise in world prices for imported food and agricultural goods is countered with a decline in world prices for their light manufactured exports, such as apparel. This partly explains the welfare losses for Bangladesh, East Africa, and the rest of Sub-Saharan Africa.

To diversify, developing countries often look at the example of the U.S. and European economies, and more recently, the economies of South Korea and China. These countries diversified away from primary commodities and light manufacturing while slowly opening their economies. They moved into the world marketplace strategically, protecting their major exporting industries in order to nurture them to compete in world markets.

China’s computer maker, Lenovo, is an example. The company was created by the government and protected for years; it recently purchased IBM’s PC division and is now a world leader in high-technology electronics. Acer Computer from Taiwan and Hyundai and Kia Motors from South Korea followed similar long-range development paths.

Further cuts in manufacturing tariffs and services regulation in developing countries, which are under consideration in the current Doha proposals, will make it more difficult for developing countries to replicate these efforts. This loss of so-called “policy space” is why many developing countries see current rich-country proposals as tantamount to saying: “do as we say, not as we do.”

A New Approach

The poverty of the current negotiations suggests that it is the moment to take a “time-out” from trade negotiations. During the respite, developed countries should demonstrate their commitment to making the world trading system more fit for development. The following are four steps toward that end.

1.Implement prior WTO rulings – The United States and Europe should agree to honor WTO rulings that have found their subsidies for cotton and sugar to be in violation of existing trade rules under the prior agreement. This would give a tangible boost to farmers in West Africa and Latin America and send a strong signal to developing countries that developed nations are willing to honor the rules of the WTO.

2.Address commodities issues – Rich countries should take seriously the proposal by many African nations to tame global businesses that demand unfair prices for resources used in farm production and reap billions in profits on the sale of final products. African nations have made numerous proposals during the round to this end, specifically to make room for international supply management schemes to raise prices and to curb the oligopolistic behavior of large foreign commodity firms. If the Doha Round is to foster development, such proposals should be at the center of the discussion.

3.Recognize commitment to Special and Differentiated Treatment – Negotiators should recognize the Doha principle of “special and differentiated treatment” for poorer nations. Developed nations should roll back patent laws that impede poorer nations from manufacturing cheaper generic drugs. They should also allow poorer countries to exempt staples of their local economies such as corn, rice, and wheat from deregulation, as part of Doha’s stated commitment to protect “Special Products” important for rural development, food security, and rural livelihoods.

4.Make up tariff losses and adjustment costs – International institutions such as the International Monetary Fund (IMF) and World Bank should step in and help developing nations cover the costs of adjustment such as tariff losses and job retraining until the proper policies can be established. The IMF’s Trade Integration Mechanism is already in place for such purposes, but it leaves little room for incorporating costs of adjustment and the Fund is often criticized for tying further reforms to adjustment policies.

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