Sunday, November 2, 2008

Focus on the current WTO negotiations

By Peter Sutherland, in The Banker, 06 October, 2008

Current WTO negotiations are encouraging a negative trend towards bilateralism and regionalism.

The World Trade Organisation’s (WTO) Doha Round of trade negotiations, launched seven years ago, will not now conclude before the end of 2009 and possibly sometime afterwards. Remarkable efforts have been made recently to secure at least the outline of a deal opening markets to agricultural and industrial goods and services and winding back farm subsidies. Those efforts are continuing in the hope that with major political events next year in some of the most powerful WTO member countries, the work and successes of the past years will not be wholly lost.

At a time when the global economy is fragile, the financial system in difficulty and growth prospects unspectacular outside the big emerging economies, a confidence boost from trade liberalisation would have been welcome. We will likely have to do without it. At the same time, the sorry state of the WTO negotiations argues not for disengagement and acquiescence. On the contrary, we are at one of those points where some profound analysis of precisely what has been negotiated and why is in order. So too is a searching debate on what is to be done in the future to ensure the WTO delivers more convincingly.

As always, beauty is in the eye of the beholder. So, what one WTO member – or even one industry within one WTO member – sees as a bankable asset among what can currently be identified as likely Doha results, others see as worthless or even an outright danger to the system.

On the positive side of the ledger, the eventual elimination of unfair competition in international agricultural markets will benefit almost everyone. Putting the lid on much domestic farm support is a plus even if what is proposed will not require the big players to take much, if any, pain. Outside of agriculture, the jewel in the crown may well turn out to be a WTO agreement to help its members adopt practical measures facilitating the passage of goods at ports and borders. Ultimately, enforceable commitments in this area will probably reap more economic and competitiveness benefits than anything else in the round.

Muddied waters

However, market access was meant to be the name of the game – and rightly so after the last global trade negotiation (the Uruguay Round between 1986 and 1994) focused largely on rule-making and institutional change in the trading system. And it is here that the most troublesome questions are to be asked. On the surface is a clean, formulaic approach that cuts higher tariffs more deeply than lower duties. That was the starting point and, in principle, it is a beautiful piece of work. However, the purity of the lines is quickly spoiled by exceptional treatment to ‘help’ developing countries. Here we hit the big fault line in the ‘development agenda’. The WTO was founded on the notion that liberalising trade and economies tends to help them grow and develop. It is a generally unchallenged economic principle and, more importantly, an approach that has consistently been seen to work.

The development mandate of the Doha Round was assumed to signal that developing countries would be spared obligations to open their markets in any serious manner; it was the already successful Organisation for Economic Co-operation and Development (OECD) countries that would do so. It is the richest countries of the world which, under present draft proposals, will bring their industrial tariffs down to a maximum of 8%. Developing countries will generally make lower cuts; in their most sensitive sectors they may make lower cuts still and for some products they will make no cuts at all. Where they do reduce tariffs – and it is from the officially ‘bound’ rates in the WTO, not the often much lower rates that they actually apply day to day – they have at least eight years in which to do so, and some recently acceded members of the WTO, such as China, will have even longer, as many as 13 years.

Over and above these especially soft terms, there is plenty of additional ‘favourable’ treatment, including, in agriculture, the special safeguards mechanism on the detail of which the US and India clashed and the July ministerial meeting supposedly failed. Add to that special let-outs for several dozen ‘small and vulnerable’ economies, others for South Africa and the Southern African Customs Union members, yet more for regional trade agreements such as the Southern Common Market (Mercosur), and specifically tailored terms for Bolivia and probably Venezuela, and you have a completely fractured ‘multilateral trading system’.

Precious little strategic thought has gone into the long-term implications of these various mechanisms. The issue is not that poor developing countries sometimes find it difficult to reform and adjust – that is accepted and allowed for in the draft texts. The issue is rather what we are saying to China, India, Brazil and some of the lesser emerging economies. Well before any conceivable deal on Doha can be fully implemented, these vast commercial powerhouses will probably be outstripping Europe and the US on many economic and perhaps social measures. We are freezing in another easy ride just at the time when the OECD countries and, more importantly, dozens of struggling middle-ranking developing nations should be seeing significant new and secure market openings from large potential markets. We are also inviting a yet stronger trend to bilateralism and regionalism than is already the case.

What to do? In the short term, it may be best to accept that in the current circumstances there will be no quick and acceptable deal. Wait until there is a new US administration place – with perhaps an easier relationship with Congress. The interval should be used to take careful stock of what is now on the table: if it needs to be adjusted and even substantially renegotiated, then so be it. We are making commitments that will last a long time; there is real danger in going for a fast agreement at any cost.

Self reflection

At the same time the WTO members should think about the institution and how it works. I chaired a group of experts some years back to look at precisely these questions. At the time, WTO officials felt themselves too busy concluding the Doha Round to take the proposals seriously. Four years have elapsed; the round is not concluded and the shortcomings of the institution are still evident.

For one thing, there needs to be serious reconsideration of how to make the development dimension of the WTO concrete in a consistent and effective manner. For another, we will have to ask whether big comprehensive trade rounds every 15 years or so are the best approach to securing multilateral liberalisation and up-to-date trade rules.

July made it rather clear that there is plenty of scope to negotiate services liberalisation in its own right. Many members signalled their willingness to improve openness to cross-border banking transactions, reduce or remove foreign equity restrictions on commercial presence and lessen restrictions on bank branching. Positive prospective moves were indicated in sub-sectors such as asset management, securities and underwriting, leasing and advisory services. Important signals were also received on insurance services.

This promise in services is held back by the blockages elsewhere. Moreover, good financial services are a fundamental for development; waiting for the world to get its act together on obscure instruments governing trade in agriculture before moving on to services is a sad betrayal of the imperatives of poverty alleviation and global growth.

There is no shortage of ideas on how the WTO can efficiently deliver growth and development-friendly results. We need to learn the lessons of the Doha Round and move the system forward.

Peter Sutherland was director-general of the Agreement on Tariffs and Trade (GATT) between 1993 and 1995. He brought the Uruguay Round to a close which led to the creation of the WTO in 1995.