Business as Usual? The G20 Communiqué and Global Trade
By Joe Guinan
With the world on the cusp of a serious recession, last weekend’s G20 summit of the leaders of the richest industrial and emerging economies pledged to maintain an open global economy in the face of the economic downturn. In addition to a raft of statements responding to the financial crisis, the leaders’ 47-point action plan included a pledge to keep free trade and to liberalize it further through a renewed effort to conclude the Doha Round of multilateral negotiations at the World Trade Organization (WTO).
Together, the G20 represents 85 percent of the world economy. In the build up to the summit, newspapers were full of comparisons to the Wall Street Crash of 1929 and the Great Depression, and political leaders were reminded of the hard lessons of the 1930s, when the “beggar thy neighbor” policies adopted by the major trading powers led to a collapse of global trade. In 1930, even as the League of Nations was attempting to negotiate a tariff truce in Geneva, the U.S. Congress passed the infamous Smoot-Hawley Tariff Act, which was greeted as “a virtual declaration of economic war on the rest of the world” and responded to in kind by America’s trading partners. A downward spiral began as countries sought to export their economic difficulties to each other, stifling trade and hampering economic recovery. Financial crises come and go, but once the business networks around trade are destroyed they can take a long time to rebuild.
As the negative effects of the current financial crisis bleed into the real economy, there is a perceived danger of a resort to protectionist trade policies, as governments are tempted to shield struggling domestic producers from foreign competition or seek much-needed revenue by raising tariffs. In the current global context, even a modest return to protectionism could have serious economic consequences. In a unique study released on the eve of the G20 summit, noted trade modelers Antoine Bouët and David Laborde of the International Food Policy Research Institute (IFPRI) have shown that more than $1 trillion worth of trade—7.7 percent of total world trade in goods—is potentially at risk, living on borrowed time in the gap between bound and applied tariff rates. Even if we assume that countries would only impose very limited new trade restrictions, raising tariffs no further than the highest applied levels of the past decade, this still results in a contraction of world trade by 3.2 percent.
To guard against all this, the G20 leaders in their communiqué made two commitments on trade. First, they pledged that:
within the next 12 months, we will refrain from raising new barriers to investment or to trade in goods and services, imposing new export restrictions, or implementing World Trade Organization (WTO) inconsistent measures to stimulate exports.
Second, they agreed to:
strive to reach agreement this year on modalities that leads to a successful conclusion to the WTO’s Doha Development Agenda with an ambitious and balanced outcome.
Both of these statements are laudable, and have been greeted as such. The problem is that in political terms the first commitment, essentially a “standstill” agreement, may actually work against the second, a successful conclusion of the Doha Round. To understand why, it is necessary to go back to the dynamics of the WTO negotiations.
Trade ministers meeting in Geneva this past July failed once again to reach agreement on elusive modalities in agriculture and manufactured products, without which the negotiations cannot move ahead. While the proximate cause for the July collapse was a stand-off between India and the United States over the arcane details of the so-called Special Safeguard Mechanism, it is becoming ever clearer that the U.S. business community has been a significant obstacle behind the scenes. Normally a reliable source of support for trade agreements, influential business groups like the National Association of Manufacturers have adopted a high-risk strategy that no Doha deal at all is better than a Doha deal that falls short of their demands. Back in July, they besieged the United States Trade Representative with calls to walk away from the package that was on the table in Geneva.
The changed context of a full-blown financial crisis and worsening global economic outlook should have given pause to these business groups. Even small increases in tariffs can have a major impact on globalized companies with distributed supply chains making products from components that are sourced in multiple countries and have to cross multiple borders. One argument for agreeing the Doha Round package as it stands is that by making deep cuts in tariff bindings it provides a global insurance policy against protectionism—as renowned trade economist Patrick Messerlin has been arguing convincingly, and as European Trade Commissioner Catherine Ashton repeated in the run up to the summit.
The problem with the commitment not to raise trade barriers in the G20 communiqué is that, in the logic of WTO negotiations, some countries have just given away something for nothing—and at a time when the market value of that ‘something’ (certainty, predictability, a global insurance policy against protectionism) has just risen exponentially. The United States, like the European Union and a small group of other WTO members, has given up nothing by making this commitment. U.S. applied tariffs are either at or very close to their bound levels. The systemic risk to global trade stems from the large gap between bound and applied tariff rates—the so-called ‘binding overhang’ or ‘tariff water’—that is available to a host of developing and emerging economies. Emerging economies bear all the ‘costs’ of the G20 commitment not to raise trade barriers, because they are the ones surrendering their policy space. With recession in the United States and European Union, these countries will also be providing close to 100% of global economic growth next year. The U.S. business community just got an insurance policy against protectionism for free, without having to pay anything for it at the WTO.
To be clear, the fact that the emerging economies set their faces against protectionism is to be applauded. By taking the high road, they have recognized the truth that, by putting up trade barriers, they would in fact only be hurting their own interests—as was the case for many of the countries who rushed to impose export bans in response to the food crisis earlier this year. Trade is a positive-sum game, and the benefits it confers on countries (better prices, lower interest rates, improvements in competitiveness and productivity) come not just from enhanced export opportunities but substantially from their own domestic liberalization. In the argot of trade economists, it is the WYGIWYG principle: “What You Get Is What You Give.”
As an institution, the WTO generally helps to advance this positive-sum view of trade. Unfortunately, however, multilateral trade talks are still conducted along the lines of a mercantilist bargaining logic in which opening up to trading partners is about making ‘concessions.’ That logic is pretty much at the end of its useful life. But for now it is the only negotiating technology we have at the WTO. The fact that leaders of emerging economies just gave up an important bargaining chip at the G20 summit in Washington could be problematic for moving forward at the WTO. It would be a sad outcome if this act of leadership were simply pocketed by the U.S. business lobby, allowing them to continue their mercantilist foot-dragging.
In fulfilling the mandate their heads of state gave to them to complete the Doha Round, trade negotiators from emerging economies would do well to point out that the G20 “standstill” guarantee is a fragile and temporary political commitment, and is in no way legally binding. If the business community in the United States wants real insurance against protectionism, then they will have to buy an insurance policy. And right now, the only place to get such a policy is at the WTO—through the successful completion of the Doha Round.
A joint initiative of The German Marshall Fund of the United States (GMF) and the International Food & Agriculture Trade Policy Council (IPC), this blog collaboration aims to provide insight on concluding the Doha Round and pursuing trade liberalization in the future.
Concluding the Doha Development Round: A Global Response to a Global Crisis
By Nicola Lightner, Program Officer, The German Marshall Fund
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When the subprime crisis started to turn into a full-blown financial crisis for the United States, German Finance Minister Peer Steinbrück claimed that the crisis was principally a U.S. problem and that Germany’s banking system was robust enough to cope with potential losses. Unfortunately, Mr. Steinbrück was wrong and the financial crisis shortly after swept across Europe and now even has global implications with banks all over the world unable to service foreign debt and stock markets reeling due to fear of a worldwide recession.
After attempts aimed at stemming the failure of domestic banks through unilateral actions failed to calm fears of investors, restore trust into the banking system, and end the credit freeze, leaders of the major industrial countries – including U.S. President Bush and French President Sarkozy – soon claimed that a global crisis needed a global response. And following the recent annual IMF meetings, U.S. and EU leaders indeed announced coordinated policy responses, including the partial nationalization of banks and the guarantee of inter-bank lending until the end of next year.
In addition to coordinating policy responses across national borders, there have also been a number of calls from policy makers to completely overhaul the Bretton Woods institutions; institutions created in 1945 with the goal to establish rules for commercial and financial relations among the world’s major industrial countries. At the beginning of the 21st century, these institutions don’t seem to be equipped anymore to effectively address new economic challenges, deal with increasingly complex financial structures, and appropriately integrate new powers like India and China into the international architecture. While reforming the Bretton Woods organizations should therefore indeed be a policy priority for governments in the United States and Europe, it will most likely take months if not years to develop concrete policy proposal and finally implement reform – too long of a time to stabilize economic cross-border activities and to restore citizens’ trust into the international economy.
But in a commentary in the Financial Times last Friday, Stuart Eizenstat, former U.S. Ambassador to the EU, alluded to a low hanging fruit that would not only provide a much needed stimulus to the global economy but also provide some continuity in these times of turmoil. The low hanging fruit Ambassador Eizenstat is talking about is the conclusion of the Doha Development Round.
As Joe Guinan, senior program officer, and Courtney Phillips-Youman, program associate at the German Marshall Fund, point out in a GMF opinion piece, economic modelers including Yvan Decreux and Lionel Fontagné from the Centre d’Etudes Prospectives et d’Informations Internationales estimate the economic gains of the Doha Round to be at least $43 billion a year, or $73 billion if a modest liberalization of services is included. While this doesn’t seem to be much compared to a seven hundred billion U.S. bailout package, these are also not trivial numbers. And as Guinan and Phillips-Youman stress, they are conservative estimates because they don’t include the full benefits of services liberalization, an agreement on trade facilitation, additional gains from the Aid for Trade initiative, and other dynamic gains that cannot be captured by trade models. But maybe more important than the financial gains to be had from a Doha agreement would be the significant cuts made to bound tariff rates. Renowned trade economist Patrick Messerlin only recently pointed out that a huge share of current trade is living on borrowed time due to the gap between bound and applied tariffs. Now, without an agreement, average tariffs across a range of the largest economies in the WTO could surge at any time by up to three-and-a-half times. Quoting Guinan and Phillips-Youman, “many foolhardy observers are eager to dismiss such a scenario as unlikely.” But one only has to contemplate the reactions of governments to the recent food crisis, with almost 30 countries rushing to impose export bans, to understand how quickly policy makers grasp at economically unviable solutions in order to appease domestic constituencies.
As many have pointed out, the World Trade Organization is not perfect. Many systemic problems – including the WTO’s mandates for unanimity and the concept of the single undertaking – have hindered the conclusion of Doha Round for years. And there is no question that this institution – similar to the World Bank, IMF, and the UN – needs reform in order to adjust to changing economic and political realities of the 21st century. But given how close negotiators were in July to reaching an agreement, policy makers in both industrial, emerging, and developing countries should show real leadership now in this time of economic uncertainty, overcome the last obstacles to a Doha deal, and sign-off on a broad agreement before the end of the year: that indeed would be a global response to a global crisis.
A joint initiative of The German Marshall Fund of the United States (GMF) and the International Food & Agriculture Trade Policy Council (IPC), this blog collaboration aims to provide insight on concluding the Doha Round and pursuing trade liberalization in the future.
Trade Liberalization in a Post-Doha Environment
By Carlos Perez del Castillo
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History tells us that multilateral trade rounds never die, and Doha is no exception. If the negotiations cannot be concluded this year, they will enter a period of hibernation, and things will pick up again when conditions are ripe to engage in a meaningful negotiation (probably during the second half of 2009 at the earliest). We will have to wait for the U.S. election, the nomination of a new USTR, and trade promotion authority from Congress. India’s upcoming elections and changes in the EU presidency will also delay negotiations.
Despite the slow progress, there are a number of good reasons to continue to support a successful conclusion of the Round. First, a strong multilateral trading system is essential for world economic growth, stable international trade, continuing agricultural reform and above all, for defending the interests of developing countries. Second, there are issues that can only be solved in a multilateral context; particularly given the agriculture industry’s challenge of increasing production with limited resources in order to meet growing demand for food, feed and fuel.
Looking ahead, a number of options exist for promoting trade liberalization in a post-Doha environment.
Sectoral Negotiations
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When the WTO was created, the idea was for the organization to become a permanent negotiating forum that would successively tackle issues of interest to the Membership. It was to start with the agreements on agriculture and services reached in the Uruguay Round. The recourse to new Rounds of trade negotiations was, at least temporarily, shelved. However, the EU soon made it clear that if there was to be a high level of ambition in the mandated negotiations, particularly in agriculture, Members would have to agree to launch a new Round that would incorporate their interests: industrial products, intellectual property, rules, environmental goods and the so called Singapore issues, namely, investment, competition, government procurement and trade facilitation. This finally occurred in Doha in September 2001.
In light of the difficulties experienced since the launching of the Round, including the recent breakdown, it would be desirable—at least once the Doha Round is completed—to return to the original idea of sectoral negotiations. Reform of trade-distorting policies requires that negotiations in agriculture continue after Doha. In the absence of a new trade round, the only way to proceed would be through the launching, within the WTO, of sectoral negotiations following the implementation phase of the obligations agreed in the Doha Round.
In order to be successful, sectoral approaches should ensure the participation of all Members, regardless of whether they have offensive or defensive concerns on the subjects under negotiation. This is particularly important with regard to agriculture in view of the protectionist and defensive attitudes of so many Members in the WTO (both developed and developing). I am afraid that unless one can have all members on board, one will not be able to properly address important issues such as subsidies, particularly domestic support. Improved market access can more easily be obtained through other means such as bilateral, regional or preferential trade agreements.
Consensus among members on how to achieve the long-term reform envisaged in the Agreement on Agriculture is a prerequisite. For example, priority could be given to the elimination of all distorting forms of domestic support (amber box, blue box and de minimis). A possible approach could be to first eliminate the amber box, say over a period of 8 to 10 years, then proceed with the elimination of the blue box, and so on. Similarly, we could agree on the level of reduction and eventual elimination of tariffs (and expansion until then of TRQ´s)
In order to monitor implementation progress of such agreements, we could have special sessions of the Agriculture Committee or eventually the General Council every two years. Alternatively, progress and compliance with the agreed objectives could be analyzed during sessions of the Trade Policy Review, which should be strengthened for that purpose. If countries are not complying or violating their obligations, a role could be envisaged for the Dispute Settlement Body.
Plurilateral Negotiations
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I am not convinced that plurilateral approaches are a convenient way out, although I acknowledge that they would be easier to implement. Plurilateral approaches create different categories of Members, undermine even further the multilateral nature of the WTO, and are likely to discriminate against the interests of developing countries. They could also further marginalize the poorest countries in discussions on major new issues of the international trade agenda.
Preferential Trade Agreements
Regional and bilateral trade agreements may well be the main vehicle for trade liberalization in the foreseeable future. In agriculture, these agreements can provide improved market access for participating countries. They may also improve the situation with regard to some non-tariff barriers such as sanitary and phytosanitary regulations. However, these agreements will not be able to effectively address domestic support issues.
I believe that the proliferation of preferential agreements—with different product coverage, rules of origin, private standards, exceptions, and measures that are not necessarily in line with multilaterally agreed rules and disciplines—will become overly complex and costly for private enterprises involved in international trade. Moreover, trade agreements between major trading partners are likely to involve considerable trade diversion, enhancing tensions, disputes, retaliation, and a return to protectionist practices. These agreements may also further exclude developing countries from the international trading system.
Carlos Perez del Castillo is a member of the International Food & Agricultural Trade Policy Council (IPC) and an independent consultant. He is the former permanent representative of Uruguay to the WTO and was chairman of the WTO General Council in 2003 and 2004.
A joint initiative of The German Marshall Fund of the United States (GMF) and the International Food & Agriculture Trade Policy Council (IPC), this blog collaboration aims to provide insight on concluding the Doha Round and pursuing trade liberalization in the future.
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Thank you for visiting Trading Ideas, a blog of the International Food & Agricultural Trade Policy Council (IPC), a research and advocacy organization that works to promote a more open and equitable global food system. Trading Ideas will feature comments and opinions of IPC experts and staff on agricultural trade issues that affect the world trading system, and welcomes input from readers.
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