WTO: the true cost of a non agreement edit

May 30, 2006

For many commentators, the puzzling issue is no longer " how to save the Doha Development Round ", but " should we save the Round ? ". The departure of Rob Portman, the apparently irreconcilable positions, as well as the increasing concerns with regards to the usefulness of these negotiations, fuel a growing pessimism. Two options can be contemplated at this stage, after having missed the April deadline. The first option is to take advantage of the pressure associated with the forthcoming elections in Brazil, the U.S. or France, in order to conclude in emergency; the alternative is to miss this target, and to start a new process on the basis of new premises; the latter option would hardly put at risk a buoyant world trade. There is however a risk associated to such postponement recently suggested by Oxfam. There is a high probability of getting stuck in the sand, the delegations entering into a trench warfare where every lost centimetre is perceived as a major defeat.

-->The controversy relies firstly on quantitative estimates of the impact of a complete liberalisation of world trade (zero tariffs, zero internal support); this is a useful hypothesis when one aims at comparing alternative models of the world economy. Such estimates may however hardly be helpful for the policy maker: indeed, the USD 168 bn welfare gains exhibited by the Carnegie Endowment for International Peace model do not match the USD 232 bn of the World Bank; but this is the outcome of having introduced more rigidities in the former than in the latter model. In contrast, it is worth estimating the potential impact of an agreement in line with the expected outcome of the negotiation, which is not free trade for good reasons. How the gains will be shared among Nations and individuals is also a key issue, and this is exactly the second component of the controversy. There is increasing evidence that the liberalisation of trade in goods contemplated in this «Development Round» will translate into limited and uneven gains for developing countries. The erosion of preferences conceded in the past is here a key concern, since the Least Developed Countries will be adversely affected.

In order to shed light on these challenging issues, let us estimate how the various items of the negotiation interplay, without sticking to the actual outcome of the negotiations which remains a moving target.

As regards the so-called «NAMA» - the negotiations on market access for manufactured products - a Swiss formula based on a coefficient of 10 is implemented. This formula compresses the highest tariffs, such as the highest tariffs in industry will be 10% afterwards. This formula has been chosen, but the coefficient is still a matter of negotiation; we leave aside by stake of simplicity the possibility to adopt a more accommodating coefficient for developing economies. A 36% tariff reduction in agriculture is implemented, without exceptions. This simple approach gives results similar to the more complex tiered-formula allowing for sensitive products that will be present in the final agreement. Export subsidies in agriculture are completely eliminated, taking into account the 2013 deadline agreed in Hong Kong in December 2005. Domestic farm support is halved in all scenarios; we do consider here that the recent move of the European Union, characterised by a decoupling of internal support launched in January 2006 (according to the June 2003 agreement) is part of the global deal at stake in Geneva. We finally consider that the developing economies of the so-called «G90» will not be requested to lower their tariff barriers, nor to cut their eventual domestic support.

What would be the gains to be expected for the world economy of such compromise? We consider the 2020 horizon, when all adjustments have taken place. Roughly one quarter of the gains associated with the move towards a hypothetical situation of free trade would be reaped, according to the model of the CEPII (Paris) on which this exercise is based: this is a check of USD 67 bn (of 2005), corresponding to the GDP of a country such as the Peru. This sheds light on the first component of the controversy: there is pie to be shared, even if the size of it could be doubled with a more ambitious outcome (a Swiss formula with coefficients of 5 for the North and 8 for the South, and a tariff cut of respectively 70% and 50% in agriculture). There is clearly food for thought for the future Rounds!

How would the pie be shared among countries? In absolute rather than in percentage terms, the European Union is the big winner: we will collectively secure one third of the gains, amounting to USD 23 bn under our assumptions. Would the Round fail, Japan would lose 11 bn, but the U.S. 3 bn only. What about developing economies? For the ASEAN as a whole, 5 bn are at stake, for India 2 bn, for South Africa 1 bn. These figures are low in absolute terms but much larger when compared to the GDP of these countries: the gain for India would be twice as large as the one of the Europeans, and respectively three times as large for ASEAN. This is not a general outcome unfortunately, since Sub-Saharan Africa will lose USD 260 millions to an agreement having the kind of characteristics assumed here. Given the precision of such models, the operational conclusion is that these countries will not record any gain, and this issue has of course to be addressed: too many studies have concluded in the past that the developing world would without exception gain to a liberalisation of world trade.

Convincing arguments should be considered, notwithstanding this deceiving result. First, alleviating poverty might either be achieved by boosting the GDP of the poorest countries, or by alleviating poverty in rural areas of intermediate income developing economies. Second, the more ambitious outcome of the negotiations referred to above (a Swiss formula with coefficients of 8 and 5, etc.) would wipe out these losses. Third, and this is new in the debate, the Round is not limited to trade in goods: liberalising trade in services, as well as facilitating trade, are also at stake. And this is where the largest gains are certainly to be expected for the developing world.

Cutting one quarter of the obstacles to trade in services, world-wide, would more than double the gains accruing to the developing world, in particular in Asia. But once again, the difficulty is here with Sub-Saharan Africa, which would hardly take advantage of such move. Accordingly, the potential gains are elsewhere for this very region of the world economy, as already discussed on Telos. Why these countries miss the gains of a liberalisation of world trade is clear-cut: these countries face tremendous difficulties to accede to the global commercial networks. Trade facilitation, driving a reduction in transaction costs, is here the key to success: cancelling additional trade costs faced by Sub-Saharan countries over a decade would be equivalent to a doubling of official development aid to these countries. Even if the huge associated investments remain to be financed, the magnitude of such gains shows us the way.