Given the deadlock of the Doha Round, most of the commentators pointed to the risks of this failure. Contrary to this standpoint, the article sees the abandon of negotiations rather as a chance for escape from a system that did not deliver the outcomes needed. What the future shall bring is first a better equilibrium between trade and financial markets and second a just treatment of developing countries’ interests. The article ends with some propositions in that sense.
Face à l’échec du cercle Doha, la plupart des commentateurs soulignaient les risques qui en découleraient. Contrairement à cette perception de la situation, l’article envisage cet échec plutôt comme sortie heureuse d’un système qui n’arrivait pas à satisfaire aux besoins de tous ses participants. Ce sur quoi il faut désormais mettre l’accent, c’est premièrement l’élaboration d’un meilleur équilibre entre le commerce et les marchés financiers et deuxièmement une juste appréciation des intérêts des pays développés d‘une part et de ceux des pays en développement d’autre part. L’article se termine avec plusieurs propositions allant dans cette direction.
Angesichts des Stillstands der Doha-Runde haben die meisten Kommentatoren auf die Gefahren eines Scheiterns der Verhandlungen hingewiesen. Im Gegensatz dazu wird in dem vorliegenden Aufsatz die Auffassung vertreten, dass hierin eine Chance zur Überwindung eines Systems liegt, das nicht die erforderlichen Lösungen lieferte. Was dringend benötigt wird ist zum einen eine bessere Balance zwischen Handel und Finanzmärkten, zum anderen eine faire Berücksichtigung der Interessen von Entwicklungsländern. Das Ende des Aufsatzes entwickelt einige in diese Richtung gehende Vorschläge.
1 Prospects for a Deal
Pascal Lamy announced in early February 2007 that after discreet meetings of key trade ministers at Davos, all negotiating groups of the Doha round were back at work. In public, WTO officials and negotiators are voicing optimism for the first time in a long time that a multilateral trade deal along the lines of the original Doha agenda is now within reach.
The public optimism is based on the belief that the EU and the G20 group of developing countries can accept a rather modest market opening deal and call it success. It is reinforced by the idea that President Bush, Prime Minister Blair, and President Chirac are desperately shopping for “legacies”, for which a new world trade deal would do nicely. However, in private the optimism is much more restrained. The US sticks to the line that ‘no deal is better than a bad deal’; given that the US is the only major negotiating party to stake this position, the US is key to reaching any deal. The US negotiating position on agriculture means it has to push for more market access from others than others are likely to agree to, especially large developing countries like India and Indonesia, which are trying to protect their farmers out of fear of poverty and unrest that would follow an opening to cheap food imports. Also, the effective deadline for a deal is the end of March. The US Trade Representative’s Trade Promotion Authority (TPA) expires at the end of June, but the law requires that Congress receives a proposed foreign trade agreement at least 90 days before the TPA expires, i.e. by March 31. TPA is important because without it, the US Constitution gives authority to negotiate foreign trade agreements to the Congress. With it, the President presents an overall agreement to Congress and the Congress has to approve it or reject it without amendments (“up or down” in the jargon). PTA means that Congress cannot start to unpick an agreement presented to it for approval by the executive branch.
If the current TPA lapses the negotiators in Geneva would be bogged down with concerns that whatever they agreed would be unpicked by Congress. Of course, Congress can always pass law granting an extension of TPA beyond the end of June 2007. But it would be a new law and all kinds of amendments could be attached to it (in a process known as “decorating the Christmas tree”). These amendments delay the law, and they may include things the Administration cannot bear, precipitating a presidential veto. Recent US trade newsletters show that this Christmas tree process has already begun in anticipation of a new law, and people are busy putting down markers for their favourite topics (“Take tough action against China!” “Pay $x millions more in adjustment assistance!”).
The process is further complicated by the new gamesmanship between the Democrat-controlled Congress and the Republican Presidency. The Republican President is asking the Democrat-controlled Congress to agree to do something he wants. Under the banner of protecting American jobs, the Democrats are inclined to say no. On the other hand, the Democrats do not want to leave themselves open to being blamed - with a presidential election looming - for abdicating America’s international responsibilities, etc. The outcome of the game is hard to predict.
Moreover, serious EU-US problems remain, backed by powerful and not-about-to-compromise economic interests, especially in agriculture. An old-fashioned deal between EU and US is certainly possible, with EU giving enough ground on market access for the USTR to claim they have made good progress, and so the US giving something on agricultural subsidies; possible but as of late February, not likely.
Brazil and India, the leaders of the developing countries, have not yet put concrete offers on the table. India has become very cautious about any more opening of its market, especially in agriculture. China says it made big concessions as part of its accession and is not about to make more. It continues to sit on its hands. The services negotiations are stalled. There is a built-in slide towards disappointment on the part of developing countries because the round is called a “development round”. The word “development” was added at a late stage of the start-up negotiations in Doha in 2001. It was an “add-on” designed to win support from developing country members (Doha came only two years after Seattle, which collapsed due to opposition from the developing countries to launching a new round). So the Doha Declaration, as adopted, puts emphasis on Special and Differential Treatment (S&D) for developing countries, and on development more generally.
But next to no thought was given to how the round might be engineered to be “pro developmental”, and the development slogan has been allowed to remain on the table unexplained. It was an empty vessel that allowed the negotiations to go forward because everyone could pour in whatever interpretation they wished. But the developed countries’ instinct is that the WTO is not, never was and never will be a development agency, and cannot therefore provide the golden key to development for all comers. They tend to treat the “development” slogan as sheer rhetoric, and dismiss any deviation from the idea that developing countries (all except the poorest) should have exactly the same obligations as they do. In short, the prospects for a deal are on the darker side of cloudy.
2 Would the Collapse of the Doha Round be a Bad Thing?
Most commentators agree that the collapse of the Doha round would be a bad thing for everyone except a few special interests, notably agricultural producers in the US and the EU. They paint a post-Doha scenario of crumbling multilateral trade arrangements, proliferating FTAs, and trade quarrels unable to be settled through the WTO’s dispute settlement system. They also say that developing countries are the big losers, because various aid-for-trade and trade facilitation measures written into Doha will now be suspended and agricultural support in the US, EU and Japan will continue. Instead I argue that the collapse of Doha is more of a lucky escape for DCs than a missed opportunity. But before I come to the argument, two big caveats up front.
The first is about what is likely to happen in the wake of a Doha collapse. In one scenario, the current drive to FTAs continues. Hence the next multilateral agreement after Doha takes the form of multilateralizing the commitments already made in the FTAs; it is shaped more by the content of the existing stock of FTAs than by fresh negotiations among the 150 members of the WTO. But most FTAs are the “hub-and-spokes” kind linking the US, EU or Japan with one or more DCs. These arrangements tend to be even more asymmetrical in favour of the AC than the multilateral rules of the WTO, even more prejudicial to development. They tend to grant DCs less “non-reciprocity”, and tend to require of them more stringent commitments to market opening and intellectual property protection than multilateral agreements.
The question, then, is whether DCs will be able to check this scenario by launching another one: using bargaining power built up during the Doha process – and leveraging the keen desire of ACs to get access to the large and growing domestic markets of some of the bigger DCs – to alter the terms of FTAs in their favour and pull the ACs back into multilateral negotiations. After all, at some point in the next 20 years groupings of DCs are going to become more assertive and more “rule makers” than “rule takers”, especially as they capitalize on the bargaining leverage inherent in the ACs’ demand for access to their markets; the question is how they use that leverage to alter the terms of FTAs and multilateral rules.
The second caveat is that if the US goes into not just a recession but severe recession or even depression within the next several months, and if, as is possible but less likely, the world economy then goes into recession, all bets are off in terms of the willingness of WTO members to make a deal. With those two caveats shunted into the category of “other things being held constant” (in the spirit of “partial equilibrium” analysis!) I argue that the demise of Doha is more of a lucky escape than a missed opportunity - for two main reasons. First, it is unlikely to dent the growth of world trade. Second, it is, on the whole, a bad deal for DCs.
Surging Trade Without Further Liberalization:
World trade and investment has been surging over the past five years, even faster than world economic growth, which has itself been higher than in any five-year period since 1945. Rapid growth of trade and international investment is likely to continue because: (1) economic growth in emerging market economies like China and India is not only faster than in the high-income economies but also substantially decoupled from their growth; (2) inflation is low; and (3) oil prices will probably fall. In these conditions, even a likely recession in the US may not provoke a global slowdown.
On the face of it, it seems that global integration is being driven by forces not much affected by policy stances (given that under the Uruguay Round [UR] the world economy moved a long way towards market liberalization) - and will continue to increase even if some OECD states adopt higher protection. This is to make the contrast with Financial Times warnings of a return to the Great Depression in the event of a “protectionist backlash”. The failure of Doha itself will not make much difference to the growth of world trade and investment (Financial Times, January 3, 2007; Wade, Financial Times, January 8, 2007).
I conjecture that part of the dynamic of the world economy comes from the rapid formation of macro-regions, like China-Japan; Northeast Asia-Southeast Asia; US-Canada-Mexico; continental Western Europe; and the Nordics. Macro-regions have become strong and are becoming stronger in terms of (a) correlated fluctuations of major economic variables, (b) trade, (c) sales of multinational corporations. Alan Rugman et al show that hardly any of the top 500 MNCs have ‘global’ sales, in the sense of at least 20% in each of North America, Europe and East Asia and less than 50% in any one of them (Rugman REFC; Thompson 2007; Mann and Riley 2007: 81-115).
I suggest that the answer to the implied paradox – little further trade/investment liberalization over the past five years but very fast global integration – may lie in the point that the integration is more regional than global, and that what is driving regional integration is something other than liberalizing policy stances. This line of argument is obscured by our propensity to talk in terms of a dichotomy between national and “global”. When we talk of “integration” we should disaggregate the “global” into regions. In any case, the bottom line is that the surging trade and economic growth of large parts of the world over the past 5 years reduces the urgency of reaching multilateral agreement on yet another round of further trade and investment liberalization.
3 Opportunity to Restructure Multilateral Disciplines in Trade and Finance
The second and main reason why the failure of Doha would be more of a lucky escape than a missed opportunity is that what was on the table for developing countries constituted an intensification of the Post-Bretton Woods international economic order based on the principle of “deep integration”. For all the difficulties of pinning down the causality, there are good reasons to think that this international economic order contains features inimical to development, and Doha would have made those features worse.
I am cautiously optimistic that, post-Doha, developing countries – inspired by the Chinese notion of “crisis” as “threat” plus “opportunity”, and worried about the consequences of a proliferation of “hub-and-spokes” FTAs with the US, EU and Japan – will leverage the slow build up of trust in cooperation during the Uruguay Round and Doha Round to mount a concerted post-Doha attempt to restructure multilateral disciplines covering both trade and finance. Not just in the WTO but also in other multilateral economic agencies like the World Bank and IMF. Having always been “rule takers” in the face of the North’s “go it alone” power (or “take it or leave it”: Gruber 2000) they would become more active “rule makers” thanks to their own gradually accruing “go it alone” power (where “alone” refers to macro-regions as well as to the bigger single countries like China).
In other words, the demise of Doha would give them a better chance to escape the “participation-development” dilemma, which the Doha negotiations looked like intensifying. The dilemma for DCs is that, to develop, they must participate in international trade and investment and finance; but the structures and terms of their participation – the “facts on the ground” – subject them to a “Golden Straightjacket”, in the form of a one-size-fits-all set of prescriptions for market liberalization and deep integration. This Golden Straightjacket is likely to hinder their development. Hence the “participation-development” dilemma.
Post-Doha: what big features of the current trade and finance regimes should DCs aim to change? It is important to consider both trade and finance, which are normally considered as separate domains studied by separate experts. I shall sometimes refer for simplicity to a single multilateral regime, covering both trade and finance and including not only the WTO but also the Bretton Woods Institutions (BWIs) and their conditionalities.
4 Lack of Multilateral Discipline in Money and Finance
Arguably the single biggest threat to the stability of the trade system comes not from within the trade system (e.g. a “protectionist backlash”) but from the lack of multilateral disciplines over the exchange rates and macroeconomic policies of the major economic states (G3), combined with the higher priority those major economic states attach to meeting international financial obligations than to maintaining trade and economic growth. Let me elaborate.
In finance, the current multilateral regime contains much less rule-based discipline on countries’ exchange rate policies, macroeconomic policies and financial policies than on countries’ trade policies. And to the extent it does exercise discipline, it is discipline on DCs, aimed at keeping them liberalizing. In particular, the finance regime – and notably the IMF and the World Bank – does little to exert multilateral discipline on AC policies which matter most for international growth and stability – their policies on exchange rates, current account deficits, and interest rates.
Yet there are strong spillovers from exchange rates and interest rates to trade. Rapid, market-driven changes in exchange rates can undermine the attempt to provide a stable trading environment through multilateral discipline on tariffs. Changes in interest rates of major reserve currencies can raise the debt obligations of DCs, forcing them to either cut the rate of growth or raise import barriers. For example, the Volker interest rate hike at the end of the 1970s, which precipitated the debt crisis of the 1980s, was decided within the Fed with no multilateral consultation, and without even internal analysis of the impact of the hike on the rest of the world, Latin America in particular. Again, during the 1990s, changes in US monetary conditions and in the exchange rates of major reserve currency countries created the conditions for the boom and bust in East Asia. One feature, in particular, puts the burden of adjustment to financial instability onto the trade system. Whereas GATT rules allow countries in external financial distress to put (temporary) barriers on imports, there are no analogous rules in the finance regime which allow suspension of financial obligations. Attempts to introduce temporary debt standstills, for example, have been blocked by Wall Street and the US government. So the burden of adjustment to financial instability falls heavily on the trade system. For all except the poorest countries the repayments have to go on, and the domestic economy has to adjust downwards.
In short, DCs are highly vulnerable to external financial shocks like boom and bust cycles of capital flows, which tend to be even more damaging than trade shocks. Yet there is much less multilateral discipline on money and finance than on trade, and such disciplines hardly figure on the agenda for reform of the international economic order – largely because they would constrain the most economically powerful countries, which are not exactly lining up to be so constrained. These same countries push trade liberalization as though it is quite consistent with the existing financial order, despite evidence that financial instabilities can disrupt trade. The asymmetry between trade rules and finance rules is an obvious target for DC negotiators post Doha.
5 The Centrality of Market Liberalization and Deep Integration
The Bretton Woods regime was designed to reduce the scope for the beggar-your-neighbours policies that had plagued the inter-war years. For example, in finance, it sought to limit exchange rate instability by (a) limiting private international capital flows, which had earlier produced damagingly erratic changes in exchange rates, and (b) subjecting governments to multilateral exchange rate discipline. In trade, it made the principle of “non-discrimination” between goods produced in different countries the core principle of the trading system. The overarching aim was “shallow integration”, in order to (a) encourage the growth of international trade, while (b) allowing for differences in national strategies, and (c) minimizing the costs of differences in national strategies for others.
In contrast, the principle rationale - the central norm - of the current, Post Bretton Woods regime for trade and finance is to promote rapid liberalization of some markets (but not all markets, an important qualification I come back to), not only at the borders but deep within borders. It aims for “deep integration”. Hence it seeks to shrink the scope for governments to use policy instruments to steer and accelerate the development of the national economy (instruments such as local content requirements on incoming foreign direct investment; tariffs and quotas; and subsidies for exports or domestic production of import substitutes). For example, the current multilateral trade regime is based not on the Bretton Woods principle of non-discrimination but the principle of “non-distortion” – a principle which justifies multilateral disciplines deep within the domestic economy and shrinks the room for differences in national strategies. Deep integration as the global public policy aim is supported by the near-consensus among economists, especially those trained in the Anglo tradition, that free trade is optimal, and that arguments for infant industry protection do not hold water. Indeed, economists tend to fall over backwards to deny that trade can have any significant harmful effects. A whole river of theory sanctions the policy conclusion that free trade is best; and the theory is supported by homely aphorisms like, in the words of a Financial Times’ editorial, “The case for free trade is simple: it is not wise to throw rocks into your own harbours” (Financial Times, July 25, 2006).
However, DC policy makers should not give strong credence to this near-consensus among economists that maximum openness or deep integration is optimal, for two kinds of reasons.
The first is that it is strikingly inconsistent with the historical evidence of industrialization coming from the pre- and post- Second World War industrializers. The broad generalization from this evidence is that there is virtually no example of modern industrialization in conditions of free trade, let alone full openness; though there are plenty of examples of countries which used protection and achieved successful industrialization. Protection, in other words, looks to be an almost necessary condition of catch-up industrialization, though not a sufficient condition. Exhibit A of protection going with successful catch up industrialization is the US. As the economic historian Paul Bairoch said, the US was “the mother country and bastion of modern protectionism” (1993: 30). Through the 19th century and up to the Second World War, the US had about the highest protection and about the highest rate of growth. Only after the Second World War did the US adopt the norm of trade liberalization, once its industrial dominance was established behind high protective barriers. Even in 1950 the US had an average applied industrial tariff rate higher than the DC average today, though it was by then the undisputed industrial hegemon and its per capita income was three times today’s DC average per capita income (Akyuz 2006).
Moreover, the US and other earlier industrializers had relatively much more protection, as compared to DCs today, than their higher tariff rates suggest, because they had more “natural protection” (transport costs were higher) and because they had smaller productivity advantages relative to competitors than do DCs today. In the trade regimes of East Asian countries after the Second World War we see a strategic use of trade protection as part of a wider industrial policy. Typically, the tariff rate in each industry followed a non-linear path, rising as the products began to replace imports, holding steady or continuing to rise as the products came close to being competitive against foreign substitutes, falling once the industry was well-established, and eliminated altogether by the time the industry stopped production at home and customers relied on imports (Wade 2004). Economists tend to respond to such historical evidence with the question, “What is the mechanism by which protection might help in industrial upgrading and diversification?” They tend to answer that no trade theory sanctions protection, except in very special circumstances. In a poll of American economists in 1983, 79% said they “agree” (as distinct from “agree with qualification” or “disagree”) with the proposition, “Tariffs and import controls lower economic welfare” (Frey et al 1984).
Let me make three points about trade theory, as to why the standard conclusion that free trade and full openness is optimal for DCs and ACs alike should not be taken as compelling. First, the theory tends to compare equilibrium positions, one with free trade, one with “protection”; which is not much use for understanding the movement of a real economy over time under the impact of liberalization from more protection to less protection. Second, the theory tends to assume that supply creates its own demand (Says Law), so that trade liberalization cannot, by assumption, cause more than short-term and ignorable unemployment of resources or deskilling of people. So the theory is biased in that it captures benefits of trade liberalization but short changes costs. The third point is that as of the last few years, trade theory at the frontiers is in upheaval under the impetus of new empirical findings. Whereas until a few years ago, trade theory operated with an assumption of the representative firm, recently available data shows that firms are extremely heterogeneous in their involvement in trade. In the US, for example, only 15% of firms in the tradable goods sectors (manufacturing, mining, agriculture) produce any exports; and among exporting firms, the top 10% produce 96% of aggregate US exports (Bernard et al 2006). This new firm-level data has spawned a new stream of theoretical literature, sometimes known as “new new trade theory”, from people like Marc Melitz, Stephen Redding, and Richard Baldwin. As yet they have not given much attention to policy implications, and they tend to focus on firms in a well-developed economy like the US. They also tend to buy into the leitmotif of the older literature, that the task is to explain the gains from trade. However, this new trade theory does highlight the idea of strategic behaviour of (highly oligopolistic) exporting and importing firms, and to that extent brings considerations of micro-economic power into the analysis – from which it may not be a long stretch to a more balanced approach to gains and losses from trade. And some of the new trade theorists – Melitz for one – have specifically addressed the infant industry argument, seeming to accept that support for infant industries in competition with well-established firms in more developed countries can be justified on “learning economy” grounds (Melitz 2005).
In short, the standard conclusion that free trade and full openness is optimal for DCs and ACs alike should be taken as less than compelling in light of (a) the historical evidence of correlation between protection and successful industrialization, and (b) the current rethinking of trade theory, propelled by new data on the heterogeneity of firms’ involvement in international trade.
6 The Unfair Balance between the Market Liberalization Priorities of ACs and those of DCs
However, the ACs do not push for market liberalization and deep integration across the board. On the contrary, they want market liberalization and deep integration mainly in sectors where they dominate, namely, free movement of industrial goods, capital, and enterprises. They are much less interested in market liberalization and deep integration in sectors of most direct interest to DCs, namely, agriculture, migration (“movement of natural persons”), and technology transfer. In the latter, where ACs would have to make the “concessions”, WTO rules exert little multilateral discipline. This asymmetry provides another obvious target for DC negotiators.
7 The High Priority to Deep Cuts in Industrial Tariffs
The agreements coming out of the Uruguay Round left plenty of flexibility to DCs in the setting of industrial tariffs. They did not prescribe steep cuts. However, from the start of the Doha negotiations the ACs have given high priority to “NAMA” (non-agricultural market access): securing deep cuts from current levels in DC tariffs and non-tariff barriers on imports of industrial goods. Not only cuts in average tariffs but cuts in tariffs on all items, line by line, across as many as 5,000 product categories, with minor exceptions for “sensitive products”. And the US, at least, has made it explicit that the Doha NAMA cuts should be part of a two stage process, of five years each, at the end of which industrial tariffs would be 0 for all except the LDCs (least developed countries). One implication is that in any DC, the dispersion of tariff rates between sectors would be more or less eliminated, so that luxury goods, basic necessities, intermediate goods, capital goods would all face a roughly similar tariff, in line with what mainstream trade theory presents as optimal. The big danger is that the NAMA proposals for steep tariff cuts will harm the industrialization of DCs by locking them into something like their current place in the international division of labour, from where catch up growth is very unlikely. The danger is compounded by the fact that the earlier UR agreements already removed the option of using most other infant industry policy tools (such as local content requirements), leaving tariffs as one of the few remaining instruments. The NAMA tariff regime of continuously falling and sectorally-uniform tariffs runs counter to the desirable pattern for promoting economy-wide upgrading and diversification. Tariffs on more skill- and technology-intensive “sun-rise” activities should rise, while tariffs on labour-intensive and natural-resource intensive “sun-set” activities should fall. At any one time the economy would show substantial dispersion in tariff rates across sectors, and in any one sector tariff rates would move non-linearly across time. But NAMA runs against this pattern. Moreover, the ACs are insisting on the principle of reciprocity (no S&D), except for LDCs. They offer to cut their tariffs on industrial imports in return for DCs cutting theirs. But this apparent “fairness” conceals the unfairness and economic irrationality. The ACs offer to lower their tariff peaks, which are mainly on labour-intensive products which will never regain competitiveness, in return for DCs’ cutting their tariffs across the board, including on skill- and technology-intensive industries which the DCs are trying to nurture – at cost to the likely chances of these industries attaining international competitiveness. It is important for DCs to change the NAMA rule that current tariffs are the starting point for negotiations about changes in only one direction: down, continuously and irreversibly. They have to win back legitimate scope for using tariffs flexibly, so that (a)tariffs can be raised for medium technology industries during the transition from natural-resource and labour-intensive industries to medium technology industries, and lowered thereafter, meaning that at any one time there is substantial dispersion in protection between sectors; (b)tariffs can be geared towards learning rather than at protecting vested interests. As Henry Bruton said,
“some form of protection for learning is necessary... The major policy issue then is to design protection measures that induce learning rather than the easy life”.Bruton 1998: 903-36
Tariffs can be renegotiated at periodic intervals. DCs should negotiate around average tariffs, leaving themselves free to vary rates for different products within the constraint of the average – so that as they raised tariffs on some emerging products they would have to lower them on others. This is a way of balancing multilateral disciplines with national policy flexibility.
The likely failure of the Doha round is more of a lucky escape than a missed opportunity for DCs, because there was too little on the table to benefit them relative to what they had to give up (e.g. in industrial policy instruments and in protection for their agricultural sectors). However, let me remind that I am excluding from consideration that (a) a Doha collapse might accelerate the spread of FTAs, which might carry strong negative effects, and (b) the US might go into steep recession within the next few months, which may alter the whole context of post-Doha discussions.
Here I have stressed the need, going forward, to alter the balance between (a) trade and finance, (b) ACs and DCs, and (c) multilateral disciplines and policy flexibility. I have argued that the biggest threat to the stable growth of world trade lies outside the international trade regime, in the lack of multilateral discipline over the exchange rates and macroeconomic policies of the major economic states (G3), together with the priority attached to meeting international financial obligations over trade growth and overall economic growth (as seen in the absence of international rules for debt standstills and workouts, in contrast to the provision for temporary import protection against import surges). I have also argued that the WTO rules are systematically biased in favour of accommodating the development trajectory of the ACs, and against accommodating the development trajectory of the DCs. We see this in the agreements from the Uruguay Round which ruled out most industrial policy instruments relevant to economies at an intermediate stage of industrialization, apart from tariffs; and we see it now in the NAMA negotiations, which call for DCs to steeply lower their industrial tariffs from current levels and to remove the dispersion in tariff rates across sectors, quite contrary to the tariff regime used by most successful industrializers in the past. Going forward in the WTO, DCs need to press for latitude to raise tariffs as well as lower them, while also accepting multilateral disciplines. The way to do it is to negotiate over average tariffs rather than line by line, and allow countries flexibility to raise tariffs on some items provided they also lower tariffs on other items, so as to keep within the agreed average. Also, the UR agreement on Subsidies and Countervailing Measures should be altered to allow subsidies not only (as at present) on R&D, environmental protection and regional development – subsidies granted on the rationale that these areas are prone to market failures, but which are of policy relevance mainly to ACs – but also on other areas prone to market failure in DCs, notably capital market failure to support infant industries and first entry into export markets. Again, the multilateral discipline might be injected in the form of overall limits on subsidies as a percentage of GDP, with scope for governments to allocate subsidies between industries within the overall ceiling.
Going forward in the Bretton Woods organizations, DCs need to press, in the IMF, for it to get out of “development” finance and stick to: providing short-term liquidity to countries facing temporary payments difficulties; preventing exchange rate misalignments and global trade imbalances; and preventing financial crises. The IMF should not be allowed to bail out lenders and investors, and it should be required to concentrate on debt workouts and restrictions/regulations on capital flows. This change would help prevent the burden of external financial difficulties being placed on the trade system.
Also, the IMF should not depend on the major ACs for its financing; so facilities like the Poverty Reduction and Growth Facility (PRGF) should be removed from it, and other methods of financing developed, such as Special Drawing Rights. Its new financial arrangements have to circumvent the basic paradox of the Fund’s present financing: its job is to prevent crises, but it generates revenue on its lending, and it lends at times of crisis. Also, the IMF’s surveillance work should be done by a body independent of the Board of Governors. The World Bank should limit its loan conditionality to measures needed to protect its own financial integrity, and give up conditionality on development strategy and development institutions. So it should also give up the big “structural adjustment” loans, and revert to project lending. Like the Fund, it should eliminate its reliance on major ACs for funding, and therefore give up IDA. It would become a development finance intermediary, borrowing from financial markets and lending to DC governments – but only to those governments or those projects not otherwise able to attract private capital on reasonable terms. Both IMF and World Bank should take it as part of their core mandate to convene networks of senior officials and parliamentarians, so that they operate less as authoritative designers of solutions and more as facilitators of networks. The changes of mandate would have to go with changes in governance: such as a double majority voting criterion (of shares, of countries) for constitutional kinds of decisions; a cut-back in Europe’s present gross over-representation to make more room for developing countries presently grossly under-represented; a balancing of constituencies such that all Executive Directors represent between 6 and 10 countries (rather than, as now, some representing one and others 20 or more); a non-residential Executive Board, slimmed down from around 24 to 15, which meets only once a quarter, limits itself to strategic (not operational) issues, hence giving more independence to the staff; and opening the top position to citizens of the world (Woods 2006).
We will need other global arrangements for grants and concessional loans to the poorest countries. These might be in the form of a pooled aid fund, run by a UN agency answerable to the General Assembly and audited by an independent body. It could receive funding from governments and private bodies, and also from dedicated taxes such as a currency transaction tax.
I take my title from Yilmaz Akyuz, “Doha: Missed opportunities or narrow escape?”, Challenge, Nov/Dec 2006, 7-10. I am indebted to discussions and comments from Roderick Abbott, Kenneth Shadlen, Diana Weinhold and Brian Hindley.
If the US does go into serious recession or depression the prospects for world trade become cloudy. The US is already experiencing serious sectoral crises in housing and finance. For example, the rate of building new houses has fallen sharply, with knock-on effects in all the construction-related and home appliance industries. House prices are falling across the US at an accelerating pace, and home mortgage foreclosures are rising rapidly (up by 42% since the start of 2006). In key states like California and Texas, one household in 35-40 foreclosed on mortgage payments in 2006 and lost possession of their house or apartment. (Global Europe Anticipation Bulletin, 12, February 16, 2007.) The pace and size of bankruptcies of financial organizations is growing. If as is quite likely these sectoral crises merge into more a general crisis, trade conflict would grow between the US and trading partners such as the EU and China. Just how the prospect of such a general crisis might affect the growth of world trade and specifically the Doha negotiations is a question I leave open.
I am indebted to Yilmaz Akyuz, “Multilateral disciplines and the question of policy space”, background paper for Trade and Development Report 2006, UNCTAD.
Source: Paul Volker, personal communication, Woodrow Wilson School, Princeton University, 1990.
To put this into broader perspective: Until the 1980s, trade theory assumed that trade was inter-industry, between industries. But accumulating evidence showed that most trade was intra-industry. In response, ‘new’ trade theory tried to explain the fact of intra-industry trade by incorporating assumptions of imperfect competition and increasing returns to scale. But it, like ‘old’ trade theory, continued to work with an assumption of a ‘representative’ firm, ignoring differences between firms. In the past several years major new data sources have become available on participation in trade at the firm level. The new evidence shows huge differences between firms in the same industry in terms of their participation in international trade, even within the tradable goods sector. A central finding is that the large majority of firms, even in traded-goods sectors, do not export at all; and that among those that do export, most exporting is done by a small percentage. All through these waves of new data and new theory trade theorists have emphasised the gains from trade. So for example Richard Baldwin’s exercise on one of the main models in new-new trade theory – the Melitz model – derives the hypothesis that: “The aggregate gain from greater openness is always positive; the gains from marginal liberalization are increasing as the world gets more open”. (Richard Baldwin, “Heterogeneous firms & trade: testable and untestable properties of the Melitz model”, NBER Working Papers: National Bureau of Economic Research, June 2005). One also sees the strength of the prior or pre-empirical commitment to gains from trade in the way that economists, especially those working for official agencies, deny that increased trade openness might be a significant cause of rising income inequality, and emphasize instead skill-biased technological change as the main driver of rising inequality. They tend to overlook the obvious interaction between trade and skill-biased technological change: skill-biased technological change itself may be a result of greater openness, or the threat of greater openness. See Ed Anderson, “Openness and inequality in developing countries: A review of theories and recent evidence”, World Development 33 (7), 2005, pp. 1045-1063.
This section on NAMA draws on Yilmaz Akyuz, The WTO Negotiations on Industrial Tariffs, Third World Network, 2005. See also Linda Weiss (2005), “Global governance, national strategies: How industrialized states make room to move under the WTO”, Review of International Political Economy 12 (5), pp. 723-749.
- Akyuz, Y. (2005), The WTO Negotiations on Industrial Tariffs: What is at Stake for Developing Countries, Geneva: Third World Network
- Akyuz, Y. (2006), “Multilateral disciplines and the question of policy space”, United Nations Conference on Trade and Development
- Anderson, E. (2005), “Openness and inequality in developing countries: A review of theories and recent evidence”, World Development 33 (7), pp. 1045-1063
- Bairoch, P. (1993), Economics and World History: Myths and Paradoxes, Chicago: University of Chicago Press
- Baldwin, R. (2005), “Heterogeneous firms & trade: Testable and untestable properties of the Melitz model”, NBER Working Papers: National Bureau of Economic Research
- Bernard, A./S. J. Redding/P. Schott (2006), „Multiple products firms and trade liberalization”, Amos Tuck School of Business at Dartmouth
- Bruton, H. (1998), “A reconsideration of import substitution”, Journal of Economic Literature 36 (2), 903-936
- Frey, B./W. W. Pomnmerehne/F. Schneider/G. Gilbert (1984), „Consensus and dissensus among economists”, American Economic Review 74 (5), pp. 986-994
- Gruber, L. (2000), Ruling the World: Power Politics and the Rise of Supranational Institutions, Princeton, N. J.: Princeton University Press
- Leader (2006, 26 July), “Free trade’s best defense is the truth: Doha has failed because its defenders used flimsy arguments”, Financial Times
- Leader (2007, 3 January), “Multilateral muscle needed for Doha deal: The prospects are poor but bilaterals are no alternative”, Financial Times
- Mann, M./D. Riley (2007), „Explaining macro-regional trends in global income inequalities, 1950-2000”, Socio-Economic Review 5 (1), pp. 81- 115
- Melitz, M. (2005), “When and how should infant industries be protected?”, Journal of International Economics, Vol. 66 (May), 177-196
- Shadlen, K. (2005), “Exchanging development for market access?”, Review of International Political Economy 12 (2), pp. 750-775
- Thompson, G. (2007), “Global inequality, the ‘Great Divergence’ and supranational regionalization”, in: D. Held/ A. Kaya (Eds.), Global Inequality: Patterns and Explanations, Cambridge: Polity press, pp. 176-203
- Volker, P. (1990), Personal communication to R. Wade
- Wade, R. (2004), Governing the Market: Economic theory and the role of Government in East Asian Industrialization, Princeton, N. J.: Princeton University Press
- Wade, R. (2007, January 8), “If trade is booming why go for more liberalization?”, Financial Times
- Weiss, L. (2005), “Global governance, national strategies: How industrialized states make room to move under the WTO”, Review of International Political Economy 12 (5), pp. 723-749
- Woods, N. (2006), The Globalizers: The IMF, the World Bank, and their Borrowers, Ithaca, N. Y.: Cornell University Press