The World Trade Organisation is struggling to reach agreement on trade liberalisation, argues David Robertson

The GATT/WTO is arguably the foremost expression of multilateralism, the most successful institution from post-1945 international economic cooperation. The General Agreement on Tariffs and Trade (GATT) was drawn up in 1947 to introduce principles into trade relations after the beggar-my-neighbour policies that forced severe contraction of international trade in the 1930s. The instruments embodied in the agreement to promote liberal trade were:

i) Tariffs as the only permitted trade instruments, and ‘bound’ to prevent arbitrary rises;
ii) Tariffs to be non-discriminatory; and
iii) Trade to be progressively liberalised using reciprocal tariff bargaining.
The GATT initiated eight rounds of tariff negotiations between 1947 and 1994, when the Uruguay Round ended. The final act of the Uruguay Round established the more extensive World Trade Organisation (WTO), which now has 149 member countries and much wider rules governing trade relations.

GATT negotiations were responsible for the present low tariffs on most traded manufactured goods. The ambitious agenda adopted for the Uruguay Round (1986-94) resulted in many new agreements to liberalise trade in non-manufactures. They include agreements on agricultural trade (the first, and ineffective) and on trade in services, and special agreements on textiles and clothing, and on a range of non-tariff impediments to trade; these contain specific interpretations of the original GATT articles. Importantly, an understanding was reached to govern the settlement of disputes between members. These new agreements were incorporated into the new WTO, which took effect in 1995. Like the GATT, all WTO decisions are made by consensus in the Council of member governments.

So far the WTO has not lived up to the record of the GATT. Realistically, this is not surprising. While trade in manufactures was liberalised progressively, and grew strongly in the second half of the twentieth century, mainly among OECD countries, trade in agricultural produce, primary commodities and processed materials, as well as textiles, clothing and footwear, which are all potential exports from developing countries, were excluded from liberalisation. Even now many of these products are subject to non-tariff restrictions (import quotas and technical barriers, such as quarantine and health standards, safety regulations, etc.). Lack of progress in negotiations in these sectors, especially agriculture and other interests of developing countries, remain serious impediments to progress in the Doha Round negotiations that began in 2001.

WTO ministers have been trying to stimulate meaningful new trade negotiations since the spectacular failure of the Seattle meeting in 1999. The Doha ministerial conference in November 2001, meeting only weeks after the 9/11 terrorist attacks, provided political impetus to begin new trade negotiations. The conference took place with unprecedented security, which denied access to demonstrators and NGO lobbyists. It also committed OECD governments to agree on an agenda and a starting date for negotiations to show a united front against the new political threats. This imperative encouraged developing countries to play an active role to get their interests at the top of the agenda. The media christened it ‘the development round’, which was consistent with sentiments about poverty being expressed in UN and NGO circles.

Unfortunately, OECD governments’ compliant response to developing countries at the Doha meeting soon evaporated when negotiations began. WTO negotiations reverted to the grinding process that had typified the Uruguay Round, with agricultural protection and access for services’ trade vying with developing countries’ demands for improved preferences in OECD markets. The Cancun ministerial meeting (2003) was terminated by confrontations between developing countries’ and OECD governments’ ministers, to the accompaniment of triumphant anti-globalisation protesters! The Round was salvaged in 2004 when some progress was made in officials’ meetings.

The state of Doha negotiations
The WTO ministerial meeting in Hong Kong in December 2005 provided just enough consensus to sustain the Doha Round negotiations. The next meeting scheduled for the end of April, however, was postponed until July to allow more time for draft agreements to be negotiated by officials. With little progress made so far this year, the prospects for a final agreement early in 2007, before the US Administration’s trade negotiating authority expires, are not auspicious. The transfer of the US Special Trade Representative, Rob Portman, to the Office of Management and Budget Office has been widely interpreted as downgrading US interest in the trade negotiations. The EU Trade Commissioner, Peter Mandelson, was quick to exploit this to mask Europe’s inability to reach decisions required for successful negotiations.

After the breakdown at the Cancun ministerial meeting (2003), some commentators tried to be optimistic about the limited progress at the Hong Kong meeting in December 2005. Such reports were based on three agreements that were achieved:

• to eliminate export subsidies on agricultural produce by 2013;
• to provide duty-free, quota-free market access for exports from 50 least-developed countries in 97% of import lines by oecd governments by 2008; and
• to provide aid to facilitate trade facilitation by poor countries, to take advantage of reductions in trade barriers.

Little progress was made in Hong Kong on other key topics. Efforts to liberalise agricultural trade by reducing tariffs and production subsidies were rejected by the EU. An agreed formula to reduce tariffs on manufactures still awaits decisions on the parameters, with different coefficients to be applied to developing countries and special consideration given to products already receiving preferences. Some progress has been reported on trade in services since the Hong Kong meeting. Plurilateral negotiations have opened, though OECD governments have difficulties with movements of labour, and non-OECD countries are reluctant to allow rights of establishment to foreign providers of services.

Even the agreements adopted in Hong Kong were tentative, with no legal drafting of agreements to begin until associated issues are agreed, such as technical assistance and funding for trade facilitation for developing countries. This interdependence extends to many items on the agenda. For example, the EU has declared it will not negotiate further on agriculture until others make offers to liberalise trade in services and tariffs on manufactures. Yet, the G20 ‘emerging’ economies (Brazil, China, India, South Africa, etc) and the US insist on movement on agriculture first! The G90 trading bloc of ‘least developed countries’ continue to exploit public sympathy to sustain their demands for special treatment.

Recent official discussions have not increased confidence about completing the Doha Round by early in 2007. Serious negotiating difficulties remain in agriculture, services and ‘the development agenda’. Several items included on the Doha agenda have already been dropped or downgraded. Some trade negotiators regard the slow progress to date as traditional GATT ‘brinkmanship’ by negotiators holding out until the last moment to get a better offer. On this occasion, however, there are new elements in play. The G20 emerging economies, as well as the G90 developing countries, have their own agendas. When these groups collaborate, they have proved to be tough negotiators. Last minute consensus at the end of this year seems unlikely with so many conflicting interests to resolve.

The Doha development agenda
The agenda embodied in the Doha communiqué allowed negotiating governments, NGOs and other special interest groups scope to introduce specific demands as conditions for progress. With 149 countries now participating, the traditional ‘club’ atmosphere of GATT negotiating rounds, where like-minded trade officials progressed agreements by effective diplomacy and conciliatory negotiations, is no longer relevant. Moreover, ‘the development agenda’ raised expectations that preferential removal of OECD tariffs on developing countries exports would raise living standards in poor countries. In fact, such liberalisation only provides opportunities for self help. Appropriate domestic policies are necessary to take advantage of such opportunities. The popular support for assistance of all kinds to be provided to developing countries, as promoted by millionaire pop stars and development NGOs, has encouraged developing countries to expect more from the negotiations than is ever likely to be offered.

The Doha ministerial declaration (2001) recognised that the integration of developing countries into the WTO required ‘meaningful market access, support for diversification of their production and exports, and trade-related technical assistance and capacity building’. Ministers committed to the objective of ‘duty-free, quota-free market access for products originating from developing countries’, and re-affirmed the provisions for ‘special and differential’ treatment for developing and least-developed countries, which were adopted in GATT Part IV (1965), and strengthened in subsequent agreements on preferential treatment.

Effectively, the Doha Development Agenda grants one-sided concessions to developing countries; that is, the GATT principle of reciprocity is set aside again for developing countries. This is intended to compensate for outstanding advantages enjoyed by OECD countries from product discrimination imposed in negotiations, which still disadvantage developing countries. For example, the Uruguay Round agreement provided a ten-year adjustment period for OECD countries to remove their quantitative restrictions on imports of textiles and clothing. This took effect on 1 January 2005, but although tariffs still apply, temporary protection has already been re-introduced against Chinese suppliers to the EU and the US markets. Agricultural protection is another major barrier to developing countries’ exports, which is a crucial sticking pointing in the Doha negotiations. (EU preferences for agricultural imports from former colonies have gone some way to compensate.)

Trade facilitation has attracted much attention. This refers to technical assistance to improve efficiency in customs administration and business regulations, because inefficiencies and corruption seriously impede the trade of many developing countries. Trade facilitation measures will improve efficiency in the handling of imports and exports. The cost of this technical assistance will be small. (It should not be confused with major port development, which remains the responsibility of the development banks and aid donors.) Provision of aid-for-trade was one agreement achieved at the Hong Kong ministerial, although most OECD governments have yet to nominate their financial commitments.

Trade opportunities are not the same as development aid. Trade levels (imports and exports) depend on economic efficiency in a country. Taking advantage of preferential access to a foreign market depends on achieving competitive prices, which depend on domestic costs, including import prices and taxes. Maintaining high import tariffs reduces a country’s export opportunities. Development depends on domestic economic effort above all.

With OECD tariffs on most manufactures at low levels, developing countries are unlikely to be competitive with small margins of advantage. G90 negotiators realise that tariff preferences become wasting assets as trade liberalisation proceeds, which leads some of them to oppose OECD countries reducing their industrial tariffs in the Doha Round. The negotiations on agricultural protection and liberalisation of trade in textiles and clothing (and other labour-intensive manufactures) are crucial to the interests of developing countries. This brings them to the crux of the negotiations, making their crusade for trade preferences much less significant than NGO propaganda indicates. The popular belief that the trade preferences and development assistance are the negotiating interests of poor countries in the Doha Round is misleading. They have a stake in the crucial agenda items.

Changing policy circumstances
Since the Doha Round was launched, economic circumstances have changed in many OECD countries. International economic imbalances affect politics as well as economic policies. Structural economic imbalances as evident currently between the US and East Asia (particularly China and Japan) promote nationalistic demands for trade protection. The US Administration has revived its interest in bilateral trade agreements with trade allies, while nationalistic pressures have increased to introduce trade safeguards (including antidumping) against imports from ‘emerging’ economies (China, Vietnam, etc). The US Congress is also seeking to tighten conditions against certain types of foreign investment inflow.

Similar trends are discernible in EU countries where high unemployment and slow growth are dictating economic policies in several countries. These forces are blocking the European Commission’s efforts to promote economic cohesion (notably, the Lisbon Agenda, 2003). A Commission proposal to promote cross-frontier trade in services within the EU was modified this year because of opposition from France and Germany. These manifestations of nationalism are evident also in opposition to some foreign investment mergers and acquisitions. Rising imports of clothing and footwear from China and Vietnam induced the EU Trade Commissioner to re-introduce quantitative import restrictions, which like US actions contradict the spirit of the Uruguay Round Agreement. These decisions bring major OECD countries into conflict with ‘emerging’ economies. With economic development issues prominent on the negotiating agenda, and domestic unemployment and economic nationalism re-appearing in OECD economies, multilateral trade negotiations are progressing only slowly.

The Doha negotiations are complex because of the number of participants, their divergent interests and the intricate agenda. Negotiations on agricultural protection and support policies, trade in services and trade preferences have not been so open to negotiation before. The interests of participants are diverse, with large, rapidly developing economies, such as India and China, playing a major role and small developing countries forming a negotiating block for the first time. Added to this are interventions by anti-globalisation demonstrators and interfering NGOs.

Parallel negotiations on many fronts are not unusual in multilateral trade negotiations. What seems to be missing in the Doha Round is the political resolve to overcome technical negotiating problems and to present the results, with alternatives, to ministers. This insouciance is consistent with lack of government leadership. NGOs and lobby groups are eager to fill that policy gap. As globalisation has brought unexpected benefits in the past decade or so, businesses and governments have accepted this prosperity as the natural state. Anti-globalisation ‘noise’ is ignored as long as growing prosperity continues uninterrupted. In these circumstances, OECD governments are reluctant to expend effort to reach a multilateral trade agreement, which might upset that balance. Any effort to sell multilateral liberalisation to the nation will require that measurable net benefits will result. Governments and business sectors appear to be taking WTO, the institution, and past trade liberalisation for granted. If the Doha Round fails, such complacency could lead to drift, and incipient nationalism combined with the fashion for bilateral trade agreements could lead to a relapse into protectionism.

Increasing discrimination
The fundamental principles set out in the GATT—carried over to the much more comprehensive WTO as GATT (1994)—were non-discrimination in trade, tariffs as the only permitted barrier to imports and periodic multilateral negotiations to reduce trade barriers on a reciprocal basis. The aim is a liberal trade regime. Certain safeguards and escape clauses allowed exceptions to these basic principles in defined conditions, to protect perceived national interests.

One exception to non-discrimination is provided by GATT article XXIV, which permits customs unions and free trade areas (FTAs) to be established among groups of countries, subject to specific conditions. These conditions have been progressively loosened. Regional trade agreements (often bilateral) have become a popular instrument to provide reciprocal, preferential access for imports from selected trade partners—that is, to discriminate among foreign suppliers. The conditions attached to FTA agreements according to article XXIV require that they cover ‘substantially all trade’ between members, and that barriers to mutual trade shall be eliminated ‘in a reasonable length of time’ (which should exceed 10 years only in exceptional cases, according to the WTO understanding). Very few of the almost 300 ‘free trade arrangements’ notified to the WTO, or in process of negotiation, meet the conditions of article XXIV. For example, most such arrangements exclude any liberalisation of trade in agricultural products (eg Japan-Singapore FTA), or contain adjustment periods that exceed 10 years (eg United States-Australia FTA). A mechanism to assess each of these FTAs exists in the Committee on Regional Trade Agreements (CRTA), established by the WTO Council in 1996. However, the interests of all the major players militate against effective reviews. So in ten years, the CRTA has produced neither an annual report on this expanding instrument of discrimination, nor a report on an individual FTA.

ilateral FTAs offer several attractions to major economies that wish to proceed to open other markets without upsetting powerful domestic lobbies, such as farmers and labour unions in regionally concentrated industries. At the Cancun ministerial meeting (and several times before), the EU, Japan, the US and others sought to incorporate agreements to increase competition in member countries by removing measures that restrict non-residents’ ability to compete in other countries’ private and public sectors, and to invest to establish residence in another country. Developing countries’ opposition made this an element in the breakdown of the Cancun meeting. The OECD countries were forced to withdraw their proposals. These ‘behind the border’ barriers to competition are now considered by many OECD governments to be more significant barriers to market access than remaining border barriers. Bilateral FTAs allow major traders to negotiate the removal of these impediments to competition, while their agricultural protection and discriminatory safeguards remain in place to satisfy domestic lobbies.

Unfortunately, longstanding economic analysis shows that FTAs not only provide beneficial trade creation (partner imports replacing higher cost domestic output), they also divert domestic consumption of imports from efficient world producers to higher cost imports from the partner country. The outcome of this discriminatory trade depends on specific circumstances. There is no a priori case that either partner will gain from an FTA. (The chances of losses in a customs union are less because members’ individual tariffs are harmonised at the average of pre-integration levels.) With OECD tariffs at low levels—with the notable exceptions—trade diversion should not be significant in the new FTAs. However, the leading proponents of ‘new’ bilateral FTAs are the major players—EU, Japan, US—which have bargaining strength. Free trade arrangements with these major players can be highly discriminatory, directly in terms of individual agreements and indirectly by allowing major players to avoid liberalising their trade in agriculture and labour-intensive manufactures.
In new circumstances

The Doha Round is unlike any other trade negotiation in the past sixty years. It has new political dimensions, from active participation by developing countries, with NGO support, to the revival of nationalism in the EU, the US and other countries. Politics has always been part of multilateral trade negotiations because any international agreement depends on participants recognising national economic self-interest. Nationalism, however, usually appears as narrow sectional interests protect agriculture or regional industries, which can disrupt negotiations. In the Doha Round, OECD governments have received little encouragement from the private sector to pursue trade liberalisation. Apart from agricultural lobbyists, business interests (with one or two notable exceptions) enjoy low industrial tariffs, so their interest is to remove technical barriers to trade. Similarly, trade in services (accounting for almost 80% of GNP in OECD economies) is impeded by ‘behind-the-border’ restrictions. These non-tariff barriers have received little attention in the Doha negotiations, mainly because of strong opposition from developing countries. Businesses conclude that the Round has little to offer them.

Although developing countries’ interests are the focus of media attention, the success of the negotiations still depends on the face off between the EU and the US. It was European tariff harmonisation that drove the US to initiate the Dillon and Kennedy Rounds in the 1960s, and further expansions in EU membership stimulated later negotiations, too. Unfortunately, the latest EU enlargements have made achieving policy compromises in Brussels more difficult, which political and economic problems in the three largest EU economies have exacerbated. When a compromise is achieved in Brussels, it becomes locked in, leaving little, if any room, for negotiations with third parties. This was apparent in the Hong Kong deal to extend the deadline for removal of agricultural export subsidies from 2010 to 2013; the latter date had been locked in by the EU agricultural budget for 2006-13. The revival of nationalism makes any flexibility in the EU position on agriculture very unlikely. This makes the prospect of any compromises improbable, which will encourage other negotiators to defend their interests stubbornly.

Lack of enthusiasm for negotiations could lead to a disappointing final package, which combined with implementation of more bilateral trade agreements and developing countries’ discontent, could seriously weaken the WTO as an institution. This will increase pressure on the dispute settlement understanding, where international lawyers are playing an increasing role at the bidding of NGOs. A weak Doha agreement will exacerbate this legalism. The danger of international lawyers interpreting WTO articles, drafted by trade officials to achieve compromises to close negotiations after midnight, should not be underestimated. The opportunities this provides for NGOs to exploit court-room ‘win-lose’ judgements at the expense of trade officials ‘win-win’ compromises is alarming, especially because it could enable trade measures to be used in contexts not intended by WTO agreements (eg labour rights, environmental issues, social welfare concerns, quarantine measures, etc).

Present circumstances militate against a successful conclusion to the Doha negotiations. There is little urgency evident among the negotiators despite the lack of progress. The consequences of failure have yet to be acknowledged. Ultimately, the fate of the Round depends on the willingness of OECD countries to accept reduced protection and supports for agriculture (not only the EU, Japan and the US but also Switzerland and Norway). Equally, more penetration of markets for labour-intensive goods and services by developing countries must be accepted. It is not WTO negotiations that decide trade policies. It is national economic policies.

Pascal Lamy, Secretary-General of the WTO, seems confident that the July ministerial deadline will be met. The big question, however, is will the negotiated package be enough to sustain the WTO, or will it degenerate into another UN-like platform for ineffectual debates? There is little optimism among the negotiators.

David Robertson is a former academic and Commissioner of the Productivity Commission. His book International Economics and Confusing Politics will be published by Edward Elgar (UK) in July.