Does a Doha Round failure matter?

Does it matter if the Doha Round of the World Trade Organization ends in failure? The mini-Ministerial round of talks at Geneva missed its June 30 deadline, and no new date or agenda has been set. The lack of seriousness of participants was well illustrated by Commerce Minister Kamal Nath. He arrived 90 minutes late for the first big meeting at Geneva because he was watching a World Cup football match. Some will say that he got his priorities right, since the World Cup is guaranteed to produce a result whereas the Doha Round is not.

The world economy has for three years been booming, so much so that even sub-Saharan Africa has registered GDP growth of almost 5% per year. So the question can be asked, when existing trading rules are producing such good results, does it matter whether or not we get some more liberalization through the Doha Round?

Some economists argue that the future lies less with WTO multilateral arrangements, which are thorny and difficult to negotiate, than with bilateral and regional Free Trade Agreements (FTAs). Not only are FTAs easier to negotiate, they are typically viewed as foreign policy triumphs, something that is definitely not the case with multilateral arrangements.

I would argue that India has much to lose if the world switches from WTO to FTAs. The USA is keen on FTAs because it has a strong bargaining position in bilateral deals. In FTAs with developing countries, it has imposed labour and environmental standards, free capital flows and other such conditions that would be impossible in the case of a WTO deal. In all its FTAs, the USA provides duty-free treatment for garment imports only if the garments are made from cloth exported by the USA. WTO rules would ban such clauses. This explains why the USA is happy to focus on FTAs, and gives much lower priority to WTO.

Can India go the same way, and opt for FTAs on a wide scale? Alas, no. It does not have the economic or political clout to strike the strong bargains that the USA has been able to. The so-called FTAs India has signed with SAARC partners, Sri Lanka, Thailand and Singapore are replete with exceptions and exemptions. They are political rather than trade initiatives.

Indian politicians worry that any really free trade could bring a flood of agricultural imports that would hit farmers and increase farmer suicides. Farmer interests are strong even in the USA where only 1.5 % of the population is in farming. In India, 60% of the population is still partially or wholly dependent on agriculture.

This is the main reason why India cannot contemplate a free trade agreement with the USA. NAFTA has allowed the USA to export subsidized maize to Mexico, hitting poor farmers there. No Indian politician dare contemplate a similar situation here. India would love to sign an agreement on free trade in services alone with the USA, but Washington will not agree. It says that FTAs must be all-inclusive, and that services cannot be dealt with separately from goods.

Several developing countries in Latin Smerica, the Caribbean and Africa have signed FTAs with the USA. Those in Africa and the Caribbean get preferential access to the European Union. All these countries have unfair advantages over India in Western markets. WTO rules mandate equal trade rules for all. But FTAs destroy that level playing field. We need a successful Doha Round to bring down overall tariffs, and thus reduce the preferential margin enjoyed by other developing countries.

However, the biggest danger of a Doha Round collapse is not the proliferation of FTAs. One key reason for converting GATT into WTO was to control US legislators hell bent on protectionist legislation. WTO institutionalized international trade rules, backed by a dispute settlement machinery. Earlier, the US Congress had resorted to protectionism through Super 301 and Special 301 laws. This became difficult after the treaty obligations imposed by WTO.

Yet even today US legislators keep introducing bills that are violative of WTO rules. One recent example is a proposal to slap an import duty of 27% on Chinese goods if China fails to revalue its currency.

US Congress has given President Bush fast track authority to negotiate a WTO deal by mid-2007. If not, the fast track authority will lapse, and legislators will pick to pieces any later deal. That will more or less guarantee the end of the Doha Round: the chances of getting an extension of fast track authority are dim.

Indeed, a Doha failure will encourage US legislators to increasingly introduce protectionist legislation that contravenes WTO rules, and challenge affected countries to do their worst. Affected countries can go to the WTO, which will rule in their favour. But a favourable ruling is of practical use to only powerful trading partners such as Japan or the European Union. If the USA refuses to abide by a WTO ruling, the aggrieved countries can impose compensatory trade sanctions on the USA. The EU has indeed done this on occasion, and this has typically persuaded US legislators to withdraw offending clauses.

But developing countries lack the economic and political lout needed to use sanctions as a weapon. If for instance India imposes higher tariffs on US machinery exports, Japanese and European companies will be thrilled at the reduction in competition, and seize the opportunity to raise their prices. Besides, the volume of Indian imports may be too small to seriously affect US producers, who will therefore have less incentive to lobby US legislators to get rid of WTO-violating laws.

In sum, a collapse of the Doha Round will probably lead to a surge of US protectionism, and undermine the entire global movement towards reduced trade barriers. The danger of protectionism may be especially high for service exports, as this will not violate existing WTO rules. That could hit India hard. It is one more reason for India to make a special effort to ensure that the Doha Round does not fizzle out.

 

What do you think?