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IMGXYZ524IMGZYX Moderator George Perkovich introduced Sandra Polaski and Arvind Panagariya and invited each of them to comment on the cause of the collapse of the Doha Round, the prospects for continued negotiations, the impact of the impasse on the WTO and policy recommendations that could lead to a successful conclusion of the Round.
Speaker Remarks
Mr. Panagariya opened his comments with a quick overview of the main actors in the negotiations and their primary objectives. He described the United States as having prioritized expanded agricultural market access. The EU has tried to link agricultural subsidy and tariff reductions to cross-sector reciprocal improvements in market access for manufactured goods and services. Developing countries have sought the elimination of agricultural subsidies and industrial tariffs while tending to their own defensive interests in agriculture.
Noting India’s positive experience, Mr. Panagariya argued that developing countries should approach liberalization with less trepidation. However, he did identify some problems created by agricultural liberalization for poor countries. Developing countries that are net food importers will suffer from an increase in agricultural prices. Also, reductions in overall tariff levels will erode the preference margins currently enjoyed by many poor countries.
However, Mr. Panagariya characterized these obstacles as surmountable and suggested that aid for trade policies could help developing countries capitalize on liberalization as a growth opportunity. In describing the benefits of multilateral liberalization, Mr. Panagariya pointed out that small, poor countries have the most to lose if the WTO stumbles as the primary body governing international trade. Representation in the WTO is not proportional to a country’s economic size, giving developing countries the same voting power as developed countries. Alternatives to the WTO, such as bilateral or regional trade agreements do not offer this benefit.
Mr. Panagariya asserted that the US alone has the power to restart the stalled talks. He described the US as the historical engine of the multilateral trade system and expressed confidence that if the US were to return to the negotiating table with an offer of concessions that the EU and developing countries would follow suit. By way of policy recommendations, Mr. Panagariya proposed longer tariff phase-out periods, of up to 25 years, which would allow developing countries to avoid acute adjustment shocks.
Ms. Polaski took a generally positive view of the WTO’s prospects for remaining a relevant body. Since it is unlikely that the US will negotiate a free trade agreement (FTA) with any major trading partner, such as the EU, China or India, the WTO will retain its role as rule setter between the world’s major trade powers. Furthermore, even without any major new trade agreements, the WTO will continue to provide expanding economic opportunities for member countries. Russia and Vietnam are pursuing accession which will open both countries’ economies to WTO member states; China’s ongoing implementation of accession agreements will also create new market opportunities for WTO members.
In addition, both rich and poor countries have an interest in preserving the dispute settlement mechanism of the WTO, which offers members a rules-based forum for challenging allegedly unfair trade practices. By sanctioning curtailed access to their markets in the event of a favorable ruling, the dispute settlement mechanism gives large, rich countries, in particular, real leverage in enforcing trade rules.
Many have wondered if the collapse of the talks will lead to a proliferation of regional and bilateral trade agreements. Ms. Polaski described the threat to the WTO from these agreements as minimal. From the US perspective, the approaching expiration of the president’s fast track authority will undermine the government’s ability to negotiate bilateral deals. In East Asia, regional integration has been proceeding rapidly independent of developments in the WTO. However, because regional integration in East Asia is mainly concerned with facilitating integrated production in the region for exports to other parts of the world, it requires WTO-regulated access to those markets. The European Union has pursued regional and bilateral FTAs and will continue to do so. However, the difficulties it faces in negotiating a new set of trade deals with African, Caribbean and Pacific (ACP) countries and other potential trade partners indicate that the EU will not abandon multilateral trade negotiations.
On the issue of the potential gains from a Doha deal, Ms. Polaski noted the growing consensus that the gains from a Doha deal are likely to be small. The Carnegie model predicts the gains from a plausible liberalization scenario to be about $43 billion, similar to the level found through other modeling exercises. While most developing countries will benefit from manufacturing liberalization, agricultural liberalization will have more varied effects on such countries. Argentina, Brazil and parts of ASEAN record modest income gains from agricultural liberalization in the model, while others such as China, India and many African countries experience losses. Even more alarming is the model’s finding that the poorest countries and regions in the world register overall income losses under all plausible liberalization scenarios.
Why will agricultural liberalization reduce incomes in much of the developing world? Ms. Polaski agreed with Mr. Panagariya that net food importing status and preference erosion will hurt many poor countries. She added that the small-scale, low-productivity structure of agricultural production in many poor countries leaves farmers vulnerable to competition from cheaper imports while promising little in terms of increased exports. For countries in which the agricultural sector accounts for the majority of employment the defensive interests are profound. By way of contrast, agriculture represents less than 2% of both employment and output in the US. Yet the US has insisted on taking a highly defensive approach to supporting its own farming sector through continued domestic subsidies while taking a highly offensive approach in pursuing greater market access in developing countries.
In looking forward, Ms. Polaski reminded the audience of a number of important dates that could mark shifts in the political landscapes of key countries. Brazil and France will both hold presidential elections between now and April of next year. In the US, Congressional elections will take place this November and fast-track authority will expire next June. Significant swings in political power could shift the direction of the talks, should they resume.
Ms. Polaski concluded by pointing out that the Round collapsed in Cancun in 2003 because the focus had shifted away from the development objectives laid out when the Round was launched. Only by refocusing the talks on development priorities through the July 2004 Framework Agreement were negotiators brought back to the table. Ms. Polaski argued that political factors such as the upcoming congressional elections in the US have once again derailed negotiations by encouraging mercantilist negotiating tactics. Unfortunately, this approach ignores the benefits to the US and other developed countries associated with growth in the developing world. Ms. Polaski quoted the chief US agricultural negotiator as saying, “US farmers have a lot at stake in the economic growth of other countries. Most of the world would spend more on food if they had more money.”
In order to get the Round back on track, Ms. Polaski proposed that the US reduce its aggressive protection of US farmers and strict demands of increased market access to poor countries. Granting developing countries flexibility through special products and a special safeguard mechanism would leave in place the policy space that poor countries currently possess to respond to the volatility and other imperfections of global agricultural markets. On the issue of non-agricultural market access (NAMA), Ms. Polaski contended that rich countries should open their markets well in advance of poor countries so that the latter can increase employment, incomes and productivity before opening their own markets to import competition. She also emphasized the need to expand duty-free quota-free (DFQF) treatment to all exports from least developed (LDC) countries and other preferential treatment to countries just above the LDC threshold.
Discussion Session
Mr. Panagariya questioned the credibility of computable generalized equilibrium (CGE) models, pointing out that there is too much uncertainty in the world to accurately predict the gains from trade. Entrepreneurship, innovation and the diffusion of technology all affect economic growth in profound ways but develop in unpredictable patterns. The evidence that should resonate most loudly, according to Mr. Panagariya, is the correlation between economic growth and liberalization seen in most successful countries. On the issue of what should be done to help marginalized poor farmers, Mr. Panagariya emphasized that the long-term goal of development should be creating employment opportunities outside of agriculture. He questioned whether focusing on stabilizing farm incomes would create incentives for migration to more productive occupations.
In response to Mr. Panagariya’s presentation, Ms. Polaski cautioned that even if the current impasse is resolved, the most pointed and difficult disagreements of the Round are yet to come. Disagreements between rich and poor countries will loom large in comparison to the disagreements between the US and the EU that have blocked progress up until this point.
The first question from the audience addressed the role that liberalization of services, which is currently not modeled, will play in amplifying opportunities for growth in developing countries. Ms. Polaski pointed out the difficulties in modeling service liberalization, including data limitations and the fact that negotiations do not take place in the same across-the-board framework used for agricultural and manufacturing liberalization. The “request and offer” approach to services makes it more like multiple bilateral deals, which are hard to predict or model.
In addition, despite the fact that the service sector accounts for many jobs in developing countries, they are disproportionately in the informal sector. Liberalization of the formal services sector is not likely to significantly affect overall service sector employment. Ms. Polaski cited the example of India, where despite the rapid growth of the services sector, only 1 million formal jobs have been created while the labor force numbers 430 million. Mr. Panagariya responded that measuring employment in the service sector would underestimate its contribution to economic growth; as industries such as communications or transportation develop, they make additional economic activity more affordable and competitive.
Mr. Perkovich asked what sequence of liberalization should be adopted to ensure that farmers are “pulled” to cities by the lure of more productive jobs rather than “pushed” there by the destruction of farming jobs. Mr. Panagariya replied that political opposition to liberalization is so entrenched in many developing countries that only dramatic liberalization of agriculture can catalyze modernization.
Mr. Perkovich questioned the impact of this strategy on families and communities. Ms. Polaski and Mr. Panagariya exchanged differing opinions on the matter with Mr. Panagariya arguing that migrants create their own opportunities once in cities and Ms. Polaski arguing that if the opportunities are not created first, urbanization simply moves rural poverty to the cities. She described Mexico as an example of a country that did not create sufficient urban job opportunities; the result has been increased migration to the US. She warned that without a wealthy neighbor as a migration safety valve, other countries could experience civil unrest and instability if urban opportunities are not created fast enough to keep pace with lost rural opportunities. Ms. Polaski used the example of China to illustrate that even with an explosion of economic growth and strong urban employment growth, it is difficult to absorb large surges of rural migrants, as evidenced by the Chinese government’s attempts to moderate rural-urban migration.
On the topic of US agricultural reform, Ms. Polaski criticized the practice of tying reform, such as lowering domestic subsidies, to increased market access abroad. Instead, she urged the government to take advantage of the upcoming new Farm Bill to tackle agricultural reform on its own merits. The final comment from the audience argued that gradual liberalization of the agricultural sector coupled with special and differential treatment of least developed countries will perpetuate poverty by keeping the rural poor in place. In response, Mr. Panagariya, Mr. Perkovich and Ms. Polaski discussed the importance of rural development policy in addressing agricultural poverty. They concurred that trade is but one tool of development that must be complemented by sound national policies. Ms. Polaski noted that “shock therapy”—forcing the poor to compete through radical liberalization policies—does not have a successful track record.
