BALANCE OF PAYMENTS

Doha Deflation

Thu. May 22, 2008


Prospects for a successful conclusion of the Doha Round of multilateral trade talks continue to dwindle. New negotiating texts in agriculture and manufacturing have just been released, but are far from being agreed upon. As a result, a meeting of trade ministers to bless a formula for cutting tariffs will not take place before late June or might slip further.

The Doha Round was launched with high hopes that it would produce major economic benefits. But now the urgency to finish the negotiations is largely fueled by concern over rising protectionism around the world. In the current rush to complete the round, there has been no official acknowledgement that the likely economic payoff has dwindled considerably, especially for the United States.

This does not mean Doha should not be wrapped up now, if possible. Nailing down even small benefits might be better than achieving nothing. An accord will curb future protectionism by limiting nations' abilities to raise their tariffs in bad times. And the credibility of the World Trade Organization, which is a useful dispute settlement mechanism, would be further damaged if the round fails.

But expectations for the Doha negotiations should be based on a realistic assessment of what the talks can and cannot produce. Washington wonks have taken to arguing that the round should be completed to preserve the trading system, not because the potential economic benefits necessarily merit support. That argument might not be enough to get Congress to back the outcome.

The case for the Doha Round in the Washington business and political communities has long been a product of unrealistic assumptions. Advocates of the negotiations initially promised that the talks would increase global income by more than $500 billion and lift more than 100 million people out of poverty.

"Those compelling numbers are still echoed in editorials and statements by public officials," writes Kevin Gallagher, a professor at Boston University, and Timothy Wise, deputy director of the Global Development and Environment Institute at Tufts University, in a recent paper, "even though they are now considered exaggerated and obsolete."

The World Bank, the source of many of the most optimistic expectations for the round, is much more sober in its expectations. Using assumptions that are more ambitious than proposals on the negotiating table in Geneva, a 2005 Bank study showed that a successful Doha outcome might boost the global economy by just $96 billion by 2015. Only $16 billion of that amount would go to the developing world, ostensibly the intended beneficiary of the talks.

The dirty little secret was that the round promised to improve the income of the poor by less than a penny per person per day.

More recent modeling by Joseph Francois, a professor at the Johannes Kepler University in Vienna, Austria, which was commissioned by the German Marshall Fund, is no more optimistic. Looking solely at the potential outcome of the Doha manufacturing negotiations, based on the proposals under consideration in February 2008, Francois anticipates gains of no more than $40 billion worldwide. That works out to 0.1 per cent of global GDP.

The benefits for individual countries are minuscule. At best, current negotiating proposals would boost U.S. income by about $500 million. All of Africa would gain no more than $800 million. And India would actually lose as much as $700 million; little wonder New Delhi has dragged its feet.

The new manufacturing text -- released Monday -- does not appear to be much better. "The new text is disappointing and is a step backward from the trade liberalization the world needs," said a statement from the National Association of Manufacturers, adding, "The new text has tilted against the United States."

The agricultural negotiations also promise meager benefits, especially for U.S. farmers. Average tariffs facing U.S. farm exports would fall from 15.7 percent to 12.5 percent, based on proposals under negotiation in Geneva in February, according to a recent study by David Blandford, David Laborde and Will Martin for the International Food & Agricultural Trade Policy Council. (There has been no assessment of the new agricultural negotiating text.)

Defenders of the Doha Round are quick to point out that snapshots of likely negotiating benefits fail to account for the productivity increases that might result from greater competition and more efficient allocation of production. But even if productivity improvements doubled the gains, the outcome would still be minimal.

Other observers note that modeling fails to include the expected results from the services negotiations and from new efforts to facilitate trade, such as speeding customs clearance. But the service negotiations have limited goals, so their overall economic benefit will necessarily be small. And trade facilitation is notoriously hard to implement, and commitments are unenforceable.

In the weeks ahead, expect a crescendo of concern from the Washington trade policy community about the dire consequences of a failure to complete the Doha Round. But a reality check of a likely Doha outcome reveals only limited immediate economic benefit for the world, for the poor and especially for the United States. So neither the Bush administration nor the Congress should be stampeded into approving a deal for its own sake.

by Bruce Stokes

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