They argue that any likely Doha agreement would do little to open new markets. The gap between many current applied tariffs and the bound tariffs under an agreement would still have too much “water” that would allow applied tariffs to be increased in the economic downturn. An agreement would also do little to tighten disciplines on contingent protections like anti-dumping and safeguard actions. Under-valued currencies are not included; capital will move to more favorable markets with unskilled labor left behind.
The U.S. and the EU are considering trade restrictions on products if other countries do not take certain environmental actions which could be an excuse for more trade protectionism. Subsidies for declining industries like the U.S. auto industry will distort trade. Export restrictions for food products over the past year that forced a few countries to take all of the supply adjustment shocks are another set of issues. The same is true for OPEC that recently collectively cut production to maintain petroleum market prices.
The authors ask, “Is it realistic for the trading system to aim for a broad agenda which includes exchange rates, environment, state aid, and oil and agricultural markets?” They argue that a bigger agenda provides for more issues for give-and-take among major trading countries. They would be forced to take a broader economic policy view rather than a narrow one about protecting specific products.
The WTO as designed when it came into existence in 1995 was not meant to do what Mattoo and Subramanian have proposed, but the world trading and financial systems are hugely more complex than they were then. The round of trade talks that became the Doha Round started with agriculture in 2000, was broadened to all products in November 2001 to be finished by January 1, 2005, but has had repeated starts and stops until the fall of 2008 when WTO Director-General Pascal Lamy wisely concluded that moving toward a successful round was not possible. The pain for gain ratio was not worth it.
Lamy has already taken small steps to broaden the WTO agenda by becoming involved in trade financing issues and tracking actions by WTO members who increase applied tariffs. The WTO staff has working relationships with international financial institutions like the World Bank and the International Monetary Fund. Most important of all, the WTO is a voluntary organization where member countries retain the final say in taking action. The WTO can only move when common ground has been established.
It is easy to get excited about the possibilities and also find reasons why it would never work. How would the EU change agricultural tariffs that allowed it to lower import tariffs when it was short of cereals in 2007 and early 2008 and then re-impose tariffs when cereal output returned to normal in the summer of 2008? How would China operate its fertilizer industry after subsidizing exports until international prices increased, then imposed an export tax only to backtrack some when market prices declined? How would the U.S. and Canada provide $50-100 billion for auto companies if they had to acknowledge the negative impact on auto producers in the rest of the world? How would the U.S. defend a policy of only buying U.S. made steel if the incoming Obama Administration accepts that request from the U.S. steel industry? And, how would the eight OPEC members who are also WTO members reconcile two radically opposing positions on trade policy?
Once these issues are considered, it is much easier to see how narrow the Doha Round trade talks have become. While the talks have been useful, much larger issues have been left off the table. As Mattoo and Subramanian pointed out, a successful Doha conclusion would still leave bound tariff rates too high and not address currency and export tariff issues.
Skeptics will be quick to point out that “it will never work.” If negotiators could not resolve small issues like cotton subidies or the amount tariffs can increase under a safeguard program, how will they deal with OPEC issues or EU cereal import tariffs? The economic gains for cotton and safeguard tariffs were not worth the political pain. In the midst of major economic pain the gain may be worth whatever political pain is necessary to get an agreement.
The Financial Times article is part of an analysis that will appear in the next issue of Foreign Affairs. Other policy wonks need to pull the pieces apart and take a closer look. Seldom are ideas like this put together right the first time, but the debate about a new set of international economic, financial and trade institutions has been around for three or four years. What was lacking was the political motivation to do something. The financial upheaval and slowdown in economic growth worldwide have gotten politicians’ attention.
While the policy thinkers grapple with these issues they must keep in mind that new institutions will only survive if they respond to market forces around the globe. It is easy for policymakers to think that international institutions should shape markets when the reality is that markets do the work of organizing economic activity and producing goods and services for consumers. To the extent that groups like the WTO facilitate market processes, they add value to the world economy. If they lose sight of that fact, they become just another deadweight that markets need to drag along.