The lack of progress at the latest WTO meeting of Trade Ministers in Geneva, Switzerland narrowed the almost five years of agricultural negotiations in the Doha Round to three key factors: 1) a political decision at the G-8 summit later this month to push for completing the round, 2) the Director-General of the WTO Pascal Lamy creating a draft text of an agricultural agreement, and 3) the WTO deciding that trade expansion remains its core mission. The first two will be much easier to deal with than the third one.
The precedent for dealing with the Doha Round at the G-8 summit was set last year as debt forgiveness and promoting the Doha talks were part of the agenda. Political leaders from Brazil, India, China, Mexico and South Africa have been invited to attend portions of the G-8 meeting. To move the talks forward political leaders in the G-8 must invest political capital. President Bush, Prime Minister Blair of Britain and Chancellor Merkel of Germany should provide the leadership. Blair and Bush led on trade at last year’s summit, and Merkel’s Germany has many trade-dependent industries. The likely result will be agreement that Director-General Lamy should create a draft text as a way of moving the talks toward a final conclusion.
There is also precedent for the Director-General creating a draft text. The Uruguay Round talks in the early 1990s had reached an impasse when Director-General Arthur Dunkel drafted a text that drew on his assessment of what would be an achievable compromise. The Committee on Agriculture Chairman Crawford Falconer prepared a 72 page “Draft Possible Modalities on Agriculture” for use in the just completed ministerial meeting that can serve as a basis for a draft text. The Trade Negotiations Committee has requested Lamy to conduct intensive and wide-ranging consultations to establish modalities and report back in two weeks. Through those consultations Lamy should get a sense of a possible consensus on tariffs and subsidies.
Choosing a single number from the range of numbers available for any particular fill-in-the-blank in the draft text on agriculture will be a true test of Director-General Lamy’s discernment of the commitment of WTO member countries to economic growth through increased international trade. While much has been made of the Doha Round as an economic development round for developing countries, developing countries want access to their markets to increase slowly or not at all. A tariff is a tax on consumers and producers that increases the cost of living and increases the cost of producing for international markets. High import tariffs are anti-economic development. Tariff reductions on bound rates need to be large enough to actually reduce the current applied rates. Anything less is anti-economic development.
The U.S. proposal for reducing tariffs is the most aggressive proposal for market access. Lamy will have to decide why higher tariffs than the ones proposed by the U.S. would be better for economic growth for both developed and developing countries. The U.S. proposal calls for bound tariffs on agricultural products for developed countries to be divided into four bands of 0-20 percent, 20-40 percent, 40-60 percent and over 60 percent. Tariff reductions would begin at 55 percent for the lowest tariffs and escalate to reductions of 85-90 percent for tariffs beyond 60 percent with no tariffs higher than 75 percent. The U.S. did not make suggestions for cuts by developing countries, but a reasonable assumption is that the cuts will be no more than two-thirds of the cuts for developed countries.
The U.S. would limit “sensitive products” not required to have the full tariff reductions to no more than 1 percent of the tariff lines of a country, while most other proposals would allow 8-15 percent of the dutiable tariff line to carry higher rates. The sensitive products area was designed to give countries some much needed flexibility in choosing how to meet broad trade policy reforms. Countries generally have about 2000 agricultural tariff lines, and exempting 10 percent, 200 lines, would gut the basic benefits of tariff reductions for both developed and developing countries. The U.S. proposal to exempt about 20 tariff lines in each country recognizes that virtually every country has a few agricultural products where the political cost of trade policy reform is not worth the effort, but requires most markets to be opened to trade. Going beyond the one percent cap will hamper economic growth, particularly in developing countries where agricultural tariffs remain high. Even with the one percent cap, access through tariff rate quotes will be important to achieve at least some market opening.
Once Mr. Lamy has the market access issues for agriculture worked out, he then can turn his attention to export subsidies and domestic supports. The export subsidies talks have progressed sufficiently that a deal can be worked out without much additional effort. The domestic support issues will require Mr. Lamy to pencil in enough subsidy reductions to achieve real changes in trade-distorting domestic subsidies in developed countries, but not so much that those countries, including the U.S., reject the plan as unbalanced. The Blue box and de minimus programs for the U.S. appear to be at most risk. These could possibly be offset by clearer definitions on what is acceptable in the green box direct payments and environmental programs.
The current negotiations are simply a debate about whether or not reducing tariffs promotes economic growth. A World Bank analysis of economic activity in the 1990s estimated that per capita real income grew 5.0 percent for developing countries that significantly lowered trade barriers compared to 1.4 percent for ones that lowered barriers less. The round has already made good progress in agreeing on tariff free and quota free access to developed country markets by most products from the least developed countries. A draft agricultural text that holds fast to the goal of increased market access would add to the legacy of the round as a truly economic development round.