CGD/IIE Brief December 2005 Achieving a Grand Bargain in the Round1 William R. Cline*

The Challenge

Time is running out for the Doha “Development Round” of global negotiations. US negotiating authority expires in mid-2007. Ideally, the outlines of a deal would have been in place by the December 2005 meeting of trade ministers in , although it now appears that an additional high-level meeting in early 2006 may be necessary for this purpose. The collapse of the ministerial meeting in Cancun in September 2003 showed that developing countries will not settle for a face-saving minimalist agreement, nor should they. The July 2004 Geneva “framework” agreement set the stage for more meaningful liberalization, particularly in agriculture. But the major negotiating countries have not yet made commitments to the deep liberalization necessary to realize the potential of the framework.

The best approach is a “grand bargain” that would include deep cuts in agricultural tariffs and subsidies in industrial countries; major cuts in their tariffs in manufactures including textiles and apparel; a ceiling of 10 percent on all tariffs on manufactures in industrial countries; major cuts in agricultural tariffs of developing countries; major cuts in their tariffs on manufactures albeit using a formula differentiated from that for industrial countries; liberalization of key service sectors in developing countries; and the granting of free or preferential entry to imports from Least Developed Countries (LDCs) into middle-income country markets and complete free entry for these imports into industrial country markets.

The stakes are high. Global in goods could lift 500 million people out of poverty (at the $2 per day level) over 15 years, and convey economic benefits worth $200 billion annually to developing countries.2 The gains would be even larger including free trade in services, especially if this involved substantial opening to cross-border movement of temporary labor. Half of the developing countries’ gain in goods would arise from elimination of barriers in industrial country markets. This means that through opening their markets to free merchandise trade, industrial countries could provide about twice as much in annual benefits to developing countries as they currently give in development assistance. Moreover, they could do so while granting the benefit of lower consumer prices to domestic households rather than imposing higher tax burdens on them.

No one expects the Doha Round to deliver global free trade. However, everyone has a right to expect the negotiations to achieve a major step in that direction, for example by cutting overall protection by half or more. The developing countries in particular have every right to expect meaningful gains in this Round. In the concluded in 1995, they did achieve a back-loaded elimination of textile quotas; but textile tariffs remain fairly high, and that round essentially left protection levels unchanged in agriculture, which is the most important export sector for many developing countries.

*William R. Cline has a joint appointment as a Senior Fellow at the Center for Global Development and the Institute for International Economics. www.cgdev.org © Center for Global Development. All Rights Reserved. Achieving a Grand Bargain in the Doha Round 2 perceive benefitsratherthan losses fromtheDohaoutcome. there willnonethelessbea need toensurethattheLDCs below, areexaggerated.However, bothofthese concerns LDCs.Asdiscussed food-importing would adverselyaffect subsidiesandprotection elimination ofindustrialcountry thathigherworldfood pricesresultingfrom also areconcerns advantages theycurrentlyhavefrompreferentialentry. There tradeliberalization willerodethe that broadinternational Developed Countries(LDCs).Manyofthemareconcerned Round isthepotentialblockingleverageofsomeLeast another dynamicthatmustbetakenintoaccountintheDoha Considering thattheWTOnegotiationsrequireconsensus, for increasedmarketaccessabroad. context ofamultilateralnegotiationholdingouttheprospect liberalization thatwillbeeasiertoovercomewithinthe they toofacedomesticinterestgroupobstaclestoimport curbs ratherthanspurstheireconomicgrowth.However, oping countriescontinuetomaintainexcessiveprotectionthat countries toreducetheirownprotectionaswell.Manydevel- a largedegree,itwouldbebeneficialformostdeveloping protection.Thesecondreasonisthatto benefiting fromimport overcome theinevitableresistanceofinterestgroupscurrently to necessary prepared toprovidethepoliticalsupport thattheywillbe interests inindustrialcountriessufficiently prospective reciprocitywillbeneededtomobilizeexport middle-income countries.Somesubstantialelementof inat least thelarge opportunities of increasedexport but insteadwillexpecttoseesomequidproquointerms groups simplywillnotendorseunilateraltradeliberalization, interest development, therealityisthatindustrialcountry of politicalmotivationsonbehalfadvancingglobal theirs. Therearetwocorereasons.Thefirstisthatregardless eliminate theirprotectionwhiledevelopingcountriesmaintain Round” doesnotmeanthatindustrialcountriesshould torecognizethatasuccessful“Development It isimportant Outlines ofaBargain indebted poorcountries. tional aidlevels,andthecancellationofdebtforheavily UN MillenniumDevelopmentGoals,theincreaseininterna- that hasbeguntotakeshapethroughsuchinitiativesasthe be aseveresetbacktothemomentumforglobaldevelopment ofthenewround.Acollapseroundwould at theheart” the pledgetoplacedevelopingcountries’“needsandinterests Doha, Qatarinlate2001,theindustrialcountriesjoined Moreover, inthedeclarationlaunchingcurrentround        be asfollows: The keyelementsofa“grandbargain”packagewouldthus does notexist. thatpresently thempreferentialentry countries shouldoffer forLDCs,andthemiddle-incomedeveloping preferential entry For thispurpose,theindustrialcountriesshoulddeepenexisting subsidies “decoupled”fromproduction. (“coupled” subsidies).Theywouldcommittoretainonly domestic subsidiesthatprovideaproductionincentive over areasonabletimetablesuchasdecade,ofall round. Theywouldcommittothecompleteelimination, subsidieswithinfiveyearsofcompletionthe export In agriculture,industrialcountrieswouldagreetoeliminate textiles andapparel. onmanufacturedgoods,including percent onalltariffs apparel. Industrialcountrieswouldsetaceilingof10 protectionintextilesand and wouldalsoreducetariff inothersectors, especially inagricultureandpeaktariffs Industrial countrieswouldmakedeepcutsintheirprotection, erential entry for imports from LDCs. forimports erential entry Middle-income developingcountries wouldintroducepref- duty-andquota-free. coverage completeandentry Least DevelopedCountries (LDCs) bymakingproduct Industrial countrieswouldextendexistingpreferencesto on manufactures. percent onalltariffs industrial countries.Theywouldsetaceilingof15to20 adoptedfor two-thirds) ofthatrequiredundertheformula their liberalizationasubstantialfraction(e.g.one-halfto (S&D)parameterthatwouldmake Special andDifferential Middle-income developingcountrieswouldapplya ture andindustrialgoods. levels aremuchhigher).Theywoulddosoinbothagricul- (where, as isoftenthecase,“bound” applied tariffs by enoughtoensuresignificantreductioninactually Middle-income developingcountrieswouldcuthightariffs, typical delayoffouryearstomakemonitoringmeaningful. would berequiredwithinsixmonthsratherthanthepresent “notifications”ofsubsidies are infactdecoupled.Country asdecoupledfromoutput subsidies toensurethosereported The WTOwouldimplementrobustmonitoringofagricultural bases for all tariff-rate quotas. bases foralltariff-rate They wouldcommittoatimetableforescalatingthevolume protection. appliedintariff-rate-quota especially thetariffs output value.Theywouldsharplyreducehightariffs, discussed below)tonomorethan5percentofagricultural domesticsubsidies(as defined trade-andoutput-distorting commit thatwithinfiveyearstheywouldcurballnarrowly- 3 They would 4  Developing countries would make forthcoming offers in If we designate the countries seeking liberalization in a given 3

financial, construction, and infrastructure services. Industrial area as being on the “demand” side of liberalization, and the December 2005 countries would bind existing free entry of electronic delivery countries whose markets are relatively more protected as being of cross-border services. However, temporary movement of on the “supply” side, then the liberalization “transactions” in the labor would not constitute a major part of the Doha Round Doha Round can be outlined as follows. In agriculture, the agreement, but would be left for future bilateral agreements United States, the , most of the G-20, and Other between industrial and partner developing countries. G-90 are on the demand side. (Some LDCs are also on the  LDCs and other low-income developing countries would demand side for products and markets where they do not enjoy reduce high tariffs to intermediate levels (e.g. no higher than preferential access, such as West African states’ demand for 15-25 percent).5 liberalization in cotton.) The European Union and the G-10 are on the supply side. To an important degree, however, the Actors and Reciprocal Interests United States is also on the supply side with respect to its agricultural subsidies; members of the G-20 are as well, espe- The principal actors in the Doha Round are the European cially regarding high bound agricultural tariffs. Union; the United States; the Group of 20 developing coun- tries led by Brazil, , and India; the Least Developed In manufactures, it is the industrial countries (EU, US, G-10) that Countries (LDCs); and the non-LDC (“Other”) Group of 90 are on the demand side, and the G-20 and other developing Africa-Caribbean-Pacific developing countries. Other important countries that are on the liberalization supply side because of groups include the Cairns Group of agricultural exporters their still relatively high tariffs. The exception is in textiles and (which includes among others , Australia, Brazil, apparel, where tariffs remain high enough that it is primarily the Canada, New Zealand, and ), and the G-10 industrial countries that are on the liberalization supply side, group of advanced countries with relatively high agricultural and the G-20, Other G-90, and even LDCs (again where protection (which includes among others Japan, Korea, preferences are incomplete) that are on the demand side. , and ).

Table 1. Doha Grand Bargain Liberalization by Major Party (row) and Prospective Benefiting Partner (column)

US EU Japan G20 LDCs OthG90

US AS AS, TRQ FE AS, TRQ tTA, tPK tTA, tPK

EU AXS, tA AXS, tA FE AXS, tA TRQ, tTA TRQ, tTA

Japan tA, TRQ tA, TRQ FE tA, TRQ G20 tM, tA tM tM tM, tA PE tM, tA LDCs (t) (t) (t) (t) (t) (t) OthG90 t t t tM t t

G20: group of 20 LDCs: Least Developed Countries OthG90: Other countries A: agriculture M: manufactures AS: agricultural subsidies linked to output TRQ: tariff rate quotas t: tariff TA: textiles and apparel PK: peak FE: free entry AXS: agricultural export subsidies PE: preferential entry Achieving a Grand Bargain in the Doha Round 4 spare capacityintheAMSfor theUnitedStatesandEU one illustration,asdiscussed belowtheexistingunused either amaximalorminimaloutcome tothenegotiations.As Overall, theframeworkleft a widerangeoflatitudefor aretriggered. quotapenalty tariffs tariff-rate and eventuallyfullyliberalize,thequotalevelsatwhich in theEUandespeciallyJapan;tosubstantiallyincrease, regimes) applicableintariff-rate-quota (especiallytariffs tariffs is decouplingarevalid;tocutsharplythehighagricultural US subsidiesfromoutput;toensurethattheEUpledges it todecouple of totalEUsubsidies.Itismuchmoreimportant theEuropeanUnion, andamountstoonlyasmallportion affects Geneva isasignificantachievement,butmodest.Itmainly subsidiesagreedin The eliminationofagriculturalexport periods andlessercutsfordevelopingcountries. peaks inmanufactures,andallowedforlongerphase-in cutsandtheeliminationoftariff called fornonlineartariff Italso called fordeepercutsinhigheragriculturaltariffs. year aftertheDohaRoundisconcluded.Theagreement (“amber box”subsidies)byatleast20percentinthefirst (AMS)insubsidieslinkedtooutput measure ofsupport” countries wouldcuttheboundleveloftheir“aggregate credit.Itstipulatedthatindustrial below-market ratesonexport subsidieswouldbeeliminated,including agricultural export on trackaftertheCancunbreakdownprovidedthat The mid-2004GenevaagreementthatgottheRoundback July2004FrameworkThe inthecolumns. partners the rowsandprincipalbeneficiary in orregion bycountry the maingroupingsofactors,withoffers ofliberalizationsupplyanddemandforsummarizes thepattern blocking powerundertheconsensustradition).Table 1 (andfornonetoexercisepotential for allcountriestoparticipate thatmakesitattractive to achieveanoverallbalanceofoffers The challengeofanyroundmultilateraltradenegotiationsis can beexpectedinthisroundonissue. movement oflabor(marketaccessforguestworkers),notmuch the G-20andOtherG-90areondemandsideintemporary binding existingfreeaccessintheindustrialcountries.Although of asanareaofliberalization“supply”intheform important ispotentially ofservices side. Cross-borderelectronicdelivery and theG-20someinOtherG-90areonsupply theEU,US,andG-10areondemandside structure services liberalization,forfinancial,construction,andinfra- In services percent, respectively(Figure1). averages fordevelopingcountriesare30,18,and12 and only3percentinothermanufactures.Thecorresponding countries, comparedwith12percentintextilesandapparel agriculture areaweightedaverageof36percentinindustrial tariff-equivalent of10percent,versusits9percentaveragetariff. tariff-equivalent is low tariffs, (3 percentversus76percent).TheUnitedStates,withits andespeciallyJapan 33 percentaveragefortariffs) of subsidiesversus intheEU(10percenttariff-equivalent tariffs than outthatsubsidieshavebeenlessimportant itturns effect, withtheequivalentimport-suppressing measure ofatariff intoa subsidiesisconverted the amountofoutput-distorting quotas intheirtotalprotectionagainstdevelopingcountries.If andtariff-rate thantheirtariffs are generallylessimportant subsidies farm out,industrialcountry on thetable.Asitturns may reflecttheirreluctancetoplaceownagriculturaltariffs however, Inpart, provide subsidiestotheirownfarmers. it to reflects thefactthatfewdevelopingcountriescanafford this agricultural subsidiesintheDohanegotiations.Inpart, Developing countrieshavetendedtostresstheneedreduce opportunities. sector andwouldstandtobenefitfromincreased oftheworld’sbecause aboutthree-fourths poorareinthe forreducingglobalpoverty,sector isespeciallyimportant free tradeforbothindustrialanddevelopingcountries.This accounts forabouthalfofthetotalpotentialbenefitsfromglobal a majoroveralloutcomeintheDohaRound.Agriculture Liberalizing globaltradeinagricultureiscrucialtoachieving Agriculture nrae aktacs,weesE eoitr havesought increased marketaccess,whereas EUnegotiators soughtdeeper negotiators havereportedly into“tiers”andapplydeepercutsforthehigher tiers.US tariffs proposal bytheGroupof20developing countriestoseparate havebuiltona Recent negotiationsonagriculturaltariffs tures. protection, remainsfarhigherinagriculturethanmanufac- Tariff ratequota protection,andespeciallybeyond-quotatariff Tariffs would remaintobeestablishedbeyondthisminimum. without anyreductioninactualsubsidies,sothetruecuts means thattheycouldmeettherequired20percentcuts 8 Post-Uruguay Round most-favored-nation (MFN) tariffs in Post-Uruguay Roundmost-favored-nation(MFN)tariffs the exception,asitsagriculturalsubsidieshada 6 9 tariff cutsand tariff export rural 7 post-reform average of about 18 percent. The difference 5

Figure 1 between the US and EU proposals is even greater for December 2005 above-quota tariffs in tariff-quota categories, which average 35 percent for the United States and 79 percent for the EU.11 The latter would be cut to 36 percent under the EU formula but Average Applied MFN to 13 percent under the US formula. Importantly, the US Agricultural Tariffs, 1998 (percent) proposal would allow departures from the tariff-cutting formula 80 in only 1 percent of tariff lines for sensitive products. In contrast, the EU proposal would allow cuts by one-third to two-thirds less than the standard formula for up to 8 percent of 60 tariff lines, which by some accounts would represent the great bulk of agricultural imports.12 40 In reaching agreement, it would help greatly if key developing countries such as Brazil and India were 20 prepared to adopt deep cuts of their sometimes inordinately high agricultural tariffs. Although as noted actual applied 0 tariffs in agriculture for developing countries are an average DC DgC US EU Jpn Brz Chn Ind Kor of about 30 percent, in some products the “bound” rates can be in the range of 100 percent in some important DC: developed countries countries. US farm interests, for example, would be far DgC: developing countries more interested in committing to the dismantling of production-linked subsidies at home if they saw an opportunity to lock in reform of such potential protection abroad; and the bound rates are often so high that their assurances of reduction in US agricultural subsidies prior to actual application would be damaging to the country in committing to tariff reductions.10 The different emphases reflect question in any event. the fact that US agricultural tariffs are relatively low whereas those of the EU are relatively high. Many developing countries appear to be concerned that in the face of subsidized agricultural production in industrial In October, 2005, the United States tabled a proposal for countries, they cannot commit to elimination of the high deep cuts in agricultural tariffs. Building on the G-20 bound rates, because they may find they need to apply proposal for graduated cuts by tiers, the proposal called for them in the face of a sudden onslaught of low-cost tariffs under 20 percent to be cut by about 50 percent, with agricultural imports. But there are two straightforward the cuts rising to 85-90 percent for tariffs above 60 percent. solutions that are better than keeping the high bound rates. There would additionally be a post-reform ceiling of 75 The first is to ensure that industrial countries live up to percent on all agricultural tariffs. This proposal involves pledges to decouple subsidies from production. The second extremely large cuts, for example reducing a 60 percent tariff part of the solution would be to shift toward a reliance on to 9 percent. The US emphasis on tariff cuts reflects its own “” protection in agriculture when necessary, rather relatively low agricultural tariffs, which average about 9 percent than maintaining extremely high bound tariff levels. This weighting sectors by global output. By implication, the type of protection is the main source of temporary import post-cut US average would be only about 4 percent. relief allowed under WTO rules in industrial goods. When a surge of imports occurs, and if a test of “injury” to domestic The European Union, which relies much more heavily on producers is met, a country can impose temporary special tariff protection, responded with a proposal to cut tariffs by a tariffs that phase out over a relatively short period such as maximum of 60 percent for the highest tariffs, and by an three years. It would be better to apply this concept in overall average of 46 percent. Considering that the average agriculture than to allow permanent exemption of “sensitive” EU agricultural tariff is about 33 percent, this implies a products from the deep cuts otherwise applicable.13 6 Subsidies A second central problem is that a major component of the AMS is fictitious: market price support (MPS). This measure is The Uruguay Round of multilateral trade negotiations an accounting concept, equal to the difference between the completed in 1994 established the framework for discipline domestic administered support price and the average world on agricultural subsidies. It placed output-distorting subsidies price in 1986-88. The use of an outdated benchmark is in an “amber box” with negotiated ceiling subsidy totals already a clue to the fiction of this concept. More fundamen- (Aggregate Measure of Support, AMS). “Decoupled” tally, however, it would be flawed even if current world prices subsidies not affecting output, such as direct income were used. The reason is that it is a measure of protection that payments unrelated to production, were placed in a “green is redundant with protection provided by tariffs and tariff-rate box” not subject to limits. Subsidies potentially affecting quotas. As such, its inclusion in the AMS overstates the output but contingent on output limiting measures such as land additional protective effect of “subsidies” beyond that already set-asides were placed in a “blue box,” also unconstrained. provided by tariffs. The agreement also exempted as de-minimis two tranches of subsidies of up to 5 percent of output (crop-specific and Conceptually the MPS is not a subsidy. Typically it does not general). The central challenge of the Doha Round in involve budgetary outlay.18 For example, in 2001, the United

Achieving a Grand Bargain in the Doha Round subsidies is to achieve a strong commitment to the phase-out States had $5.8 billion in MPS from its administered price (or at least sharp phase-down) of amber- and blue-box supports ($4.5 billion for dairy, $1.0 billion for sugar, and subsidies that boost output (or keep it from falling); and to $0.3 billion for peanuts), yet the corresponding budgetary close or at least narrow the de-minimis loophole. outlays were close to zero.19 Similarly, the European Union no longer builds up “butter mountains” of costly stockpiles, so it is In 2003 the EU adopted a major reform set to decouple a likely that its accounting MPS too does not represent budgetary substantial portion of its subsidies from output, to be imple- outlays. Japan has already shown that including the MPS in the mented in the period 2005-07.14 The bulk of these changes subsidy base can be mischievous. By eliminating administered represented shifts of subsidies from the blue box, where they prices in the late 1990s while keeping tariff and tariff-rate were related to output but nonetheless subject to production quota protection intact, it sharply cut its reported MPS and constraints, to the green box. In this shift, payments previously amber box subsidies without changing de-facto protection.20 linked to output were replaced by a “Single Farm Payment” Skeptics similarly fear that US and EU commitments to cut amber (SFP), based solely on producers’ historical payments in box “subsidies” in the Doha Round will be accomplished by 2000-02. Unfortunately, in the United States the farm bill of removing administered prices and getting credit for reducing 2002 took a step backwards. It raised “loan rates” on subsidies that do not exist.21 grains, reestablished a target-price system, created new counter-cyclical payments, and, crucially, allowed farmers to The clean solution to this problem would be to strip out market update historical bases—so that payments were no longer price support from the measure of amber-box AMS, on grounds decoupled from production decisions.15 that its protective effect is already incorporated in tariffs and tariff-rate quotas, which are being liberalized separately.22 The framework agreement of July 2004 uses the total of Then the proposed cuts in subsidies would be from a smaller amber box, blue box, and de-minimis subsidies as the but more meaningful base. If the MPS is kept in the base, then overall measure of trade-distorting subsidies to be cut. An at the least the negotiators should agree that when a country important problem is the large amount of “water” in the cuts its MPS in the future, its total amount of allowable AMS bound levels of the Aggregate Measure of Support (AMS). should be cut by the same amount. Otherwise fictitious The EU AMS bound ceiling for 2001 (the most recent subsidies could be replaced by real subsidies without penalty. available year) was €67.2 billion ($60 billion) annually, but the actual amounted was only €39.3 billion ($35.1 If the MPS is stripped out of the AMS, actual trade-distorting billion).16 Similarly, the US bound AMS ceiling for 2001 was subsidies (not bound levels) in the most recent reported year $19.1 billon, but the actual amount was only $14.4 were as follows. In 2001, the European Union had $10.6 billion billion.17 The large gap between bound and actual rates in narrow AMS subsidies (total €39.3 billion less €27.5 means that a large “cut” in the bound rate would be billion MPS), plus $0.7 billion de-minimis support, plus $21.2 compatible with no reduction at all in actual subsidies. billion in blue box support, for a total of $32.5 billion.23 7 December 2005 Bound tariff countries are levels in developing 26 DC DgC US EU Jpn Brz Chn Ind Kor Average Tariffs in Textiles and Apparel (percent) in Textiles Tariffs Average 5 0 35 30 25 20 15 10 Figure 2 The developing countries should continue to press the United continue to press countries should The developing to Union to achieve cuts much closer States and the European level of narrowly-defined amber box, 50 percent in the actual subsidies. They and other negotiators blue box, and de-minimis to WTO monitoring of subsidies should also call for aggressive actually fully decoupled (green box) if they ensure that they are negotiators make this possible, the To are treated as such. of subsidy amounts to the WTO should agree that notification no later than six months of the completion will be made within years in the The present lag of typically four of the crop year. monitoring impossible. notifications makes serious Manufactures calls for major cuts in The July 2004 framework agreement protection of manufactures while preserving some degree of less than full reci- flexibility for developing countries, including Both industrial and developing countries still have procity. relatively high tariffs and apparel (figure 2). Although in textiles apparel quotas (after the Uruguay Round eliminated textile and Januarya lengthy timetable that just ended in 2005), it did little to cut tariffs sensitive sectors. in these traditionally countryIn all other manufactures as a group, industrial tariffs at a weighted average of about 3 percent, tend to be low, whereas developing countrytariffs as actually applied are of 11.5 percent considerably higher at a weighted average (Figure 3). total narrowly-defined The US would place the It has suggested an 80 24 25 agricultural output value. and de-minimis) should be cut to no more than 5 percent of trade-distorting subsidies (AMS excluding MPS; plus blue box Similarly, the EU has proposed a 70 percent cut in the Similarly, bound AMS, to $24 billion. counter-cyclical subsidies in the blue box, but limit the blue counter-cyclical subsidies in the blue box, amounting to $5 billion. It would box to 2.5 percent of GDP, of 5 percent of GDP cut the de-minimis allowance to a total general). This total (2.5 percent specific, 2.5 percent of which $5.8 potential would amount to $22.6 billion, rate), leaving the billion would be fictitious MPS (at the 2001 potential true (narrow) trade-distorting total at $16.8 billion. 2001 level ($15.7 This is actually higher than the narrow billion as just indicated). In contrast, the offers leave far more room for large so far 2005, the United States post-reform subsidies. In October, offered level by 60 percent, or from to cut the AMS bound $19.1 billion to $7.6 billion. So the Doha Round negotiators could reasonably be negotiators could reasonably So the Doha Round by all the opacity of domestic subsidies asked to cut through committing to the following goal: The United States in 2001 had $8.6 billion in narrow AMS $8.6 billion in States in 2001 had The United support$7.1 billion in ($14.4 billion less $5.8 billion MPS), de-minimis support, zero in blue box subsidies, for a total and trade-distortingof $15.7 billion narrow support. 50 percent A trade-distortingcut in actual, narrowly-defined subsidies would of level to $16.2 billion, or 5.4 percent thus reduce the EU or and the US level to $7.9 billion, agricultural output value, output. 4 percent of agricultural percent cut in de-minimis protection, to 2 percent of with the agricultural GDP or $6 billion for itself. Together framework 5 percent ceiling for blue box subsidies ($15 billion), this would amount to $45 billion. If the MPS maintained its 70 percent share of the AMS, post-reform MPS would be $16.8 billion, and narrow AMS, $7.2 trade distorting narrowly-defined subsidies billion. Total would be $28.2 billion (7.2 + 6 + 15), only 13 percent lower than the same concept in 2001 ($32.5 billion). Even worse: if both the United States and the European Union decided to follow the Japan tactic and eliminate adminis- tered prices (while keeping tariff protection), this would allow room for a major increase in trade-distorting subsidies unless the new AMS ceiling explicitly provided that in such cases the bound ceiling would be reduced by the amount of the previous MPS. Achieving a Grand Bargain in the Doha Round 8 apparel tariffs. In the Swiss formula, a coefficient of acoefficient IntheSwissformula, apparel tariffs. agriculturalmarketsandtextile of industrialcountry than, say, 15-20percent,inexchangefor adeepliberalization downtoarangeofnomore hightariffs would cutevenvery that formula countries shouldbepreparedtoacceptatariff Developing quence ofsuppressingdemandforimports). exchange ratetosettleatanoverlystronglevelasaconse- (bycausingthe indirectly actasapenaltytoexports and and lethargictechnologicalchangefordomesticfirms, impose highcostsonconsumers,leadtomonopolypower areinjurioustothe country’sby acountry owneconomy. They maintained should keepinmindisthatextremelyhightariffs negotiators The fundamentalpointthatdevelopingcountry lower tariffs. than byalargerproportion thatreduceshighertariffs formula (Swiss) The negotiationshavecenteredonatariff-cutting ratherthanjustsqueezingthe“water”outofboundtariffs. tariffs, factures, andtodosoinameaningfulwaythatcutsapplied protectioninmanu- to obtainreductionsindevelopingcountry even higher. A cuts. developing country from(moreaggressivethan)thatusedfor that isdifferent forcutsbyindustrialcountries shallower cuts,oracoefficient thatleadsto countries havetendedtofavoreitheracoefficient developing thatgeneratesdeepcutsforhightariffs; “coefficient” as (such could reasonablycallforamore aggressivecoefficient would accomplishcutsofthismagnitude. Developingcountries Figure 3 C 10 15 20 25 30 0 5 = 10;seefigure4)forindustrial countries. Average Tariffs inAllOtherManufactures(percent) CDCU UJnBzCnIdKor Ind Chn Brz Jpn EU US DgC DC 27 key objective of industrial country negotiatorsis key objectiveofindustrialcountry Industrial countrieshavecalledforaformula 28 C = 20 Union. Once again, a differential-treatment parametercould Union. Onceagain,adifferential-treatment no industrial country tariff in manufactures should exceed 10 exceed should manufactures in tariff country industrial no able targetisthataftertheDoha Roundisfullyimplemented, are typicallydefinedasthoseabove15percent.Areason- ceilings.Forindustrialcountries,peaktariffs tariff post-reform Finally, peaksshouldbeeliminatedbyspecifying tariff developing countries. for industrialcountriesintoa7.5to10yearperiod of 1.5to2wouldtranslatea5yearimplementationperiod countries—length ofphase-inperiod—anS&Dparameter Similarly, inanotherdimensionofflexibility fordeveloping parameter of2.0),orbyanyotherspecifiedfraction. developing countriesasforindustrial(foranS&D byhalfasmuchfor thatwouldcuttariffs given Swissformula for any todevelopasetofS&Dcoefficients straight-forward cutforadevelopingcountry.proportionate Itwouldbe wouldtranslatetoa30percent(=60/2) cut inagiventariff thatgenerateda60percentproportionate then aSwissformula industrial countries.Forexample,ifthisparameterwere2.0, specific “S&Dparameter”modifyingwhatisexpectedof treatmentfordevelopingcountriesasinvolvinga differential More generally, itwouldseemusefultothinkofspecialand percent Figure 4 10 15 20 25 0 5 , asproposedinearlyOctober bytheEuropean Formula Coefficients (percent) Coefficients Formula Tariffs Swiss UnderAlternative AFTER CUT 5 15 30 01 02 03 04 05 06 70 65 60 55 50 45 40 35 30 25 20 15 10 10 25 20 8 6 BEFORE CUT 29 9 December 2005 33 32 that there are benefits to stability of the domestic banking of the domestic are benefits to stability that there and expansion of market access in financial system, for example, services many seem a reasonable area in which would could both benefit their own economies developing countries the deal for an overall agreement that and help sweeten of industrial countryinvolves true liberalization agricultural of high textile-apparel tariffs.protection and reduction For their part, industrial countries could usefully offer the to lock in the treatment of cross-border “offshoring”current open-market services This is as call centers and software development. such great concernan area that has ignited of jobs about loss abroad, and clearer industrial country commitments to keep that developing these markets open would be insurance countries might be well advised to purchase. The largest potential offer industrial countries could make that in services of cross-border movement would be in liberalization this area is so politically and However, of temporary labor. that a major new culturally sensitive that it seems unlikely timetable of the Doha agreement can be achieved within the to derail Doha Round, yet it would be a serious mistake One question is because the absence of such an agreement. is more appropriately whether this issue belongs in the WTO, or geographically an issue of bilateral arrangements between and historically linked countries. This net favorable outcome does depend on liberalization of the markets where they do not currently have free entry. The issue of preference erosion must be dealt with or else there is some risk that the Doha Round could stall because Preference Erosion? Preference been whether global An issue of considerable recent debate has trade liberalization would actually hurt rather than help the advantages from LDCs because it would reduce their special tariff preferences. This concern tends not to take the full picture into account. If there were global free trade, the LDCs would gain new markets in the many countries where they do not including middle-income developing have preferential entry, gain from liberalizing their LDCs should countries. Moreover, own markets, and politically that is much more difficult for most of them to do, given domestic interest group opposition, in the absence of a global . In model estimates of the effects of preference erosion, it turns out that the LDCs still gain from global free trade, although not by as much as calculated if preferences are not taken into account. 31 30 As part of a grand bargain, it would seem desirable for both industrial and developing countries to adopt at least the easier parts of services liberalization. Most developing countries that have opened their banking sectors to foreign firms have found Industrial country objectives in this area tend to be to expand substantially access of their multinational firms to right of establishment in developing countries in such areas as financial services, construction, and infrastructure. Developing countries have tended to be cautious on opening these areas. Instead, they have tended to seek opening of temporary labor services. The negotiations consist of country by country “offers” and “requests,” rather than a uniform mechanism and transparent such as a formula for cutting tariffs. In part, this is because services protection is mainly by regulation, analogous to a quantitative restriction, rather than by a price mechanism analogous to a tariff. The Doha Round negotiations have gone furtherThe Doha Round negotiations have gone in agriculture and manufactures than in services. Many economic analyses could be even tend to show that the gains from liberalization greater in services especially if temporary than in goods, labor services are included. Services A crucial feature of tariff in manufactures is that liberalization be available to the WTO set of “safeguard” options would buffer protection. When there is a the adjustment to lower surge in imports, the country and when can show that “injury” safeguard tariffs has occurred, then time-limited can three years. As partbe imposed. These are phased out over tariffs,of the negotiations in manufactures differential provide developing treatment could again be allowed to latitude for applying countries greater (but still constrained) safeguard protection. As for the LDCs, it would also be in their own interests to set the also be in their own interests to set As for the LDCs, it would ceiling on tariffs at moderate levels. Arguably for manufactures to have tariffsthey might keep flexibility as high as 25 percent, agreed to ceilings of 20 percent. if middle-income countries would almost certainly be this, however, much higher than Tariffs growth in the LDCs. to the detriment of sustainable be applied. Thus, with the industrial country Thus, with the industrial be applied. ceiling for tariffs at 10 percent, no developing countryon manufactures set tariff if the differen-manufactures would exceed 15 percent in 2. were 1.5, or 20 percent if it were tial-treatment parameter 10 Achieving a Grand Bargain in the Doha Round will payonhigheragriculturalprices. exceedtheadditionalcoststhey shouldcomfortably imports LDCs shouldexperiencefromlowerpricesonmanufactured raise, overallworldprices.Thismeansthatthesavings allocationofresourcesshouldlower, international efficient not increase inglobalproductivityasaconsequenceofmore anydirectlossesfromhigherfoodprices.An than offset oftradegainsthatshouldmore They willexperienceterms andeventhoughfoodpriceswillrise. they arefoodimporters agricultural liberalizationratherthanlosefromit,eventhough analysiswillshowthattheLDCsbenefitfromglobal partial) ding ratiosformanufactures.Soacomplete(ratherthan offoodareconsiderablyhigherthantheircorrespon- imports “blue box”subsidiesinfactdo notinduceextraoutput.There for aggressiveWTOmonitoringtoensurethatany“green” or farmoutput-distorting agriculture byindustrialcountries;anddeepreductionsintheir quotasin andtariff-rate Round involvesdeepcutsintariffs The grandbargainthatneedstobestruckintheDoha Conclusion other developingcountries. comparative advantageinfoodandagriculture,justlikemost outthattheyhave financedbyaidinflows.Itturns everything, deficits inmanufactures.Theyhavelargetrade that theLDCshaveatradedeficitinfood,theyevenlarger istrue isbroadlymisplaced.Althoughit prices. Thisconcern andagriculturalfreetradewouldboostworldfood importers tion ofglobalagriculturaltrade,becausetheyarefood by Developed Countrieswouldinsteadbehurt poverty. However, somehavearguedthattheLeast prospects fordevelopingcountrieswouldhelpreduceglobal poor areintheruralsector, improvedagriculturalexport It isbroadlyrecognizedthatbecausethebulkofworld’s LDC Food Deficits? lowering thepreferentialadvantage. of aboutadverseeffects deal andalleviatinganyconcerns fromtheLDCs,therebysweetening toimports free, entry the industrialcountriesinextendingpreferential,andideally problem isthatthemiddle-incomecountriesshouldjoinwith countries. Assuggestedabove,mysolutiontothispotential of squabblesbetweentheLDCsandmiddle-income subsidies, togetherwithanewmechanism 34 The ratios of their exports to The ratiosoftheirexports liberaliza- alization. preferenceerosionfromgeneralliber- ground becauseoftariff they toowillbenefitfromtheGrandBargainratherthanlose preferential (andideallyfree)entry, inordertoassureLDCsthat free access,andmiddle-incomecountriesshouldadopt For theLDCs,industrialcountriesshouldgrantfullandimmediate be kepttoaminimum. for“sensitive”sectorsshould as othersectors,andcarve-outs goods shouldbeimplementedintextilesandapparelaswell ofthebargain.Tariff part industrial-country cutsinmanufactured tradeliberalizationasthe groups topressforfarm interest the quidproquoneededtomotivateindustrialcountry of part above presentlyappliedlevels,willbeanimportant stillator tariffs high “bound”levelsthatleavepost-reform below “applied”levels,notjustmakingphantomcutsfrom middle-income countries. again tariff, country a ceilingofnomorethan10percentforanyindustrial Tariff tariffs. country byapplying peaksshouldbechoppedoff appliedtoindustrial formula indicated bythetariff-cutting cutwouldbeonlytwo-thirdstoone-halfaslarge their tariff eter” ofsay1.5to2,meaningthatforexamplethedepth param- countries canreasonablyseeka“differential-treatment Developing requires relativelydeepcutsforhightariffs. shouldbechosenthat cuttingformula In manufactures,atariff safeguardprotectionifneeded. should insteadapplytemporary aboutvulnerabilitytosurgesinagriculturalimports concerned aswell.Developingcountries countries’ agriculturaltariffs subsidies.Thereshouldbecutsinmiddle-income farm torting should beatimetableforthecompleteeliminationofoutput-dis- cuts thancutbacksinthesocial safetynet. recipients maybeanareamorepoliticallyattractiveforbudget subsidiesdirectedheavily towardlarge obvious thatfarm especially theUnitedStates,whereitshouldbeincreasingly may behelpedinthisdirectionbythefiscalpressures in for thisbargaintobeachieved.Thedomesticpoliticalcalculus domesticspecialinterests, a willingnesstoconfrontpowerful It willrequirepoliticalleadershiponallsides,andinparticular because of)thelikelyresultingriseinworldfoodprices. from globalagriculturalliberalizationdespite(andultimately in thelongrunbutalsonearterm, too willgain,certainly because theyhavecomparativeadvantageinagriculture, 35 It will also be important thatLDCsrecognize It willalsobeimportant with a differentiated (higher)ceilingfor with adifferentiated Cutting developing country tariffs Cutting developingcountry December 2005 11 n d a n t d p. 198. go, n n n d trade n omic Research s lifted out of der n n s.” The farmer g n

n n n . It is likely that the g. n n gai farm subsidies, a perso n e of the dollar has n n ique va , 2004. e 2004, pp. 48-51). n n chmarks for collateral o n n group GDP a g loa n n trolled “amber box,” n dicators d Domi n n t I t of Agriculture, Eco a e, 2004, pp. 175-78 a a co tial US cuts i n n shares i n n n n omics, forthcomi n n iversity, 2005, processed.) iversity, e for safeguard protectio n n d. Although some developi al Eco n n k estimated 320 millio ated as LDCs. (See Cli n ell U o. 37, Nov. 2, 2005 2, 2005 o. 37, Nov. n n didly called “marketi n atio .htm.) Note that the decli n n n da: Poverty Impacts of a WTO Agreeme g subsidies as i n ter n World Developme , William J. Marti n n gladesh, Ethiopia, Democratic Republic of Co k, n rates” are commodity price be n these goods, triggered by imports above g with the Times.” , vol. 9, n k results cut this estimate to 95 millio n n the Doha Rou rate. See US Departme n derso n n n t. This is ca tries are desig n n Bridges stitute for I t Farm Reform,” ot yet fully completed. See Cli n n ewed i tries as Ba 2002 the World Ba 2002 the World n cou ded with a call for more substa s.” (Ithaca, NY: Cor s.” (Ithaca, NY: n to the Doha Age /article_5114_e n n n n d I n d Kym A n n d the loa of Aggregate Measure of Support, paragraph 8. n ifica n n n n repayme itio ew World Ba ew World ot re t a n stead require the same discipli n n n n n Africa respo d were d Jeffrey Schott. n n n tries. See World Ba tries. See World n d i t Back i n try (DgC) averages, weights are based o budgetary outlays. io n n n n n situte. Note that “loa , a ce upo n n n U gful Defi n Adopts Sig n d ambiguous system of reporti i n g cou n .org/articles/e n n io n n come Cou -u n n U the market price a n g rather tha n g Developme n n the Uruguay Rou Agricultural Policy—A Policy Evolvi omics, 2004). Note that i n t opaque a n d developi n n n of Low I clude such relatively large cou n Nash, David Orde , October 10, 2005. ter for Global Developme n the right to impose Special o n n da Policy Brief, October 10, 2005. n ce betwee e, 2004, pp. 143, 282-84; a al Eco n November 2005, however, November 2005, however, n n n n , Ce , Joh t of Agriculture). www.ers.usda.gov/db/wto. ex 3: Domestic Support: Calculatio n t the curre atio n try (DC) a t Age ters, eds., Putti n . These i n nn tries n n cial Times n n n s/). . n , “The Commo ufactures. This authority will lapse if ter o. 6, July 2005. Cordell Hull I n e Normile, “Europea a n n n n n Wi nn its classificatio the differe n Fi t effects. I n n t to the farmer to cover the differe n ma Agriculture: A Struggle for Mea n n g irreleva k i n i n n n dustrial cou to tariffs were give d Poor Cou , vol. 7, n n d L. Ala ts Database : US Departme n Agriculture, A d Mary A n n n Commissio stitute for I vestme n n n n n t” based o ce this threshold is exceeded. t o gto alysis the highest agricultural tariffs. The Europea n d I n n n d “EU Offer of Deeper Farm Tariff Cuts Fails to Restart Talks,” Cuts Fails to Restart Talks,” d “EU Offer of Deeper Farm Tariff n n tries. Approximately three-fourths of the Sub-Sahara n Rich a Farm Trade,” Farm Trade,” n n tries, a better outcome would be to abolish them a of about 650 millio n n n t a n duced i n n g/farmpolicy/questio n t makes a payme t cuts i .” Europea d the scope of this Brief. See Cli n n . (Washi g cou n cy payme n of i n n n ter-bid o me WTO Commitme n n g Proposals,” October 10, 2005. (http://europa-e Trade Policy A (for 2000). n Thomas W. Hertel a Thomas W. clusio n n d a higher tariff o g. WTO, Agreeme da: Agriculture i n n n , Nov. 7, 2005; a , Nov. iel Cook, “Domestic Support i ti ts Database verted agricultural quotas i text.” . n n n n n n umerous smaller cou imis,” as discussed below. s, so it is likely that its MPS too is almost fully book-keepi n n ecessary for safeguard protectio n s with total populatio Global Agriculture Trade.” Doha Developme Global Agriculture Trade.” 1998. ERS, n ded to developi k Kimberly Elliott, Gary C. Hufbauer, Will Marti k Kimberly Elliott, Gary C. Hufbauer, n .htm.) Also see David Kelch a n n n n ts Database tai ew results is beyo n i n n rate, the gover d J. Da t). n t makes a “deficie n cial Times n n n ter for Global Developme atio WTO Negotiati jury n n n n n n a o n me tries that co the Doha Age a Global Co n n n Fi : Ce n n of the n Beattie, “EU Offers Cou n ,” g products by world output shares. For the i n g o da, as well as tly of the volume of productio ited States called for 90 perce n n gto delso n n n n Poverty,” chapter 17 i Poverty,” swers” (www.ers.usda.gov/briefi n n n n cludes 49 de of serious i n n n box” subsidies decoupled from output, thereby maki box” subsidies decoupled from output, WTO Commitme d A able Developme d Uga n n agriculture be exte er Ma Deliveri n n dustrial) cou n specific issues, I tha (Washi n arios o tries i depe n . Harry de Gorter a t of Agriculture. euros, to about $80 billio n s a n n n 1997 to $5.9 billio n n amic model), because of lesser i n ts Database. ts Database. stratio n o g such outlays, as double-cou n n n n n ly i n n i t, but evaluatio ed by weighti n rates for 1997-98. The rates may be modestly overstated because the cuts agreed i n n n ly “gree n d Sustai n clusio imis, ERS, come level would be the $735 per capita used by the World Ba come level would be the $735 per capita used by the World n n which case the gover n , Nepal, a n imports quota volume, a up to a total n atio n ,” G/AG/N/EEC/51, November 4, 2004. clude the effect of tariff-rate quotas. n n n n ista ds heavily to build up butter mou WTO Agricultural Trade Policy Commitme n n g the demo n tials for the 2007 Farm Bill i derstateme d Global Poverty tative, “US Proposal for Bold Reform o at all, i n n n d, those (mai n n n d, for de-mi s. If the actual price falls below the loa n n ger spe tre for Trade a tre for Trade , “EU Trade Commissio , “EU Trade tial u n n ia, Afgha k, 2005). n cept ($2 per day, dy cept ($2 per day, , “Notificatio the highest agricultural tariffs. Ala n g, which is expressed i , “Esse n n ot requiri ch Week for Draft Trade Declaratio for Draft Trade ch Week n n n ufactures. n n alysis, see Kimberly Elliott, n n the loa n t/comm./agriculture/public/capleaflet/cap_e o lo za n t i n ot fully decoupled “blue box,” or exempt as “de mi n n d n al Ce earlier draft or discussio n n

appropriate cut-off i n n n n n izatio ma d Commodity Policy: Questio s’ list of Least Developed Cou d ceili a Trade Policy a n n , Ta io n n n n n n atio e, n Commissio , September 2004, US Departme U n d Cook also arrive at this co : World Ba : World n ts o n the Uruguay Rou ter n try level, the averages are obtai n n t agricultural loa ot to obtai n n n n n trolled but ly 50 perce gto e, 2004, p. 198. The rates i n n ited Natio n n me n ’s reported AMS fell from $25.8 billio ’s co mar, Suda mar, n WTO Agricultural Trade Policy Commitme WTO Agricultural Trade Policy Commitme eva: I tries have proposed that Special Safeguards i omic Research Service (ERS), n n ces Williams, “Cru sbrugghe, “Global Impacts of the Doha Sce n over. Tariff rates are most-favored- Tariff over. n e, 2004, p. 123. n elect n n n n u future, the vast majority of will be paid i n n deed, the WTO rules explicitly exclude addi the October 2005 US proposal discussed below, the U the October 2005 US proposal discussed below, effect this would leave as permissible o agriculture as i ew estimate is a substa n n n n n n At the cou Fra i cou specified volumes a poverty for the same co boosted the bou Me tur (http://europa/eu.i (Washi Mya gover (Ge See Europea WTO, G/AG/N/EEC/51; a Represe Office of the US Trade Japa The Europea De Gorter a I ERS, World Trade Orga Trade World ERS, See Robert L. Thompso Amber Waves Note that i Eco See Cli I For a more detailed a Cli quotas apply a lower tariff o Tariff-rate The U For this purpose, a I William R. Cli For comme n a ca cut of o Service, “Farm a “I Endnotes 25 26 23 24 20 21 22 18 19 16 17 15 14 13 11 12 9 10 6 7 8 4 5 3 2 1 27 The formula is: t1 = [t0 x C] / [ t0 + C], where t0 is the tariff before the cut (in percent), t1 is the tariff after the cut, and C is the “coefficient” chosen. A lower value of C leads to larger proportional cuts for higher tariffs.

28 A proposal by Pakistan, for example, calls for the formula to apply a coefficient of C = 6 for industrial countries and C = 30 for developing countries. (, “Market Access for Non-Agricultural Products: The Way Forward, Communication from Pakistan.” TN/MA/W/60, July 20, 2005.) As shown in figure 4, this would cut a 30 percent tariff to 15 percent in a developing country but to 5 percent in an industrial country.

29 For example, if the industrial country Swiss formula coefficient is set at C = 10, then the proportionate cut in the tariff will be half as much for developing countries along the following schedule. For initial tariffs of 5, 10, 20, and 30 percent, the standard Swiss formula would cut tariffs to 3.33, 5, 6.67, and 7.5 percent, yielding proportionate tariff cuts of 33.3%, 50%, 66.7%, and 75%, respectively. To obtain proportionate cuts only half as large, the adjusted coefficients for developing countries would need to be C = 25, 30, 40, and 50, respectively. For a more moderate S&D parameter of 1.5, any given proportionate tariff cut of x would translate to x/1.5 for developing countries. This would generate an alternative set of Swiss formula C coefficients corresponding to the industrial country C= 10, depending on the level of the initial tariff.

30 This section is from my article “Doha and Development,” Foreign Affairs, forthcoming.

31 Brown, Deardorff, and Stern (p. 40) estimate that services would account for about two-thirds of potential static gains for developing countries from global free trade. (Drusilla K. Brown, Alan V. Deardorff, and Robert M. Stern, “CGE Modeling and Analysis of Multilateral and Regional Trade Negotiating Options.” Research Seminar in International Economics Discussion Paper 468. Ann Arbor, MI: University of Michigan, 2001.) The (p. 172) suggests that developing country gains from global free trade in services (excluding temporary labor) could be four times as large as those from free trade in goods. (World Bank, Global Economic Prospects and the Developing Countries 2002: Making Trade Work for the World’s Poor. Washington: World Bank, 2002). Note, however, that the assumption typically used in such estimates—that free trade would reduce the price of such services as public utilities, construction, and transport to the lowest rate currently identified among reference countries—is likely to give an upward bias to estimated welfare gains because of country-specific factors not included.

32 The case for a bilateral approach is set forth by Lant Pritchett, The Future of Labor Mobility: Irresistible Forces Meet Immovable Ideas, forthcoming, Center for Global Development.

33 See Cline, 2004, pp. 217-20.

34 Excluding Bangladesh, three-fourths of the population of LDCs is in countries that have comparative advantage in food production. And although Bangladesh instead has comparative advantage in manufactures, it stands to gain from the Doha Round from liberalization of markets for manufactured goods.

35 This approach would seem far more compelling than the current international strategy, which is to offer “aid for trade.” Such aid would seem unlikely to be truly additional and would thus come at the expense of other aid; and the magnitudes suggested, some $200–$400 million over five years, have been characterized by some LDC spokespersons as too small to be meaningful at about $2 million per country per year. See International Monetary Fund and World Bank, “Doha Development Agenda and Aid for Trade,” September 19, 2005.

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Achieving a Grand Bargain in the Doha Round William R. Cline

December 2005