Mahoshada

The Suspension of the WTO Doha Round Talks
This week the global trade negotiations that have been taking place through the World Trade Organization’s Doha Development Round (DDR) were formally indefinitely suspended. Many believe that this constitutes the final failure of the talks, raising serious concerns about the future of the WTO and the global multilateral trading system. Some hope that this is just another example of brinksmanship that has characterized international trade negotiations in the past and that a way to resurrect these talks will be found at the last minute. Only time will tell which view is right.

It is clear, however, that the DDR, which began in November 2001, is now effectively finished unless a consensus among the WTO’s 149 member countries can be quickly found to revive it. The reality is that there is evidently an unmovable deadline for this process. This is because the White House’s authority from the US Congress to complete negotiations and submit an agreement to the US Congress expires next year. This authority requires Congress to vote up or down on the entire agreement without any amendments. Without this authority in place, any trade agreement submitted can and almost certainly would be picked apart. Given the lead time that it would take to conclude an agreement and submit it to Congress, the end of this month is effectively a firm deadline. Most observers believe that the US Congress is unlikely to renew that authority next year, rendering any near-term agreement impossible.

Few people in Sri Lanka seem to appreciate how potentially important success of the DDR would be for the economic future of the country. Trade talks are admittedly a complicated topic that uses an arcane terminology, making them seemingly technical and inaccessible. Nevertheless, it should be understood that the failure of the DDR would have important negative repercussions that would be felt throughout the global and consequently the national economy. Consider the assessment offered by The Economist:

“This disaster, [the wrecking of the Doha round] born of complacency and neglect, signals a defeat of the common good by special interest politics. If the wreck is terminal – and after a five-year stalemate, that seems likely—everyone will be the poorer, perhaps gravely so.

“It is not just the narrow business of the Doha round (if narrow is a fit adjective for an ambition to lift millions out of poverty, curb rich countries’ ruinous farm support and open markets for countless goods and services) that is at stake. In the long run, the lack of commitment to multilateral trade that sank the Doha round this week will also start to corrode the trading system as a whole.” (The Economist, 27th July 2006)

Sri Lanka’s economy depends crucially on a healthy global trading environment. The substantial and immediate negative economic impacts of the recent port strike should make this very clear.

The Causes of the Failure of the DDR
The final collapse of the DDR talks came with the failure of a group of six “core” countries to come to some sort of agreement on how to proceed on the contentious issue of reducing agriculture trade barriers. The six “core” countries were India, Brazil, the US, EU, Japan and Australia.

In these negotiations, the US has continued to argue for larger cuts in import tariffs to expand agricultural trade globally, a demand fiercely rejected by the EU, Japan and India, which said the US had first to go further in offering to cut agricultural subsidies. The EU trade commissioner, Peter Mandelson, was quoted in the Financial Times as saying that “If the US continues to demand dollar-for-dollar compensation in market access [cutting tariffs] for reducing domestic support, no one in the developing world will ever buy that, and the EU will not either.” The Indian trade minister, Kamal Nath, said of the US: “Everybody put something on the table except one country who said, ‘We can’t see anything on the table.’”

The counter argument, the US position, is that unless tariffs for agricultural comities are reduced, there will not be the expansion in international agriculture-based trade that would lead to substantial economic benefits for developing countries generally. The reality is that many developed countries, including the EU, Japan and Switzerland, as well as developing countries such as India, Indonesia and the Philippines, are trying to protect a wide range of agricultural products from increased competition through further tariff cuts. The US Trade Representative, Susan Schwab, said that maintaining existing high tariffs on agricultural commodities would defeat the object of the talks. Her complaint is that “As we went through the layers of loopholes . . . we discovered that a couple of our partners were more interested in loopholes than in market access.” The US, which has championed earlier trade rounds, has taken the position that a bad deal would be worse than no deal at all.

Perhaps the overriding reason for the apparent failure of the DDR is a general lack of commitment to the global multilateral trading system. For decades, global trade has been growing faster than GDP, reaching record levels. But there has also been a major increase in the number of bilateral and regional trade agreements in place, which has given the impression of substantial ongoing trade liberalization. This has evidently led to a high level of complacency regarding the importance of maintaining progress in reducing trade barriers globally – in effect creating a situation that could in the end lead to killing the goose that has laid the golden egg.

Another fundamental problem that has led the WTO to this apparent dead end can be seen in the approach in the DDR, which has purportedly sought to be a development round, which would primarily benefit developing countries. The approach has been based on a false premise, ignoring the reality that for most countries, more economic benefits from trade liberalization would result from cheaper imports than through increased exports. Implicitly, the broad strategy followed with the DDR has been that the developed countries would reduce their trade barriers, providing developing countries greater market access. Contrary to the original intention, if implemented this strategy would result in the opposite of what the DDR was intended to achieve – leading to greater economic benefits for the wealthy countries than for poor countries.

The Implications for Sri Lanka
Sri Lanka’s economy depends crucially on trade. As trade as grown, including both imports and exports, so too have real incomes and employment opportunities. One has only to look back to the 1970s, a time when the country was largely cut off from international trade and the economy nearly collapsed. Since then, as trade policies have been liberalized over time, the economy has grown. When these policies have been reversed, the cost of living has increased more rapidly and economic performance has suffered. This is consistent with the great deal of evidence from other countries that has shown the strong links between the openness of trade policies and economic growth. As pointed out above, despite what many people might think, reducing trade barriers at home to allow cheaper imports is one of the principal sources of economic benefits. It is not all about gaining access to other countries’ markets.

The global process or multilateral trade liberalization has been a substantial benefit for Sri Lanka over the years. As a small country member of the WTO, Sri Lanka has gained in two ways: first, it has provided a framework to reduce domestic trade barriers and second, it has offered greater access for exports to all other countries’ markets. Small developing countries generally are able to obtain benefits from the major trading powers that would be impossible to realize on their own. If the failure of the DDR means a slowing or a cessation of multilateral liberalization, Sri Lanka and other small developing countries will be the chief losers.

However, the country could still achieve considerable economic benefit in the absence of an active WTO process if it were to follow a course of unilateral liberalization – in other words, if tariffs and other forms of trade taxes and non-tariff barriers raising the costs of imports were simply to be reduced. The cost of living would be reduced while consumers would have greater choice and local producers would be compelled to be more productive. Exporters would also benefit because their costs of doing business would be reduced as well. However, the government has been following a different course in recent years, raising trade barriers instead of cutting them. Unfortunately, this will further limit the scope for economic growth and development in Sri Lanka.