How to Free Trade: The Doha Round

Transcription

1 How to Free Trade: The Doha Round AED/IS 4540 International Commerce And the World Economy Professor Sheldon

2 The Doha Round Doha Round began in November 2001 in Doha, Qatar First round of trade negotiations under WTO since conclusion of Uruguay Round of GATT in 1994 Key to negotiations is the agricultural sector which was brought under GATT rules for first time in the Uruguay Round Agreement on Agriculture (URAA) Key features of URAA were focus on: (i) market access tariffication (ii) disciplines on export subsidies (iii) disciplines on domestic farm policies

3 Why is Doha Round important? 96% of world s farmers 1.3 billion live in less developed countries (LDCs) 73% of the poor live in rural areas, with over 1000 million people living off under $1/day LDCs very dependent on agriculture for household income International markets important to sustained income growth of LDCs

4 Why is Doha Round important? Doha Round labeled development round Focus on increasing market access to developed countries for LDC agricultural exports Reduce world price distortions due to developed country farm policies Uruguay Round brought only modest impacts on market access, export subsidies, and farm support

5 Developing countries and the WTO Developing countries get free pass to tariff cuts negotiated in GATT/WTO under MFN clause but do not have to reciprocate, i.e., special and differential treatment (SDT) Objective to ensure developing countries benefit from gaining market access to developed country markets Evidence suggests GATT/WTO membership has resulted in significant increases in trade volumes for developed countries but less so for developing countries (Subramanian and Wei, 2007)

6 Developing countries and the WTO Despite free pass to tariff reductions of developed countries, developing countries have lost voice over which sectors to liberalize As a result, sectors that matter to developing countries textiles, clothing, and agriculture have seen least trade liberalization Latter argument misses point of SDT though, i.e., developing and developed country exporters would each be able to compete for market share in developed countries under a specific tariff line

7 Why might SDT be a problem? Imagine 3 countries, i =1,2,3 where 1 imports good x from 2 and 3, and 1 exports good y to 2 and 3 (see figure) Allow for trade negotiations where: - 1 and 2 reduce their tariffs t 1 and t 2-3 faces tariff cut on t 1 via MFN, but under SDT, it does not cut its tariff t 3 Assume there is balance of concessions between 1 and 2 (empirical evidence suggests reciprocity has been norm, e.g., Limao, 2006)

8 Structure of trade and tariffs y t 2 Country 2 x Country 1 t 1 x y t 3 Country 3

9 Why might SDT be a problem? 1 cuts tariff on x, local price of x decreases and world price of x increases - consumers in 1 import more x from 2 2 cuts its tariff on y, local price of y decreases and world price of y increases - consumers in 2 import more y from 1 Both 1 and 2 gain increased market access for their exports, but terms of trade remain unchanged, i.e., px/py is constant 3 faces no change in its terms of trade, and its local price of y does not change

10 Why might SDT be a problem? As local price of x falls in 1, its consumers substitute away from y to x, and resources shift to producing and exporting more y (vice-versa in 2) 1 s increased demand for x is met by 2, while 2 s increased demand for y is met by 1 Hopes of 3 for free pass under SDT not realized as it cannot compete with 2 in exporting x to 1 Maxim in trade negotiations: what you get is what you give, i.e., tariff cuts can stimulate exports

11 The latecomers problem As well as concerns over SDT, the WTO may face a latecomers problem, i.e., globalization fatigue Reciprocal bargaining among developed countries has gone on for over 50 years tariffs on manufactures are now very low Local price distortions in developed countries have been already eliminated, making it difficult for them to identify new tariff bargains with developing countries How can room be made at the table for developing countries?

12 Trade structure EU exports y to US with an export subsidy, and applies tariff on imports of x from US and Brazil (see figure) US exports x to EU with an export subsidy, and applies tariff on imports of y from EU and Brazil At same time, Brazil exports both x and y, and applies tariff on imports of z from EU and US What can EU, US and Brazil bring to negotiating table that will result in reciprocal bargain in tradition of GATT?

13 Structure of trade and policies t Brazil x Brazil y EU z y t EU s US t US t Brazil s EU x US z t US

14 A possible solution Key for US and EU to reduce export subsidies on x and y in exchange for Brazil cutting its tariff on z If US cuts export subsidy on x, world price increases and volume traded declines Assuming Brazil has comparative advantage in exporting x, it faces higher world price, and EU reorients imports of x away from US to Brazil US price of x also falls, its consumers substituting away from importing y to consuming x i.e., lowering export subsidies also reduces imports

15 A possible solution At same time, if EU cuts export subsidy on y, world price increases and volume traded declines Assuming Brazil has comparative advantage in exporting y, it faces higher world price, and US reorients imports of y away from EU to Brazil EU price of y also falls, its consumers substituting away from importing x to consuming y - i.e., lowering export subsidies also reduces imports Why does cutting export subsidies solve WTO latecomers problem?

16 Making WTO work Cut in export subsidies on x and y is a bargaining chip for US and EU in negotiations with Brazil Increase in local relative price of say y in US also places higher value on reciprocal tariff cuts between US and Brazil, US cutting tariff on y, and Brazil offering cut in tariff on z This type of bargain would help in Doha Round negotiations, but requires relaxation of SDT However only likely to be effective for large agricultural exporters such as Brazil