SELA Antenna in the United States SELA Permanent Secretary No th Quarter 2009

Transcription

1 SELA Antenna in the United States SELA Permanent Secretary No th Quarter 2009 SUMMARY: WHY THE DOHA ROUND IS A LOW PRIORITY FOR THE UNITED STATES Most Barriers to U.S. Exports Have Already Been Reduced or Eliminated The Disappointing Results of the Uruguay Round Multilateral Liberalization Means Reducing Margins of Preference Trade Is Not Part of the Obama Administration s Short or Long-Term Priorities Conclusion Why the Doha Round is a Low Priority for the United States The Doha Round of multilateral trade negotiations in the World Trade Organization (WTO), which was supposed to be completed in five years, has been underway since There is no guarantee that these talks will be completed in 2010, or indeed that they will ever produce a final agreement. While there is no single cause for the many delays in these negotiations, one of the main problems has been the lack of strong and sustained U.S. leadership. The United States played a leading role in all of the rounds that were negotiated under the General Agreement on Tariffs and Trade (GATT) from the late 1940s through the early 1990s, but the only times that U.S. negotiators have pressed hard in the Doha Round were in the 2001 launch (which was cast more as a post-9/11 opportunity for international solidarity) and in the 2003 Cancún ministerial meeting (which collapsed when the United States and the European Union failed to impose a deal they had worked out between themselves). Since that time the principal contribution of the United States, first under President Bush administration now under President Obama, has been to repeat the warning that no agreement is better than a bad agreement, and that the round is worth completing only if the results are ambitious enough to justify the effort. There are three things that the United States will need to do in order to bring this round to a successful conclusion. The first step is for the U.S. Congress to make a new grant of trade promotion authority (also known as the fast track ) to the president; without such a grant, the U.S. implementing legislation for the Doha Round agreements could easily be blocked or even amended in Congress. The second step, which might be taken concurrently or sequentially with the first, would be a much more active engagement in the negotiations by the United States. The third is congressional approval of the agreements. This is a task that depending on the terms of the agreements could be more difficult to achieve than was the case for the agreements reached in the Tokyo Round (approved in 1979) or the Uruguay Round (approved in 1994). All three of these steps require that the Obama administration invest much more of its political capital in the process, and elevate the priority that it accords to trade policy in both international negotiations and in domestic policymaking. This note seeks to explain why this has not yet happened. It looks at the current posture of the United States in the Doha Round not simply as the choice of one administration, but instead as part of a longer trend that has stretched across two successive presidencies. While the Bush and Obama administrations differ on a great many issues, including trade policy, the current administration s approach to the Doha Round so far has been quite similar to that of its predecessor. For reasons that are explained below, that continuity can be attributed as much to long-term economic movements as it can to shorter-term political developments. The thesis presented here complements the argument made in the previous report (SELA Antenna No.92), which examined the decline in both the supply and demand for trade policymaking in the United States. Trade policy has gradually diminished in importance to the U.S. private sector, and the response from elected officials has reflected this downgrading. The lack of enthusiasm for the Doha Round is one manifestation of that trend and, as is the case for trade policy in general, the drift away from the round is accelerated by the fact that the Obama administration sees both political and economic reasons to put other topics ahead of the Doha Round. Most Barriers to U.S. Exports Have Already Been Reduced or Eliminated One reason why the United States has shown relatively little interest in this round is that there are relatively few barriers left to U.S. exports in major markets. This has been the consequence both of past rounds of multilateral negotiations as well as the many free trade agreements (FTAs) that the United States has negotiated since the mid-1980s. As can be seen from the data in Table 1, the FTAs that are now either in effect or pending approval in the U.S. Congress cover over two-fifths of U.S. exports. Apart from a small number of products in each agreement that were isolated from

2 2 liberalization, this means that nearly all goods and many services exported by the United States to these partner countries will once the phase-in periods for all of the agreements are concluded enjoy free access to these countries markets. As is discussed in a later section, any commitments that these partners make for further cuts in their trade barriers will mean reducing the margins of preference that the United States enjoys. The second-largest category of partners consists of those member states of the Organization for Economic Cooperation and Development (OECD) with which the United States has not negotiated FTAs. These countries, which collectively account for close to one-third of U.S. exports, already made significant concessions in the past rounds of GATT negotiations. As a result, the great majority of the U.S. exports to these partners are either duty-free on a most-favorednation (MFN) basis or face relatively low duties. That is not a universal rule: Passenger automobiles face a 10% import duty in the European Union, for example, and Japan imposes high tariffs on some U.S. agricultural products. The United States also places fairly high tariffs on some items imported from these partners, especially luxury goods. These are the exceptions rather than the rule, however, and in general there are few gains to be had from further liberalization of these countries markets. So who is left? The larger developing countries are the main targets for the United States in the Doha Round s marketaccess negotiations. That is especially true for the group that is often deemed the major emerging economies, and less formally known as the BRICs (i.e., Brazil, Russia, India, and China). One of the principal complaints heard from the U.S. private sector and its allies in Congress is that the offers these countries have put on the table are not sufficient. As the data in Table 1 show, however, these four countries collectively account for just over 10% of U.S. exports. Even if they were to make substantial liberalization commitments in this round the gains for the United States would be fairly limited. And if one goes beyond the BRICs to include the other major developing countries, including five oil-exporters and eight others, we are still looking at countries that collectively take in just over onefifth of all U.S. exports. The BRICs and other large, non-fta partners in the developing world are thus put in a somewhat difficult position: They form a large enough part of the potential gains to attract a great deal of U.S. attention, but are not so large that the U.S. negotiators feel compelled to reach a deal at any cost. The Disappointing Results of the Uruguay Round Another reason why U.S. policymakers and leaders in the private sector are reluctant to invest much in the present round is that they were disappointed with the results of the last one. The United States had been the main demandeur in SELA Antenna in the United States the Uruguay Round, and the U.S. strategy in that round was based largely on the introduction of new issues to the trading system. The United States had traditionally run a strong surplus on agricultural products, and in the 1980s representatives of the U.S. services sector argued forcefully that they, too, should benefit from market-opening initiatives. The aim of the U.S. negotiators was thus to trade off further U.S. commitments on non-agricultural goods in exchange for liberalization in agriculture and in services, while also winning commitments for stricter enforcement of intellectual property rights. The data illustrated in Figure 1 show that these expectations have been unmet. The U.S. deficit on non-agricultural goods continued to grow after the Uruguay Round results entered into force in 1995, and have not been counterbalanced by increases in the surpluses on agricultural and services trade. To the contrary, both of those surpluses declined sharply in the early years of this decade. Even though the U.S. balances in these sectors have since recovered somewhat, the interest groups that represent agricultural and services are not nearly as enthusiastic about the current round as they were about the last one. This enthusiasm gap is one of the main reasons why neither the Bush nor Obama administrations have felt much pressure at home to bring this round to a conclusion. It has grown even more significant over the past year, with the U.S. private sector feeling more compelled to act defensively on domestic policy initiatives than to seek new international agreements. The reversal of fortunes in the agricultural sector is especially worrisome, as this had once been the strongest advocate for trade liberalization. The U.S. agricultural trade surplus peaked at $29.6 billion in 1996 (equal to 0.4% of GDP), but it declined thereafter in both absolute and relative terms. The United States very nearly ran an agricultural trade deficit in 2005, when exports exceeded imports by just $41 million. Rapid growth in exports boosted that surplus to $30.4 billion in 2008, but in relative terms (0.2% of GDP) that represented a significant decline from When combined with the declining surplus on trade in services, the net result has been a rebuke to the U.S. strategy in the Uruguay Round. In the years immediately preceding the entry into force of that round s agreements, the twin U.S. surpluses on services and agriculture offset about half of the deficit on non-agricultural products. It reached a high-point in 1991, when the combined value of these surpluses was equal to 70.2% of the non-agricultural trade deficit. With both of the surpluses declining and the non-agricultural deficit rising, however, that figure fell as low as 10.4% in It has since recovered somewhat, reaching 20.2% in 2008, but the overall pattern is clear: It is highly unlikely that the U.S. gains in these more competitive sectors can fully erase the overall U.S. trade deficit at any time in the foreseeable future.

3 SELA Antenna in the United States 3 Table 1: U.S. Merchandise Exports to Selected Economies, Millions of Dollars, FAS Value, Domestic Exports; 2009 Year-to-Date Data Are January-October 2008 Share 2009 YTD Share FTA Partners 504, , Canada 222, , Mexico 131, , Korea* 33, , Singapore 25, , CAFTA-DR 23, , Australia 20, , Middle East FTA Partners** 14, , Colombia* 10, , Chile 11, , Peru 5, , Panama* 4, , Other OECD 345, , European Union (27) 251, , Japan 61, , Switzerland 20, , All Other OECD Members 12, , Major Developing Economies 243, , The BRICs 122, , China 67, , Brazil 29, , India 17, , Russia 8, , OPEC Members 45, , United Arab Emirates 14, , Saudi Arabia 11, , Venezuela 11, , Nigeria 3, , Ecuador 3, , Others 76, , Taiwan 23, , Malaysia 11, , Thailand 8, , Egypt 5, , Philippines 7, , Argentina 6, , Indonesia 5, , South Africa 6, , All Other Partners 75, , World 1,169, , * : FTA still pending approval in the U.S. Congress. ** : Bahrain, Israel, Jordan, Morocco, and Oman. Source: Calculated from U.S. International Trade Commission data.

4 4 SELA Antenna in the United States Figure 1: U.S. Balances on Merchandise and Services Trade as a Percentage of Gross Domestic Product, Non-Agricultural Merchandise Trade Deficit Services Trade Surplus 0 Agricultural Trade Surplus Note that the definition of agricultural products used here includes, per the WTO definition, both raw and processed agricultural products (i.e., chapters 1, 2, and 4-24 of the Harmonized System, plus cotton, wool, and silk). Sources: GDP and services trade data from the Bureau of Economic Analysis (U.S. Department of Commerce), merchandise trade data from the U.S. International Trade Commission. Multilateral Liberalization Means Reducing Margins of Preference Discriminatory trade arrangements, whether they are provided through FTAs or preferential programs, create both economic and political disincentives to multilateral liberalization. As was already alluded to in an earlier section, any commitments that a U.S. FTA partner might make for reductions in MFN tariffs will mean reduced margins of preference for U.S. exports. On a political basis, many U.S. policymakers are reluctant to make commitments that would reduce the margins of preference currently enjoyed by developing countries that the United States wishes to support. It is that second point that deserves close scrutiny here. One of the political disincentives to multilateral liberalization, from the perspective of U.S. foreign policymakers, is that it would be costly for several partners that the United States has sought to aid through preferential access to the U.S. apparel market. It is not much of an exaggeration to say that, at a time when the average U.S. tariff on non-preferential imports is just 1.6%, apparel is almost the only major item that is still subject to very high MFN barriers to the U.S. market. 1 It is also a sector for which the United States created a series of preferential programs and agreements over the past generation, primarily in the Americas but also in the Middle East and sub-saharan Africa, with the twin aims of (1) promoting the development of export-oriented apparel industries in those countries and (2) encouraging the use of U.S. fabrics by these industries. With some variation between different programs and agreements, most arrangements extended duty-free, quota-free access to the U.S. market for apparel made from U.S. textiles. The beneficiaries of these agreements and programs include Mexico, countries in the Caribbean Basin (including Central America), the beneficiaries of the Andean Trade Preferences Act (ATPA) and the African Growth and Opportunity Act (AGOA), and other FTA partners. 1 In 2008 non-preferential imports of apparel and accessories sector (NAIC category 315) accounted for $9.2 billion in U.S. tariffs, or 35.7% of all tariffs that the United States collected on MFN imports. The average MFN tariff on imports in this sector was 15.0%. The only other major import category that came close to these numbers was leather and allied products (NAIC category 316), for which average MFN tariffs were 10.2% and the collected tariffs of $2.9 billion accounted for 11.3% of the total for nonpreferential imports.

5 SELA Antenna in the United States 5 This strategic use of managed trade was already undercut by commitments made in the Uruguay Round, and could be further undone by the Doha Round negotiations. In the Uruguay Round the United States and other industrialized countries agreed to phase out the quota arrangements that had strictly controlled apparel trade for decades. The final phase-outs came at the end of Since that time, the main contestants in the U.S. market have been those developing countries in the Americas and Africa that enjoy preferential access that is conditional upon strict rules of origin versus those developing countries in Asia that pay MFN tariffs but can source their fabric freely. As the data in Table 2 show, the latter group has been winning. The countries that received preferential access to the U.S. apparel market collectively accounted for close to twofifths of total imports in 2000, but by 2009 their share was reduced to just over one-fifth. Haiti is the only country in the world to benefit from a U.S. preferential trade program that is devoted entirely to one partner (the Haitian Hemispheric Opportunity through Partnership Encouragement Act, or HOPE), and is also the only country in the region that has managed to increase its share of the U.S. apparel-import market during By contrast, the decline was especially sharp for the other members of the Caribbean Community (CARICOM), whose share of the U.S. apparelimport market fell from 0.5% to almost nothing. These trends may only accelerate if the Doha Round leads to substantial cuts in U.S. tariffs on apparel. That is a prospect that has led to concern on the part of many U.S. trading partners that now enjoy preferential access to the market, as well as their allies in the U.S. textile industry and Congress. Their concerns are among the reasons why the United States has shown little inclination to provide leadership in the round. Trade Is Not Part of the Obama Administration s Short- or Long-Term Priorities In addition to the longer-term trends raised above, we must also look to two developments in 2008 that have further contributed to the U.S. reluctance to press hard for conclusion of the Doha Round. These are the outbreak of the financial crisis in the Fall of 2008, which was followed shortly by and was a contributing factor to the election of Barack Obama as president. These twin developments rearranged the priorities of the United States in ways that push trade negotiations farther back: In the short term the new administration is focused on recovery from the recession, and in the medium term its priorities are on issues that have little to do with trade (i.e., health care and climate change). One might reasonably ask the question, Why doesn t the Obama administration treat multilateral trade liberalization as part of its economic recovery program? There are at least three reasons why, from the administration s perspective, completion of the Doha Round is not an attractive option for restoring economic growth. The first reason is a simple matter of timing. Under the most optimistic scenario, it would take at least two years to conclude the negotiations and approve the results. Even if the Obama administration had made the round its top priority a year ago it could not realistically expect to see agreements enter into effect until the start of 2011, and the results might not be felt until the 2012 presidential election season had begun. By the U.S. economic and political calendar, that is just too far away to be relevant. And now that another year has slipped away it is difficult to see how the results of this round, even if concluded and approved expeditiously, can have much effect within the current presidential term. Second, trade does not matter as much to the U.S. economy and hence to U.S. economic policymakers as it does to other countries. According to the World Bank, as of 2006 (the most recent year for which global data are available) exports of goods and services were equal to 24% of GDP in Latin America and the Caribbean. For the United States, however, that figure was just 11%. This translates into a lower level of interest in trade as an engine of growth and recovery. Things might be different if trade were seen to be part of the problem, but that has not been the case in this recession. The merchandise and services trade deficit in the first three quarters of 2007 (i.e., the final full pre-recession quarters) was equal to 5.3%, 5.2%, and 4.9%, respectively, of gross domestic product (GDP), respectively. The data in Figure 2 show that since the onset of the recession, and especially since the outbreak of the financial crisis in late 2008, imports have fallen sharper than exports. As a result, the deficit was equal to 2.7%, 2.4%, and 2.8% of GDP, respectively, in the first three quarters of As long as trade is not perceived to be one of the drags on the economy, it is natural for U.S. policymakers to focus on other means to promote recovery. The third reason why the Obama administration sees little advantage in concentrating on the round is that it has no desire to antagonize members of its own party during the most critical period of the presidency. Democrats expanded upon their majorities in both the House of Representatives and the Senate in the 2008 elections, but it is widely expected that they will lose seats in both chambers in the November, 2010 elections. They could even lose their majority in the House in those midterm elections. The 111 th Congress ( ) thus represents President Obama s best opportunity to enact legislation in areas that are high priorities for Democrats, such as health care and climate change, and any additional issues that he might take on during that time will only dilute the administration s efforts on the priority matters. That is doubly true for trade liberalization, which has far more support from the minority Republicans than it does from the majority Democrats.

6 6 SELA Antenna in the United States Table 2: Shares of the U.S. Import Market for Apparel, Percentage Shares of Total U.S. Imports of NAIC Category 315; Change Calculated in Percentage-Point Shifts; 2009 Data Are January-October Change Change LAC Preferential CAFTA-DR Mexico Peru Haiti Colombia Chile Other CARICOM Other Preferential Other FTA Partners AGOA Beneficiaries LAC Non-Preferential Brazil All Other Asian Non-Preferential China Non-Preferential LDCs* Vietnam Indonesia India Pakistan Sri Lanka Rest of World World * : Non-Preferential LDCs are three Asian least-developed countries that do not have preferential access to the U.S. market (i.e., Bangladesh, Cambodia, and Nepal). Source: Calculated from U.S. International Trade Commission data.

7 SELA Antenna in the United States 7 $3 Imports of Goods and Services Figure 2: U.S. Balances on Merchandise and Services Trade, Quarterly Data, Trillions of Dollars Outbreak of Recession Outbreak of Financial Crisis $2 Exports of Goods and Services $1 Deficit on Goods and Services $ Source: Calculated from the Bureau of Economic Analysis (U.S. Department of Commerce) data. Conclusion The foregoing analysis should not be read to mean that the United States has no interest at all in the Doha Round, or that the Obama administration will fail to participate in the talks, or that Congress would necessarily refuse to approve their results. It is possible to imagine scenarios in which 2010 proves to be the breakthrough year in the negotiations, and will produce a set of agreements that are eventually perhaps in 2011 sent to Congress for approval. The problem with those scenarios is that, in the absence of some major shift, they will need to rely on initiative that comes from somewhere other than the United States. For the time being, it is questionable whether trade policy will be any higher on Washington s agenda in 2010 than it was in There is still unfinished business on the table: The Obama administration has not yet declared a definitive position on the three FTAs that it inherited from its predecessor (i.e., with Colombia, Panama, and Korea), nor has it expressed precise wished for three preferential trade programs that face expiration. Congress acted at the end of 2009 to renew the Generalized System of Preferences and the Andean Trade Preferences Act for another year, and parts of the Caribbean Basin Initiative will expire on September 30, 2010 if not renewed before then. The only item in trade policy that Congress seems likely to take up in 2010 is reform of the preferential trade programs, and in that instance the initiative comes more from the legislative than the executive branch. It has yet to be determined whether or not the pending FTAs will be taken up, or will spend yet another year in legislative limbo. While it is conceivable that Congress might also take up a new grant of trade negotiating authority, that does not seem likely to happen unless and until there is progress in the Doha Round. And to return once again to the same chicken-and-egg problem that has bedeviled trade policy since 2007, the round itself may not move far unless and until Congress makes that new grant of authority. SELA Permanent Secretariat, Apartado Postal 17035, El Conde, Caracas 1010-A, Venezuela Tel: / Telefax: / difusion@sela.org (Legal Deposit No. pp CS182, ISSN: )