United Nations Conference of Trade and Development Coping with Trade Reforms: A Developing Country Perspective of the On-going WTO Doha Round of Negotiations United Nations New York, 8 July 2008 Santiago Fernández de Córdoba Economist UNCTAD
Content Introduction to WTO Doha Round Trade, development and poverty Market access impacts Gains and Risks Coping with trade related adjustment costs Conclusions
WTO Doha Round All the deadlines have been missed In Doha, November 2001, members agreed to launch negotiations (4th MC) In Cancún, September 2003, members disagreed on everything (5th MC) Some progress on July 2004 ( July package ) The original 1st January 2005 deadline to conclude the Round was missed In Hong Kong, December 2005, some progress (6th MC) However, the negotiations were suspended in July 2006 The next deadline December 2006 was again missed Negotiations re-launched in 2007, with a focus on achieving a breakthrough soon We are in April 2008 and all the deadlines have been missed. Will there be a collapse of the Doha round? 2001 2002 2003 2004 2005 2006 2008.???
Will there be a collapse of the Round? Negotiations have resumed, but none of the counterparts have changed their position New February 2008 negotiating texts: surprise no numbers! Reasons for the impasse: - US refuses to accept deeper reductions in agricultural subsidies - EU refuses to accept deeper reductions in agricultural tariffs - Developing countries refuse to accept deeper reduction in industrial tariffs Risks if the negotiations fail: - Main losers: developing countries - Risks: increase in FTA s What is behind? - US Presidential election New wave of protectionism in Washington - EU CAP reform (2003 to be implement by 2012) - Global economic downturn - Surge of commodities prices Is there political will to conclude the negotiations? Are we back at the beginning?
WTO Doha Round The Mandates Agriculture: - Market access: substantial reductions - Exports subsidies: HK Ministerial agreed to eliminate them by a date to be negotiated - Domestic support: substantial reductions for supports that distort trade Non-Agricultural Market Access (NAMA): - Reduce or eliminate tariffs, including tariff peaks, high tariffs, tariff escalation, non tariff barriers, especially on products of export interest to developing countries. Implementation-related issues Services - Uruguay Round s built-in agenda Singapore Issues: Competition Policy, Investment, Government Procurement and Trade Facilitation, (two out, two in!) Aid for Trade - Less than full reciprocity - Single undertaking - No overall target
Gains and Risks (summary of the conclusions book) More ambitious approaches show greater gains but greater challenges Potential gains developing countries: - Welfare +$65 to +$135bn - Exports +5 to +16% BUT Gains and losses not evenly spread across countries, sectors (winners and losers) Output, employment, government revenue losses up to 50% This raises several issues: What is the impact on development, industrialization? What is the future of preferences? Do estimated effects measure up to Doha promises? How would developing countries cope with challenges?
Content Introduction to WTO Doha round of trade negotiations Trade, development and poverty Market access Gains and Risks Coping with trade related adjustment costs Conclusions
Trade is not the Goal, but a Development Tool! Recent economic history proves that countries with less barriers to international trade experience faster economic progress Dani Rodrik Policies oriented towards international trade are among the most important factors that promote economic growth and convergence of developing countries Jeffrey Sachs Trade reform isn't about charity, it's about justice, and (it) is an unstoppable idea. Bono, U2
Trade liberalization Trade liberalization increases efficiency and economic growth: Better allocation of resources Allows for capital accumulation Stronger competition Investment friendly setting` Trade and development are connected through trade policy Market liberalization Capital Flows Domestic policies should be coordinated with trade policies through: Macroeconomic stability Appropriate institutional reforms Social, development and employment policies Economic development Generally, gains are to be made in the medium/long run Gains of trade are spread fairly evenly around the economy; the costs, however, tend to show up more on a few sectors
What do we know about trade liberalization and poverty reduction? The link between trade liberalization and economic growth is an empirical Trade liberalization is not sufficient to reduce poverty but is almost certainly necessary Economic growth reduces absolute poverty, but it can increase inequality (especially in low income countries) Developing countries own liberalization should be supplemented with complementary policies to stimulate adjustment and flexibility
Trade liberalization and poverty: some evidence Chile Liberalized trade regime unilaterally 1974-2000 Economic growth of 7% per year (1985-2000) Poverty declined by more than 50% between 1987 and 1998 China Trade to GDP grew from 11% in 1978 to 50% in 2000 Economic growth of 10% per year in last 25 years Poverty declined from 30% (1978) to 15% (1998) India Trade to GDP grew from 10% in 1980 to 25% in 2000 Economic growth of 6% per year (1980-2000) Poverty declined from 45% (1980) to 26% (2000) Bangladesh Trade to GDP grew from 17% in 1990 to 30% in 2000 Economic growth of 4.8% per year (1991-2000) Poverty declined from 59% in (1974) to 50% (2000)
Content Introduction to WTO Doha round of trade negotiations Trade, development and poverty Market access impacts Gains and Risks Coping with trade related adjustment costs Conclusions
WTO Doha Ministerial Declaration - NAMA Negotiations to reduce/eliminate tariffs, including tariff peaks, high tariffs, tariff escalation and non tariff barriers, especially on products of export interest to developing countries. No a priori exclusions Take into account the special needs and interests of developing countries, including through less than full reciprocity in reduction commitments.
Developing Countries and LDCs have faced higher tariff rates MFN Average Applied Tariff Rates by Country Grouping Exporter Developed Country Developing Country LDC Developed country 1.31 2.12 3.05 Importer Developing country 9.00 6.26 6.33 LDC 10.88 14.79 9.95 Source: UNCTAD Computations WITS/TRAINS Database
Developing Countries have been lowering their tariff 90 80 70 60 MFN Applied Rates on Industrial Good Bangladesh Brazil Developing countries have carried out autonomous liberalization % 50 40 30 20 10 India Malawi Philippines Developing Countries 0 1994 2004 Source: WITS/TRAINS
Tariff escalation remains an issue for developing countries Tariff Escalation Trade Weighted Averages % 20 16 12 8 4 0 17.2 9.4 8 3.3 3.6 3.2 0.5 1.2 Developed Developing LDC Primary Intermediate Final 12 Source: UNCTAD Computations WITS/TRAINS Database
Tariff peaks on products of export interest to developing countries Number of Tariff Peaks Among Selected Developed Countries Leather Footwear Fish and Seafood Preparations Textiles Apparel, knit Apparel, not knit Tariff peaks: Three times the national average 0 50 100 150 200 250 Number of Tariff Peaks USA Japan EU Source: UNCTAD Computations WITS/TRAINS Database
Key issues in the NAMA negotiations Formula Tariffs and development strategies Sectoral Elimination Less than Full Reciprocity, Special and Differential Treatment What is negotiated? Sensitive Products Issues for Developing Countries Preference Erosion Loss of Tariff Revenue Tariff Binding Tariffs and binding coverage Credit for Autonomous Liberalization Bias in protection against developing countries
Swiss Formula T 1 = (a x T 0 ) (a + T 0 ) Final Tariff (%) 8 7 6 5 4 3 2 1 0 0 20 40 60 80 100 Initial Tariff (%)
WTO- ABI Formula t 1 = ( B ta ) t0 ( B ta ) + t0 WTO Proposal (B=1) F in a l T a riff (% ) 20 15 10 5 0 32 % Base Average 16 % Base Average 8% Base Average 4% Base Average 0 20 40 60 80 100 Initial Tariff (%) Weighted Averages, t a Ecuador 18% Egypt 24% Pakistan 10%
Proposals reduce developing countries tariffs considerably Initial tariff: 3.4% Weighted Averages (%) Initial tariff: 12.5% Developed countries Developing countries 2 1.5 1.4 20 15 17.1 15.3 1 0.5 0.5 0.7 0.5 0.5 0.9 10 5 3.4 6.4 9.2 5 0 Swiss WTO 0 Swiss WTO Ambitious Moderate Flexible (1) India, China and Brazil
Content Introduction to WTO Doha round of trade negotiations Trade, development and poverty Market access impacts Gains and Risks Coping with trade related adjustment costs Conclusions
Gains from Doha: Increase Welfare and Exports Free Trade: $ 135 B Developing Countries Free Trade: 15.9% Sum of Additional Welfare in $B 100 87 79 82 80 65 66 61 60 40 20 0 Swiss WTO 10 9 8 7 6 5 4 3 2 1 0 Percentage Increase of Exports 8.5 7.7 7.2 6.8 Swiss 4.84.4 WTO Ambitious Moderate Flexible These long term gains can only be realized by mitigating against the short-term risks
Risks: Employment losses in certain sectors Percent Changes in Labor Usage Relate to Base, by Sector Swiss Formula, Ambitious Scenario Machinery a Equipment Non Ferrous Metals Other Manufacturin Motor Vehicles Electronics China -2.8-4.1-0.2-10.4 6.7 Asia India -2.2-25.9-2.1-5.6-1 Rest of South Asia -8.7-13.4-7.3-36.8-14.9 South East Asia 0.2-6.4-2.3-6.6-1.7 Brazil -5.2 3.2-2 -4.3-1 Central America a Caribbean -6.3-8.2-6.2-2.1-6.8 Americas Andean Pact -4.7 6.4-2.9-9.6-10.7 Argentina, Chile Uruguay 3.2-1.4-2 9.3-7.6 Middle East and Africa and North Africa 0.2 5.8-1.5 1.9 5.1 Middle Eas Sub Saharan Africa -0.6 8-0.5 0.6-3.5
Risks: Tariff revenue losses 10 % Change in Tariff Revenue Relative to Base for Developing Countries Base Revenues: $156 b 0 Swiss WTO -10 % -20-15 -14-30 -30-23 -40-38 -50-44 Ambitious Moderate Flexible
Content Introduction to WTO Doha round of trade negotiations Trade, development and poverty Market access impacts Gains and Risks Coping with trade related adjustment costs Conclusions
Coping with what? Trade liberalization involves some risks: Sectoral unemployment Reduction in tariff revenue Import liberalization precedes supply side response Adjustment costs: Short term costs related to the reallocation of labor and capital between sectors after the process of trade liberalization Private sector: unemployment, re-training costs, obsolete capital, transition costs Public sector: loss of tax revenue, efforts to maintain macro stability, implementation of reforms, programs to increase competitiveness
Experience of adjustment to trade reforms Eight case studies in the book: Bangladesh, Brazil, Bulgaria, India, Jamaica, Malawi, Philippines, Zambia Context difficult to isolate effects of trade reforms Broad-based WB/IMF programmes include macro policies Regional trade agreements 4-fold increase since 1990 Many negative cases job losses, reduced growth, social problems Import liberalisation precedes generation of supply response Growth does not always lead to better income distribution Significance of large diversified economies FDI ahead of trade liberalisation seems to facilitate reform, create jobs Preference erosion important for small countries Importance of coutry ownership of reform process
Policies to cope with adjustment Phase-in policy changes Labor and capital have more time to adjust Time to implement tax reforms to make up revenue losses Paying compensation to potential losers Social policies and safety nets: Unemployment benefits Retraining Pension portability Long-term policies: Education Health Physical infrastructure, especially transport
Key policies to generate a positive response Macro-economic stability (but don t squash growth!) Good governance can help promote FDI Political stability, functioning institutions, legal framework Competitive real effective exchange rate Functioning capital markets Tax reforms to complement trade reforms Expenditure on infrastructure Labour market reforms Developing a supply response External financial support (Aid for Trade)
Content Introduction to WTO Doha round of trade negotiations Trade, development and poverty Market access impacts Gains and Risks Coping with trade related adjustment costs Conclusions
Conclusions Potentially important gains but some serious adjustment issues Need for solution to adjustment costs BEFORE conclusion of current WTO negotiations Special and differential treatment and non-full reciprocity are crucial Extended implementation for developing countries Make haste slowly Foreign aid to build supply side, not on implementation of WTO rules BUT What are development priorities? What contributes most to development? AID for TRADE Gains will only be possible through a development-centred agreement with policies to reduce the adjustment costs
United Nations Conference of Trade and Development Santiago Fernandez de Cordoba fernandezdecordoba@un.org