Ready for Launch? The Prospects for Global Trade Negotiations

Lael Brainard
Lael Brainard National Economic Advisor - National Economic Council

September 1, 2001

With only three months left until the World Trade Organization meeting in Doha, Qatar, it is still an open question whether trade ministers will agree to launch a new round of global trade talks. How the question is resolved matters for the livelihoods of millions both in the developing world and in the wealthiest nations. The current economic slowdown makes agreement all the more important but also more difficult. Market forces no doubt will continue to drive globalization forward regardless of the outcome in Doha. But whether negotiations are launched—and on what basis—could determine far into the future the rules under which further globalization takes place and the distribution of benefits among and within nations. Much is at stake.

Impediments to the launch of negotiations are serious but surmountable. Reconciling the divergent interests of the world’s trading nations will require accommodation among key industrialized nations—the United States, Japan, and the European Union chief among them—and agreement between these nations and key middle-income and poor countries. In addition, each nation—the United States in particular—must enter the negotiations with broad domestic support.

Getting to Yes among the Wealthiest Nations

The outlines of an agreement among the industrialized countries have been discernible for some time. The question is when and how each can make the requisite trade-offs among domestic interests to strike the deal.

Having been burned in their efforts to launch a world trade round at the 1999 WTO meeting in Seattle, American policymakers may hesitate to be out front in pursuing that goal this year. But leadership in the global trade system is in America’s national interest. The U.S. agenda includes ambitious goals for opening agricultural and services markets (where it has many allies) and modest goals on social issues (where it has few). The key U.S. defensive priorities include antidumping—or unfair trade remedies—and protection in a few vulnerable sectors.

The United States has pushed market access as the central thrust of the next trade round. Doing so is in America’s interest and is also the strongest point of common interest with developing nations. In particular, the last world trade round—the Uruguay Round, implemented in 1995—mandated follow-on negotiations for market access in agriculture and services, both areas of particular U.S. strength. Today, farmers face tariffs averaging 50 percent, and quotas continue to hinder trade in major farm products, while negotiations have brought average industrial tariffs down to 4 percent, and quotas on industrial products have been banned. Similarly, services sectors are presumed closed unless countries offer them up to foreign competition, while the reverse is true for all other products. There is also a strong logic for the next round to lock in open markets for the products and services associated with the new economy rather than risking far more contentious negotiations in the future, once barriers have grown and vested interests formed.

But agricultural liberalization is a sensitive issue for Japan and Europe, since both heavily subsidize their inefficient farm sectors. In reality, the European Commission has a considerable interest in WTO negotiations on agriculture. A deal that forces subsidy cuts would enable the Commission to blame the WTO for agricultural reforms that will be essential if big farm producers like Poland are to join the EU without busting the budget—half of which now goes to farm support. Moreover, there is particular urgency because the so-called “peace clause” preventing agriculture disputes between the United States and the EU is set to expire in 2003.

But France strongly opposed the agricultural terms negotiated in Seattle and will remain resistant unless the EU broadens the agenda to include subjects such as investment and competition policy. That will provoke opposition from many developing countries, which are overwhelmed by having to implement the rules agreed in the last global negotiating round, and from the United States, which worries that these issues will provoke controversy, prolong negotiations, and possibly undermine strong domestic regulations for little gain abroad. American officials took to heart the high-profile 1998 failure of negotiations on an investment accord among the wealthiest nations, which aroused strong grassroots opposition in the United States and Europe. They are likewise skeptical of the prospects for global agreement on competition policy. As the U.S. Trade Representative has signaled, the United States nevertheless can go some way in accommodating the EU’s objectives on these issues, trusting that the negotiations ultimately will be circumscribed by opposition from key developing countries.

The EU also has an ambitious offensive agenda on trade-related environment issues, reflecting the strength of its environmental constituencies and weak consumer confidence in the food safety system. This agenda faces strong opposition from a coalition of agricultural exporters (the Cairns Group) and from many developing countries, which are concerned about disguised protectionism. Although many Americans share European interests in ensuring that global trade rules respect domestic protection of the environment, the two sides differ over how to achieve the goal. The EU is an ardent proponent of a broad interpretation of the precautionary principle, which would allow countries to restrict imports in cases (such as beef grown with hormones and genetically modified foods) where serious public concerns exist. The United States favors a narrower interpretation of the precautionary principle that would limit restrictions on the basis of risk assessment in cases where the science is not yet sufficiently advanced and on the basis of sound science otherwise. Second, in disputes involving trade and the environment, the EU favors a general deference of WTO disciplines to multilateral environmental agreements. The United States, for its part, opposes blanket deference and has generally preferred to see issues of overlap worked out through the jurisprudence of the WTO, which so far has been largely on the side of domestic environmental regulations. Given the strong European reaction to the U.S. reversal on the Kyoto global warming accord, the United States would be wise to start out in a moderating posture on the trade-related environment issues, since the Cairns Group and many developing countries will continue to oppose the EU’s environmental agenda.

The United States and Japan (as well as Korea) differ most sharply on the issue of antidumping, with steel at the center of the debate. Going into Seattle, Japan opposed a global round and used the stalemate over antidumping as a convenient pretext. Japan’s interest in global trade negotiations appears to have grown of late. To move forward, Japan must accept the hard truth that there is little flexibility in the United States on antidumping. Bipartisan opposition is strong, especially against the backdrop of sharp U.S. job losses in steel and the manufacturing slowdown. But the United States will have to accept the equally hard truth that antidumping cannot be taken off the table completely. One possible area of accommodation with Japan would be a program confined to the administration of existing antidumping laws. Indeed, the United States has a growing interest in the fair and transparent administration of foreign laws, since developing countries are increasingly resorting to their own antidumping investigations, with America squarely in their sights.

A Good Deal for the Developing Nations

Any deal worked out among the wealthiest nations must entice developing nations to the bargaining table. To succeed, the negotiating agenda must be perceived to deal fairly with the interests of poorer nations, including significant liberalization of trade in agricultural and industrial products, expanded market access for the poorest countries, flexibility on implementing existing commitments, restraint on the scope of the agenda, and reform of the WTO governance structure. Brokering such a deal will be complicated because, although the developing countries are effective as a blocking coalition, their interests are highly diverse.

The biggest prize for many developing nations is freer agricultural export markets—including not only the reduction of tariffs and quotas but also significant reductions in production and export subsidies. Wealthy nations, and particularly the EU, spend roughly $300 billion a year—more than the combined national income of Sub-Saharan Africa—on agricultural support.

Developing countries also want expanded access into industrial sectors where trade barriers remain high-including apparel, where there is concern that the industrialized nations are in no rush to fulfill their commitment to eliminate import quotas by 2005. Japan, the United States, and the EU will probably agree not to exclude any industrial products from the negotiations up front, but will probably likewise refrain from committing to any particular concessions. In the United States, despite strong opposition to further liberalization in selected industries, restructuring of domestic industry is already well under way as a result of the North American Free Trade Agreement and existing trade preference programs. With some exceptions, allowing imports from more countries will likely result more in a shift of imports among developing nation suppliers than in further displacement of domestic production.

The wealthiest nations all back expanded market access for the poorest reform-oriented nations to bolster support for market-driven development, but they disagree on the details. The EU has put forward an ambitious-sounding offer of access, but some suspect that, like the EU’s existing preference programs, it will fall short on agriculture. The United States offers among the most generous preferential access in the world, with recent and proposed legislation expanding preferences for the Caribbean, Africa, and Southeast Europe, but apparel access will likely remain somewhat conditional. To complicate matters, special access for the poorest is opposed by many middle-income countries, who see themselves as the losers when favorable tariff rates are offered to lower-wage competitors.

Implementing trade agreements can be extremely costly for developing countries. Michael Finger of the World Bank and Philip Schuler of the University of Maryland estimate that a typical developing country must spend $150 million to implement just three of the WTO’s many agreements—on intellectual property, customs valuation, and technical standards. That’s more than the entire annual development budget for many poor countries. Developing countries’ objections to implementation vary widely. Some simply oppose specific Uruguay Round commitments. Others are willing to implement but lack the legal, judicial, or administrative resources. For the latter group, the developed countries could provide technical assistance and permit flexibility on deadlines in return for a commitment to a detailed work program and timeline for compliance. In addition, special circumstances—such as the HIV/AIDS crisis in Africa—warrant special exceptions.

Many of the smaller poor nations have legitimate concerns about how well the WTO represents their interests. Although in principle a consensus organization, in practice the WTO has lent itself to agenda-setting by a small group of wealthy nations through a nontransparent, ad hoc process. Although it is clear that the traditional model will no longer work, it is equally clear that requiring consensus among 142 members is a recipe for deadlock. The wealthiest nations should support reform of the WTO that better represents member interests yet keeps decisionmaking efficient. This challenging and time-consuming exercise in institutional reform, however, must proceed in parallel with rather than as a precondition for the launch of negotiations.

Finally, trade proponents and opponents alike must remember that trade is necessary but by no means sufficient to drive growth in the developing world. Wealthy nations must build public support for targeted, efficient development assistance, just as the poor countries themselves must lay solid domestic foundations for broad-based growth.

Building Support at Home

The United States must rebuild broad support at home as it enters the next round of trade negotiations. In the run-up to the WTO ministerial at Doha, the Bush administration has made a tactical choice to pursue fast-track trade authority legislation that would commit Congress to take an up-or-down vote on any trade agreement the president negotiates.

But trade authority in the abstract is a hard sell. Asking Congress for an open-ended grant of authority to pursue trade agreements whose benefits are as yet undefined and far into the future is a recipe for trouble. A powerful coalition of trade opponents has demonstrated that they can bridge their differences and mobilize effectively to oppose trade legislation. But supporters have mounted full-fledged offensives only when concrete benefits are in the offing. In 1997, with no trade agreement pending, trade authority failed in the House of Representatives, but in 1994, when the hard-won gains of the Uruguay Round hung in the balance, the House vote was 295 to 125 in favor, including nearly 60 percent of Democrats. Similarly, in 2000 the vote to grant China permanent normal trade relations succeeded, despite the unpopularity of trade votes in election years, because of the strength of the underlying trade agreement with China.

Although a strong trade authority vote would be a powerful symbolic demonstration of U.S. congressional support, the more likely scenario is a bruising battle that, even if ultimately successful, may do more to cast doubt on America’s negotiating credibility than to bolster it. Moreover, seeking trade authority at this early juncture reinforces expectations abroad that without it, America cannot be a responsible negotiating partner—even though recent history suggests otherwise. In the absence of trade authority, for example, the United States joined in launching the Uruguay Round and negotiations toward the Free Trade Area of the Americas. Moreover, congressional consultation and input on the launch and conduct of trade negotiations can be secured in other ways without putting members in the uncomfortable position of taking a vote that forces them to declare whether they are for or against trade in the abstract.

Nevertheless, to maximize the prospects for success, President Bush should reach out to Democrats and pursue trade authority legislation that addresses the legitimate concerns of many Americans. Getting the House to pass pro-trade legislation has been difficult in recent years because of a growing number of trade opponents within the Republican caucus and the reluctance of the House leadership to make the compromises necessary to attract a compensatory number of Democrats (the China PNTR vote succeeded in part because key concessions were made). But President Bush could change that dynamic, retaining support from much of his own caucus and gaining the support of many Democrats by demonstrating a genuine commitment to address concerns on labor and the environment.

Even the most orthodox economists acknowledge that although trade expands the overall pie, there is no guarantee the gains will be equitably shared. Not only do the less skilled fare poorly on a relative basis, but many who lose their jobs may take years to find work at comparable pay. Thus, any serious effort to gain support for trade liberalization must at a minimum include expansion and reform of adjustment assistance for dislocated workers.

A serious effort must also address labor and environmental standards. Americans want trade to be a force for rising living standards and human dignity both here and abroad. Unfortunately, the current debate suffers from a serious lack of trust among the main protagonists.

In the United States, a fabric of social protections was woven together over several decades as the national economy grew increasingly integrated. These protections, emerging from an evolutionary domestic process, in turn contributed to the development of a mass middle class and sustained prosperity. The question today is whether globalization makes it more difficult for individual developing countries to weave such a safety net because of a harmful race-to-the-bottom dynamic, especially in “footloose” industries such as textiles and footwear, where a global floor could be helpful.

We are in the early stages of understanding the linkages between labor standards and trade (see Gary Burtless’s article in this issue). At the multilateral level, the obvious first step is to establish a dialogue to promote common understanding, but even that is contentious. Most developing countries oppose housing a dialogue at the WTO because they fear it will be the first step to trade sanctions, since the WTO is notable among international institutions for its binding dispute settlement. And proponents of labor standards worry that housing a dialogue at the notoriously weak International Labor Organization would render the dialogue irrelevant. The obvious middle ground—which came close to acceptance in Seattle—is a dialogue shepherded jointly by both institutions.

High Stakes

Whether the world’s trade ministers will be able to launch a new trade round at Doha in November remains uncertain. It is far from clear that the wealthy nations and the key developing countries can make the requisite accommodation in time. As November approaches, America’s foreign trade partners will be scrutinizing the U.S. congressional trade authority debate to see whether Washington will enter the negotiations with broad domestic support and sufficient negotiating flexibility. How these scenarios play out could affect the shape of the world trading system, and America’s role in it, for years to come.