The Potential Cost of the Doha Round Failure

Antoine Bouet – David Laborde (d.laborde@cgiar.org)IFPRIAugust 12th 2010 – Piracicaba, ESALQ, USP

Overview

1. Motivation2. Scenarios design3. Methodology4. Results5. Conclusions

IFPRI discussion paper + IFPRI Policy Briefhttp://www.ifpri.org/publication/potential-cost-failed-doha-round-0

Motivation

Setting the stage

•Research done during the 2008 fall

•Many feedbacks and quotes▫WTO staff▫Press (The Economist, Washington Post,

Newsweek…)▫Academic community (Baldwin, Evenett,

Messerlin, Deardoff, Baghwati…)

What’s about?

Effects of finalizing the

DDA negotiations

Potential effects of not reaching an agreement

Total cost the DDA failure

How to assess the gains of the DDA?

• Traditional approach: 1. Assessing the trade liberalization scenario negotiated

versus the status-quo2. Combination of tariff scenario building and economic

modeling (mainly through CGE assessment)• In the last years, assessment of the gains (upper

part of the iceberg) have melted away▫ Better data▫ Ongoing process of :

regional liberalization (FTA between members, Side effects of the Custom Unions negotiations in Africa)

and/or unilateral liberalization (India in 2004)

Missing gains? (or the quest for big numbers?)•Models are incomplete (Dynamic gains of

trade liberalization…)▫Model improvement

•Rethinking the assumption of status-quo▫New Scenario design

•We will focus on this last issue

Value of this research• For policy makers:

▫Provide new lights on the gains at stake in the current DDA

▫Analysis of a “what if” scenario.

• Applied research:▫Rethinking the relevant baseline▫Providing figures and order of magnitude for

effects already discussed in the literature▫Assessing partially the value of the binding

process

1. Dynamics of trade policy

•Status-quo is not a feature of trade policies

•Trade liberalization like a bicycle

or

• Failure of the DDA: Signal of the end of cooperative policy

• WTO as a litigation arena and not as a place for negotiation (see Brazil reaction on US ethanol tax credit/tariff in July)

2. Not a “business as usual” period• Risk of rising protectionism

▫ Tariffs – Domestic support• Financial crisis

▫ Analogy with the 1929 crisis and its trade policy aftermaths H-S tariff act Society of Nations was calling for a tariff truce as the G-20

now Fighting deflation, supporting local producers and raising

public revenue• Lack of cooperation of governments

▫ Beggar-thy-neighbor policies▫ Underestimation of the retaliation process

See Food prices crisis policy measures

3. Rethinking the reference point•Follow-up on previous research (Bouet and

Laborde, 2004; Laborde, 2008; Bouet and Laborde 2009)

•WTO negotiations as a Nash Bargaining game▫Combining Cooperative Game Theory and CGE

analysis▫Concluded on the emptiness of the core in

many negotiation configurations (predicting DDA difficulties)

▫But…

Nash Bargaining game•Finding a scenario s as

s.t. the participation constraint of every player m

•Two parameters of importance▫m the bargaining power

▫Wm0 the payoff without agreement. The

threat point.

Scenario Design

Two main directions

•Increase in protectionism

•Regionalism

•Assessing DDA scenario is already challenging

•Defining realistic “what if” scenario is worst▫Very subjective

Trade policy changes in the late 2008Examples in Latin America• Argentina has recently imposed non-automatic licensing

requirements on products considered as sensitive, such as auto parts, textiles, TVs, toys, shoes, and leather goods.

• On 17 November 2008, Mercosur members reached an agreement to raise their common external tariff, by five percentage points on average, on a number of specific items, including wine, peaches, dairy products, textiles, leather goods. and wood furniture.

• On 26 November 2008, Ecuador raised, between 5 and 20 percentage points, its tariffs on 940 products, including butter, turkey, crackers, caramels, blenders, cell phones, eyeglasses, sailboats, building materials, and transport equipment. As a result, Ecuador expects to collect additional revenues of US$85.5 million.

Source: WTO

Description of the scenarios• Baseline: Enforcement of current FTAs and Multilateral commitments• Doha: Exhaustive 2008 July Package modeling• Up to Bound: All tariffs, except preferences covered by bilateral-

regionals treaties, are moved to their Bound level. Unbound lines are set to their MFN level increased by the average binding overhang

• Up to Max: All tariffs, except preferences covered by bilateral-regionals treaties, are moved to their maximum level reached over the last 13 years. Bound tariffs are still capped by the UR commitments.

• FTA HIC: Free trade area on 95% of tariff lines between OECD members• Up to Max+FTA HIC: the Up to Max scenario is completed by a 95%

FTA between OECD countries.• Up to Bound&DDA: All tariffs, except preferences covered by bilateral-

regionals treaties, are moved to their new Bound level. Unbound lines are set to their MFN level increased by the average binding overhang

• Up to Max&DDA: All tariffs, except preferences covered by bilateral-regionals treaties, are moved to their maximum level reached over the last 13 years. Bound tariffs are still capped by the post DDA commitments.

Tariff cut implementation in the DDA scenario

Preferential Margins

Binding overhangApplied MFN

Bound level

PreferentialApplied

I

II

III

Tariff increase implementation

2008 applied MFN

Bound level

2008 Preferential Applied

Up to Bound

Max MFN tariff since 1995

UP TO MAX

Preferential rates covered by a bilateral treaty are “protected”

Methodology1. Building tariff scenarios

Building tariff scenarios

•Not the Aether of economic science…• but still it’s rocket science

•A lot of small details that make a huge final difference

•Heavy engineering: combining tools and materials from different origins

Different data sources• MAcMapHS6 version 2 (Laborde, 2008) –

Harmonized protection dataset for 2004▫Applied trade protection at the bilateral level for

170 countries and 5,113 products Follow MAcMapHS6 v1 (Bouet, Decreux, Jean

Fontagne and Laborde, 2004 and 2008) Used by GTAP7

▫Bound rates for all WTO members Follow previous version of the dataset (Bchir, Jean

and Laborde, 2005)• TRAINS

▫We need time series for scenario “Up to Max”

Combining TRAINS and MAcMapHS6

• Different datasets▫Different assumptions▫Different raw data

• Issue of the intertemporal variation of unit values for computing AVE▫We do not want to capture volatility in tariffs

related to volatility in unit value (or do we?) No we don’t → Rely on reference unit values based on WTO

guidelines• We use the dynamic of the power of tariff from

TRAINS (normalized to 2004) and we apply it to MAcMapHS6 data

Small details (1) : Tariff structure

Page 23

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Austra

lia

Canad

a

Europ

ean

Union

Japa

nUSA

Brazil

China

India

South

afri

ca

Thaila

nd

Russia

n fe

dera

tion

Wor

ld

Pref_Margins

Trq_margins

Ad_valorem

AVE_specific

Reference group weighted

Changing trade policies (2001-2004) in agriculture

-6

-5

-4

-3

-2

-1

0

1

2

3

World LDC Develping countries

Rich countries

World LDC Develping countries

Rich countries

Policy and measurementTRQ effectWeightsUnit value effectExchange rate effect

Reference group weighting scheme

Trade weighting scheme

Implementing tariff scenarios• For the Doha Round scenario: 2008 July

package (Laborde, Martin, van der Mensbrugghe, 2008)▫Non linear formulas▫… with flexibilities

By country: SVE, LDC, RAM, low binding coverage countries, specific members of custom unions

By product: sensitive products, special products, tariff escalation, tropical products…

▫Definition of unit values (WTO guidelines)▫Base rate (the NAMA case)▫DFQF initiative 97%

Choosing sensitive products•For the DDA scenario, for the FTA scenario

▫Jean, Laborde and Martin (2004)▫Jean, Laborde and Martin (2008)

•A political economy model

where ▫ e is the consumer expenditure function, defined over a vector

of domestic prices, p and the utility level of the representative household, u;

▫ g(p,v) is a net revenue or GDP function defined over domestic prices and a vector of specific factors, v;

▫ p* is the vector of foreign market prices for traded goods, so that (p- p*) gives tariff rates; ∙

▫ zp is a vector of net imports; zp (p- p*) is tariff revenues

Small details (6): the role of flexibilities

0

5

10

15

20

25

Developed WTO

Developing WTO non

LDCs

Normal Developing

WTO

RAM WTO SVE WTO Developed WTO

Developing WTO non

LDCs

Normal Developing

WTO

RAM WTO SVE WTO

NAMA AMA

Base applied rate - WTO Classification

Formula - WTO Classification

+ Country flexibility - WTO Classification

+ Product flexibility - WTO Classification

Reference group weighted

The baseline• A baseline is implemented from 2008 to 2025, which

depicts the world without a new multilateral agreement.

• Concerning trade reform, the following agreements since 2004 have been included in the baseline: ▫Achievement of the complete FTA for ASEAN, CEMAC,

COMESA, SADC ECOWAS;▫EU-ACP Economic Partnership Agreements▫ Implementation of the EU-INDIA, EU-India, EU-ASEAN,

US-Colombia, US-Oman, US-Bahrain, US-Morocco, US-Australia, Mercosur-Colombia, China-Chile FTA.

• WTO accessions since 2004 are implemented

Methodology2. Using the Computable General Equilibrium Model MIRAGE

The MIRAGE Framework• A multi-country, multi-sector CGE• Features of the version used:

▫Dynamic (up to 2025) The role of Domestic support constraint in Dynamics

▫Perfect competition▫No Government, only one representative agent▫CES-LES Final Demand function▫Take into account TRQ rents

• Current account fixed as a share of world GDP• Similar to the GTAP or LINKAGE model• Used GTAP 7 database • See Decreux and Valin (2007)

MIRAGE – Demand side

Results

World Average Tariffs

Reference group weighted

Agricultural products Industrial goods All sectors0%

5%

10%

15%

20%

25%

30%

35%

BaselineDohaUp_to_BoundBound&DDAUp_to_MaxMax&DDA

Protection faced

Reference group weighted

Baseline DohaUp to Bound

Bound&DDA

Up to Max

Max&DDA FTAHIC

FTAHIC+UptoMax

HICAgricultural products

16.1

11.9

28.5

21.1

20.3

16.1

14.6

18.2

Industrial goods 3.8

3.0

7.7

5.4

5.6

4.2

3.2

4.8

All sectors 4.6

3.6

9.0

6.4

6.5

5.0

3.9

5.6

MICAgricultural products

17.1

13.8

30.6

23.7

21.2

17.7

17.1

21.2

Industrial goods 4.0

3.0

7.5

5.0

5.9

4.0

4.0

5.9

All sectors 4.6

3.6

8.9

6.4

6.3

4.6

4.6

6.3

LDCAgricultural products

9.9

8.2

30.2

24.0

14.6

12.6

9.9

14.6

Industrial goods 3.9

2.7

9.4

6.2

9.0

4.5

3.9

9.0

All sectors 4.0

3.2

11.7

8.5

7.3

4.7

4.0

7.3

WorldAgricultural products

16.4

12.6

29.4

22.2

20.6

16.7

15.5

19.3

Industrial goods 3.9

3.0

7.6

5.3

5.7

4.2

3.5

5.2

All sectors 4.6

3.6

9.0

6.4

6.4

4.8

4.2

5.9

Overview

-400-350-300-250-200-150-100-50

050

100

Worl

d a

nn

ual

Real

Incom

e c

han

ges,

$B

lns b

y

2025

Source: Bouet and Laborde, 2009. MIRAGE simulations

Direct gains from the DDA

“Insurance” value of the DDA, extreme case

“Insurance” value of the DDA, intermediate case

Real Income (1)

Real Income (2)Developed countries Developing countries

-250.0

-200.0

-150.0

-100.0

-50.0

0.0

50.0

DDAIncrease to UR bound tariffsIncrease to post DDA bound tariffsIncrease to last ten years tariff peaks within UR limitsIncrease to last ten years tariff peaks within DDA limits

An

nu

al

Real

Incom

e c

han

ges,

$B

lns

by

2025

Real Income (3) %

Detailed results for Brazil (1)

Variable DOHAUp to Bound

Up to BDDA

Up to MAX

Up to MDDA

OECD FTA

Up to MAX OECD FTA

Welfare 0.3 -0.4 0.1 -0.1 0.2 -0.0 -0.1 Exports (val) 4.0 -25.6 -7.4 -5.9 -0.7 -0.2 -6.2 Imports (val) 5.2 -33.8 -8.3 -9.8 -2.0 -0.2 -10.1 Real effective exchange rate 0.6 3.5 0.6 -0.0 0.1 -0.1 -0.1 Real return to capital 0.3 -2.0 -1.0 -0.3 -0.1 0.0 -0.3 Real return to land 4.8 -10.3 -1.6 -1.8 1.7 -0.1 -1.8 Real return to natural resources -1.7 28.3 16.0 8.3 7.6 0.2 8.5 Skilled real wages 0.1 -0.5 0.2 -0.4 -0.1 -0.0 -0.4 Terms of trade 0.8 3.9 1.1 0.4 0.6 -0.1 0.3 Unskilled real wages 0.2 -2.5 -0.9 -0.6 -0.2 -0.0 -0.6 Unskilled real wages in agriculture 4.2 -8.5 -1.8 -1.7 1.0 -0.0 -1.7 Unskilled real wages in non agricultural sectors -0.1 -2.0 -0.8 -0.5 -0.4 -0.0 -0.5 Employment in agricultural sectors 2.0 -3.1 -0.5 -0.6 0.6 -0.0 -0.6

Detailed results for Brazil (2) - VA

Sector DOHAUp to Bound

Up to BDDA

Up to MAXUp to MDDA

OECD FTAUp to MAX OECD FTA

Agro-food 5.26 -10.65 -1.84 -2.00 1.60 -0.04 -2.04 Primary products -2.00 29.15 16.67 8.70 7.92 0.17 8.86 Industry -1.97 -2.02 -1.93 0.20 -0.84 -0.02 0.17 Services 0.08 -1.32 -0.13 -0.47 -0.16 -0.01 -0.48 Beverage and Tobacco 0.48 -3.18 -0.57 -1.04 0.03 -0.01 -1.09 Cereals 5.91 -12.49 -1.74 -6.07 0.53 -0.21 -6.34 Other processed food products 1.05 -4.31 -0.65 -1.19 0.34 -0.03 -1.22 Meat (Cattle sheep goats horses) 15.54 -12.46 -2.40 -2.95 2.27 0.03 -2.89 Meat producs 17.13 -13.65 -2.79 -3.25 2.45 0.03 -3.19 Milk and dairy products 3.40 -3.88 0.15 -0.66 1.37 -0.02 -0.70 Other agricultural products 2.22 -11.90 -0.76 -0.77 2.93 -0.09 -0.85 Paddy and pocessed rice 1.69 -3.34 0.74 -0.98 0.67 -0.02 -1.01 Plant-based fibers 1.55 -15.46 -7.87 -2.59 -1.79 -0.00 -2.62 Sugar 3.03 -19.29 -10.92 -6.63 -2.27 0.01 -6.64 Vegetables and fruit 1.28 -8.51 -2.60 -2.61 -0.90 -0.04 -2.66 Wheat -0.62 -17.86 -4.73 -5.08 -3.39 0.27 -4.75 Forestry and fishery 1.57 -4.72 -0.92 -1.19 0.41 -0.01 -1.20 Wearing and Apparel -1.70 -1.23 -2.45 -0.20 -1.99 -0.02 -0.23 Textile -2.36 -1.47 -2.98 0.44 -2.11 -0.10 0.31

Sources of the gains/losses: Up to Max scenario

Modeling Domestic support with Dynamic constraint: Agricultural Production

Brazil EU USA

-2

-1

0

1

2

3

4

5

With "dynamic" OTDS constraintWithout "dynamic" OTDS constraint

Conclusions

DDA and Up to Max

Exports:+$363 Bn

Welfare: +$59 Bn

Exports:-$808 Bn

Welfare: -$134 Bn

Exports:-$1,171 Bn

Welfare: -$193 Bn

Ongoing research• The value of new capping in particular for SVEs

and LDCs → DDA will lock recent liberalization process

• Introducing stochastic elements in the CGE combined to political economy determination of tariffs and domestic support▫Real value of the Binding Overhang

• FDI as a trade policy locking mechanism▫FDI may change the political economy of trade

policy, in particular compared to 1929’s crisis▫Vicious circle of the financial crisis

Appendix

47

Small details (0) : Example of Binding overhang and tariff volatility

• 23.44 EUR / 1000 kg  

• 15.22 EUR / 1000 kg

• 49.94 EUR / 1000 kg

• Imported by land, inland waterway or sea from Mediterranean, Black Sea or Baltic Sea Ports

• 11.44 EUR / 1000 kg

• 3.22 EUR / 1000 kg

• 37.95 EUR / 1000 kg  

• Imported by sea from ports other than Mediterranean, Black Sea or Baltic Sea Ports and arriving via the Atlantic Ocean with the port of unloading in Ireland, the United Kingdom, Denmark, Sweden, Finland or on the Atlantic Coast of the Iberian Peninsula

• 10.44 EUR / 1000 kg

• 2.22 EUR / 1000 kg

• 36.95 EUR / 1000 kg

• Imported by sea from ports other than Mediterranean, Black Sea or Baltic Sea Ports and arriving via the Atlantic Ocean or the Suezcanal with the port of unloading on the Mediterranean Sea

• 13.44 EUR / 1000 kg  

• 5.22 EUR / 1000 kg

• 39.95 EUR / 1000 kg  

• Imported by sea from ports other than Mediterranean, Black Sea or Baltic Sea ports or imported by air

• September

2001

• May 2001• March 2001

• Low quality durum wheat : 1001 10 00 30

• BOUND RATE = EUR 148 / 1000 kg

Small details (2): The role of TRQ in measuring protectionCountries Inside rate

appliedMacMapHS6 solution

Outside rate applied

South Africa 12.6 15.1 18.0

Canada 5.7 15.9 17.3

China 10.6 11.1 25.9

South Korea 23.8 36.8 55

United States 3.8 8.9 9.9

Japan 20.0 28.2 31.6

Panama 13.1 15.8 17,7

Switzerland 30.1 53.2 83.6

European Union

16.1 21.3 24.2

All countries with TRQ

14.7 18.8 22.0

Reference group weighted

Product MFN rateBinding

overhang Bound cut Applied cut40130 30.0% 10.0% 38.0% 17.3%40210 60.0% 0.0% 38.0% 38.0%40221 60.0% 0.0% 38.0% 38.0%40229 30.0% 10.0% 38.0% 17.3%40291 30.0% 10.0% 38.0% 17.3%40299 30.0% 10.0% 38.0% 17.3%40410 30.0% 10.0% 38.0% 17.3%40510 40.0% 0.0% 38.0% 38.0%40520 40.0% 10.0% 38.0% 22.5%40590 40.0% 0.0% 38.0% 38.0%40610 30.0% 10.0% 38.0% 17.3%40620 30.0% 10.0% 38.0% 17.3%40630 30.0% 10.0% 38.0% 17.3%40640 30.0% 10.0% 38.0% 17.3%40690 40.0% 0.0% 38.0% 38.0%

350110 30.0% 10.0% 38.0% 17.3%

Small details (3): Binding overhang heterogeneityIndia – Dairy products ‘mil’ – Third band - AMA

Applied Tariff levelPref.

MarginsBound cut

rateApplied cut

rate0.0% 15.0% 65.2%4.5% 10.5% 65.2% 0.0%4.8% 10.2% 65.2% 0.0%6.7% 8.3% 65.2% 22.1%8.3% 6.7% 65.2% 37.1%8.5% 6.5% 65.2% 38.6%9.0% 6.0% 65.2% 42.0%

10.0% 5.0% 65.2% 47.8%11.7% 3.3% 65.2% 55.4%12.3% 2.7% 65.2% 57.6%14.0% 1.0% 65.2% 62.7%15.0% 0.0% 65.2% 65.2%

Small details (4): Preferential marginsEU – Flat fishes – NAMA – one product (030229)

Small details (5): Tariff escalation modalities

52

How to weight a HS6 product tariffs ?

Brazil

EU

US

Japan

Australia

Other Ref. Group A ’s countries

Ref. Group A

Trade weight

Ref. Group Weight