The Potential Cost of the Doha Round Failure

Antoine Bouet – David Laborde (a.bouet@cgiar.org; d.laborde@cgiar.org )WTONovember 2nd 2010 – Geneva

Overview1. Motivation2. Scenarios design3. Methodology4. Results5. Conclusions

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

What is all 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-quo

2. 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: see Will Martin’s

comments on Consistent Aggregation

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

•We will focus on this last issue

But, keep in mind that Quantitative Assessments using CGE obey some rules:

▫ Equilibrium models▫ Most of them assume “constant employment of factors”

(capital and labour) : Modelers like to model what they understand.

▫ Technology is exogenous▫ Therefore, engines of growth are out of the story we look

at: We are doomed to show you small GDP figures! They are driven by Efficiency gains (most of the case

second order effects): allocative effects Interests of the CGE:

comparing scenarios and their design Look at winners and losers A “small” figure is not a pro/against trade liberalization

argument in itself

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

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 in 2004)

▫But solutions exist

Two main directions

•Assessing DDA scenario is already challenging

•Increase in protectionism

•Regionalism

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

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

Applied Preferential

I

II

III

Tariff increase implementation

2008 applied MFN

Bound level

2008 Preferential Applied

Max MFN tariff since 1995

Preferential rates covered by a bilateral treaty are “protected”

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

World Average Tariffs

Reference group weighted

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

Source: Bouet and Laborde, 2009. MIRAGE simulations

Direct gains from the Direct gains from the DDADDA

““Insurance” value of the DDA, Insurance” value of the DDA, extreme caseextreme case

““Insurance” value of Insurance” value of the DDA, the DDA, intermediate caseintermediate case

Real Income (1)

Real Income (2)

Real Income (3) %

Sources of the gains/losses: Up to Max scenario

Another example of valuable concessions: the time dimension of Domestic support.Agricultural Production

DDA and Up to Max

Exports:+$363 Bn

Welfare: +$59 Bn

Exports:-$808 Bn

Welfare: -$134 Bn

Exports:-$1,171 Bn

Welfare: -$193 Bn

Additional remarks

•Real value of the Binding •WTO has two values as a public good:

▫Promote cooperative behavior▫Limit damages due to retaliations process

and may deter it•FDI may change the “dynamics” of trade

liberalization▫Locking device▫Vicious and Virtuous circles