Friday, September 10, 2010

What China & the US should do to revive the Doha Round?

For starters, China should agree to join the WTO's Government Procurement Agreement (GPA), which ensures public agencies open procurement to companies from other GPA signatories. Furthermore, it should bind its provincial administrations as well as the central government in Beijing to its rules. Such steps would guarantee that foreign products enjoy nondiscriminatory treatment and would quiet concerns over Beijing's "indigenous innovation" program, which strongly favors Chinese firms. At the same time, China should join sector liberalization agreements in chemicals, information technology hardware, and environmental goods. Finally, China should be at the front of talks to liberalize services—not dragging the rear, as it is now.
If China acts as a leader in the trading system, it should be recognized as one. In its WTO accession agreement, China reluctantly agreed to be treated as a nonmarket economy in antidumping cases until 2015, which meant that its exports could be subject to safeguards with a lower trade impact threshold ("market disruption") than normal safeguards applied to other WTO members ("serious injury"). This provision was invoked by Obama last year, when the United States slapped high duties on inexpensive car tires made in China and imported by Walmart and other budget retailers. China also agreed in advance of its WTO accession to submit to annual compliance reviews, which Beijing considers humiliating. In return for concessions on government procurement and services, the United States and other developed countries should grant China recognition as a market economy—with normal remedies in antidumping and safeguard cases—and also put an end to annual compliance reviews.
Meanwhile, the United States should phase out cotton subsidies—which were ruled illegal by the WTO two years ago—and put a cap of about $9 billion annually on all its agricultural subsidies. Washington should also agree to extend duty-free, quota-free treatment to virtually all the exports of the least developed countries and allow duty-free imports on all manner of environmental goods, including ethanol. Such a gesture would give substance to the development promise of the Doha Round and, in a modest way, put the United States on the right side of the climate agenda.
If China and the United States are on board, other major players will feel enormous pressure to contribute. India, with its demonstrated interest in maintaining open markets in information services, would likely join the services talks and sign on to the GPA. Brazil and other successful developing countries would do the same and contribute concessions on industrial products.
These proposals could make the Doha Round a political winner: Major concessions by China and a few other emerging countries would be seen in the United States as evidence of greater access in markets that count. And China would advance its status as a full participant in the world trading system, while also positioning itself as the leader that delivered the benefits of the Doha agenda to all developing countries. The world would recover that much faster from the hangover of the Great Recession.
More by Haufber and Lawrence from Peterson Institute for International Economics here

In June, PIIE came out with a study that said that the total gains from the successful conclusion of the Doha Round (to 7 developed and 15 developing countries that together account for roughly three-quarters of all global imports and exports and nearly 90 percent of global GDP) would be US$280 billion per year. Studies show varying gains from trade under the Doha Round mainly because of the assumptions they work with. For the evolution of various proposals since 2001, here is a good note.

In 2005, a World Bank study put a bombshell on the overly optimistic estimations of gains from trade. The study showed that under the "likely Doha scenario", the global gains in the year 2015 would be just $96 billion, with only $16 billion going to the developing world. This means the developing countries would see a one-time increase in income of just 0.16 percent of GDP. Also, it showed that only 6.2 million people would be lifted above the $2 per day poverty line (it represents just 0.3 percent of those living in poverty worldwide). Worse, most of these gains would go to the developed world and those that goes to the developing world is largely distributed among few countries. Half of all the benefits are expected to flow to just eight countries: Argentina, Brazil, China, India, Mexico, Thailand, Turkey, and Vietnam. Furthermore, this study by Carnegie Endowment shows that total gains from trade to be between $32-55 billion, with rich nations getting $30 billion; middle income countries like China, Brazil and SA getting $20 billion; and poor countries getting $5 billion (about $2 per head).

Here is a policy brief by Gallagher and Wise that contests the estimation of gains from trade by PIIE economists. Kevin Gallagher and Tim Wise argue that the assertions of PIIE rest on "shaky assumptions, controversial economic modeling, misleading representations of the benefits, and disregard for the high costs of Doha-style liberalization for many developing countries." They wonder how the economists found another  $150-$350 billion in benefits for developing countries that the World Bank missed in 2005.
The gains in the new study from agriculture and non-agricultural market access (NAMA) are of the same order of magnitude as previous studies, about $100 billion, with the vast majority going to rich countries.
The new estimates for services, sectorals, and trade facilitation are highly speculative, use methodologies that are unproven, and assume far more ambitious outcomes than seem at all likely at this point.
Peterson finds high gains in services and sectorals because they assume that developing countries will make big concessions and that those same countries are big winners (from lower prices) even if they lose significant parts of those sectors to imports.
The estimates of $365 billion in gains from trade facilitation are particularly exaggerated, because they assume not only agreement on reforms but resources for the vast investments in infrastructure and human capital needed to make them happen.
The claims of “balance” are unfounded, as developing countries receive less than one-third of the projected income gains. Previous modeling has shown that many poorer regions, such as Sub-Saharan Africa, are projected to be worse off after an agreement.
As with most such projections, researchers disregard the costs of liberalization for developing countries. Tariff losses just from NAMA reforms are estimated at $64 billion, far more than the estimated gains to developing countries. As countries struggle to recover from the financial crisis, this is not the time to cut needed government revenues. Terms of trade for developing countries are 

projected to decline significantly, as they shift back toward primary production rather than forward toward industrial or knowledge-based development.