A quarterly magazine of the IMF

September 2002, Volume 39, Number 3

The launch of a new trade round in Doha last November was a major breakthrough following the debacle in Seattle in 1999. The new round places the needs and interests of developing countries at the heart of its work, but a successful outcome for rich and poor nations alike is by no means a foregone conclusion.

Trade has been an engine of growth for the past 50 years, owing in part to eight successive rounds of multilateral trade liberalization. Over the past 20 years, world trade has grown twice as fast as world real GDP (6 percent versus 3 percent), deepening economic integration and raising living standards. Many developing countries have shared in this process, narrowing the gap with rich countries and becoming—as a group—key players in world trade. Their trade has grown the fastest and their trade relations have changed markedly from the traditional north-south pattern. They now account for nearly a third of world trade; many have substantially increased their exports of manufactures and services; and 40 percent of their exports now go to other developing countries. But even after successive trade rounds, many lower-income countries have failed to integrate into the global economy—reflecting both external and internal constraints—and the poorest countries have seen their share of world trade decline (see chart).

The last trade round, the Uruguay Round launched over 15 years ago, was the most ambitious thus far, and some of its agreements are still being implemented (see table). Tariff cuts covered a greater percentage of world trade than under previous rounds, and quantitative restrictions will be virtually eliminated by 2005. The round also established the World Trade Organization (WTO)—the successor to the General Agreement on Tariffs and Trade (GATT); brought international trade rules to areas previously excluded or subject to weak rules (agriculture, textiles and clothing, services, trade-related investment measures, and trade-related intellectual property rights (TRIPS)); and strengthened the dispute settlement mechanism. Developing countries played a more active role than in previous rounds and adopted the same WTO agreements as other members as part of the round's "single undertaking"—nothing is agreed until everything is agreed.

Yet despite these achievements, the global trading system faces major challenges. First, even after Uruguay Round commitments are fully implemented, protection will remain high and concentrated in areas of particular interest to developing countries. In agriculture, only limited progress has been made in reducing high tariffs and trade-distorting subsidies. In manufacturing, the rules for phasing out quotas under the Agreement on Textiles and Clothing allow most liberalization to be postponed until 2005. And in both agriculture and manufacturing, tariff peaks (tariffs at or over 15 percent) and escalation (tariffs rising with the degree of processing of imports) persist, impeding the diversification of developing country exports. Moreover, developing countries themselves maintain high protection in these same areas; their tariffs on industrial products are three to four times as high as those of industrial countries. And use of contingent protection such as antidumping measures is now widespread among both developed and developing countries.

Second, with the deepening of economic integration and the decline in tariffs and quantitative import restrictions, attention has shifted to other obstacles to trade that touch on domestic policies, such as industrial subsidies and intellectual property rights (incorporated in past negotiations) and, more recently, investment and competition policies. While some find this shift necessary for the trading system to remain relevant, others believe that pressures to bring domestic regulatory policies into the WTO could hurt the interests of developing countries, in part by diverting attention from more pressing needs.

Third, many poorer developing countries feel that they are bearing the costs of implementing difficult and complex Uruguay Round agreements (for example, customs valuation, intellectual property rights) without seeing the benefits of improved market access or obtaining adequate technical and financial assistance to ease their integration into the global economy. Given the constraints on their capacity to negotiate and undertake needed supply-side investments, they are reluctant to engage in further multilateral negotiations.

Outcome of Doha

Against this backdrop, the Ministerial Conference in Doha in November 2001 adopted the Development Agenda, which calls for a more coherent approach to trade and development and puts the needs and interests of the developing countries at the heart of the WTO's work program. The agenda includes new trade talks; an action program to resolve developing countries' complaints about the implementation of Uruguay Round agreements; and, in a major breakthrough, an accord on TRIPS ensuring that patent protection does not block developing countries' access to affordable medicines. The conference also paved the way for China and Taiwan Province of China to get full membership in the WTO.

What do the new trade talks cover? They are actually quite broad, giving negotiators a chance to tackle both old and new areas. The timetable is ambitious—negotiations are scheduled to conclude no later than January 1, 2005, as part of a single undertaking (see box). The trade negotiations that began in 2000 on agriculture and services will be expanded to cover industrial goods (including textiles and clothing). Negotiators will also review and update trade rules—a major part of the work program—and delve into new areas, including the environment and the so-called Singapore issues (investment, competition policy, transparency in government procurement, and trade facilitation).

While the broad scope of the negotiations will facilitate trade-offs, it could overwhelm even the more advanced developing countries. Thus, as part of the bargain, trade ministers made extensive commitments to provide technical assistance and capacity-building programs to help ensure that developing countries can defend their interests and respond to trade opportunities. However, because much of the capacity-building agenda lies outside the competence of the WTO, its credibility will depend critically on the response of the international community and whether developing countries move aggressively to help themselves.

What's at stake

Is the successful outcome of this new trade round really that critical? The answer is an unqualified yes, for three main reasons. First, the remaining trade barriers impose costs on all countries and provide an opportunity for substantial gains from reciprocal trade liberalization. Estimates by the World Bank and others suggest that the static welfare gains from removing barriers to merchandise trade would amount to between $250 billion and $620 billion a year—with developing countries capturing one-third to one-half of these gains, largely by opening their own markets. This is far more than the annual flow of aid to these countries. Removing barriers to trade in services would increase global welfare by even more, given the dominant role of the service sectors in most economies and the still large trade barriers typical of these sectors.

Second, removing the barriers to poor countries' exports is key to the success of the international community's strategy for achieving the Millennium Development Goals—including halving poverty by 2015. Opening markets would not only boost trade and global growth over time, it would also bring greater stability and predictability to the global economy and thereby help ensure a healthier international financial system.

Third, further strengthening and developing trade rules is vital to improve the security of market access and establish favorable conditions for trade and long-term capital flows. In particular, trade rules need to be clarified and strengthened in areas susceptible to capture by protectionist interests (for example, antidumping and other safeguard measures, and health and safety standards). A more effective dispute settlement mechanism is essential to maintain confidence in the rules-based system, which ultimately protects the weak against the powerful. Constructive ways must also be found to deal with new issues such as investment and competition policy, where developing countries are reluctant to make new commitments. Cooperative (rather than legalistic) approaches, such as those developed to strengthen the international financial system (for example, the IMF-World Bank Financial Sector Assessment Program) could be explored to promote good practices in these areas.

But overcoming the strength of protectionist forces will not be easy. This was evident from the Doha Conference, where some of the most contentious issues were the phasing out of agricultural export subsidies and quotas on textiles and clothing, and the tightening of disciplines on antidumping actions. To build support for liberalization, countries need to do much more to facilitate structural change and to help their citizens adapt to it—for example, by providing more effective adjustment assistance for those hurt in the short run. This is particularly true of industrial countries, where vested interests have long resisted the changes required when certain sectors lose their comparative advantage. Developing countries also need to convince their citizens that the benefits of multilateral liberalization outweigh transient trade preferences and special treatment that shield their economies from competition.

However, for the developing countries to become full partners in the global trading system, trade measures alone will not suffice. That is why the Doha Declaration invited the Bretton Woods institutions and the broader international community to join forces with the WTO as part of a coherent approach to global policymaking. Efforts by the WTO to open markets and strengthen trade rules must be reinforced at the global level by sound macroeconomic and financial policies and financial market stability. And to benefit from open markets, developing countries will need to strengthen their own policies. They will also need much greater aid for trade from their development partners to build the capacity to engage in trade and participate effectively in the WTO.

One promising approach to the challenge of coordinating such assistance is the Integrated Framework for Trade-Related Technical Assistance for Least-Developed Countries. The IMF is working with the World Bank and others within this framework to help poor countries strengthen their own policies and institutions and make trade a strategic component of their poverty reduction strategies. By prioritizing and coordinating the delivery of trade-related technical assistance within these strategies, the aim is to improve the relevance and effectiveness of such assistance. Areas where the IMF is providing trade-related technical assistance include revenue systems, customs administration, trade facilitation, social safety nets, and financial sector soundness—which is particularly relevant to the liberalization of financial services.

Realizing the promise

As the global community searches for ways to ensure brighter prospects for all people, the new trade round, which embraces industrial and developing countries, holds the greatest promise of making inroads where protection remains concentrated and of developing a trade architecture that both meets the needs of global commerce and supports economic development. The advantage of multilateral negotiations is the leverage they provide over domestic protectionist interests; by opening other markets on a nondiscriminatory basis, they magnify the gains. Moreover, ownership and effectiveness require that the shortcomings of the trading system be tackled at the multilateral level with the full participation of developing and developed countries alike. The WTO, as it approaches universal membership, provides the appropriate forum for governments representing their citizens' interests to grapple with these issues.

Whether the promise of Doha can be realized, however, will depend on the extent to which trade barriers and trade-distorting subsidies are substantially reduced; both developed and developing countries cooperate in further reforming the trading system in ways that foster development; the international community supports the round through complementary efforts to provide resources for technical assistance and capacity building; and developing countries strengthen their own policies and institutions, so their citizens can respond to the opportunities for trade and investment.

References:
  Bernard Hoekman, 2002, "Strengthening the Global Trade Architecture for Development," World Trade Review, Vol. 1 (March), pp. 23-46.
  International Monetary Fund, 2001, World Economic Outlook, October 2001 (Washington).
  ——— and World Bank, 2001, "Market Access for Developing Countries' Exports," joint IMF-World Bank staff study; http://0-www-imf-org.library.svsu.edu/external/np/madc/eng/042701.htm.
  Jeffrey Schott, 2002, "Reflections on the Doha Ministerial," Economic Perspectives, Vol. 7, No. 1 (January).
  Alan L. Winters, 2002, "Doha and the World Poverty Targets," paper presented at the World Bank's Annual Conference on Development Economics, Washington, D.C., April 29-30.