After Cancún: The dangers of second best

Trade Directorate

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The failure at Cancún risks a serious weakening of the multilateral trading system. And that includes sustained damage to the interests of poorer countries. It does not have to be so.

Cancún failed not because of mismanagement or miscalculation, but because of deep-seated differences among WTO member countries over a range of issues, not least agriculture. The persistence of those differences, compounded by the electoral cycle and the prospect of some key changes in administration, means that the deadline of completing the Doha Development Agenda on time, by January 2005, is very unlikely to be met. The danger is that in the absence of an active pursuit by all WTO members of broad-based and ambitious negotiations, resort will be made to partial, and second-best, solutions.

In fact, this is already happening in three ways. First, there is the principle, advanced by a number of developing countries, that they should be allowed a lower degree of commitment to trade liberalisation than that undertaken by developed countries. This was a central element in the approach taken to agricultural negotiations in Cancún by the G21, a grouping including India, Brazil, China and South Africa.

A second notion that has resurfaced since Cancún is that countries should be allowed to opt out of agreements in areas they consider as overly sensitive. This plurilateral approach is now being advanced as a way of dealing with the so-called Singapore issues of investment, competition, trade facilitation and transparency in government procurement that have been on the agenda since 1996.

The third manifestation is in the pursuit of bilateral and regional deals, rather than seeking agreement multilaterally through the WTO. Since the failure of the fourth WTO ministerial conference in Seattle in 1999, regional trade agreements have grown in number by more than one third to 142. In the aftermath of Cancún, some seven agreements await ratification. Over 50 are being planned, of which more than 30 involve countries in Asia, including Japan, Korea, China and India – countries that had earlier eschewed regionalism. It is estimated that by 2005 over a half of world trade will be accounted for by bilateral or regional agreements.

The problem with these approaches lies not so much in any formal clash with WTO provisions. In fact, the idea that developing countries should be allowed to liberalise at a slower pace than developed countries is fully consistent with the principle of special and differential treatment enshrined in the WTO. Plurilateral agreements can co-exist with the WTO framework, and, as evidenced by the Agreement on Government Procurement, can be incorporated into the WTO legal system, given the approval of all WTO members. And preferential regional trade agreements are a permitted exception to the WTO’s “most favoured nation” principle.

But while not inconsistent with the WTO, these approaches still pose serious risks. For a start, a systemic danger arises from the conjunction of these three approaches, the potential scale of their application and the fact that they are being advanced in a context where a broad-based, multilateral agenda is perceived to have failed. Two-speed liberalisation, opt-outs and regional deals will create vested interests that will make the pursuit of multilateral liberalisation and rules strengthening even more difficult than it already is.

Then there is a serious practical danger that those who stand to suffer most from these initiatives are those who can least afford it. Take the notion of two-speed liberalisation. Our evidence clearly shows that much of the gain from trade liberalisation comes from one’s own market opening because import competition improves domestic efficiency and productivity. For example, modelling the liberalisation of services trade shows that the biggest gains go to those with the highest initial barriers. These are often developing countries.

Similarly, tariff liberalisation would deliver welfare gains in sectors critical to developing countries, not least in respect of trade among these countries. Average tariff rates on industrial goods traded between developing countries are often twice as high as those for similar goods traded within the OECD area. Allowing developing countries a lesser commitment to liberalisation is more likely to bestow a cost than a benefit. In this respect, calling the current WTO negotiations the Doha Development Agenda, however well intentioned, may have backfired, both by obscuring the fact that trade liberalisation is in itself welfare enhancing and encouraging some developing countries to seek market opening from others while not offering any – or much – in return.

Should a plurilateral approach to the Singapore issues be pursued, a large number of developing countries would be among those choosing to opt out. And yet it is precisely these countries which have potentially most to gain from progress in these areas. Take trade facilitation: available estimates suggest that the reduction of administrative barriers at the border could significantly reduce the cost of transactions and may account overall for up to a third of the expected gains from improvements to market access under the Doha Development Agenda. According to the OECD, two thirds of these benefits would flow to developing countries as their transaction costs would be lowered substantially. "Opting out" would not mean sacrificing every benefit of trade facilitation, though it could mean forgoing clear advantages an agreed framework would bring, such as performance assessment against best practice, whose value should not be dismissed lightly.

Perhaps not surprisingly, none of the preferential bilateral or regional trade agreements currently under consideration involves the poorer developing countries. And where developing countries are involved it is often as the weaker partner or as part of a hub-and-spokes configuration where the country at the hub – usually a trading major – enjoys preferential arrangements with each of the spoke-countries which these countries are denied among themselves. Moreover, sectors of particular interest in developing countries, such as agriculture, are often excluded from regional deals, further reducing the gains on offer. While regional agreements can complement multilateral arrangements, they are not a substitute and are unlikely to deliver optimum results for any country.

What can be done to help obviate the dangers from these second-best approaches? Part of the answer lies in damage limitation, by seeking ways of strengthening the compatibility of these approaches with the goals of the multilateral system. That means finding the least distorting way of implementing special and differential treatment (through shared commitments applied progressively), plurilateral agreements (by encouraging opting-in), and regional arrangements that seek to cover all trade.

But better still is pursuit of multilateral approaches underpinned by a domestic commitment to reform and strengthened governance. The OECD has a key role to play here, by fully analysing the costs of market opening, as well as the benefits. This includes distinguishing between the direct costs to governments arising from regulatory or physical infrastructure needs, and broader adjustment costs involved in redeploying capital and labour to more competitive activities.

Trade policy is not a panacea. Trade liberalisation, and the adjustment strains it entails, must be backed by other policy concomitants and broad-based domestic economic reform. Market opening may need to be accompanied by budgetary measures tied to production, investment and R&D. For the poorest countries, liberalisation must be accompanied by help from donors in building up supply-side capacities. And for all countries market opening must be backed by a sound regulatory framework.

Trade liberalisation is not the same as deregulation; the words of Friedrich Hayek ring as true now as they did 60 years ago: “nothing has done so much harm to the liberal cause as the wooden insistence of some liberals on the principles of laissez-faire”. The liberal cause suffered a serious setback at Cancún. Concerted effort – led by the OECD economies, building on the prospects of economic recovery – will be needed to regain momentum and offer a viable alternative to second-best solutions, which risk not being solutions at all.

References

Heydon, K., (2001), “Making the global market work”, in OECD Observer No 228, also available online at www.oecdobserver.org. 

Metzger, J.M., “Mapping the bumpy road to Cancún”, in OECD Observer No 237, available online at www.oecdobserver.org. 

©OECD Observer No 240/241, December 2003




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