Why Doha matters

OECD Observer

The Doha round of trade negotiations was launched in November 2001, but stalled in July this year. It should be relaunched. International trade may be stronger today than ever, but the global marketplace remains littered with barriers and restrictions that hold back potential, not least in developing countries.

Indeed, development via a fuller participation of poorer countries in global trade is what sets the Doha agenda apart. Here are just a few reasons why an agreement could make a difference.

Note: North-South=gains from liberalisation in the north accruing to the south.

Source: OECD

Farm welfare
Productivity boost
Southern comfort

Also, Preparing for market

Farm welfare

Though the Doha trade round may be a low-hanging fruit in the international architecture, discussions were fraught enough to keep a result just out of reach. No aspect of the talks generated greater difficulty than liberalisation in agriculture. Yet as OECD research shows, some of the greatest gains for both developed and developing countries would come from serious cuts in agricultural tariffs and other barriers to agricultural market access. This is especially important for developing countries since increased access to rich world export markets would allow expanded output, greater specialisation and improved productivity, generating an economic surplus or savings that could be invested in further upgrading of their economies.

Source: OECD

The Uruguay Round led to the first limited steps in agricultural reform, binding agricultural tariffs so that countries could not raise the levels later, and converting many non-tariff barriers, such as sanitary measures, to tariffs. The 1994 reforms also introduced tariff rate quotas which allowed a specified quantity of agricultural products to enter a country at a lower tariff rate. However, tariff rate quotas were typically very small and the overall tariffs that replaced non-tariff barriers in many instances were very high, in some cases over 100%. Trade gains in agriculture were not possible.

In the Doha round, development is the goal, so agricultural reform is central to a successful outcome. The most important focus is on market access measures, notably tariffs, which are the most trade distorting and the most prevalent form of support and hence offer the greatest gains from agricultural reform. Efficient agricultural exporters, such as Australia, Brazil, Thailand and the US would be major beneficiaries, but consumers in OECD countries would also benefit. Interestingly, developed countries gain more from a hypothetical halving of OECD farm support measures, although developing countries also stand to win.

But for these countries to fully benefit, other forms of trade-distorting support must also be addressed. These include direct support payments based on output or input use and export subsidies. Otherwise, any gains from tariff cuts could be offset. Cotton is a good example. Some OECD countries provide such high levels of support to domestic producers that poor countries in sub-Saharan Africa, which should normally enjoy a comparative advantage in cotton, are prevented from competing to potential and achieving the jobs and growth they should gain from selling that particular crop. More positively, tariff cuts can also pave the way for additional domestic reforms in OECD countries since other measures to protect farming interests become less tenable–and more expensive–in the absence of tariff protection.

Tariff escalation is also an issue, since higher tariffs on processed food products impede the export of value-added products by developing countries. For example, Japan has no tariff on imports of cocoa, but tariffs of up to 25% on imports of chocolate paste. Such policies affect the ability of poorer countries to earn more from their agricultural output and keeps them hostage to commodity production. In other words, freeing up trade would free up farmers’ potential, too.

Productivity boost

How does better access to markets help poorer countries to develop? The answer is productivity. Sustained gains in productivity, based on new knowledge and innovation, represent the main route through which countries can achieve improvements in living standards. An economy with average annual productivity growth of 1% will take almost 70 years to double its standard of living. A productivity growth rate of 2% will achieve the same result in half that time.

Simply put, trade raises the overall level of productivity in an economy and hence its ability to support a higher standard of living.

How does this happen? Trade liberalisation shifts labour and capital to those activities with the highest potential for productivity growth while drawing resources away from those with the least potential. Through competition and access to new markets, and the related spill-overs in terms of technology and knowledge, countries are able to specialise more and raise output, driven by the prospect of larger markets. The upshot is a higher overall level of productivity: instead of producing 100 goods the old way for smaller markets, firms produce 1,000 goods with lower unit costs and improved quality. Labour is more skilled, technology is better, management techniques are sharper, and markets are more accessible. This dynamic creates more wealth.

In the real world, this effect can be seen in developed and developing countries alike. US, Japanese and German-based car manufacturers have shifted their productivity focus by incorporating new production technologies and concentrating on the most knowledge-intensive components. This has allowed developing countries to move into lower-value automotive components which, nonetheless, represent attractive productivity opportunities for these countries and put them on the path to higher-value activities in the future. Meanwhile, Mexico’s free trade arrangement with its North American neighbours has opened markets and brought in investment to reach back into those richer markets, raising Mexico’s productivity potential. Outside of the OECD similar virtuous circles between trade and productivity can be seen in Chinese Taipei and Singapore, as well as China and India.

A recent OECD report on China shows that low-cost production of information technology has enabled firms in developed countries acquiring Chinese-made technologies to boost their productivity through better management and use of these technologies. Ironically, this productivity boost has yet to occur in Chinese firms because many of them lack the management know-how to extract the productivity advantage from the same IT systems (see page 24).

One of the fastest ways to introduce new knowledge and technology into the economy is through new businesses. That means paying attention to the business environment matters if developing countries are to benefit from trade liberalisation. This includes providing the competitive environment for firms to grow in, too. Procedures on starting a business, minimum capital requirements, dealing with licenses, getting credit, paying taxes, enforcing contracts, employing workers, and registering property: all of this contributes to an environment for growth. It also helps to improve attractiveness for productive foreign investment.

Meanwhile, trade barriers affect productivity by keeping costs high, slowing innovation and dulling incentives for improvements in management. Some industries may argue for time out from world trade, to build up strength to be able to compete. Governments facing these pressures clearly have to manage the situation, working in partnership to encourage adjustment, good governance, investment, training, better management, and so on, though always with their sights firmly fixed on freeing up trade. As history has shown, trade, not protection, boosts productivity.

Southern comfort

There is a part to the trade story beyond improved access to rich country markets, which is vital if a Doha trade round is to reduce poverty: trade between developing countries–what we call south-south trade. The potential is enormous. More effort by poorer countries to open their markets to one another and to increase trade among themselves would pay off more handsomely than many realise.

Indeed, research from the OECD and others show that developing countries would gain at least as much from south-south tariff liberalisation as it would from freeing up access to rich country markets. Again, this is particularly true of liberalisation of agricultural tariffs. There are some encouraging signs. South-south trade in goods has expanded more rapidly than north-north or north-south trade since the early 1990s, although starting from a much lower base. As a consequence, the share of intra-developing world trade in total world merchandise exports rose to 6% in 2003, double the share of the 1980s and the highest level in the past 50 years. Growing trade between India and China, as well as with the ASEAN countries, is one example of these increasing ties. South-south trade in services accounts for just 10% of world trade in services.

That said, south-north trade still dominates trade for developing countries and southsouth trade accounts for just 14% of their total merchandise trade. Moreover, the lower income countries play only a minor role in world trade, making up barely 1% of the total.

A key problem is that the trade barriers between developing countries are about three times as high as barriers to north-north or north-south trade. Tariffs are usually higher anyway, and customs clearing and other trade-related costs may be more difficult. Indeed, the poorest countries tend to have the highest tariffs, in part because tariffs represent an important part of government revenues. Obviously, such countries will need to adopt other measures to facilitate adjustment, in addition to trade liberalisation, if potential is to be achieved.

But the underlying message is clear. Developing countries as a group stand to gain more than developed countries, in shares of national income, if the Doha round succeeds. By how much also depends on the willingness of developing countries themselves to open their markets and expand trade among themselves.

Preparing for market

Great trading nations were not built overnight. Shipping, port facilities, financial and legal institutions, skills and practices: these have evolved over centuries. Little wonder some developing countries that struggle to get goods to market find the prospect of freeing up to world trade rather daunting. Nevertheless, if they are to be able to profit from improved market access and move up the value ladder, they must ensure that infrastructure, credit and other market-enhancing facilities are in place. While this will be easier to do if they are confident that potential market access and growth opportunities from trade are real, assistance to help countries build their capacity is often needed, particularly in poorer ones.

Note: TRTA/CB: Trade-related technical assistance and capacity building

Source: OECD Creditor Reporting System database and WTO/OECD Trade Capacity Building Database

That is why international help is so important. The amount of trade-related technical assistance and capacity building has increased by 50% since the Doha round was launched five years ago. Beyond these activities aid donors have become active in the broader aid-for-trade area: in 2004, nearly $23 billion were dedicated to improving trade capacity in developing countries, which is 25% of total bilateral official development assistance, less debt relief. Assistance is provided in such areas as customs, insurance and other legal and regulatory areas; infrastructure to move goods and export them; and initiatives to improve the business climate.

By most evaluations the impact of aid-for-trade programmes could be improved. It is not always clear who gets the aid and for what purpose. Guiding principles, such as those in the Paris Declaration on Aid Effectiveness, are far from being applied, particularly in regard to ownership of programmes and measuring results.

What matters most is how to ensure the effectiveness of aid spending for trade. More involvement by the private sector would help, since businesses are well placed to better identify the real needs in trade. They could also help make local officials more accountable for results. Institutions should not let up in monitoring aid effectiveness, not only of aid commitments, but their real impact on the ground. The OECD/WTO trade-aid database and dialogue with multilateral organisations and partner countries are steps in this direction. RJC, DC

References and contacts

For references and documentation on trade, agriculture and development in relation to Doha, visit www.oecd.org/doha

For more information on agricultural issues in light of the Doha Development Agenda, contact Ken.Ash@oecd.org; on productivity and south-south trade, Przemyslaw.Kowalski@oecd.org; and on capacity building, Frans.Lammersen@oecd.org

For general queries and letters to the editor, contact Observer@oecd.org

©OECD Observer No 257, October 2006




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