New Commission study on impacts of Doha Round

The G20 Cannes Summit, despite being side-tracked by the continuing eurozone crisis, did address other issues of importance to the global economy. In the section of its final communiqué on trade, the heads of state reaffirmed their ritualistic commitment to the Doha Round mandate. However, they went on to note that “It is clear that we will not complete the [Doha Development Agenda] if we continue to conduct negotiations as we have in the past.” Instead, they called for “fresh, credible approaches to furthering negotiations, including the issues of concern for Least Developed Countries and, where they can bear fruit, the remaining elements of the DDA mandate” to be pursued in 2012.

However, as the preparations for the forthcoming WTO Ministerial Council on 15-17 December rachet up in Geneva, there is little evidence that the same countries are ready to reach agreement on a common approach to the next steps to rescue the Doha Round.

The EU has proposed a three-prong strategy, including a more ambitious negotiating agenda to expand the range of issues being discussed at Geneva to include climate change, investment, competition, and food security; not walking away from the gains made to date on the Doha negotiating agenda; and focusing on early deliverables for the least developed countries, including progress on duty-free access and trade facilitation. These proposals have met with a frosty reception so far particularly from the emerging economies.

New Commission study on Doha impacts

The EU’s DG Trade has now released a new study of the likely gains from a Doha Round agreement undertaken by the French research institute CEPII (Centre d’Etudes Prospectives et d’Informations Internationales). While the report is intended to underline the potential gains to the global economy from concluding an agreement on the basis of the draft modalities proposed by the respective Chairs in April 2011, it also highlights some of the reasons why agreement is difficult.

The study examines three sets of scenarios. The first is a conventional liberalisation of agricultural and non-agricultural tariffs (goods trade), complemented by some modest liberalisation of services. The second scenario, called the central scenario in the report, models the impact of additionally including trade facilitation in the agreement. Indeed, the main message of the report is the importance of reducing the transactions costs of trade, particularly to developing countries. In a third set of scenarios, the additional effects of including sectoral agreements on chemicals, electronic products and machinery as well as environmental goods are added to the central scenario.

The study represents the state-of-the-art modelling of trade liberalisation in a computable general equilibrium framework. It is based on a dynamic version of the MIRAGE model which takes into account imperfect competition in manufacturing sectors as well as elastic land supply functions. The study pays particular attention to modelling tariff liberalisation at a very disaggregated level (the HS6 tariff line) in order to properly capture the complexity of the draft modalities as well as to correctly identify differences in tariff regimes (e.g., MFN vs preferential) that apply to individual exporter-importer trade flows.

Winners and losers

The high-powered modelling does not fundamentally change the conclusions of a series of recent studies of trade liberalisation that the global gains from further conventional trade liberalisation appear to be relatively modest. The report estimates a $US70bn world Gross Domestic Product (GDP) long run gain when agriculture and industry are liberalised, and a further $US85bn gain when a 3% reduction in protection for services is added to certain services sectors. Calculation of the gains associated with trade facilitation suggests roughly a doubling of the expected gains ($US152bn); while improving port efficiency adds another $US35bn (all figures are reported in 2004 prices relative to 2025 economic values).

Some commentators explain the low estimated gains from further conventional trade liberalisation by arguing that the modelling misses out on important channels whereby trade can positively impact on economic growth and welfare (for example, by encouraging faster rates of productivity growth). It is also evident the losses to the global economy would be substantially higher if a failure to agree on further liberalisation actually led to backsliding on previous commitments and to the growth of trade protectionism (the bicycle theory of trade liberalisation).

Nonetheless, the relatively modest gains to be achieved from further conventional trade liberalisation (due to the previous success of the GATT and WTO in reducing particularly non-agricultural tariffs) may help to explain the reluctance of governments to make the final political push for an agreement. This reluctance is reinforced by the fact that governments are able to reap a significant part of the gains from multilateral liberalisation through bilateral deals (as in the recent EU-South Korea free trade agreement) even if these are not fully optimal and carry risks for the governance of the multilateral trade regime.

These difficulties are compounded by the asymmetric distribution of the gains, with some regions actually losing out from further conventional trade liberalisation. Outcomes for some important players in the negotiations are shown in the table below.

In dollar terms, the main beneficiaries of liberalisation are China and the EU. The EU and China reap each 22% of world GDP long-term gains from a goods-and-services scenario. US gains are less spectacular (7% of world gains) compared to its relative size in the world economy. Three regions suffer small losses: the Caribbean, Mexico (not shown) and the Sub-Saharan countries. However, in two of these regions (Caribbean and Sub-Saharan Africa) trade facilitation makes it possible to reap gains from this Round.

In welfare terms (which in addition to GDP changes also takes account of terms of trade effects), a number of developing country regions (Caribbean, North Africa and sub-Saharan Africa) lose from a goods-and-services scenario. This reflects partly the effects of preference erosion (all three regions benefit at present from significant preferential access to the markets of the United States and the EU) and, in the case of Sub-Saharan Africa, the fact that the various flexibilities and exemptions in the draft modalities mean that they undertake little liberalisation themselves and thus cannot benefit from the allocative efficiency gains which would result.

In two of these regions gains from trade facilitation would be sufficient to reverse these losses. But arguably these trade facilitation gains do not depend on concluding a Doha Round agreement and could be achieved through the enhanced ‘Aid for Trade’ programmes to which donor countries have already agreed.

Impacts on EU agriculture

Readers of this blog will be interested in what the study has to say about the impacts of a multilateral deal for EU agriculture. A word of warning: global models of the kind used in this study are useful in giving broad-brush impressions of the overall scale of changes and welfare gains from further liberalisation, but become less reliable if attention is focused on the results for particular sectors or particular countries, simply because much relevant institutional detail in terms of policies must be left out.

In agriculture, the study projects that two main beneficiaries of the DDA in terms of exports are the EU (+$US9.8 bn) and Australia and New Zealand (+$US8.3bn), with Brazil also gaining from agriculture in this Round (+$US 6.7 bn).

However, in terms of overall agricultural value added, Australia and New Zealand benefit the most from increased exports (+6.9%), followed by Argentina, Canada and Brazil (3.4%, 3.3% and 4.2% increases, respectively). Japan experiences a significant decrease in agricultural value added of -3.8% while, due to their very strong initial protection, the EFTA countries face the strongest reduction for agriculture value added (-18.7%) and reorient their resources toward the other sectors. China and India are hardly affected.

EU value added reduces by -0.7%, with some differences across sectors. The largest drop in value added is projected in the sugar sector (-12.9%). For vegetable and fruits, fibres and crops, cereals, dairy, and even meat, changes are below 2% for the EU, but oils and fats show a drop of -4.2% over the long run. These changes reflect the use by the EU of sensitive product status for a number of the more vulnerable import-competing commodities, in which tariff cuts are only one-third of those otherwise mandated but compensated by increases in tariff rate quotas.

Despite this, the relatively small changes projected in EU agricultural value added are striking and will give rise to some controversy. They reflect in part the continuing reform of the EU’s agricultural policy which has removed some of the worst excesses of past protectionism, including reforms undertaken since the Doha Round was launched. But they will be interpreted by developing countries as justifying their criticisms that the current modalities do not offer much in the way of agricultural benefits in return for the concessions they are being asked to make in NAMA and services.

This post has been authored by Alan Matthews.

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