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Patrick Grady
"Did the Disaster at Cancun Destroy the WTO?"*
November 17, 2003.

I have a confession my title for this talk is a bit of an exaggeration to get your attention. Things weren't really so bad in Cancun. It could have been much worse. For example, terrorists could have blown up the Convention Centre all to hell with the delegates in it.

The International Climate for Trade Negotiations is not Good

Now that I have gotten your attention, I can bore you with the all too obvious observation that this is not the best of times for multinational trade negotiations. In fact, it's closer to the worst. While countries rallied together to launch the negotiations at Doha following September 11, the unilateral approach of the United States in Iraq has created a feeling of resentment in many countries that seems to have spilled over into the trade negotiations.

In addition, as a result of tax cuts and increased defense spending, the United States has managed to run up a whopping $500 billion trade deficit that threatens the stability of the world trading system (Table 1). The US has been particularly concerned about its over $100 billion trade deficit with China and $70 billion deficit with Japan. But it also has an over $80 billion deficit with the EU and almost $50 billion deficit with Canada that it would like to do something about. The huge trade deficit has spawned demands for protectionism in US, which has already led to action on steel and wheat.

Table 1
United States Trade Balance in 2002
($ Billions)
Total482.9
China103.0
EU82.1
Japan70.0
Canada48.1
Mexico37.1
Taiwan13.8
South Korea13.0
Thailand9.9
Hong Kong3.3

If that weren't enough, world trade has been weak since 2000. After falling by 4 per cent in 2001, world exports only rose by 3 per cent in 2002 powered by strong import demand in developing Asia, transition economies and the United States . In the first half of 2003 world exports have been stagnant. This is not a climate favourable to trade negotiations, but it is certainly one that could benefit from a successful round of trade negotiations.

Would More Trade Liberalization Really Be Helpful?

A good point to start in looking at Cancun is to ask ourselves if it really matters? Some might argue that after eight rounds of trade negotiations tariffs have already been sharply reduced and that most trade barriers have been eliminated. The main job in their view has basically already been done.

To convince those who don't believe that another round is necessary, the WTO released a study in 2001 called Market Access: Unfinished Business.1 It found that trade liberalization is far from complete and that many trade distortions remain. Its main findings were:

So, as you can see, there's still lots of room for improvement, particularly among the developing countries, which tend to be the least open.

At the risk of offending any mercantilists who might have snuck in today amongst us loyal disciples of Adam Smith, I make the claim that developing countries would benefit as much from opening up their own markets as from increased access to developed country markets. Studies, including the famous one by Sachs and Warner,2 reveal that the most open developing countries have grown several times as fast as the most closed over periods of several decades.

The World Bank has estimated that the elimination of tariffs on goods would increase world GDP by $830 billion per year, of which two-thirds would go to developing countries. Interestingly, three quarters of the income gains of developing countries would come from reducing the tariffs they levy on each other.3 And liberalization of trade in services would bring about even further increases in income, which the World Bank estimates at $900 billion for developing countries.4

More specifically, the World Bank also estimated that a successful Doha Round could bring $520 billion in benefits to developed and developing countries.5

What Really Happened at Cancun?

Getting back to the debacle at Cancun. By the way, were any of you there? No. Whew! Good. Now I feel more comfortable not having to worry about being contradicted by someone claiming that if I'd actually been there I wouldn't be saying such a stupid things.

Going into Cancun, things didn't look so bad. Even though it had taken a while, the Doha concern about TRIPs and public health had been successfully addressed. But at Cancun things really came unglued.

One way of looking at it that is familiar to simpleminded economists like ourselves is to consider inputs and outputs. They went into the Conference with this ten page Ministerial Declaration from the Doha Ministerial in November 2001 launching the Doha Development Agenda Round seeking to make progress in fleshing out the details a new trade agreement and came out with this one page Ministerial Statement, which patted participants on the back for making "considerable progress" and instructed officials "to continue working on outstanding issues with a renewed sense of urgency, and purpose and taking fully into account all the views we have expressed at the Conference." At its most daringly frank, the statement concludes that "notwithstanding this setback, we reaffirm all our Doha Declarations and Decisions and recommit ourselves to working to implement them fully and faithfully." Who says that trade ministers and officials aren't masters of bureaucratic doubletalk?

Once back in Geneva, all that was left to do was to turn out the lights. The WTO Director General Supachai Panitchpakdi soon announced that the work of all the negotiating committees was being shut down pending a decision on how to proceed. I'd say it sure doesn't look good for those betting that an agreement will be reached by the target January 1, 2005 date set at Doha.

A cynical view of what went wrong is that at Cancun the WTO displayed, perhaps fatal, symptoms of turning into a UN style talkfest where badly-run developing countries take turns piously lecturing others. In fact, developing countries were having such a good time lambasting the developed world that they weren't able to switch gears fast enough to reach a deal when the opportunity presented itself. That is, of course, assuming they had even wanted to. Apparently, they were advised by anti-globalist experts from NGOs who wanted nothing better than to cause the WTO to self-destruct. Perhaps this is an inevitable result of the expansion of the WTO to 148 members and the rise of the anti-globalization movement.

On the fifth and final day of the Conference, the US and EU were ready to try to cut a deal. The EU's Trade Representative Pascal Lamy offered to drop the two most contentious of the EU's Singapore issues, namely investment and competition, leaving only transparency in government procurement and trade facilitation. Incidently, this concession made liars of those who were saying that the EU was only pushing the Singapore Issues to make sure that no agreement was reached which would threaten the its precious Common Agricultural Policy.

Mexican Foreign Minister Louis Ernesto Derbez consulted with some of the main developing country delegates making up the G-22 and thought he had a deal to drop the two most contentious Singapore issues. But when he presented it on the floor, some of the developing countries started in again with their set speeches, while the Japanese on the other hand kept pushing for full inclusion. In spite of pleas by some to continue, and based on his own judgement that an agreement could not be reached, Derbez unceremoniously pulled the plug on Conference rather than extending it. He blamed part of deadlock on "a failure to move away from rhetoric."

The lines at the Conference had definitely been drawn in North South terms. On the one hand, the U.S. and the EU had been able to compromise to reach an agreement, including on agriculture the most contentious bilateral issue. On the other hand, the Group of 22 led by India, China, South Africa and Brazil had refused to compromise. To a certain extent, they may have been captured by their own moralistic posturing. Regardless of the reason that the developing countries rejected the compromise offered, it meant that they left Cancun with nothing, which they apparently viewed as being better than something.

China, the most important new member of the WTO, definitely made its presence felt at the meeting. But, while it was part of the Group of 22, it maintained a fairly low profile when all the preaching was going on consistent with its recent overall approach in global affairs.

The African cotton producing countries of Benin, Burkina Faso, Chad and Mali also played an important role in scuttling the talks with their demand for the unilateral elimination of cotton subsidies and for compensation.

There was no denying that Cancun was the first Ministerial Conference where a developing country block was able to challenge the Quad's prerogative to set the global trade agenda. It represents a real, but perhaps, temporary shift in the balance of power.

Symptomatic of the difficulty reaching a consensus on anything at Cancun was that WTO members announced that the next Ministerial Conference would be held in Hong Kong, but that they couldn't agree on the date.

Pascal Lamy railed against the WTO procedures calling them "medieval." An angry Robert Zoellick wrote a op-ed in the Financial Times entitled "America will not wait for the won't-do countries" which skewered those countries he thought had torpedoed Cancun.6 The EU and the US evidently missed the old days of the Green Room under GATT where a few they could get together and call the shots. With decision-making by consensus at the WTO, it won't be east to reform procedures.

Does the Failure at Cancun Really Mean the End of the WTO?

No, of course not. The WTO will continue to function just as it has since it was established in 1995. It will still carry out its three functions to varying degrees: 1) efforts will continue in Geneva to negotiate new rules; 2) existing rules will continue to be implemented; and, 3) disputes over the rules will continue to be adjudicated.

However, it must be admitted that it is not only in the area of negotiating rules that the WTO is running into trouble. The Dispute Settlement Mechanism is not working very smoothly. There has been a proliferation of trade cases, many more than was expected when the WTO was set up, and almost all the cases are being appealed. This may not be a bad thing in that it will result in a more consistent application of rules, but the lack of resolution of some of the most important disputes does raise some questions about the effectiveness of the DSM. The EU's claim over the FSC and the Extraterritorial Tax Incentives of the United States (which could lead to a possible $4 billion in rebalancing measures as early as next March) and claim against US steel antidumping ($2.2 billion in duties threatened for as early as December) could give rise to a trade war. The US claims against the EU on Bovine Growth Hormone and GMOs have still not been satisfactorily resolved. Our own dispute with Brasil over Regional Jets is another example of a case that never seems to get resolved.

Why were Developing and the Least Developed Countries so Unhappy with the WTO?

There was a general, and probably justified, feeling among developing countries that they got a raw deal out of the Uruguay Round. They were particularly incensed about the TRIPs agreement, which clearly obligated them to pay the developed countries for the use of its intellectual property. In their view, this was not offset by the increased access to textile and clothing markets in the industrialized world. The phase-out of the Multi-Fibre Arrangement which established quotas for textiles and clothing was too back end loaded for their tastes and safeguards and anti-dumping made their improved access less than fully secure. The developing countries also had real problems in implementing all of their new WTO obligations and felt they did not have the technical expertise to protect their interests in the WTO. And last, but not least, was a general dissatisfaction with the lack of access to developed countries' markets for agricultural goods.

Where do We Go from Here? The Worst Case Scenario

At the conclusion of Cancun US Trade Representative Robert Zoellick announced the US's intention to try to negotiate bilateral deals if it was impossible to reach a multilateral deal. In effect, he was threatening to take his marbles and go home.

So far the US has been successful in picking off many of the G-22, including Costa Rica, Guatemala, Peru, Colombia, and Ecuador. The formidable G-22 is now the G-17 and shrinking.

Incidently, it is not likely that the US will be able to make progress on the FTAA unless the objective of including all the Western Hemisphere is dropped because of the importance of Brazil and Mercosur in Latin America. We'll find out how things are going this week at the FTAA Ministerial which is taking place in Miami.

There is a real possibility that the WTO will become increasingly irrelevant and that the main industrial countries will cut bilateral deals among themselves that will cover the lion share of trade and will leave the developing world out in the cold. The biggest of these could be a US-EU deal, which, by the way, Canada could not afford to be left out of. Even now many Canadian businesses prefer to try to resolve Canadian-EU issues through the US-EU TransAtlantic Business Dialog rather than the Canada-EU Roundtable. It is significant that theUS has confirmed its intent to engage in negotiations with the EU to devise a new approach for the management of its bilateral air relations with the EU now that it has established a single EU-wide agreement governing air relations. There are many other non-tariff barriers to trade in the area of regulation that can be most effectively addressed bilaterally.

Where do We Go from Here? The Best Case Scenario

The notorious one-pager from Cancun asked the Chairman of the WTO's General Council, Carlos Pérez Del Castillo, to convene a meeting in Geneva before December 15 to try to get the negotiations back on the rails. The best hope for a successful completion of the Doha Development Agenda according to most knowledgeable observers is if agreement can be reached to continue from where Cancun left off.

Shortly after the Cancun fiasco, the Leaders of APEC countries made some encouraging noises about the MTN at the end of their October meeting in Bangkok. Their Declaration reaffirmed their commitment to the DDA and agreed to "re-energize the negotiation process, building on Chairman Derbez's text of September 2003, recognizing that flexibility and political will are urgently needed to move negotiations toward a successful conclusion." They also agreed to "work towards the abolition of agricultural export subsidies, unjustifiable export prohibitions and restrictions."

In their view, this Revised Draft Ministerial Text prepared by Mexican Foreign Minister Louis Ernesto Derbez provides the basis for the next stage of negotiations

However, the sailing will not be smooth. Several important developing countries, including members of the G-22, such as India, oppose using the Derbez Text as the basis for talks and contend that there is not enough "common ground" on the Text. Indian Commerce and Industry Minister Arun Jaitley said that "the Cancún draft can't be the starting point for any discussion, it completely failed to gauge the mood at Cancún and was contrary to the mood prevalent there." The EU Trade Commissioner, in response to APEC's endorsement of the use of the Derbez Text as the basis for deliberations, mused "I am left to wonder, rather, what magic dust has been shaken over a text so roundly rejected in September, to find it so roundly endorsed in October." On the other hand, USTR Robert Zoellick considers the Derbez Text to be a "pathway to move forward", and has called on the EU to endorse the use of the Text.

Given the uncertain status of the Derbez Text as something rejected at Cancun, it's not surprising that many WTO members are divided on its utility as a basis to "re-energize" negotiations.

Nevertheless, it's useful to consider the Derbez Text. At 12 pages with 21 pages of appendixes, it provides a lot more specifics on modalities than the Doha Declaration. While it is still filled with brackets and doesn't incorporate any numbers and few dates, it represents the culmination of almost two year's hard work to find a common ground in many negotiating committees and is in fact the result of the only concrete effort to find the lowest common denominator among the rounds participants. If we throw it out, we might as well abandon the negotiations as we are going all the way back to square zero.

Let's consider some of the most important issues: agriculture; NAMA; Singapore issues.

Agriculture

To achieve "substantial reductions in trade-distorting domestic subsidies," the Annex A of the draft text calls on members to "reduce the Final Bound Total AMS in the range of [...]% - [...]% and that "product specific AMS should be capped at their respective average levels during the period [...]. Members are allowed to make direct non-production related payments as long as they don't exceed 5% of the total value of agricultural production, but that this "shall be subject to a cut of at least [...]%."

Following up on the Doha call for "reductions of, with a view to phasing out all forms of export subsidies," the annex to the text reiterated this commitment and went on to make more specific commitments "to eliminate export subsidies for products of particular interest to developing countries."

The text also made generous allowances for "special and differential treatment for developing countries," including exempting least-developed countries from reduction commitments.

And it extends the "Peace Clause" in the Agreement on Agriculture (Article 13), which expires at the end of 2003, and prevents members from initiating trade disputes before the WTO on agriculture.

It was unfortunate that the main developed countries could not agree to open up their markets to African cotton. The US pays $3.5 billion in subsidies to cotton producers. And 10 million African farmers are dependent on cotton for their livelihood.

Nevertheless, the Derbez Text on agriculture constitutes a logical framework for further negotiations.

Non-Agriculture Market Access

Annex B of the Debez Text provides the framework for establishing negotiating modalities in market access for non-agricultural products. It recognizes that "a formula approach is key to reducing tariffs, and reducing or eliminating tariff peaks, high tariffs, and calls on the Negotiating Group "to continue its work on a non-linear formula applied on a line-by-line basis, which shall take fully into account the special needs and interests of developing and least-developed country participants including through less than full reciprocity in reduction commitments." The reference document, which is to serve as the basis of future work, is "Draft Elements of Modalities for Negotiations on Non-Agricultural Products," which is based on a joint paper on NAMA that was submitted by the US, EU and Canada. This paper proposed that WTO Members agree on the use of a single mathematical formula to reduce all tariff rates, simple to apply and to understand, geared to producing ambitious tariff cuts and to reduce differences in tariff rates across WTO Members and across tariff lines within member countries (in the WTO jargon "a simple, single, ambitious, harmonising formula").

The proposed formula is:

				t1= (B×ta×t0)/(B×ta+t0)


where 	t1 is the final rate to be bound in ad valorem terms;
	t0 is the base rate;
	ta is the average of the base rates across tariff lines; and
	B is the coefficient for each participant.7

This formula, which can be characterized as a modified Swiss formula, has the effect of bringing all of the tariff rates down towards the average rate after the desired cuts are made with the largest cuts falling on the tariff lines with the highest tariffs.

Singapore Issues

Given what went on at Cancun, the sections of the Derbez Text dealing with investment (clause 14) and competition (clause 15) are likely to be dropped, but sections and annexes on government procurement and trade facilitation still provide a solid basis for proceeding.

Annex D on transparency in government procurement makes it clear that the negotiations "shall be limited to transparency aspects and therefore will not restrict scope for countries to give preferences to domestic supplies and suppliers." Further, the coverage of any agreement will be limited to goods procurement above certain thresholds by central government entities. Domestic as well as foreign suppliers would benefit from a clarification of procurement rules. What possible economic rationale could there be for keeping procurement rules and procedures in the dark?

Annex E on trade facilitation focuses on clarifying the GATT and reaching an agreement to "further expedite the movement, release and clearance of goods, including goods in transit." It recognizes that "implementation capacity of developing and least-developed countries must be taken into account in the negotiations and that the principle of special and differential treatment should be taken into account. Again a perfectly reasonable approach.

While competition policy may be beyond the capabilities or even understanding of most developing countries and investment is politically charged since the demise of the MAI, it is hard to understand why developing countries are so opposed to negotiating on transparency in government procurement and trade facilitation. Doing something in these two areas is in their own interest from the point of view of fostering development regardless of what the NGOs are be saying.

Conclusion

Well maybe Cancun didn't destroy the WTO, but it's certainly not going to be easy to get the Doha Development Round back on track. The General Council Meeting in early December may not be enough. The EU has called for a special Ministerial Conference in early 2004 "to advance the implementation of the Doha Development Agenda." It believes "that the experience of Cancun demonstrates the need for far-reaching reform both of the WTO itself and of its place in the wider framework of global governance." The EU is right. A successful Ministerial Conference is what is required to save the round, if not the WTO itself, from going up in smoke.

You know, if the WTO doesn't get its act together soon, even the anti-global protestors will lose interest in its meetings.

Endnotes

*   Notes for a presentation to the Canadian Association for Business Economics National Members Roundtable "Defining Canada's Place in the World," Toronto, November 17-18, 2003.

1   WTO, Market Access: Unfinished Business- Post Uruguay Round Inventory, Special Study Number 6 (2001).

2   Jeffrey Sachs and Andrew Warner (1995) "Economic Reform and the Process of Global Integration," Brookings Papers on Economic Activity, 1, pp.1-95.

3   World Bank, Global Economic Prospects and the Developing Countries 2002 (2001), p.168.

4   Ibid, p.172.

5   World Bank, Global Economic Prospects 2004 - Realizing the Development Promise of the Doha Agenda (2003), pp.50-51.

6   Robert Zoellick, "America will not wait for the won't do countries," Financial Times, September 22, 2003, Edition 1, p. 23.

7   WTO, Negotiating Group on Market Access, "Draft Elements of Modalities for Negotiations on Non-Agricultural Products," TN/MA/W/35/Rev.1, p.3.

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