The Doha Round of trade negotiations is in deep trouble. Asian nations need to focus more on what they can do to rescue it; they must also be thinking about what they should or should not do if it does go nowhere.
Urgency is needed because unless there is agreement this year, it is quite likely that none will be forthcoming in the foreseeable future. US President George W. Bush’s so-called fast-track negotiating authority is unlikely to be renewed, which means any deal would require Congressional approval. This would be difficult given the US trade deficit and rising anti-trade sentiments.
China has so far played a low-key role in the negotiations. This befits its relatively recent entry into the WTO, and the competitiveness of its exports, which are worrying countries in Asia as well as the West. But the success of China’s export orientation over the past two decades should be an example to the rest of the region of the benefits of trade liberalization.
Unfortunately, these negotiations, like most others involving trade, have focused on horse-trading conducted from legalistic standpoints rather than on economic gains. The net result is that developing countries are saying they won’t agree to reductions in industrial tariffs (among other things) unless Europe and the US give more ground in areas like agriculture. While there is no question that the EU and US (and Japan and Korea) positions on agriculture are outrageous, there is a danger of the developing world, particularly Asia, cutting off its nose to spite its face.
As the Asian Development Bank’s Outlook 2006 makes very plain, Asia would benefit from industrial tariff cuts. The successful East Asian economies already have quite low average-applied tariffs, with China on 9.1%, slightly above Malaysia, Korea and Taiwan, but low by developing country standards (developed OECD countries are in the 2-3% range). The rapid reduction in China’s tariff levels over the past decade is clearly connected to its success in attracting export-oriented foreign investment and gains in industrial productivity.
The consequences of a failure to secure a Doha agreement are twofold. Firstly, the WTO cannot be seen to stand still. A Doha stalemate represents an erosion of its prestige, increasing the likelihood of the WTO being bypassed or ignored in the future, opening the way for a surge in unilateral anti-dumping and other trade restraints. Secondly, it will appear to justify the bilateral and regional so-called free trade deals that have been blossoming in Asia. Contrary to the claims of politicians, these are likely to do more harm than good.
The ADB, an organization in the forefront of Asian economic cooperation, warns: "The global tide of bilateralism on which Asian countries are being carried could pose significant risk to the multilateral trading system." Make no mistake; although intra-Asian trade has grown rapidly over the past decade, much of it results from exchange of components (electronics, garments, etc) for end-products whose markets are outside Asia. Asian trade is no substitute for global trade.
Indeed, experts such as Victor Fung of the Hong Kong-based Li & Fung group, which organizes sourcing and manufacturing production systems, warns that bilateral deals complicate matters and divert trade and production to less efficient locations. Sometimes it is better to pay a low and predictable tariff than try to figure out permutations of tariffs and rules of origin.
The ADB admits that free trade deals within Asia could be beneficial in the same way as NAFTA and the EU have spurred regional integration without putting up barriers to the outside world. However, any such arrangements must be as wide as possible, have consistent and preferably harmonized rules of origin, and meaningful mechanisms for dispute resolution.
This is not evident in the deals being signed or negotiated between Asian nations or with countries outside the region such as Australia and the US. Nor has the WTO or ADB or any other multilateral organization been asked to help harmonize these myriad deals. The bilaterals have mostly been driven by political considerations and the big players – the US, China, Japan – have effectively started competing with each other to sign deals regardless of economic or commercial logic, or their potential to divert or even impede trade.
All in all it’s a sorry situation and China could do the rest of Asia a favor by talking less about bilaterals and using its growing influence to push the likes of India and Brazil into a more accommodating stance in the Doha talks. Without a deal to cut industrial tariffs, Asian growth could slow dramatically in the next decade. As Western consumption plateaus, Asia will need to spur domestic demand through higher productivity and increased trade with other developing countries in and outside Asia. Without the kind of tariff reform which China and its neighbors have achieved there will be no such spur to growth.