TABLE OF CONTENTS
The Doha Declaration
The Economic Value
The Heckscher-Ohlin Model
The New Trade Theory
The Competitive Advantage of Nations
The German Economy and the EU’s Common Agricultural Policy
The German Interests in the Doha Round
Major Impediments to the Doha negotiations
Protectionism of Developing Countries
Impediments inherent to WTO-principles
HOW TO MOVE THE DOHA ROUND FORWARD
The World Trade Organization’s (WTO) Doha Round was established in 2001 as the new multilateral negotiation round, the first one of the still young WTO. The members agreed to set a sign for market economy and development, not at last to undermine terrorism. Different from the preceding Uruguay Round, initially scheduled on four but stretching over seven years, the negotiations this time should last three years and reach consensus by the end of 2004. Almost five years later the Doha Round could be closer to its exodus that its consensus.
This paper aims to provide an understanding of central impediments to the Doha negations as well as proposals how to move towards a consensus on major subjects, in particular from the perspective of Germany as a member of the European Union. For this purpose, the background information provided will introduce sections of the Doha Declaration relevant to later discussions. International trade theory, especially comparative advantage theory and protectionism, provide the foundations for the analysis section. The starting point of the analysis is a brief overview of Germany’s economy and the Common Agricultural Policy (CAP) imposed by the European Community (EC) as well as Germany’s interests in the Doha negotiations.
The second part of the analysis discusses four major impediments to the success of the Doha Round at present: Political interests, protectionism of developing countries, implementation-related issues, and WTO-principles. The paper concludes with suggestions that address the four impediments mentioned and provides a general idea how to restructure the negotiations in order to improve efficiency.
The Doha Declaration
The Doha Declaration constitutes a list of 21 subjects to provide a guideline that steers negotiations towards development as intended when established in 2001. For the purpose of this study, only two major issues will be introduced. The full list of negotiation subjects can be reviewed under WTO (2009).
Agreement on Agriculture (AOA): Strives to create fair competition and less distortion on the world agriculture market. For this purpose, members have committed to engage in negotiations that are aimed at:
- Market access: Average tariff reductions on agricultural products of 36% for developed, and 24% for developing countries. The least developed countries (LDC) are not required to reduce their tariffs.
- Export subsidies: Developed countries are required to reduce direct export subsidies to a level that is 36% below1986-90 base period level. Total subsidized exports need to be reduced 21%. Reductions for developing countries are two thirds of the above rates.
- Food safety, animal and plant health regulations: Aims to prevent the use of over-restrictive regulations as import barriers. Members need to accept the measures of the import country if an equal level of health protection is achieved.
- Ministerial decisions concerning the least-developed and net-food-importing countries: Establish objective with regards to food aid, full grant food provisions, agriculture development aid.
Different obligations for developing countries are grounded on the WTO-principle of “special and differential treatment” which also intends a prolonged implementation period for developing countries.
Market access for non-agricultural products (NAMA): The initial indent was to reduce trade barriers in particular for non-agricultural products of export interest to developing countries. These negotiations also consider “special and differential treatment” for developing countries and no tariff reductions for LDC. However, current NAMA-negotiations rather focus on developed countries’ market-access interests.
Other major negotiation topics are trade-related aspects of intellectual property rights (TRIPS), General Agreement on Trade in Services (GATS), and implementation-related issues. However, the discussion in this paper mainly refers to the two introduced subjects.
The Economic Value
Several studies estimated the economic impact of the Doha Round and came to different conclusions. The Carnegie Institute asserts that under a realistic trade scenario to be agreed on, only a marginal long-term benefit plus a one-off world income increase of $40-60bn could be expected. The World Bank on the other hand sees global annual benefits of $95-120bn, if the Doha-Round reaches consensus on the Hong Kong proposal (EurActiv, 2006). The OECD estimates that the liberalization of international trade in agricultural products alone would result in nearly $100bn added economic welfare per year (Gurria, 2006).
Trade theory suggests that there is an increase in economic efficiency if a country moves from autarky to free trade. Economic efficiency can be seen as a measure that refers to the use of scarce resources to satisfy the needs of a country’s people (Kling, 2008). In the following sections we will examine why free trade raises economic efficiency and therefore aggregate welfare.
Adam Smith in 1776 already suggested, that if a country A can produce some goods at a lower cost, with higher production efficiency than country B, and if country B has a higher production efficiency for some other goods, then country A would be better off to trade its cheaper produced goods for country A’s cheaper produced goods. Both countries would benefit from this trade (Suranovic, 2006). For example, assume that it takes 80 workers per year to produce drilling machines in Germany and 120 workers for the same time to produce wheat. To produce wheat in India requires 80 workers and for drilling machines the country needs 120 workers. Both countries would maximize their welfare, if Germany produced surplus drills and trade them for India’s wheat, and if India produced surplus wheat and trade it for Germany’s drills.
David Ricardo extended the above concept with his comparative advantage theory published in 1821. He suggests that a country can even gain benefits from specializing in goods where its relative production efficiency is better than for other goods (Ricardo, 1821). For example, assume now that it takes 80 workers per year to produce drilling machines in Germany and 90 workers for the same period to produce wheat. In India drills can still be produced with 120 workers while wheat production now needs 100 workers per year because of constant field watering that is needed due to the climate change. India would still be better off to specialize in the production of wheat and trade the surplus for German drilling machines, and the other way around. Trade allows both countries to benefit from their comparative advantage.