The Potential Cost of the Doha Round Failure Antoine Bouet – David Laborde WTO November 2 nd 2010 – Geneva

Overview 1.Motivation 2.Scenarios design 3.Methodology 4.Results 5.Conclusions IFPRI discussion paper + IFPRI Policy Brief failed-doha-round-0

What is all about? Effects of finalizing the DDA negotiations Potential effects of not reaching an agreement Total cost the DDA failure

How to assess the gains of the DDA? Traditional approach: 1.Assessing the trade liberalization scenario negotiated versus the status-quo 2.Combination of tariff scenario building and economic modeling (mainly through CGE assessment) In the last years, assessment of the gains (upper part of the iceberg) have melted away Better data Ongoing process of : regional liberalization (FTA between members, Side effects of the Custom Unions negotiations in Africa) and/or unilateral liberalization (India in 2004)

Missing gains? (or the quest for big numbers?) Models are incomplete (Dynamic gains of trade liberalization…) Model improvement: see Will Martins comments on Consistent Aggregation Rethinking the assumption of status-quo New Scenario design We will focus on this last issue

But, keep in mind that Quantitative Assessments using CGE obey some rules: Equilibrium models Most of them assume constant employment of factors (capital and labour) : Modelers like to model what they understand. Technology is exogenous Therefore, engines of growth are out of the story we look at: We are doomed to show you small GDP figures! They are driven by Efficiency gains (most of the case second order effects): allocative effects Interests of the CGE: comparing scenarios and their design Look at winners and losers A small figure is not a pro/against trade liberalization argument in itself

Value of this research For policy makers: Provide new lights on the gains at stake in the current DDA Analysis of a what if scenario. Applied research: Rethinking the relevant baseline Providing figures and order of magnitude for effects already discussed in the literature Assessing partially the value of the binding process

1. Dynamics of trade policy Status-quo is not a feature of trade policies Trade liberalization like a bicycle or Failure of the DDA: Signal of the end of cooperative policy WTO as a litigation arena and not as a place for negotiation

2. Not a business as usual period Risk of rising protectionism Tariffs – Domestic support Financial crisis Analogy with the 1929 crisis and its trade policy aftermaths H-S tariff act Society of Nations was calling for a tariff truce as the G-20 now Fighting deflation, supporting local producers and raising public revenue Lack of cooperation of governments Beggar-thy-neighbor policies Underestimation of the retaliation process See Food prices crisis policy measures

3. Rethinking the reference point Follow-up on previous research (Bouet and Laborde, 2004; Laborde, 2008; Bouet and Laborde 2009) WTO negotiations as a Nash Bargaining game Combining Cooperative Game Theory and CGE analysis Concluded on the emptiness of the core in many negotiation configurations (predicting DDA difficulties in 2004) But solutions exist

Two main directions Assessing DDA scenario is already challenging Increase in protectionism Regionalism Defining realistic what if scenario is worst Very subjective

Description of the scenarios Baseline: Enforcement of current FTAs and Multilateral commitments Doha: Exhaustive 2008 July Package modeling Up to Bound: All tariffs, except preferences covered by bilateral-regionals treaties, are moved to their Bound level. Unbound lines are set to their MFN level increased by the average binding overhang Up to Max: All tariffs, except preferences covered by bilateral-regionals treaties, are moved to their maximum level reached over the last 13 years. Bound tariffs are still capped by the UR commitments. FTA HIC: Free trade area on 95% of tariff lines between OECD members Up to Max+FTA HIC: the Up to Max scenario is completed by a 95% FTA between OECD countries. Up to Bound&DDA: All tariffs, except preferences covered by bilateral- regionals treaties, are moved to their new Bound level. Unbound lines are set to their MFN level increased by the average binding overhang Up to Max&DDA: All tariffs, except preferences covered by bilateral-regionals treaties, are moved to their maximum level reached over the last 13 years. Bound tariffs are still capped by the post DDA commitments.

Tariff cut implementation in the DDA scenario Preferential Margins Binding overhang Applied MFN Bound level Applied Preferential I II III

Tariff increase implementation 2008 applied MFN Bound level 2008 Preferential Applied Max MFN tariff since 1995 Preferential rates covered by a bilateral treaty are protected

The baseline A baseline is implemented from 2008 to 2025, which depicts the world without a new multilateral agreement. Concerning trade reform, the following agreements since 2004 have been included in the baseline: Achievement of the complete FTA for ASEAN, CEMAC, COMESA, SADC ECOWAS; EU-ACP Economic Partnership Agreements Implementation of the EU-INDIA, EU-India, EU- ASEAN, US-Colombia, US-Oman, US-Bahrain, US- Morocco, US-Australia, Mercosur-Colombia, China- Chile FTA. WTO accessions since 2004 are implemented

World Average Tariffs Reference group weighted

Protection faced Reference group weighted BaselineDoha Up to Bound Bound& DDA Up to Max Max&DD AFTAHIC FTAHIC+ UptoMax HIC Agricultural products Industrial goods All sectors MIC Agricultural products Industrial goods All sectors LDC Agricultural products Industrial goods All sectors World Agricultural products Industrial goods All sectors

Overview

Source: Bouet and Laborde, MIRAGE simulations Direct gains from the DDA Insurance value of the DDA, extreme case Insurance value of the DDA, intermediate case Real Income (1)

Real Income (2)

Real Income (3) %

Sources of the gains/losses: Up to Max scenario

Another example of valuable concessions: the time dimension of Domestic support. Agricultural Production

DDA and Up to Max Exports:+$363 Bn Welfare: +$59 Bn Exports:-$808 Bn Welfare: -$134 Bn Exports:-$1,171 Bn Welfare: -$193 Bn

Additional remarks Real value of the Binding WTO has two values as a public good: Promote cooperative behavior Limit damages due to retaliations process and may deter it FDI may change the dynamics of trade liberalization Locking device Vicious and Virtuous circles