Will "Sectorals" Sink WTO Doha Deal Prospects?

The latest reports out of Geneva suggest that the United States, the country that has pushed the trade agenda most strongly in the postwar period, may now be the main obstacle to the completion of the Doha Round. While completing Doha at this time was bound to be difficult anyway provided Bush's lame duck status, America's insistence on adding so-called "sectoral" deals has made matters more complicated. What exactly are these sectoral deals? The International Centre for Trade and Sustainable Development (ICTSD) has this summary for us. It's taken from the ICTSD's weekly trade newsletter, Bridges, which I recommend all those interested in trade read regularly:

The NAMA [non-agricultural market access] issue on which the WTO chief will be looking for “positive results” will be “sectorals,” the term used by trade negotiators to refer to proposed initiatives under which participating countries would deeply cut tariffs on entire industrial sectors, such as chemicals, forest products, or industrial machinery.

To compensate for what they see as weak levels of overall tariff reduction for developing countries, industrialised nations like the US, Canada, and Japan want to be sure that major markets like China, Brazil, and India will participate in some sectoral liberalisation initiatives.

The developing countries counter that the negotiating mandate specifies that participation in such initiatives is non-mandatory. They are willing to commit to no more than a discussion of how a sectoral might work in terms of product coverage, exceptions, and future tariff levels for developed and developing countries.

Proposals to create duty-free zones in some industries like chemicals may turn out to be the final stumbling block for efforts to reach a breakthrough in the World Trade Organisation's (WTO) trade-opening Doha round.

The important thing to note is that sectorals are by and large industrialized country add-ons to the ongoing Doha negotiations--they are ancillary and by no means central to its agenda. While there are some LDCs pushing for them too, developed nations have been most adamant in calling for them. Here is a comprehensive list of these sectorals. The second important bit of jargon, "critical mass," refers to the percentage of world trade conducted among countries assenting to a sectoral deal required to knock tariffs down to a given level. For instance, under Norway's proposal, countries voluntarily joining a sectoral deal on fish and fish products would apply a tariff rate of zero if countries representing more than 90% of the global trade in these products sign on.

The key word is voluntary. What large, fast-growing LDCs dislike is that they are effectively being pushed into joining sectoral deals due to their size. Sceptics would say it's blackmail: "if you don't sign on, then you can kiss Doha goodbye." Like in the days of yore, negotiations are bogging down along North-South divides. As mentioned in my earlier post, American lobbying interests make an appearance. US senators are keen on major developing economies like China, India, and Brazil opening up by a significant degree to receive their consent. In other words, they need "something to show for" to their constituents. And, of course, the manufacturing lobby is one these key constituents. From Reuters:

If, as some economists say, the WTO is not about free trade but disciplined protection, then efforts to eliminate tariffs in some industry sectors could prove a step too far, at least now. What is already clear is that the sectorals have taken on a totemic significance, encapsulating both the desire of the United States for a Doha deal that cracks open new markets for its exporters and the determination of big emerging countries not to have an unfair deal foisted on them by the rich.

"Unless they're handled very, very carefully -- and it doesn't seem to me that they are being handled with the care necessary to secure a broad-ranging agreement -- then these are just adding an unnecessary complication to the negotiations at the moment," said Simon Evenett, professor of international trade at St. Gallen University.

For economists like Evenett, pushing for more market opening is yesterday's battle. As the global economy slows down or heads into recession, negotiators should concentrate on locking in present levels of trade liberalisation in a new deal. Otherwise countries will be able to use the leeway that current agreements give them to raise tariffs and subsidies up to the ceilings set by the previous agreement signed in 1994.

On the other hand, the worst economic crisis in a generation may change the calculations of some countries which were willing to let Doha die rather than sign up to sectorals. News of a shock 2.2 percent fall in Chinese exports in November, the biggest drop for nearly 10 years, could well make the leadership of China's export-driven economy reassess the value of a deal that promises to keep export markets open.

WTO Director-General Pascal Lamy and ministers from the United States and other trading powers, including the three emerging giants India, China and Brazil, are in intensive consultations this week to resolve outstanding issues in the seven-year-old Doha round -- sector deals foremost among them.

On the basis of those talks, Lamy will decide whether to call ministers to Geneva next week to seek a Doha breakthrough. Leaders of the G20 rich and emerging nations called last month for an outline Doha deal by the end of this year to help counter the financial crisis by warding off protectionism.

But diplomats in Geneva say the talks are not going well, and sectorals are the main problem. The chairman of industrial goods negotiations at the WTO, Swiss ambassador Luzius Wasescha, acknowledged members were far from consensus on sectorals when he issued a revised negotiating text on Saturday showing broad agreement in most other areas, such as overall cuts in industrial tariffs for all members.

The new text was immediately rejected by the U.S. National Association of Manufacturers (NAM), which said it was not a basis for ministers to meet and seek a deal. NAM President John Engler said the text's failure to require China, India and Brazil to participate in sector agreements was a deal-breaker.

Wasescha's response was: business lobbyists would say that, wouldn't they. "I'm not negotiating with you, the media, I'm not negotiating with associations. Members are negotiating among themselves and I'm the facilitator," he told reporters.

But NAM's backing will be essential to get any Doha deal passed by the U.S. Congress. The problem is that the U.S. stance is out of line with the agreed Doha mandate, which makes it clear that participation in the sector deals is voluntary.

The big emerging countries have fought hard to defend the non-mandatory nature of sector deals, rejecting U.S. efforts to compensate participants with smaller tariff cuts elsewhere and even challenging calls for the deals to have "critical mass", which Beijing sees as code for Chinese participation.

The latest dispute turns on a U.S. call for members to commit to participate in certain sector arrangements at the time an outline deal is agreed, which the emerging nations reject as an attempt to pre-judge the outcome of negotiations.

Since general cuts in tariffs will bring the ceiling for major developing countries' industrial duties to 11-12 percent on average, some negotiators wonder whether the row simply masks U.S. unwillingness to reach a deal for other reasons.

But U.S. officials, keen to show some benefits from a deal to a sceptical Congress, say that waivers for developing countries to the general tariff cuts mean that the overall Doha deal may not create any new business opportunities.

Options to break the deadlock include looking at "subsectors" -- for instance drugs rather than the full range of chemicals -- and deals which eliminate duties in developed countries but allow participating developing countries to retain a low tariff.

The United States is not the only proponent. Several developing countries such as Thailand and Taiwan have also come up with proposals, some of which would not be to Washington's taste.

An EU proposal for a sector deal on textiles, which could mean opening the U.S. market to duty-free clothing from China and other Asian producers, is unlikely to get Washington's support, even if that deprives the deal of critical mass.

Manufacturing lobbies of industrialized nations appear convinced that their future prosperity is strongly tied to opening up the BRICs via sectorals and other measures. Whether such demands cause Doha to buckle once again is certainly an open question. Stay tuned.