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Asian Development Outlook 2006 : I. Developing Asia and the World
Key issues in the Doha Development AgendaThe majority of ADB developing member countries are WTO members. Of the rest, a little over half have applied to join and are at various phases in the accession process; Viet Nam should join in 2006. Table 1.5.1 presents ADB developing member countries by increasing order of per capita gross domestic product (GDP)2 and offers details regarding when (or if) they joined WTO. These countries are quite dispersed among the many existing coalitions, a reflection of the diversity in trade regimes in the region (Table 1.5.2). Columns 1 to 5 of Table 1.5.2 present the coalitions that are centered on developing countries' role in WTO. These countries tend to seek exemptions from various WTO disciplines and commitments for their members, e.g., the "Least-Developed Countries" (LDC) group, the "Small and Vulnerable Economies" (SVEs) coalition, and the "Like-Minded Group" (LMG). Columns 6 to 9 focus on coalitions ranked by their position on agricultural liberalization, from a group that opposes liberalization (G10) to one that promotes open global markets (the Cairns Group).3 There follows a brief survey of the key issues articulated at the Ministerial Meeting in Hong Kong, China, namely Non-Agricultural Market Access (NAMA), Agriculture, Services, and Rules. Select aspects of the Doha Development Agenda of particular interest to developing Asia, i.e., aid for trade and trade facilitation, are stressed. Non-Agricultural Market AccessAs noted above, trade in manufactures has been the traditional area of focus at previous multilateral rounds, with considerable success: developed-country tariffs tend to be quite low on average in this area. However, tariff levels in developing countries continue to be quite high (though they also have come down considerably over the past 10 years); hence, there is considerable asymmetry in tariff levels between countries, as well as across sectors within countries. An important facilitating format established at the Ministerial Meeting in Hong Kong, China was the agreement to use the "Swiss formula" (Box 1.5.2) as the main vehicle of liberalization and harmonization under NAMA. The beauty of the Swiss formula lies in its simplicity: negotiators need only to agree on one element of the formula (the reduction factor); the rest of the process is automatic and completely transparent. And there is no need to have a common reduction factor for all economies; several reduction factors could be used, with such indicators as per capita GDP determining which reduction factor could be applied to which country group. It allows the process to eschew the definition of what is a "developing economy" and to apply "special and differential treatment" (SDT), a concept that was not only accepted but emphasized at the Hong Kong, China meeting. The Swiss formula's transparency and simplicity also empower even the least-developed member states to participate actively in the negotiations.  From an economic point of view, the Swiss formula cuts higher tariffs by more than the smaller tariffs. By doing so, it enhances economic benefits from trade liberalization in two ways: it delivers higher welfare gains than in the case of, say, a straight-line approach,4 and it may improve tariff revenues.5 Moreover, from a political point of view, the Swiss formula tends to reduce domestic bickering regarding post-liberalization tariffs between domestic vested interests because it does not change the ranking of the domestic protection by industry, though it does reduce differentials. The tariff structures of 18 countries actively involved in the Doha negotiations are summarized in Table 1.5.3. As these countries together account for over three fourths of world GDP, a deal between them has the potential to trigger a successful outcome of the Doha Development Agenda. Table 1.5.3 is based on the detailed tariff rates available at the Harmonized System six-digit level (HS6) of disaggregation, usually including some 4,000 products. It differentiates "bound" tariff rates,6 above which a country cannot raise its tariffs, from "applied" tariff rates, i.e., those that were in effect as of 2001. Negotiators focus on bound tariffs; to the extent that the bound tariffs exceed the applied tariffs, there is said to be "water" in the tariffs. Water in the tariffs is spread widely across WTO member states. This is problematic; if a formula has a country reduce its (bound) tariff to a level that is above the actual applied tariff, it will have no effect on trade. Table 1.5.3 shows that the developed countries have little to offer in the NAMA negotiations, as their tariff structures are characterized by low bound and applied tariffs, with the exception of "mega-tariffs," i.e., products with tariffs of 20% or higher. The developed countries also tend to have far less water in their tariffs. Hence, it is clear that the developed-country negotiators are keen to promote liberalization in NAMA (as "demandeurs," in WTO-speak) and certain developing countries' negotiators are less anxious to do so (as "demandées"). The compromise would have to be in the developed countries offering up more in agriculture, services, and certain aspects of "rules" (discussed below).  As previously noted, the compromise is an ironic one. Developing Asian countries resisting NAMA cuts have the most to gain from an ambitious Swiss formula, as liberalization would lead to greater welfare gains due to their higher levels of protection. Such a "sacrifice" is the economic equivalent of "crocodile tears." Still, negotiators view "concessions" as negotiating chips, which they hope will be successful in eliciting "sacrifices" from developed countries under agriculture. Successful negotiations lead to a "prisoner's delight" scenario in which all countries gain, though not due to the intentions of the negotiators (who tend to focus on the interests of producers alone). In the 2004 July Package, negotiators agreed on "flexibility" provisions, with the intent to take into account the "special needs and interests of developing countries." A first provision refers to longer implementation periods; this approach is traditional in GATT/WTO negotiations and so is not particularly controversial. The two other provisions are much more complicated, that is: (i) the possibility of excluding a certain percentage of total import value from the formula cuts; and (ii) the possibility of excluding a certain percentage of tariff lines from the formula cuts. Critics stress that these two flexibility provisions could undermine the negotiating, economic, and political advantages of the Swiss formula.7 It certainly would not be to the advantage of developing Asian countries. Without a successful conclusion to NAMA talks, the Doha negotiations will not progress. Also, the ultimate substance of NAMA will be critical to the effectiveness of Doha and in setting the stage for future WTO negotiations. While NAMA needs to be ambitious in cutting tariffs, it is essential that it be symmetric in its applications. It could absolve the system of many of its past sins by creating a far more uniform tariff structure within and between countries. The structural adjustment that will result from such a process will make future WTO rounds that much easier. The Swiss formula approach offers an excellent opportunity to do this. However, a "flexible" compromise in which sectors are excluded could significantly reduce the potential gains from Doha, postpone once again liberalization in key sectors, and set another bad precedent for future rounds.
AgricultureAgriculture has traditionally been one of the most difficult sectors to liberalize, for reasons familiar to both developed and developing countries. In the main, this is due to various political and political-economy-related issues. Politicians will often resist liberalization on the basis, among other things, of "food security," "national security," cultural preservation, the need to maintain a beautiful countryside (the "multifunctionality" of agriculture), and health-related issues. While some of these arguments may be legitimate in theory, in practice they tend not to be. Instead, they are often merely finely wrapped excuses hiding old-fashioned protectionism. Farm lobbies are extremely strong in most developed countries, especially the EU, US, and Japan. It is an easy application of the political economy of protectionism (see, for example, Baldwin 1982); farmers tend to be geographically concentrated, have a well-defined producer interest, and can use politically popular slogans to mask the higher prices, fiscal cost, and other distortions created by agricultural protectionism. Less than 5% of the labor force is employed in agriculture in developed countries. Yet protection of this sector in the Organisation for Economic Co-operation and Development (OECD) costs over $300 billion a year (a multiple of the value of development assistance, for example) and has often caused modest results in trade negotiations of all kinds. Disputes pertaining to trade in agriculture almost scuttled the Uruguay Round; it was in part responsible for the failure at Cancun in 2003, and experts who are skeptical about the future of Doha generally point to the powerful protectionist forces in this area. The Uruguay Round was not particularly successful in liberalizing farm trade. Today, the level of agricultural protection in the OECD countries is still close to its level in 1986—1988, the reference years used by the Uruguay Round negotiators. Nevertheless, the Uruguay Round was instrumental in introducing the minimal level of transparency necessary to prepare for profound future changes in OECD agricultural markets.8 In particular, it helped to place farm liberalization at the forefront of the Doha negotiations and reinforced the steady decline of OECD public support for a highly subsidized farm sector. Moreover, the emergence of developing countries as key negotiators at Doha has also helped place agriculture at the top of the agenda. Net exporters of farm products with a long-term comparative advantage in agriculture, such as Brazil or Thailand, have been effective in applying and organizing pressure at Doha for agricultural liberalization. And many other developing countries have realized that they are at the stage where farm exports are essential to their development because their farm sector is large and labor intensive. Agriculture accounts for 40% of GDP, 35% of exports, and 50—70% of total employment in LDCs (12%, 15%, and 15—40%, respectively, in the other developing countries). Three quarters of the world's poorest people live in rural areas, with the proportion in LDCs as high as 90%. This being the Doha Development Agenda, agriculture must be part of a final package. Farm negotiations in the Doha Round are taking place under three pillars: (i) rules on export subsidies; (ii) rules on domestic support; and (iii) tariff cuts. This structure is a source of difficulty in negotiation because the use of these instruments is asymmetrical. Most OECD countries use all three instruments, while developing countries protect their farm sector only behind tariffs. Negotiating on the combined effects of these instruments would be ideal, but is not technically possible. Export subsidy eliminationThe Ministerial Meeting in Hong Kong, China confirmed the need to eliminate farm export subsidies by 2013 (2006 for cotton export subsidies). This decision has received considerable publicity, despite the fact that export subsidies only represent roughly 5—6% of total farm subsidies, and that it simply binds the reduction of export subsidies unilaterally undertaken by the EU since the late 1990s.9 Nevertheless, economic calculations, e.g., Anderson and Martin (2006), have shown that eliminating export subsidies without cutting tariffs and domestic support will generate noticeable welfare losses in many of the developing countries that are net importers of subsidized farm products. These calculations have also consistently shown that the only way to (more than) counterbalance this negative impact is to reduce domestic support and tariff rates in order to boost world production. In the export subsidies domain, the Hong Kong Ministerial Declaration may prepare for future WTO negotiations by expanding the definition of export subsidies to include the export subsidy elements of export credits, food aid, and state trading enterprises. These instruments are currently of marginal importance (Hoekman and Messerlin 2006); nevertheless, such disciplines are significant in inhibiting their intensive use in the future, perhaps to fill the void left by the elimination of existing export subsidies. Domestic supportDomestic support is an area where the OECD countries have de facto benefited from a "reverse" special and differential treatment (SDT) under the Uruguay Round. Whereas there is an outright legal prohibition against trade-distorting subsidies in manufacturing (and countries importing subsidized goods are allowed to impose countervailing duties), in agriculture domestic support is only disciplined by rules against highly distorting subsidies and practices. These tend to be extremely expensive, which explains to some extent why only developed countries tend to use them. The US and EU together represented over three fourths of global farm domestic support in the early 2000s (Anderson et al. 2006a).
The EU approach in particular has been very much criticized for several reasons. First, there is a long WTO tradition (that the EU has always supported) that unilateral liberalization should not be credited as WTO concessions. Second, the EU proposal in farm tariff cuts is viewed as weak (see below) whereas its requests for tariff cuts in NAMA are substantial (see above). Last, but not least, the 2003 CAP reform did not really liberalize the EU farm sector. All other things being constant, the overall level of EU protection has decreased marginally from 57% to 56% after the 2003 reform (OECD 2004). Tariff cuts and the "Big Bargain"Tariff cuts are crucial to agricultural liberalization because they are the best way to reduce and control subsidies, as lower tariffs make existing subsidies more visibly expensive.10 Unfortunately, the ongoing Doha negotiations on farm tariff cuts face a much more complicated format than did the NAMA negotiations, with the risk they will reduce the level of ambition in farm liberalization, already fragile because of the political importance of the farm sector to almost every WTO member. First, complicated modalities in farm negotiations flow from the fact that the proposals on tariff cuts for the Ministerial Meeting in Hong Kong, China have adopted a tiered format, with four ranges of tariffs, each range being subjected to a different percentage cut, as shown in Table 1.5.5. These proposals differ with respect to the figures defining the various ranges and percentage cuts. As a result, negotiators need to strike deals on the three thresholds defining the four tariff ranges, on the four percentage cuts for each range, and on the use and definition of a tariff cap. If there are different cuts for developed and developing countries (an almost certain situation), negotiators have to agree on 16 figures at least, which is no mean feat. The fact that "specific tariffs" (i.e., a tariff based on a fixed value and/or quantity, rather than a percentage-based "ad valorem" tariff, which are almost always applied in manufactures) exist on agricultural products complicates matters, as they would likely need to be converted to an ad valorem equivalent in order to be liberalized. This presents a problem in that the conversion can lead to greater protection.11
In sum, Doha negotiations particularly in the areas of domestic support and tariff cuts continue to be controversial, and the outcome is unclear. However, past experience has shown that developing countries in particular are placing a high priority on this area. An underestimation of the seriousness of developing countries in this regard was in evidence at the Cancun Ministerial Meeting, at which a compromise agreement between the EU and US in agriculture was rejected by developing countries (under the leadership of the G20). This should not happen again. These three areas of agriculture will also have to be an important part of a final Doha package. Still, agriculture is complicated and faces strong resistance at the local level in developed and developing countries. As farm interests in the EU, for example, attempted to keep any commitments at the Ministerial Meeting in Hong Kong, China as modest as possible, Korean farmers also actively sought to influence their country's position. However, WTO has matured such that it needs to tackle trade in agriculture seriously, unlike in the past. Doha presents an opportunity to do this, that is, to treat agricultural trade more like trade in manufactures, in which trade-distorting subsidies are eliminated and tariffs are lowered and made more uniform. The adoption of the Swiss formula to agricultural tariffs would help to achieve this. Trade in servicesGlobally, services represent more than 50% of the GDP of any country, and more than 70% of many developed economies. International trade in services is becoming commensurately important; in 2003, it came to $1.8 trillion, about one quarter the value of merchandise trade (WTO, International Trade Statistics, 2004, Table 1). Although data on barriers to trade in services are notoriously rare and often incomplete, in-depth studies on specific services sectors suggest that protection in this sector is much higher than is the case for trade in goods, suggesting that trade liberalization in services has significant potential for all WTO member states. While services are not included in the Doha liberalization scenario reviewed below using ADB's General Equilibrium Model of Asian Trade (GEMAT), Francois et al. (2003) do estimate the potential gains from various scenarios of liberalization in services trade. Assuming a 50% reduction in their estimated barriers to trade in services and increasing returns to scale, they calculate a $68 billion global gain, double that of a similar reduction in protection in manufactures and about one fourth more than in agricultural liberalization. Developing countries almost gain as much as the OECD countries, with the PRC and India accounting for over three fourths of this share. Clearly, the potential economic gains from services liberalization are high. Nevertheless, negotiations under services have hitherto produced very little at Doha. As of July 2005, less than half of WTO's member countries had tabled proposals of any kind. Moreover, the content of these offers seems thin, especially in Mode 3 (commercial presence, see Box 1.5.3), which is of special interest to the industrial economies, and in Mode 4 (that is, trade in labor services), which is of special interest to some developing countries (for example, in Asia, Bangladesh, India, Pakistan, Philippines, and Sri Lanka).
A first reason for this deadlock is the negotiating process per se, which is complicated in part due to measurement problems. In trade in goods, negotiators balance the concessions granted to trading partners via tariff cuts at home with those they receive in return, a straightforward calculation. In services, it would make little sense to balance, say, the number of licenses granted to foreign insurance companies with the number of visas obtained for domestic nurses willing to work outside the country. Moreover, until the Ministerial Meeting in Hong Kong, China, negotiations were exclusively based on bilateral offers and requests, a cumbersome procedure that complicates the negotiations. So does the fact that substantial services liberalization can require behind-the-border changes (e.g., changing a law or bureaucratic regulations). To simplify things, services negotiations under WTO in the past have focused on national treatment, that is, on the elimination of measures that discriminate against foreign service providers. Such an approach allows regulatory flexibility, but this comes at a price: there is no "forced" regulatory efficiency. The failure of countries to adopt "best practices" in this regard has been estimated to be high (OECD 2005, Estevão 2005). In order to allow for deeper integration in the services context, the Ministerial Meeting in Hong Kong, China decided that countries could pursue services negotiations on a "plurilateral," rather than the usual bilateral, basis. That is, more than two countries can negotiate a liberalization package in a certain sector, a result which would be extended on a most-favored-nation basis.12 Although there could be some breakthroughs in the less controversial areas, the paucity of proposals on services thus far does not bode well for a breakthrough in this area. Nevertheless, it is an increasingly important sector with great potential. A successful conclusion to the Doha negotiations would also likely produce a strong commitment to focus on services in future rounds of multilateral negotiations. RulesThe Doha discussions on "rules" focus on several issues; for developing Asia (and other developing regions) it is argued that the most important areas relate to contingent protection (antidumping and countervailing duties) and regional trading agreements. (Aid for trade, including trade facilitation, is handled in the next subsection.) During the last decade, WTO has been unable to monitor effectively the use of nontariff barriers (NTBs). The success of the Uruguay Round to eradicate "gray measures" (such as quotas and voluntary export restraints) has been somewhat diminished by the increased use of contingent protection, especially antidumping measures. Hitherto there has been no major systematic effort by WTO to delineate and quantify major NTBs imposed by WTO member states. Table 1.5.6 provides an illustration of the use of antidumping duties and other NTBs gleaned from recent trade policy reviews13 of selected WTO members. It suggests that the NTB problem continues to be important. Doha discussions on reforms addressing antidumping and countervailing duty procedures have not yet reached the negotiating stage, but such topics tend to be handled in the final negotiating phase. Contingent protection could represent a growing threat to open trade. While, technically, antidumping measures and countervailing duties are justifiable in certain cases, in practice they have been used as a protectionist tool, all the more problematic because applications are firm- or country-specific. Enforcement of rules governing contingent protection has also been relatively lax. Hence, discussions regarding the need to make contingent protection more transparent and symmetric between countries will likely become a significant issue at Doha, though it is not clear exactly what will be put forward. Still, the regulatory nature of this area, as well as the increasing use of contingent protection even by developing countries, will render progress difficult. Little progress is expected in this regard outside clarification of rules, as was basically the case during the Uruguay Round. As is noted at length in Part 3, the trend toward the creation of preferential trade agreements (e.g., free trade areas or customs unions) has become increasingly important in driving international commercial policy over the past 10 years. By their very nature, these agreements discriminate in favor of partner countries, to the disadvantage of nonpartners. This is a violation of the heart and spirit of the GATT/WTO, i.e., most-favored-nation treatment, enshrined in Article I. However, Article XXIV allows for preferential trade agreements, provided that they meet certain general criteria. In GATT's early years, preferential trade agreements were relatively few in number. As of March 2006, however, almost 200 such agreements had been reported to WTO, double that of just a decade earlier. Many more are in the works; the vast majority of developing Asian countries are party to such agreements. Recognizing that this trend poses an important challenge to nondiscrimination, WTO members have been discussing the need to revamp the organization's policies toward regionalism. The 1994 Understanding on the Interpretation of Article XXIV of GATT was an attempt to enhance the compatibility of regionalism with multilateralism at a time when the trend was beginning to grow, but it did little to clarify the issues. Under the Doha Development Agenda, further revisions of interpretations of Article XXIV were to be part of its "single undertaking." But little was accomplished at the Ministerial Meeting in Hong Kong, China in this regard, except a commitment to improve the transparency of free trade areas and encouragement to negotiators to arrive at "appropriate outcomes" by the end of 2006. Because the global trend toward bilateralism and regionalism is new and just about all WTO member countries are involved, it is unlikely that substantial progress will be made in this area at Doha, outside of some minor points on definitions and transparency. However, the problems that are being created by this trend—such as inevitable trade and investment diversion, "noodle bowl" (or "spaghetti bowl") issues, and the clear threat to the multilateral system—will become evident in time, and the threat to the multilateral system will be taken more seriously. This will no doubt be a key area of discussion in subsequent rounds, if not sooner. Special and differential treatment and aid for tradeThe 6 years between the ministerial meetings held in Seattle and Hong Kong, China witnessed an intense debate on whether and how developing countries should be granted special and differential treatment (SDT). Importantly, at the Ministerial Meeting in Hong Kong, China developed countries agreed to end tariffs and quotas on 97% of the tariff lines exported by the LDCs by 2008. This was hailed as an important success. However, it has been criticized as not being extensive enough.14 To begin, it should be noted that the pursuit of SDT has often been counterproductive for developing countries. As noted above, countries tend to gain most from their own liberalization, and the quest for exclusions, drawn-out timetables for the implementation of reform, and lack of active participation in global trade talks (meaning that protection remains relatively high in LDCs) have postponed or even stifled liberalization. The possibility of a "round for free" was discussed earlier in the Doha talks, ostensibly suggesting that LDCs should be exempt from everything at Doha. This approach, though well meaning, would have been highly detrimental to LDC development, as it would have precluded the need for domestic reform and restructuring. Moreover, active participation ensures that the issues they really care about will be addressed. Some aspects of SDT can be useful, but in no way should it serve to exclude LDCs and developing countries more generally from being true partners in the global trading system. Since the 1970s, SDT has been mostly delivered through preferential (low or zero) tariffs granted to a limited number of developing countries defined on an ad hoc basis by developed countries (on an individual basis). However, the value of SDT preferences has been falling over time. For example, beneficiaries are currently suffering from "preference erosion" and associated adjustment costs. During the last decade, the differences between the most-favored-nation tariff rates and the preferential tariff rates have been reduced by a long series of trade agreements, under the GATT/WTO and in regional trade agreements. "Aid for trade" has become a buzzword in the Doha negotiations, and as a result, deserves to be defined with some precision. The preference erosion issue, for example, is often included under the aid for trade heading. What follows limits aid for trade to issues increasingly related to governance in general (and not necessarily to trade directly). First, aid for trade can be linked to "trade facilitation," that is, to the activities undertaken by customs and logistics procedures, e.g., improving the movement, release, and clearance of goods, including goods in transit. The Doha Development Agenda has a program of negotiations on trade facilitation intended to buttress developing-country capacity to implement trade liberalization and structural change in general. A particularly important aspect of this program relates to transit conditions (for example, fees, delays, and transparency), which is of prime importance to landlocked countries. Second, as the above definition of trade facilitation is quite narrow (it covers only public governance at the borders), this approach could potentially be extended to all activities involved in the international movement of goods and services, such as building the corresponding infrastructure (ports, roads, and other transport facilities), or operating trade-related services (mail and parcels, telecoms, specialized legal and insurance services, storage, and the like). This "trade facilitation plus" concept is very close to services negotiations since de facto it relies on a cluster of services on which developing countries need to focus in order to reap effectively gains from trade liberalization.
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Table 1.5.4 presents the reform proposals put forward by the EU, G20, and US at the Ministerial Meeting in Hong Kong, China, focusing on the two largest subsidizers, the EU and US. It shows that the proposed subsidy cuts (applied to Uruguay Round commitments) may look huge in percentage terms, but in effect they reflect a good deal of "water" in the subsidies. For instance, the EU has made a proposal, which is a mere binding at WTO of its already-completed reforms of the Common Agricultural Policy (CAP) undertaken since 2000 (Kutas 2006).
Such a difficult format for negotiators could prove counterproductive. Thus, there is a strong incentive to look for more simplified parameters for negotiations, keeping in mind that the Hong Kong Ministerial Declaration (paragraph 24) says: "[..] we instruct our negotiators to ensure that there is a comparably high level of ambition in market access for Agriculture and NAMA." Importing the Swiss formula from NAMA to the farm negotiations seems a first condition to ensure a comparably high level of ambition by using the same instrument for tariff cuts in farm and NAMA negotiations. There is no extra cost for such a move; the Swiss formula requires that specific tariffs be transformed into ad valorem tariffs, but this exercise will be necessary anyway for the tiered proposals articulated at the Ministerial Meeting in Hong Kong, China. A Swiss formula approach would have the same advantages of transparency and symmetry as in the case of NAMA, to much greater effect given the greater divergence in tariff rates within and between countries in agriculture. It would also be instrumental in setting the stage for effective future WTO rounds and would reduce the "exceptionalist" mentality regarding agriculture that has always accompanied WTO negotiations. Finally, the Swiss formula opens the possibility of a clearer linkage between the NAMA and farm negotiations; that is, it opens the door to a transparent "Big Bargain" with trade in goods.
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