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p. 13 of 36 BACK | NEXT Foreword 1. Developing Asia and the world Overview Prospects for developing Asia, 2006 and 2007 Prospects for the world economy, 2006 and 2007 Subregional summaries Suspension of Doha talks and emerging trade issues Suspension of Doha Development Round negotiations Renewed momentum for preferential trade agreements Textile and clothing trade: Performance of Asian suppliers What developing Asia can now do II. Economic trends and prospects in developing Asia III. Developing Asia's imprint on global commodity markets Appendix Statistical notes and tables ADO forecasting performance for GDP growth and inflation

Asian Development Outlook 2006 Update : 1. Developing Asia and the world

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Suspension of Doha Development Round negotiations

This section updates the analysis of developments in the international trade arena previously presented in ADO 2006 in April this year (ADB 2006). (Readers may wish to review that publication for discussion of technical issues and further background detail, which are not repeated here.) This section of Part 1 of the Update focuses on the implications of the failure of the Doha Round negotiations to make a breakthrough for the countries of developing Asia. One of the main implications—a continuing avalanche of bilateral trade deals throughout the region and the world—is evaluated in more detail. The performance of Asian developing countries in the post-quota era (i.e., since 31 December 2004) in the world textile and clothing trade is brought up to date from the discussion in ADO 2006. This section also includes an examination both of the relative market shares of nonpreferential and preferential suppliers in the large United States (US) market, and of the impact of safeguard restrictions placed on the People’s Republic of China (PRC) by both the US and the European Union (EU) (Box 1.5.1).

The suspension of the negotiations in July 2006 has put 5 years of work on the Doha Development Agenda at risk and will almost certainly delay any World Trade Organization (WTO) agreement until after the next US presidential elections in 2008. The announcement by WTO Director-General Pascal Lamy of the suspension scarcely ruffl ed financial markets around the globe. Indeed, this may reflect the “deflation of the currency” in terms of the much lower level of ambition that was apparent in the aftermath of the Ministerial Conference of December 2005 held in Hong Kong, China and the repeated downgrading of the estimated gains reported by computable general equilibrium simulations (Hertel and Winters 2006, Anderson and Martin 2006). The inability of the developed countries to overcome an impasse over agricultural trade protection and domestic support measures was the proximate cause of the collapse of the talks.

The negotiating positions of the main protagonists—EU, US, and major developing countries, represented by the Group of 20 (G20) developing countries—did not appear to be irreconcilable. Agreement on the “first pillar” of the agriculture negotiations (export subsidies) appeared to be in hand with the EU offer to eliminate all export subsidies by an agreed date, provided that others also accepted the discipline over export support. The “second pillar” of the negotiations (domestic support) was more contentious. The EU and US positions for reductions of agricultural subsidies (called the Aggregate Measure of Support) diverged. Moreover, the difference in Aggregate Measure of Support reductions that each side called for did not seem in themselves to create unbridgeable obstacles. It was over the “third pillar” of market access that the talks broke down. Tariff-cut offers and demands between the US, G20, and EU were not all that far apart. The US position was more ambitious than the EU or G20, but the gap did not seem impossibly large.

However, the lack of flexibility among all negotiators and the weak level of ambition expressed in the inability of the G20 to clarify its own tariff reductions meant that fixed positions among the G6 (Australia, Brazil, EU, India, Japan, and the US) became an immovable object. The offers of all the major parties, particularly of the US and the EU, to the negotiations were strictly conditional upon market access concessions, yet some key players in the developing world, particularly the large emerging economies, refused to budge on these concessions. The divisions over numerical values of tariff reductions and extent to which exceptions would be allowed for “special products” proved to be too much to overcome. The absence of flexibility and the hardened positions taken by all sides led the Director-General to declare a suspension in the talks.

Previous rounds also saw periods of impasse that finally gave way to renewal of efforts to reach a compromise. Hence, there is reason to believe that the talks may be eventually revived, though not in time to finish the complete text and to secure ratification of the agreement ahead of the lapse of the trade promotion authority of the US president in July next year.

Forgone benefits

Opinions on the implications of the suspension vary. Although some observers have concluded that the collapse of the talks is “good news for the world’s poor” (ITC, July 2006, p. 8), the evidence points in the opposite direction.

The potential gains and losses from freeing up world trade in agricultural products for the poor were widely debated, but there is no question that the developing and least-developed countries (LDCs) will come out worse off than if the Doha Round had reached a successful conclusion. The World Bank estimates that about two thirds of the gains from a successful round for low-income developing countries would result from global liberalization of agricultural trade, with another one fourth coming from freeing up trade in textiles and clothing, with most of these gains stemming from tariff cuts in the developing countries themselves.

Leaving aside agriculture for the time being, developing countries had much to gain from non-agricultural market access (NAMA) negotiations had the round moved forward. NAMA covers all products other than agriculture including fish, forestry products, mining, fuels, and manufactures. The NAMA mandate is “to reduce, or as appropriate, eliminate tariffs, including the reduction or elimination of tariff peaks, high tariffs, and tariff escalation, as well as nontariff barriers, in particular on products of export interest to developing countries” (INSAT, December 2005, p. 5).

The approach adopted at the December 2005 Hong Kong Ministerial Meeting was very promising in enhancing market access for developing Asia’s economies. The formula approach agreed at that meeting has the virtue of sharply reducing peak and maximum tariffs in developed countries (as well as developing countries) and in reducing the dispersion of tariffs around the mean tariff rate. Indeed, the so-called “Swiss Formula” has great advantages over the “linear reduction approach,” where all tariffs are cut by the same percentage. The extent to which the Swiss Formula reduces maximum tariffs depends upon the coefficient selected, but any coefficient in the range discussed for developed countries (5 to 10 with larger coefficients implying smaller overall reductions) and for developing countries (15 to 30) would have great benefits for developing Asia. This is because peak tariffs in developed countries are on products of export interest in developing Asia—footwear, textile intermediate and made-up products, clothing, and automotive components. The reductions would also have reduced tariff escalation that is facing processed agro-industrial products from developing Asia including fish, shrimp, wood, rubber, palm oil, and many others.

The Doha Round also promised to deliver at least some level of liberalization in services, although the offer-request approach (by which interested countries exchange concessions in market access and national treatment for one or more of the modes of supply of services) confined itself to a fairly low level of ambition. Many of the offers put on the table did not generate many new business opportunities, nor did they even reflect existing levels of liberalization. Still, a breakthrough in agriculture could have stimulated an improvement in offers of services liberalization.

For the LDCs in the region, the Doha Development Agenda held out the promise of providing them with duty- and quota-free access for 97% of tariff lines in developed-country markets. Unfortunately, agreement on whether this access was to be legally binding could not be reached. This creates uncertainty and lessens the likelihood of new investment flows into the region. The TRIPS (Trade-Related aspects of Intellectual Property Rights) component of the agreement was also promising in providing flexibility to developing countries by allowing them to override patent protection for life-saving pharmaceutical products needed to combat threats to public health.

The Doha Development Agenda also included provision for special and differential treatment for LDCs, requiring them to undertake only those concessions consistent with their individual development needs and capacities. The agenda was to emphasize trade facilitation and to enhance technical assistance and capacity building extended to developing countries under an “aid for trade” initiative. Although there is no reason why donors will not continue to provide technical assistance in the agenda’s absence, there may well be less enthusiasm on the part of governments to commit resources to support the multilateral trade system with the suspension of talks.

Another major area of promise in the Doha Development Agenda was inclusion of a new rule-making component that could have improved transparency and discipline in a number of areas of vital interest to developing Asia’s economies. In particular, improvement in reporting and monitoring of preferential trade agreements (PTAs) and possible improvements in discipline over use of contingent forms of protection— particularly antidumping duties and “safeguard” measures—would have been very beneficial.

Perhaps the most serious legacy of this failure of multilateralism is a renewed global push toward bilateralism, which will fragment the world trading system into a series of closed “hub-and-spoke” free trade agreements (FTAs). These agreements are actually discriminatory trade agreements that lower tariffs on selected goods and services only for member states. Barriers against nonmembers remain in place. Peak mostfavored- nation (MFN) tariffs have not been touched and hence margins of discrimination of as high as 20–30% are maintained against exports of labor-intensive manufactured goods in the major industrial markets of the US and EU. Moreover, complex and restrictive rules of origin may divert trade and investment and complicate international commerce for businesses everywhere.

The net gains from a successful Doha Round were expected to be modest for developing Asia’s economies (perhaps $20 billion–40 billion a year in increased welfare),¹ but the losses from an out-of-control system could be even larger and will be borne disproportionately by the poorest countries in the region and the world.

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