Concluding the Doha Development Round: A Global Response to a Global Crisis
When the subprime crisis started to turn into a full-blown financial crisis for the United States, German Finance Minister Peer Steinbrück claimed that the crisis was principally a U.S. problem and that Germany’s banking system was robust enough to cope with potential losses. Unfortunately, Mr. Steinbrück was wrong and the financial crisis shortly after swept across Europe and now even has global implications with banks all over the world unable to service foreign debt and stock markets reeling due to fear of a worldwide recession.
After attempts aimed at stemming the failure of domestic banks through unilateral actions failed to calm fears of investors, restore trust into the banking system, and end the credit freeze, leaders of the major industrial countries – including U.S. President Bush and French President Sarkozy – soon claimed that a global crisis needed a global response. And following the recent annual IMF meetings, U.S. and EU leaders indeed announced coordinated policy responses, including the partial nationalization of banks and the guarantee of inter-bank lending until the end of next year.
In addition to coordinating policy responses across national borders, there have also been a number of calls from policy makers to completely overhaul the Bretton Woods institutions; institutions created in 1945 with the goal to establish rules for commercial and financial relations among the world’s major industrial countries. At the beginning of the 21st century, these institutions don’t seem to be equipped anymore to effectively address new economic challenges, deal with increasingly complex financial structures, and appropriately integrate new powers like India and China into the international architecture. While reforming the Bretton Woods organizations should therefore indeed be a policy priority for governments in the United States and Europe, it will most likely take months if not years to develop concrete policy proposal and finally implement reform – too long of a time to stabilize economic cross-border activities and to restore citizens’ trust into the international economy.
But in a commentary in the Financial Times last Friday, Stuart Eizenstat, former U.S. Ambassador to the EU, alluded to a low hanging fruit that would not only provide a much needed stimulus to the global economy but also provide some continuity in these times of turmoil. The low hanging fruit Ambassador Eizenstat is talking about is the conclusion of the Doha Development Round.
As Joe Guinan, senior program officer, and Courtney Phillips-Youman, program associate at the German Marshall Fund, point out in a GMF opinion piece, economic modelers including Yvan Decreux and Lionel Fontagné from the Centre d’Etudes Prospectives et d’Informations Internationales estimate the economic gains of the Doha Round to be at least $43 billion a year, or $73 billion if a modest liberalization of services is included. While this doesn’t seem to be much compared to a seven hundred billion U.S. bailout package, these are also not trivial numbers. And as Guinan and Phillips-Youman stress, they are conservative estimates because they don’t include the full benefits of services liberalization, an agreement on trade facilitation, additional gains from the Aid for Trade initiative, and other dynamic gains that cannot be captured by trade models. But maybe more important than the financial gains to be had from a Doha agreement would be the significant cuts made to bound tariff rates. Renowned trade economist Patrick Messerlin only recently pointed out that a huge share of current trade is living on borrowed time due to the gap between bound and applied tariffs. Now, without an agreement, average tariffs across a range of the largest economies in the WTO could surge at any time by up to three-and-a-half times. Quoting Guinan and Phillips-Youman, “many foolhardy observers are eager to dismiss such a scenario as unlikely.” But one only has to contemplate the reactions of governments to the recent food crisis, with almost 30 countries rushing to impose export bans, to understand how quickly policy makers grasp at economically unviable solutions in order to appease domestic constituencies.
As many have pointed out, the World Trade Organization is not perfect. Many systemic problems – including the WTO’s mandates for unanimity and the concept of the single undertaking – have hindered the conclusion of Doha Round for years. And there is no question that this institution – similar to the World Bank, IMF, and the UN – needs reform in order to adjust to changing economic and political realities of the 21st century. But given how close negotiators were in July to reaching an agreement, policy makers in both industrial, emerging, and developing countries should show real leadership now in this time of economic uncertainty, overcome the last obstacles to a Doha deal, and sign-off on a broad agreement before the end of the year: that indeed would be a global response to a global crisis.