World Trade Organization: Global Trade Talks Back on Track, but Considerable Work Needed to Fulfill Ambitious Objectives
Published: 2005-05-31T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The outcome of ongoing World Trade Organization (WTO) negotiations is vital to the U.S. economy, because trade with WTO members accounts for about one-fifth of the U.S. gross domestic product. The current round of trade negotiations--called the Doha Round--was supposed to end by January 2005 with agreement on the key issues of agriculture, industrial market access, services, and to strengthen the trading system's contribution to economic development. Failure to reach any agreement at the last WTO ministerial meeting in Cancun, Mexico, in September 2003, put the talks behind schedule and threatened the outcome; however, talks resumed in 2004, and a new ministerial conference will convene in Hong Kong in December 2005. In light of these events, and with the impending renewal decision on U.S. Trade Promotion Authority, which streamlines the process by which Congress approves trade agreements, GAO was asked to assess (1) the overall status of the Doha Round negotiations, (2) progress on key negotiating issues, and (3) factors affecting progress toward concluding the negotiations.
section_title: What GAO Found
paragraphs: During 2004, Doha Round negotiations got back on track as trade ministers signed a framework agreement known as the "July package." By committing to eliminate agricultural export subsidies, the agreement's main achievement was to recognize the importance of agriculture in the round and thus reopen talks on other issues. Since this breakthrough, negotiations are picking up momentum, as WTO members are working toward deadlines for more detailed agreements at the December 2005 Hong Kong ministerial conference. Yet despite the improved negotiating atmosphere, the talks are behind schedule, and considerable work remains on the numerous issues that must constitute a final agreement. Progress has been uneven on the six negotiating issues identified as central to the Hong Kong meeting--agriculture, trade facilitation (customs reforms), industrial market access, services, WTO rules, and development issues. The United States has particular reform interests in the first four of these issues. Progress has occurred on two of them: in agriculture, based on agreements in the July framework, and trade facilitation, for which talks have finally been started. However, little progress has been made on industrial market access and services, two other issues of interest to the United States. Several factors could affect progress in the critical period leading up to the December 2005 Hong Kong ministerial. Achieving consensus among the WTO's 148 members is a challenging task, and diverse economic incentives and competing visions add complexity to the negotiations. Cooperation by the United States, the European Union, and some of the developing countries is also seen as key to a successful conclusion before U.S. Trade Promotion Authority expires in mid-2007, an implicit deadline for the talks.

section_title: Letter
paragraphs: U.S. trade with members of the World Trade Organization (WTO) totaled  $2.1 trillion in 2004, accounting for almost one-fifth of U.S. gross domestic  product. As such, the United States has a considerable stake in WTO  negotiations launched in November 2001 that aim to liberalize trade by  lowering tariffs and other distortions to global trade in agriculture,  industrial goods, and services and to strengthen the trading system’s  contribution to economic development. Officially known as the Doha  Development Agenda, the talks are being conducted under the auspices of  the WTO and are the latest in a series of negotiating “rounds” among its  members, which now number 148 nations and customs territories. Past  GAO reports have highlighted the ambitious list of 19 substantive issues  being addressed in what is now known as the Doha Round and the  challenges WTO members have faced in making progress. Notably, the  failure of the September 2003 meeting of trade ministers at Cancun,  Mexico, set back the talks and made meeting the original January 2005  deadline for conclusion impossible. The President recently requested a 2-year extension of Trade Promotion Authority (TPA) from Congress,  which streamlines congressional approval of trade agreements, for  purposes of pursuing a final Doha Round agreement, among others. TPA  legislation allows for such an extension unless a disapproval resolution is  passed by either House of Congress by June 30, 2005. The U.S. Congress  will also consider the 5-year WTO membership review, as called for in  section 125 of the Uruguay Round Agreements Act.
Given the importance to the United States of the WTO Doha Round and  Congress’s present TPA renewal decision, you asked GAO to provide a  status report on the WTO negotiations. In this report, the latest in a series,  we assess (1) the overall status of the WTO Doha Round negotiations; (2)  developments on key negotiating issues since the previous (January 2004)  GAO report; and (3) factors affecting progress in the negotiations.
To address these objectives, we met with and obtained documents from a  wide variety of WTO, U.S., and foreign government officials, as well as  academic experts and private sector groups (including business  associations, law firms, and civil society groups), both in Washington, D.C.,  and Geneva, Switzerland. We also reviewed international tariff and trade  data from the WTO and the United Nations. We determined that these data  were sufficiently reliable for the purposes of our analysis. Appendix I  provides a full description of the scope and methodology of our work. We  conducted our work from March 2004 through March 2005 in accordance  with generally accepted government auditing standards.
subsections: section_title: Background
paragraphs: The World Trade Organization (WTO) was established as a result of the  Uruguay Round on January 1, 1995, as the successor to the General  Agreement on Tariffs and Trade (GATT). Based in Geneva, Switzerland, the  WTO administers agreed-upon rules for international trade, provides a  mechanism for settling disputes, and serves as a forum for conducting  trade negotiations. There are currently 148 WTO members, up from 90  GATT members when the Uruguay Round was launched in 1986 and from  128 members in 1995.
The highest decision-making authority in the WTO is the ministerial  conference, which consists of trade ministers from all WTO members and  occurs every 2 years. The outcome of ministerial conferences is a  ministerial declaration that guides future work. The WTO General Council,  which consists of representatives from all WTO members, is empowered to  make decisions between ministerial conferences. Decisions in the WTO are  made by consensus—or absence of dissent—among all members rather  than a simple majority.
At the fourth ministerial conference in Doha, Qatar, in November 2001,  WTO members reached consensus to launch a comprehensive negotiating  round, the Doha Development Agenda or Doha Round. The Doha Round is  the ninth round of trade liberalizing negotiations since the trading system’s  founding in 1947. These rounds result in legally binding international  obligations on members both in terms of the trade barriers they are allowed  to maintain, such as tariffs (import taxes), and the trade rules (disciplines)  they are to abide by. Failure to comply is subject to binding dispute  settlement and possible trade retaliation. In the Doha ministerial  declaration, WTO members set a number of overall objectives for the  round, such as the need to ensure that developing countries, particularly  the least-developed, secure growth of world trade commensurate with their  needs for economic development (see fig. 1 for a list of the overall Doha  objectives). The declaration sets forth a work program that covers 19  negotiating areas, including agriculture, services, and market access for  nonagricultural goods (also known as industrial market access). Within  each of those areas, WTO members set specific goals. WTO members also  established a Trade Negotiations Committee, chaired by the WTO Director  General, to oversee the round’s progress. Because the Doha Round is a  package, or “single undertaking” in WTO parlance, simultaneous agreement  on all issues is required to finalize an agreement.
In negotiating the Doha Round on behalf of the United States, the Office of  the United States Trade Representative (USTR) is also guided by certain  goals, notably the goals outlined by the Trade Promotion Authority (TPA)  granted by Congress in 2002. TPA’s goals for USTR negotiators include  overall and principal objectives and promotion of certain priorities. In  addition to TPA, USTR has its own goals for the Doha Round outlined in a  required official notification to Congress in November 2002. (See fig. 1 for  a description of the TPA and USTR goals.) In general, USTR states that it  plans to use the Doha Round negotiations to strengthen the multilateral  trading system, improve the operation of the WTO, and liberalize  international markets. USTR places special emphasis on creating new  export opportunities for the United States in agriculture, manufacturing,  and services. USTR must explain how any resulting agreement makes  progress towards TPA goals when submitting it for consideration for  congressional approval under TPA’s expedited approval procedures. TPA is  set to expire in mid-2005, but provides a procedure for the President to  request a one-time extension of the authority to July 1, 2007. The President  recently requested such an extension, which is automatic unless Congress  disapproves it by June 30, 2005.
The Doha declaration also set several goals for the following ministerial  conference. However, at the ministerial conference held in Cancun,  Mexico, from September 10-14, 2003, WTO ministers were unable to  achieve these goals or to bridge wide, substantive differences on individual  negotiating issues. They concluded the unsuccessful conference with WTO  members sharply divided along North-South (developed-developing  country) lines and agreed only to continue consultations and convene a  meeting of the General Council by mid-December 2003 to take steps to  move the negotiations forward. As we noted in our January 2004 report,  the Doha Round of WTO negotiations had missed virtually all of the  established milestones for progress during its first two years. The  breakdown at Cancun threatened to derail the talks completely. The  December 2003 General Council meeting did not result in any agreements,  except to resume talks in early 2004. As a result, WTO negotiators missed  the original deadline of January 1, 2005, for concluding a Doha Round  agreement. Thus, at the time our last report was issued, in January 2004,  the Doha Round’s prospects were uncertain.
section_title: Doha Round Behind Schedule but July Framework Injected New Momentum into Trade Talks after Failed Cancun Ministerial
paragraphs: Despite the Doha Round starting 2004 on an uncertain note, political  leadership, intensified dialogue, and a series of conciliatory gestures  resulted in adoption by WTO members of a framework agreement on key  negotiating issues called “the July framework” or “package.” The  framework is credited with putting global trade talks back on track, and  participants report that they have finally begun to make progress. Recent  high-level meetings have sought to focus and accelerate work that leads up  to a December 2005 ministerial conference in Hong Kong. The Hong Kong  meeting is now hoped to result in decisions that will help determine how  ambitious the Doha Round will be in terms of cuts in subsidies, tariffs, and  other barriers. But even if negotiators reach the goal of setting the stage for  finalizing a Doha Round agreement in 2006, WTO negotiations are about 2  years behind their original target date.
subsections: section_title: Shows of Leadership and More Interactive Process Spur Progress
paragraphs: Contrary to post-Cancun gloom, 2004 witnessed a resumption of Doha  negotiations. Active leadership by the United States and the European  Union (EU) proved essential to progress, as did a more interactive process  and hard bargaining. Former U.S. Trade Representative Robert Zoellick is  widely credited with taking the initiative to resume talks with a January  2004 letter to fellow trade ministers urging them to keep 2004 from being a  lost year for the WTO and suggesting various ways to make the agenda  more manageable. He followed up on the letter with extensive foreign  travel to meet with other WTO nations and rally support for resuming talks.  WTO Director-General Supachi also traveled extensively as part of an  active outreach effort to WTO member country officials.
WTO members reactivated Doha negotiating groups in February 2004 with  new chairs intent on ensuring more fruitful member-to-member  discussions. Summing up the status after his visits with foreign officials,  Ambassador Zoellick concluded that a breakthrough on agriculture was  “absolutely the key” to progress. WTO members undertook intensive  efforts to reach a breakthrough on agriculture both in Geneva and at high- level meetings among key nations. Observers credited the EU Trade  Commissioner Lamy’s offer in May to eliminate export subsidies with  providing a tangible incentive to reach agreement on agriculture. Several  conciliatory initiatives were also taken to allay specific developing country  concerns. For example, a workshop held in Benin emphasized the  importance of cotton reform to growth and poverty reduction in Africa. To  alleviate poorer countries’ concerns over adjustment costs that were  holding back overall trade liberalization, the EU suggested the WTO’s  poorest members in Africa and elsewhere should be offered the “Round for  Free”—that is, they would benefit from others’ concessions without having  to offer much if anything in return. The offer sparked a debate over this  differentiation by making it clear that the EU felt the Doha Round offered,  and expected, more of other developing countries.
Developing countries also took on leadership roles and actions that  contributed to progress. After Cancun, there was skepticism in some  quarters as to whether the newly-created coalitions of developing countries  would be able to maintain cohesion and play constructive roles. However,  according to other participants, throughout 2004, these groups articulated  their positions clearly and negotiated effectively with other groups,  including the industrialized countries. For example, the group of populous  developing countries with agricultural interests known as the Group of 20  (G-20) issued a late May paper setting forth principles to govern tariff cuts  to help bridge wide differences in agricultural market access. Malaysia  played a key role in shaping the novel terms for trade facilitation  negotiations.
The WTO negotiating process also became more effective, contributing to  progress. In our last report, we noted that the WTO’s large number of  members made formal gatherings increasingly ineffective and more  suitable for speech-making or restating well-known-positions than for  advancing the negotiations. Moreover, members often focused their efforts  toward influencing the negotiating group chairmen, rather than other  members. In early 2004, a series of mini-ministerials and other smaller,  informal group meetings were used to foster direct interaction between  members and became the real venues for moving the negotiations forward.  Negotiating groups on specific issues also adopted informal meetings that  featured more direct member-to-member dialogue rather than the prior  chair-driven process.
Yet, leadership and process improvements alone were not sufficient to  attain agreement. Hard work and willingness to compromise were also  required. The wide remaining gaps on agriculture and unrealized demands  on other issues were apparent at a late June 2004 meeting of the WTO  Trade Negotiations Committee. WTO Director General Supachai  Panitchpadki urged members then, and at a ministerial among African  nations shortly thereafter in Mauritius, to seize the opportunity before  them and show the flexibility required to seal a deal. With the July 16  release of a draft text, 2 weeks of day-and-night negotiating—often in  intensive small group settings—were begun. An ad hoc group called the  Five Interested Parties (or Group of Five)—composed of five key players in  agriculture—was critically important in bridging developed/developing  country differences and shaping agreement (even though some members,  such as the Group of 10 net agricultural importers, complained about being  left out of these deliberations). Finally, on July 31, 2004, WTO members  reached a deal on a framework agreement and adopted it formally at a  WTO General Council meeting.
The main features of the July framework agreement were: establishing key  principles for each aspect of global agricultural trade reform, launching  negotiations to clarify and improve WTO rules on customs procedures  (trade facilitation), identifying the key elements of negotiations to improve  industrial (nonagricultural) market access, and stressing the importance of  liberalizing access to services markets and addressing outstanding  development concerns. It also set a notional December 2005 date for the  next WTO ministerial in Hong Kong but did not set a new deadline for  concluding the Doha Round. A veteran U.S. negotiator suggested they had  pleasantly “surprised themselves” in reaching agreement at the WTO on a  long-sought framework. The framework was widely praised by its key  architects and many of their stakeholders, though it drew skepticism from  some corners.
section_title: July Framework Unlocks Negotiations and Improves Negotiating Atmosphere
paragraphs: The July 2004 framework is widely credited with putting the Doha Round  “back on track” and renewing political commitment to its ultimate success.  Up until then, it had proved impossible to make meaningful progress on  any of the other 18 issues of the round because key members linked  movement on those issues to satisfactory progress on agriculture. Several  participants went so far as to suggest that the July 2004 framework meant  WTO members had prevented failure in the Doha Round and the WTO from  becoming obsolete as a forum for liberalizing trade. A number of officials  and experts we met with maintain that the package represents important  progress and provided a sound basis for productive technical work on all  issues during an anticipated political hiatus in the fall of 2004, when the  European Commission changed and the United States held elections.
section_title: Considerable Work Remains on All Issues
paragraphs: While GAO’s examination does reveal some progress on all fronts either in  the July framework or afterwards, participants and experts widely agree  that considerable work remains on all issues if the Doha Round is to be  concluded successfully as a package deal. Notably, experts agree that  translating political commitment into concrete cuts in agricultural  subsidies and tariffs involves grueling negotiations over myriad technical  details. Without such commitment, loopholes and exemptions could  undermine hoped-for liberalization. Moreover, agriculture is recognized as  having achieved greater progress than other issues, such as industrial  market access and services, which are essential for attaining an acceptable  balance of issue interests among the WTO’s 148 members. While cautioning  that each issue will advance at its own rate and urging others not to insist  on lock-step progress, U.S. negotiators have made it clear they must see  evidence of others’ commitment to liberalize barriers to industrial goods  and services by the WTO ministerial now officially slated for December 13- 18, 2005, in Hong Kong so that member-to-member negotiations can begin  in earnest. Such progress is also vital to attaining U.S. TPA objectives—and  realizing U.S. economic gains—for the Doha Round.
section_title: Next 6 Months Will Determine How Ambitious the Doha Round Will Be
paragraphs: With tough battles on the details of agriculture reform ahead and the need  for progress on other issues, the coming 6 months are crucial. U.S.  negotiators are hopeful that groups will concentrate on working through  the issues and ensure they are sufficiently advanced to obtain needed  decisions by the December 2005 Hong Kong ministerial. If so, and if the  Hong Kong ministerial results in the needed decisions, there is at least a  reasonable prospect for the talks to conclude by the end of 2006 with  meaningful results.
Early 2005 high-level meetings have sought to focus negotiations ahead of  the December 2005 Hong Kong ministerial. At the late January 2005 mini- ministerial in Davos, Switzerland, and the subsequent mid-February Trade  Negotiations Committee meeting, WTO members generally agreed to focus  on six issues in Hong Kong. These six issues are: (1) agriculture, (2)  industrial or nonagricultural market access (NAMA), (3) services, (4) trade  facilitation, (5) “rules” such as subsidies and antidumping, and (6)  development. They also generally agreed that the Hong Kong ministerial’s  goal is to set the stage for final negotiations in 2006.
Although there is not yet agreement about what this entails, U.S.  negotiators report that it is widely accepted that by the time of the Hong  Kong ministerial WTO negotiators should seek to finalize “modalities” on  agriculture and NAMA—that is, numerical targets, formulas, industrial  sectors for potential sectoral agreements, and technical guidelines for  countries’ commitments on cutting tariffs and subsidies. By the Hong Kong  ministerial, negotiators should also have made progress in services, market  access, and rules discussions and narrowed the focus, and possibly have  begun to outline or draft texts on trade facilitation and development issues.
These deliverables will be critical in determining how ambitious the Doha  Round will be in terms of cuts in tariffs, subsidies, and other barriers to  trade, and what the overall balance will be across various issues. Finalizing  modalities is also an important interim step before concrete negotiations  can occur among WTO members. WTO members had hoped that by mid- July 2005 they would be able to get a sense of how well their balance of  issue interests are being met through such means as producing a “first  approximation” of the relevant texts or conducting stocktaking meetings  on negotiating progress. However, at a late April 2005 TNC meeting WTO  Director-General Supachai expressed concern about meeting these goals,  noting that across the board progress has fallen short of what is required.  He urged greater unity of purpose and warned that without better progress,  WTO members could be facing major problems for Hong Kong. At an early  May 2005 meeting of the Organization for Economic Cooperation and  Development (OECD) in Paris, ministers called for a heightened sense of  urgency in the negotiations and expedited preparations for the Hong Kong  conference. After the Paris meeting, trade officials from certain WTO  members reached an informal agreement on a technical issue—on the method for converting specific tariffs to ad valorem tariffs—that was  considered significant because it had been blocking progress in the  agriculture negotiations for months.
section_title: WTO Negotiations Are About 2 Years Behind Their Original Target Date
paragraphs: Even with the July framework and a successful Hong Kong ministerial,  slow overall progress and the Cancun setback means the Doha Round now  is unlikely to conclude before December 2006, 2 years after the originally  established deadline of January 2005. However, past rounds have taken  longer than originally planned, and the last two rounds—which involved  fewer countries—each took 6 or more years to complete.
Experts offer mixed views as to whether this lag is cause for concern. A  number of experts we spoke with stressed that the real question is not how  long the round is taking, but how ambitious—in terms of liberalization and  reform—the Doha Round’s result will be. Some were fairly pessimistic. For  example, one USTR and WTO Secretariat veteran termed the progress to  date not only pitiful but worrying. Another expert said he did not believe  the round was on track for achieving its ambitious liberalization and  development objectives and expressed concern because the hardest issues  still have not been tackled. As a result, this expert felt that the round would  only conclude by December 2006 if work accelerates and political  engagement increases. However, other experts said it is too early to give up  on the round’s success. One expert stressed that ups and downs—such as  build-ups before deadlines and let downs after missing milestones—are  typical in trade negotiations. Another expert noted that failures can often  be vital to achieving worthwhile agreements and suggested Cancun was  such an event. Both he and another expert indicated that there is still time  for the Doha Round to conclude with meaningful results in all key  negotiating issues. However, they said there is no more time to spare if a  balanced, ambitious package is to be attained because even past rounds  have required at least a year and a half of very hard bargaining to conclude.  That time is upon us, if one works backwards from the July 1, 2007,  expiration of any renewed U.S. Trade Promotion Authority.
section_title: Negotiators Have Made Uneven Progress in Key Issue Areas
paragraphs: Negotiating progress has varied markedly in the six issues designated as  key work areas at the upcoming Hong Kong ministerial—(1) agriculture,  (2) trade facilitation, (3) industrial (nonagricultural) market access, (4)  services, (5) development issues, and (6) rules. Some advances have been  clear in two issues advocated by the United States, agriculture and trade  facilitation, although negotiations in the latter have just begun. As detailed  in appendixes III and IV, very limited progress has occurred so far in two  other issues being advocated by the United States—industrial market  access and services. Progress has also been limited on two other issues  being advocated by other WTO members—development-related issues and  rules. Reform of WTO rules remains an area of controversy, with the United  States and other users of the trade remedy laws pitted against many other  countries over whether to maintain and even strengthen current rules.
subsections: section_title: Progress Made in All Three Pillars of Agricultural Reform, but Difficult Debate Lies Ahead
paragraphs: As detailed in appendix II, negotiators pressed hard in 2004 to make some  progress on all three pillars for agricultural reform: (1) export competition,  (2) domestic supports and (3) market access. The centerpiece of WTO  member countries’ efforts was the July 2004 framework agreement to  remove all export subsidies at a future date. This commitment had long  been sought by the United States and other nations, but involved a trade- off: the agreement to negotiate disciplines in other agricultural export  competition programs, including U.S. export credit and food aid programs,  and state trading enterprises. The framework also set ceilings on certain  trade-distorting domestic supports (subsidies), though negotiators will  need to further define and set comprehensive reduction schedules for such  trade-distorting domestic supports. The framework also establishes the  principle that countries with higher trade-distorting domestic supports and  tariffs reduce them comparatively more.
Market access, the third area of reform, proved the most difficult to  negotiate. As further explained in appendix II, the July framework  established a principle of tiered and harmonized reductions in tariffs, but  did not resolve the differences on how this would be accomplished.  Negotiators still need to agree on numerous outstanding details if WTO  members are to achieve modalities at the December 2005 Hong Kong  ministerial. Technical work on issues including tariff rate quota  administration, export credit repayment terms, and converting tariffs into  ad valorem equivalents has begun. Yet, the months-long stalemate on the  last issue frustrated progress until May 2005. Moreover, according to many  experts, the big battles that will determine how ambitious the Doha round  will be--- over whether and how trade-distorting domestic support  categories will be redefined, setting domestic support and tariff reduction  formulas, and defining the sensitive and special products that can be  insulated from tariff cuts—remain to be fought.
section_title: Launched after Years of Discussion, Trade Facilitation Negotiations in Early Stages
paragraphs: WTO members finally agreed in the July framework to formally launch  negotiations on trade facilitation (customs reforms). Trade facilitation,  together with three other issues—investment, government procurement,  and competition policy—had been under consideration and intense debate  by WTO members for the past 7 years (since the Singapore ministerial).
Trade facilitation is an issue that the United States is very interested in  bringing into the trading system in order to establish the transparent and  swift customs procedures that are vital to realizing the benefits of market  access concessions. The July framework contained agreement by explicit  consensus to begin negotiations on trade facilitation and contained an  annex specifying the goals, scope, and other understandings associated  with their launch. Notably, WTO members agreed that “the extent and  timing of entering into commitments  shall be related  to the implementation capacities of developing and least-developed   (m)embers.…” WTO members also decided to halt work toward  negotiations on the remaining three “Singapore issues” of investment,  government procurement, and competition policy for the remainder of the  Doha Round. Since the July framework, WTO members created a  negotiating group and selected a chair. The group has met several times,  and various countries, including the United States, have tabled proposals.  According to a U.S. trade official, two potentially difficult issues are  dispute settlement and technical assistance to help developing countries  defray implementation costs. While WTO members did not set specific  goals on trade facilitation for Hong Kong, the United States is hopeful that  negotiators can make meaningful progress in evaluating proposals. Some  experts we spoke with said that progress on this issue is increasingly seen  as a “win-win” proposition for developed and developing countries alike.
section_title: Little Progress in Narrowing of Differences on Industrial Market Access
paragraphs: As detailed in appendix III, thus far WTO members have made little  progress in negotiations aimed at securing improved industrial market  access, a key U.S. objective in the Doha Round. The July framework for  industrial market access established an agenda for discussion and, since  July, negotiators have addressed some technical issues. However,  disagreement persists over the two main methods being considered for  liberalization of trade in industrial goods: the tariff reduction formula and  sectoral initiatives that would further reduce tariffs in agreed-upon sectors.  Such disagreement is reflected in the lack of consensus over the tariff  reduction guidance in the July framework. As of late April 2005,  disagreement continued over the type of tariff reduction formula to use, the  extent of exceptions to the formula that would be available to developing  countries, and whether or not sectoral agreements should be included and  on what terms. Nevertheless, achieving a meaningful agreement in  industrial market access will be essential for the United States.
section_title: Services Talks Still Lagging
paragraphs: Services liberalization is also a key U.S. objective in which progress is  lagging, as discussed further in appendix IV. Initially thought to be a  lynchpin of the Doha Round, services talks have taken a back seat relative  to other issues. Although several economists and trade experts argue that  both developed and developing countries would greatly benefit from  services trade liberalization, certain developing countries perceive this goal  as a developed country priority. Nevertheless, the inclusion of services in  the July framework, on an equal footing with agriculture and industrial  market access, represented a victory of sorts and resulted from efforts on  the part of both developed and developing country members. Since the July  framework, talks on the domestic regulation of services have shown signs  of progress. Technical negotiations on market access are also underway  but have yet to translate into many new or improved offers in the lead up to  May 31, 2005, the deadline set by the July framework. As a result, WTO  members and officials remain disappointed with the number and quality of  offers. For example, many developing countries have a keen interest in  liberalizing the temporary movement of service professionals, but  developed countries have so far shown few signs of movement towards  more responsive offers.
section_title: WTO Members Still Divided Over How to Approach Development Issues
paragraphs: On development, WTO members are grappling with developing country  concerns in the areas of special and differential treatment (S&DT) and  implementation of their past WTO commitments in light of the July  framework’s calls for decisions by July 2005. Conceptual divisions between  developed and developing countries, and among developing countries,  remain unresolved. They involve such basic issues as whether participating  in trade liberalization and abiding by the agreed-upon trade rules is good or  bad for development and whether S&DT is an across-the-board right for all  developing countries, or an ad hoc privilege available only on a case-by- case basis to meet justified needs, particularly of the WTO’s poorest  members. The chair has had only limited success to date in getting  members to move to a practical, problem-solving stage. However, as  negotiations on agriculture and other market access areas move forward,  specific S&DT language is being included. Certain negotiators told us that  future progress on S&DT seems increasing likely to come out of technical  negotiations within specific negotiating committees, more so than the  Committee on Trade and Development, which examines it as a systemic  issue.
section_title: Negotiations on Antidumping Rules Intensifying, with United States on Defensive
paragraphs: Review and possible reform of WTO “rules” for trade remedies such as  antidumping against unfairly priced imports is prominent and controversial  in the Doha agenda, though not in the July framework. Other WTO  members, notably a coalition of 15 developed and developing nations  known as Friends of Antidumping Negotiations, have advanced numerous  proposals for extensive reform of existing trade remedy rules. Some of the  proposed reforms target U.S. practices that have also been challenged  under WTO dispute settlement procedures. In 2004, WTO members  participated in an active schedule of meetings to discuss these proposals in  depth. Proponents are pushing to intensify negotiations with a view to  having rules be a major component of a Hong Kong package. According to  U.S. government officials, the United States remains committed to  preserving the effectiveness of trade remedies but wants increased  transparency abroad.
section_title: Several Factors Pose Challenges to Successful Negotiations in Hong Kong
paragraphs: Seven interrelated factors may influence the Doha Round’s progress in  resolving substantive differences in the lead-up to the Hong Kong  ministerial. First, achieving internal consensus on a balanced package for  trade liberalization and successfully negotiating a result that is acceptable  to 148 members is an enormously complicated task. Second, formation of  coalitions may facilitate consensus building, but developing countries  show no signs of taking a less assertive role in pressing their sometimes- competing vision for the WTO’s Doha Development Agenda. Third, U.S. and  EU cooperation remains pivotal, but leadership transitions may change  relationships. Fourth, analysts agree that action on high-profile WTO  dispute settlement cases such as trade remedies and cotton could prove  important to ongoing negotiations. Fifth, trade negotiations pursued  outside the WTO are widely seen as affecting the Doha Round, though  opinion differs on how. Sixth, there are timing considerations, with the  mid-2007 expiration of any renewed U.S. Trade Promotion Authority acting  as an implicit deadline. Finally, preparation strategy has proved critical to  past WTO ministerial success, but there is mixed news on preparations for  the Hong Kong ministerial.
subsections: section_title: Negotiators Face a Complex Task
paragraphs: The complexity of the task itself could make it hard for Doha negotiators to  achieve consensus. Several experts and negotiating participants told us  that the scope of work remaining is considerable and that the current  round is more complex than past rounds because the number of countries  actually participating is larger and the issues are, in some sense, unfinished  work from prior negotiations. The fact that agriculture had not been  addressed for most of the trading system’s first half century was cited  frequently as evidence of its thorny nature. The last (Uruguay) round  succeeded in the complex challenge of adding agriculture, services, and  intellectual property rights to the trading system for the first time. The  Doha Round is ambitious because it aims to cut subsidies and trade  barriers from the Uruguay Round’s high levels. In industrial goods, the  Doha goal of having all members conform to specific methods for  liberalizing tariffs on all products differs from past practice of relying  primarily on member-to-member bargaining to secure tariff cuts. (Past  practice did result in substantial liberalization, but left in place high  barriers on some goods and in some countries.)
The diversity of economic costs and benefits also makes the task complex.  Studies emphasize that both developed and developing countries are  positioned to benefit from the Doha Round, but individual countries face  varying economic incentives that could affect their willingness to  compromise on issues at the Hong Kong ministerial. The Doha talks have  been fueled by the premise that international trade can positively benefit a  country’s overall growth and development. As discussed more fully in  appendix V, a number of expert studies have emerged in response to the  negotiations that estimate potential worldwide economic gains exceeding  $100 billion under an ambitious liberalization scenario. However, the  distribution of economic gains may vary within and between countries,  creating perceived winners and losers. For example, several studies  estimate economic losses from agricultural liberalization for regions that  are large net importers of food, such as North Africa and the Middle East,  because the removal of developed country subsidies may increase world  food prices. Other experts point out that for countries receiving  preferential trade access the estimated economic benefits from worldwide  trade liberalization may not reflect export losses from erosion of those  preferences. Potential losses in tariff revenue may also be a concern to  certain developing countries that heavily rely on trade taxes for  government financing. In April 2004, to assist developing countries with  potential adjustment costs to trade liberalization, the IMF introduced a new  lending program called the Trade Integration Mechanism (TIM).
section_title: Maturing of Country Coalitions May Facilitate Progress, but Differences in Visions between Developing and Developed Countries Persist
paragraphs: Coalitions of WTO members have been a factor in both leading and  preventing movement forward in the Doha negotiations. At Cancun, the  large number of participants proved unwieldy and the unexpected  emergence of developing country coalitions challenged traditional ways of  negotiating. Since then, country coalitions have matured and now advance  common priorities of many types. See appendix VI for a depiction of some  major groups of countries and their negotiating interests. Developing  countries in particular have become more active and influential, according  to various participants. A number of ad hoc groups have arisen around  other issues. For example, the Colorado Group has led discussion on trade  facilitation issues; a variety of “friends” groups have formed to advocate  positions in the services negotiations; and the Friends of Antidumping  Negotiations group has pressed for changes in the antidumping agreement.  This mode of operations has been particularly valuable to developing  country members, which sometimes cannot afford to maintain enough staff  in Geneva to attend all negotiating sessions that interest them. By reaching  an agreement on negotiating proposals within groups, coalitions also help  to overcome the difficulty of creating consensus in an organization as large  as the WTO. By the same token, they may strengthen opposition to  proposals that some members might not otherwise care about. Country  coalitions also have other drawbacks, according to several participants— they cannot be relied on exclusively as interlocuters because country  interests vary and not every country is included; internal communication is  critical, but sometimes breaks down; and coalitions’ efforts to forge  common positions may leave little room for negotiating maneuver.
Developing countries are not monolithic in their interests, but there is still  some evidence that developing and developed countries have competing  visions of Doha Development Round’s promise and that satisfying  developing country’s expectations may be difficult--factors we identified as  challenges in prior reports. While developed countries tend to stress the  development benefits projected to accrue from agriculture reform and  trade liberalization, developing country coalitions, in various formations,  have continued to emphasize the need for special and differential  treatment. The largest group of developing countries, the Group of 90  G-90), has advanced specific special and differential treatment proposals,  protection against erosion of trade preferences, and trade facilitation  approaches that address implementation costs and capacity building  issues. However, satisfying these demands--without prejudicing the  interests of other developing countries—has proven difficult. In addition,  four least-developed African cotton-producing countries successfully  lobbied in July 2004 for a special focus on cotton within agricultural  negotiations, but have expressed dissatisfaction with progress attained  since then and called for decisive action by Hong Kong.
section_title: Leadership Critical, but U.S.-EU Political Transitions May Change Relationships and New WTO Director- General Is Being Selected
paragraphs: Despite more active and positive participation by developing countries,  2004 also demonstrated that leadership and cooperation by the United  States and the EU remains essential. A special relationship between U.S.  and EU leaders contributed to the Doha ministerial’s success and to the  July 2004 package. But the U.S.-EU trade principals have changed since  then. Two very important participants in the negotiations, who played  pivotal roles in launching the round in 2001 and reviving the Doha  negotiations in 2004 after Cancun, U.S. Trade Representative Robert  Zoellick, and the EU’s Trade Commissioner, Pascal Lamy, are both out of  those offices. The President named a new USTR in mid-March who  assumed office on April 29, 2005. In the interim, continued direction by the  Acting USTR kept the United States engaged in negotiations. However, the  relationship that develops among new U.S.-EU leaders could influence  Hong Kong’s success. Their will to lead is also vital. Over the coming  months, the United States will face important tests of its trade leadership,  such as potentially divisive domestic debates over the Central American  Free Trade Agreement (CAFTA), competition from China, TPA renewal,  and continued U.S. WTO membership. The EU, meanwhile, has made some  statements that suggest it “gave most” in 2004 and thus is expecting others  to reciprocate with ambitious offers for services and industrial market  access offers.
The WTO has been in the midst of selecting a replacement for the position  of Director-General (DG). Three WTO committee chairs are personally  conducting the vetting process whereby those candidates with the least  support from the members are expected to withdraw voluntarily. The last  DG selection became so contentious along North-South lines that the job  ultimately had to be shared by dividing the DG’s six-year term between two  candidates – Mike Moore of New Zealand and the current DG, Supachai  Panitchpakdi of Thailand. To avoid a similar situation, WTO members  agreed to a selection process and timetable. Mr. Supachai’s term ends on  August 31, 2005; by May 31, WTO members aim to select a new Director  General who will assume the DG’s position in September, just three months  before the Hong Kong ministerial. A smooth transition is necessary to  ensure members can concentrate on the difficult negotiations needed to  achieve results at Hong Kong. (It appears that a new DG has been selected  – France’s Pascal Lamy - and that the process worked well avoiding a  contentious north/south divide. Specifically, on May 13, 2005, the General  Council Chair informed WTO delegations that Mr. Lamy had received the  broadest support from the WTO members and that therefore she would  recommend that WTO members appoint Mr. Lamy as the next Director  General of the WTO starting September 1, 2005. On May 26, 2005, WTO  General Council officially named Mr. Lamy, the next Director General.  Welcoming the move, current WTO Director General Supachai pledged to  “make every effort to move the Doha Development Agenda negotiations as  far as possible to ensure that we are well positioned for our Hong Kong  ministerial conference in December.”)
section_title: Ongoing Disputes Could Affect Negotiating Dynamics
paragraphs: WTO disputes often have little day-to-day impact on negotiations, but  several ongoing disputes may affect the negotiating atmosphere leading to  Hong Kong. In recent months, Brazil won two high-profile cases against the  United States and the European Union. Both rulings are expected to  influence the Doha agriculture negotiations. In March 2005, the WTO  Appellate Body upheld a panel finding against U.S. cotton subsidies, stating  that certain types of current U.S. domestic supports result in significant  price suppression in world markets. The United States has informed the  WTO that it intends to come into compliance and is now consulting with  Congress and stakeholders about possible reforms. The European Union  has vowed to reform its sugar sector in the wake of an adverse WTO ruling,  but is facing challenges to its proposals to reform its banana regime to  conform with another adverse ruling. The United States is also facing calls  to bring its trade remedy laws and actions into conformity with adverse  WTO rulings. With the EU and Canada both imposing millions of dollars in  retaliation starting in May because the U.S. has not repealed the Continued  Dumping Subsidy Offset Act (also known as the Byrd Amendment), there is  a risk of a negative spillover into the Doha negotiations. In part to avoid a  similar situation, the United States and the EU have been trying to resolve  their dispute over aircraft subsidies.
section_title: Free Trade Negotiations Outside of the WTO Affecting Progress
paragraphs: Although WTO members and experts have divergent views on the effects of  the numerous free trade negotiations that take place outside of the WTO,  they widely agree that the negotiation of preferential trade agreements  (PTA) have an impact on multilateral trade talks such as the Doha  Round. The Bush administration has actively pursued PTAs as part of its  trade liberalization strategy, and more generally, these extra-WTO  agreements have flourished worldwide since the mid-1990s. Proponents of  PTAs claim that they offer opportunities for achieving deeper and faster  liberalization than is possible in the WTO by allowing members to negotiate  with subgroups of likeminded countries. Once in place, they argue, PTAs  can demonstrate the benefits of freer trade to nonmembers, thereby  encouraging greater multilateral liberalization. In contrast, opponents  claim that the rising number of PTAs increases the administrative and legal  complexity of international trade and adds to the difficulty of building an  open, rules-based trading system. After weighing many of the arguments in  its report on the future of the WTO, a Consultative Board to the Director  General recently stated that there is “real reason to doubt that the pursuit  of multiple PTAs will enhance, rather than undermine, the attractiveness of  multilateral trade liberalization—at least in the short and medium term.”
Among other objections, the Board expressed concern that such  agreements are diverting skilled and experienced negotiating resources  and reducing enthusiasm for the Doha Round.
section_title: Timing Constraints
paragraphs: Timing considerations are also relevant. WTO negotiators are keenly aware  that the United States will consider revamping comprehensive farm  legislation slated to expire in 2007 and want to make sure it includes WTO- agreed reforms. Moreover, the duration of U.S. Trade Promotion Authority  is, in effect, operating as an implicit deadline for concluding the Doha  Round, according to numerous participants and experts. If Congress  renews TPA in mid-2005, the Doha Round agreement would be eligible for  approval under TPA provided it was signed by the President by June 30,  2007. However, the President must fulfill a number of procedural  requirements and meet certain time frames established by TPA. Thus, the  WTO Doha negotiations would need to conclude by the end of December  2006 to meet TPA’s statutory requirements. If the Doha Round agreement  required no changes to trade remedy laws, the effective deadline could  change to the end of March 2007.
section_title: Ministerial Preparations Under way, but Still Incomplete
paragraphs: A preparation strategy has proved to be critical to WTO ministerial success  (Doha) and failure (Cancun and Seattle) in the past, but there is mixed  news on preparations for Hong Kong. Ministerials are important because  unlike political summits or annual meetings of other international  organizations, actual negotiations occur and decisions are made to enable  future work. Indeed, ministerials are the only occasion when trade  ministers of all WTO members gather to provide high-level political  direction. As noted above, the December 2005 Hong Kong ministerial is  pivotal so that final bargaining on cuts in subsidies and tariffs can occur  and a Doha package can be finalized by the end of 2006.
On the positive side, although Ministers at Hong Kong will face a complex  and full agenda, WTO members are trying to narrow differences and clarify  options prior to the ministerial. Moreover, there is general agreement on  which issues will be discussed and on concrete deliverables desired. In late  January and mid-February 2005, WTO members agreed that they would aim  to make concrete progress by July on a Hong Kong package. In March, 2005  WTO members agreed on a work plan.
On the negative side, April 2005 meetings and our issue-by-issue analysis  suggest that wide substantive differences persist and progress in bridging  them is lagging, but WTO ministerials have inherent limits and drawbacks  in resolving them. First, ministerials can get out of hand if too many  unresolved issues are presented or if politically charged issues dominate.  Second, the glare of the public spotlight can make compromise difficult.  WTO ministerials are large, public events that can involve high-profile  confrontations over politically sensitive issues (e.g., labor at Seattle, Trade  Related Aspects of Intellectual Property Rights (TRIPS) and Public Health  at Doha, cotton at Cancun). The atmosphere surrounding the July 2004  framework was markedly different, in part because WTO negotiators  operated outside public view. Third, there has been no change in the  process for conducting ministerials, which is, by all accounts, unclear and  sometimes chaotic. Past experiences at Cancun and Seattle have shown  the risk associated with this situation.
section_title: Concluding Remarks
paragraphs: Taking into consideration that two of the three last WTO ministerials ended  in failure, we have noted some positive developments in the current WTO  negotiating environment compared to that just before Cancun. For  instance, the July framework represented progress, and since the July 2004  Framework, there has been significant activity and positive engagement by  all member countries, including developing countries. Members are very  aware of the tight deadlines and work remaining prior to the Hong Kong  ministerial. If they are successful in meeting their goals for interim  progress, the risk of arriving in Hong Kong with an overly full agenda will  be reduced.
However, as we pointed out in the report, the ministerial faces a number of  potential challenges—and some risk of falling short of its ambitious goals  without a greater sense of purpose, according to WTO Director-Supachai’s  latest assessment. Furthermore, issue progress requires compromise, but  substantive movement toward convergence is still not evident in most  areas. Agriculture remains central to the round. Despite some progress,  developed country commitments to undertake painful agricultural reform  are at least partly contingent on movement on market access. Yet, technical  talks on market access are bogged down, and meetings have only recently  broken the impasse. Moreover, even with recent proposals, there is scant  evidence that key countries are willing to make commitments to liberalize  access to their markets for industrial goods and services. But cutting  barriers from today’s high levels will be the source of any projected gains  from the Doha round to rich and poor countries alike--and deemed vital to  achieving balanced results. Deadlines for deciding development issues  loom in July 2005, but discussions on outstanding proposals have yet to  become fruitful. The United States, meanwhile, is facing tests of its trade  leadership at home and calls by other WTO nations for urgent action on  cotton, as well as greater receptivity to difficult demands in services and  antidumping.
With an effective deadline of December 2006, the question is whether the  rest of 2005 will see sufficient progress to enable final agreement on a  package that offers gains to all WTO members. Some experts remain  optimistic that the Doha Round can deliver its promised benefits. Others  say tough decisions are necessary for progress and warn time is short given  the substantial work remaining.
section_title: Agency Comments and Our Evaluation
paragraphs: We requested comments on a draft of this report from the U.S. Trade  Representative, the Secretary of Agriculture, the Secretary of Commerce,  and the Secretary of State, or their designees. The Assistant U.S. Trade  Representative for WTO and Multilateral Affairs and other USTR staff  indicated general agreement with the report, but provided us with several  technical comments, which we incorporated as appropriate. The  Department of Agriculture’s Foreign Agriculture Service agreed with our  report’s factual findings and analysis, but provided several technical  comments, including data on non-ad valorem tariffs, which we  incorporated as appropriate. The Department of State’s Director of  Multilateral Trade, Bureau of Economic and Business Affairs, indicated  agreement with GAO’s findings and analysis, and provided a technical  comment, which we incorporated. The Department of Commerce provided  written comments, indicating that “GAO analysts have focused on the  essential pieces of the negotiating puzzle” and “accurately portrayed the  broad state of progress and existing negotiating tensions in the key areas”  (see app. IV). In addition, the Deputy Assistant Secretary for Agreements  Compliance and other Commerce staff provided us with oral technical  comments on the draft, which we incorporated as appropriate.
We are sending copies of this report to interested congressional  committees, the U.S. Trade Representative, the Secretary of Agriculture,  the Secretary of Commerce, and the Secretary of State. We will also make  copies available to others upon request. In addition, the report will be  available at no charge on the GAO website at http://www.gao.gov.
If you or your staff have any questions about this report, please contact me  at (202) 512-4347. Contact points for our Offices of Congressional Relations  and Public Affairs may be found on the last page of this report. GAO staff  who made major contributions to this report are listed in appendix VII.
section_title: Objectives, Scope, and Methodology
paragraphs: The Chairman of the Senate Committee on Finance and the Chairman of  the House Committee on Ways and Means asked us to assess (1) overall  progress in the WTO Doha Round of negotiations, (2) progress in specific  negotiating areas, and (3) factors affecting progress.
We followed the same overall methodology to complete all three of our  objectives. We obtained, reviewed, and analyzed documents from a variety  of sources. From the WTO, we analyzed the 2001 Doha Ministerial  Declaration, the Doha Work Programme Draft General Council Decision  of 31 July 2004, known as the “July framework,” as well as numerous  negotiating proposals from WTO member countries and other documents.  From U.S. government agencies and foreign government officials, we  obtained background information and documentation regarding  negotiating proposals and positions. We also obtained information on day- to-day developments from reputable trade publications.
We met with officials from key U.S. government agencies, including the  Department of Agriculture, the Department of Commerce, the Office of the  U.S. Trade Representative, the State Department, and the Department of  the Treasury, to obtain perspectives on progress in the negotiations overall  and individual issue areas and factors affecting negotiations. The State  Department arranged meetings with various of its country desk officers to  provide us with perspectives on key WTO participating member nations.  We also met with trade representatives from developed and developing  countries located in Washington, D.C., including Australia, Brazil, Canada,  Chile, Costa Rica, the European Union, Guyana, Japan, Malaysia, New  Zealand, Norway, Singapore, South Korea, and Switzerland. Further, we  met with private-sector representatives from specific business sectors,  including the American Sugar Alliance, the National Association of Wheat  Growers, National Corn Growers Association, the Coalition of Services  Industries, the National Association of Manufacturers, and the Zero Tariff  Coalition. We met with nongovernmental organizations (NGO), including  Oxfam America and the Carnegie Endowment; and trade experts from  institutions including the United Nations Conference on Trade and  Development (UNCTAD); Georgetown University; the Cato Institute; the  Institute for International Economics, the American Enterprise Institute;  the World Bank; Columbia University; the University of Toronto; the  Manufacturers Alliance; and the Institute for International Business,  Economics, and Law, the University of Adelaide, Australia; White and Case;  and C&M International.
To illustrate tariff profiles for examples of developed and developing  countries, we reviewed international tariff and trade data from the World  Bank’s World Integrated Trade Solution (WITS) database, which contains  member-supplied data from the WTO and the United Nations. Though these  organizations are limited in their ability to verify official country data, we  concluded that the data is sufficiently reliable for the purposes of our  analysis based on accuracy checks regularly performed on the database  and its’ wide usage in the negotiations.
Prior to the July 2004 mini-ministerial, with the assistance of USTR and the  State Department, we traveled to WTO headquarters in Geneva to obtain  foreign government official, private sector, and nongovernmental  organizational views on progress. We followed this initial visit to Geneva  with another trip in late June and early July 2004, to meet with U.S. and  WTO officials and observe the Trade Negotiations Committee negotiations;  a visit in September 2004, to obtain official reactions to the July framework;  and a mid-April 2005 update. The series of visits to Geneva resulted in  interviews with WTO member country officials from developed and  developing countries including Australia, Brazil, the European Union,  India, Jamaica, Japan, and Singapore. We also met with WTO officials,  including the agriculture, industrial (nonagricultural) market access,  services, development, and trade facilitation negotiating group chairs. In  total, we conducted more than 130 interviews with negotiators and trade  experts.
We performed our work from March 2004 through April 2005 in accordance  with generally accepted government auditing standards.
section_title: Agriculture
paragraphs: Given the importance of agriculture in the Doha Round negotiations,  coalitions of countries regrouped in 2004 and focused on making progress  on the three pillars in agricultural reform of export subsidies, domestic  supports, and market access. The most notable achievement thus far has  been agreement in the July 2004 framework to remove all export subsidies  at some future date. The framework also set ceilings on certain trade- distorting domestic support categories. However, disagreement persists  over how to define such categories and set reduction schedules, as well as  how to improve market access through a tariff reduction formula and the  definition of sensitive and special products that can be insulated from tariff  cuts.
subsections: section_title: Export Competition
paragraphs: The May 9, 2004, EU letter from Pascal Lamy and Franz Fischler to WTO  member countries offered to eliminate all export subsides -- with no  products excluded – if suitable agreements were reached on market access  and domestic support. This offer was warmly welcomed by member  countries; for decades, the United States and other countries have  advocated completely eliminating export subsidies.
Lamy and Fischler conditioned their offer on what they termed “full  parallelism,” meaning the commitment to eliminate all export subsidies is  linked to establishing new disciplines in other export competition  programs, including U.S. export credit and food aid programs, as well as  export state trading enterprises. The move reinvigorated negotiations,  country officials and we agreed, because the European Union had  previously offered only the substantial reduction and elimination of export  subsidies for certain products, not total elimination.
The EU’s offer, valued at about US $9 billion, meant other countries with  substantial export competition programs, such as the United States, would  need to agree to undertake disciplines on them. The July framework  envisions new disciplines on export credits, food aid, and state trading  enterprises.
The framework is likely to force the substantial restructuring of U.S.  export credit programs, trade officials say, and our analysis supports  this conclusion. For example, the July framework language stipulates  that export credit programs may not have financing repayment periods  of longer than 180 days. The main U.S. export credit programs, General  Sales Manager (GSM)-102 and GSM-103, have repayment periods from 6  months to 3 years and up to 10 years, respectively.
All food aid programs are subject to scrutiny and could be subject to  new disciplines, with certain U.S. programs the focus of international  attention, country officials and trade experts told us. The European  Union and many African nations advocate that food aid be made only in  grant form. They also want to make sure food aid is not a mechanism for  surplus disposal when commodity prices are low and commodity stocks  are high, because this can trigger commercial displacement. This  agreement would have implications for the United States’ Title I P.L. 480  food aid program , which provides for long-term, low interest loans to  developing countries for their purchase of U.S. agricultural  commodities, and the Section 416b food aid program, which authorizes  USDA to donate surplus agricultural commodities overseas. As a result,  the U.S. successfully sought changes in a July 16 draft text for the  framework agreement, which had called for disciplines to “ensure that  food aid is not used as a mechanism for surplus disposal and to prevent  commercial displacement” . However, the framework text  agreed upon in late July makes no such mention of surplus disposal.  Instead, it indicates that there will be future discussions on “providing  food aid exclusively in fully grant form.”
Finally, the framework calls for disciplines to remove the export subsidy  components of state trading enterprises, including the government  financing of and underwriting losses of such programs. U.S. goals for the  negotiations reflect long-held concerns about the exercising of  monopoly power on imports and exports through these institutions. As a  result, Canada and Australia are likely to face tighter disciplines on their  wheat state trading enterprises, trade officials and experts told us.
section_title: Domestic Supports
paragraphs: Many developing and developed countries are seeking substantial  reductions in developed country trade-distorting domestic support  programs because these programs can reduce world prices and displace  otherwise competitive producers from world markets. The European  Union and the United States in 2001 together accounted for the majority of  global spending in trade-distorting domestic supports. The U.S. has  publicly stated it would significantly reduce its trade-distorting domestic  support spending if other WTO member nations agree to ambitious  outcomes in other areas, such as market access.
In July, WTO members agreed that the eventual Doha Round agreement  would contain a strong element of harmonization in reductions of trade- distorting domestic support programs by developed countries, with those  countries with larger subsidy programs cutting more. This dovetails with  U.S. aims in the domestic supports pillar, since the European Union still  outspends the United States. The framework sets ceilings on certain kinds  of trade-distorting domestic supports and calls for the capping and future  reduction of others. The July framework also called for a substantial  reduction in the overall level of trade-distorting support from bound levels.
To examine how these broad guidelines could affect existing European  Union and the United States programs, we have reviewed the various  categories of domestic supports, which the WTO classifies into “boxes:”  amber, blue, green, and de minimis supports. Figure 3 describes the  categories of WTO-recognized domestic support programs.
The WTO classifies agricultural domestic support into main categories  identified by traffic-light color-coded “boxes” that range from most to least  trade-distorting: Red, e.g. spending not permitted in these types of  supports; amber, domestic supports that are production- and trade- distorting, the total value of which was capped and then reduced; blue,  production-limiting subsidies that have marginal trade-distorting effects;  and green, non- or minimally-trade distorting, and thus permitted.
De minimis is a category that captures other domestic supports, including  market price support measures, direct production subsidies, or input  subsidies. There is no requirement to reduce de minimis trade-distorting  domestic support for any year in which the aggregate value of the product- specific support does not exceed 5 percent of the total value of production  of the agricultural product in question. In addition, non-product specific de  minimis support which is less than 5 percent of the value of total  agricultural production is also exempt from reduction.
Trade-distorting support is comprised of a country’s expenditures in  Amber Box, Blue Box, and de minimis supports. In other words, it does not  include Green Box measures.
For Amber Box supports, the most trade-distorting category, the July  framework calls for final bound thresholds to be reduced substantially,  using a tiered approach whereby members with more substantial support  programs will be placed in higher tiers and forced to cut more. As  illustrated in figure 4 below, this provision will narrow the difference  between the levels the United States and European Union are authorized to  spend versus the amount they actually spend.
In absolute terms, the European Union spends substantially more in Amber  Box programs than the United States and accounts for more than half of  the total amount notified by the 30 WTO members that use such domestic  supports. The U.S. is permitted to spend less than one-third of what the EU  is permitted. In recent years the European Union spent just over half of  what it is permitted to spend on these trade-distorting domestic supports,  and its actual spending has declined.
By contrast, trade experts and officials told us that other countries are  concerned about U.S. domestic subsidy programs due to the United States’  trend of increased spending. The United States has supplied official WTO  notifications through 2001 that indicate its Amber Box program spending  was within established WTO limits, but its actual spending in Amber Box  supports grew from $6.2 billion in 1995 to $15.6 billion in 2001, the most  recent year data are available.
Furthermore, as we reported in our January 2004 report, the 2002 Farm  Bill could increase U.S. agricultural support spending and shift its  composition. Specifically, the 2002 Farm Bill created a new category of  domestic support programs, dubbed “countercyclical payments,” which are  income support payments to farmers when the market price for a covered  commodity falls below a legislatively-set target price. As a result, the  United States has pushed in the WTO Doha Round for a redefinition of the  WTO Blue Box, in which it currently does not spend – so that as long as the  Blue Box exists it has greater flexibility to allow access for other programs  that are less trade- distorting to count against its current, unused ceiling for  this category of domestic supports.
The July framework language regarding the Blue Box was favorable to the  United States, trade officials and experts told us. It redefines the Blue Box  to allow direct payments that do not require production limitations if  based on certain criteria. This has met with sharp resistance from the G-20  and other WTO members that seek significant reductions in all forms of  trade-distorting domestic supports. These members are concerned that by  allowing the United States to place its countercyclical payments in the  redefined Blue Box, the United States will not be forced to reduce its trade- distorting domestic support programs and could in fact increase its total  sum of trade-distorting domestic support. As recently as March 2005, the G-20 called for further disciplines on price-linked supports in the  provisionally redefined Blue Box to allow the compensations for some, but  not all, of the difference between market and target prices, among other  proposals.
The July framework calls for a cap on the Blue Box of 5 percent of the  production value, with historical spending patterns to be determined as a  base. This could affect the European Union, trade officials and experts told  us, which in 2001 spent 23.7 billion euros in Blue Box supports, or 9.6  percent of its total agricultural production.
To ensure ambitious cuts in domestic support, the July framework also  calls for a substantial reduction in overall trade-distorting support,  specifically the sum of Amber Box spending as measured by “Final Bound  Total AMS,” Blue Box payments, and de minimis programs—with a 20  percent cut to be made in that total in the first year of implementation.  However, the specific extent of reductions was left to future negotiations.
Finally, on non- or minimally trade-distorting “Green Box” domestic  supports, the framework called for a review, but not a capping or cut of  these supports. The G-20 has charged that certain current Green Box direct  payments to producers contradict the Green Box criteria of being non- or  minimally trade-distorting. The United States and the European Union have  resisted caps and cuts, but agreed to examine concerns about abuse. The  United States spent about $51 billion in these types of supports, according  to its 2001 notification to the WTO, the most recent year that data are  available.
section_title: Market Access
paragraphs: Market access remains the most difficult pillar of the negotiations, country  officials and experts told us. Major agricultural exporters including  Canada, Australia, and Brazil want to expand their overseas markets. The  United States is the world’s largest exporter of agricultural products, is a  highly competitive producer of many products, and has significant  offensive interests in this area. The United States has conditioned domestic  support cuts on gains in market access. However, many developing  countries have resisted liberalization, arguing they do not have the means  to subsidize exports or domestic production, and that tariffs are their only  source of leverage and protection in the agricultural negotiations.
Though the July 2004 framework states that a numerical formula will be  used to cut tariffs from current bound rates, countries differ strongly over  the type of formula they prefer. The methodology for converting specific  tariffs into ad valorem equivalents, upon which the tariff reduction  formula would be applied, also frustrated progress in the market access  negotiations for months. Such differences are based on the widely  divergent tariff profiles among WTO members. Specifically, several studies  by the Organization for Economic Cooperation and Development and the  World Bank find that for agricultural goods, developed countries tend to  have lower average bound and applied tariffs. However, developed  countries have a greater percentage of specific (non-ad valorem) tariffs and  tariff peaks. The products where developed countries have specific tariffs  tend to be those with high levels of protection and the products where they  have tariff peaks tend to be those of export interest to developing  countries. In contrast, developing countries have uniformly higher bound  tariffs, though currently applied tariff rates tend to be far lower than bound  tariff rates and specific tariffs are rare. To illustrate these different tariff  profiles, table 1 provides agricultural goods weighted average tariff rates  for a selected set of countries and products. Due to member differences  over the methodology for calculating ad valorem equivalents, the data  excludes specific tariffs.
In line with these general patterns, the table shows that developed country  members such as the United States, the European Union, and Japan have  relatively low average bound and applied ad valorem tariff rates that range  from around 2 percent to 7 percent. However, by excluding specific tariff  rates, the table does not show the full extent to which these countries  protect their agricultural sectors. According to the World Bank, the  European Union, for example, has specific tariff rates on 44 percent of its  agricultural product lines. A 2001 study by the U.S. Department of  Agriculture employed a certain methodology for converting ad valorem  equivalents and estimated that the non-trade weighted average tariff rate  for agricultural goods in the United States, the EU, and Japan was 12  percent, 30 percent, and 58 percent respectively. Additionally, for the  example products of dairy, fruits and nuts, and tobacco, the United States,  the European Union, and Japan have relatively high tariffs and a large share  of international peaks. The United States’ average tariffs in the tobacco  sector are extremely high, at around 71 percent.
Developing countries such as India, Indonesia, Kenya, and Venezuela have  much higher average bound tariffs, ranging from 54 percent in Indonesia to  126 percent in India. However, in each of these cases, there are substantial  gaps between the bound and applied tariff rates.
The contrast between developed and developing country tariff profiles has  fueled a sharp debate on what formula to use to conduct tariff reduction,  country officials and trade experts told us. Some developed countries,  including the United States, have advocated for a harmonizing formula  called a Swiss formula, that would reduce high tariffs by a larger  percentage than low tariffs. Developing countries and, particularly net- exporters such as Brazil with high bound tariffs want more flexibility than  the Swiss formula would offer. As an alternative, they advocate a banded  approach, which divides tariffs into a series of bands and applies an  average tariff reduction within each band. The banded approach would  apply larger reductions to higher tariff bands—thereby addressing  developed country tariff peaks – but would be less harmonizing than a  Swiss formula. A formula that combines elements of both Swiss formula  reductions and linear reductions is a blended approach.
The United States was among a handful of nations that in June 2004 penned  and circulated a draft market access white paper attempting to strike a  compromise. The paper called for a different type of a tiered formula  approach, where within each band a certain percentage of bound tariffs  would be cut by a Swiss (harmonizing) formula and a certain percentage of  bound tariffs would be cut by a linear percentage. A certain number of  tariff lines would be exempt from either a Swiss or linear cut. Instead,  liberalization would be handled through tariff rate quota increases. This in  effect allows member countries to shield themselves from substantial  reduction commitments for certain products by self-designating them as  “sensitive products.”
Continued disagreement on the tariff reduction formula is significant  because variations in the type of formula could result in widely different  results. Recent studies indicate that for developed countries, the banded  approach reduces applied tariff rates in some instances more than the  blended approach. These studies further indicate that the blended  approach could have a greater impact in reducing bound rates in  developing countries due to the homogeneity of their bound rates at  relatively high levels. However, irrespective of the type of tariff reduction  formula chosen, the degree of liberalization will strongly be affected by the  degree of ambition within the formula, as determined by the coefficients,  and by the exceptions to the formula through sensitive product  designation.
Negotiators had hoped to agree on the formula to cut tariffs in July 2004 but  were unable to do so. Instead, they agreed that (1) the future formula will  be a single approach for developed and developing countries; (2) the future  formula will be tiered, with progressive reductions achieved through  deeper cuts in higher tariffs; and (3) all WTO members will have some  flexibilities in applying cuts to sensitive products that will be used in the  future. Under the framework, increased market access on sensitive  products will be achieved through expanded tariff quota rates and tariff  reductions.
Sensitive products and special products—whereby developing countries  are allowed to declare additional products exempt from standard  reductions under certain criteria, such as rural development or food  security needs—are likely to be among the most contentious battles going  forward, trade officials and experts told us. The G-20 and other negotiating  groups have stressed that the exceptions for sensitive products – whereby  countries are permitted to declare certain key commodities as sensitive  and exempt them from standard tariff reduction schedules—is at odds with  the liberalizing mission of the Doha Round. Sensitive product exceptions  could be used to protect developed country tariff peaks, these countries  say, and greatly undermine the ambitious nature of any agreement.
section_title: Industrial Market Access
paragraphs: Negotiators report that during the period between Cancun and the July  framework, members avoided discussing differences in industrial market  access (nonagricultural market access or NAMA) so that they could focus  on the agricultural negotiations. As a result, while the negotiating  atmosphere has improved, the July framework represents a lack of  movement on key issues in the industrial market negotiations relative to  Cancun. In fact, the framework consists simply of the text that was  circulated in Cancun with the addition of a paragraph stating that  agreement on substantive elements of the text had not yet been reached.  While negotiators are using the framework as an agenda for discussion, the  framework lacks both consensus and specificity on the two main methods  being considered for liberalization of trade in industrial goods—a tariff  reduction formula and sectoral initiatives—as well as the flexibilities that  developing countries will be offered in applying these methods. As of the  spring 2005, consensus on these substantive issues had not yet been  reached.
subsections: section_title: The Tariff Reduction Formula
paragraphs: WTO members remain divided over the tariff reduction formula and its  application. The July framework suggests a nonlinear formula, to be  applied line by line to bound tariff rates, with the aim of reducing or  eliminating tariff peaks and tariff escalation. Despite the framework’s  disclaimer that agreement on the formula had not been reached,  negotiators we spoke with indicated that members have generally accepted  the idea of a nonlinear formula. Nonetheless, there remain strong  differences over countries’ preferences for the type of nonlinear formula  chosen and the formula coefficients. The July framework also suggests a  variety of ways in which special and differential treatment could be  provided. Negotiators we spoke with suggest that members agree that least  developed countries (LDCs), as well as countries with a low percentage of  bound tariffs, can be exempted from reducing their tariffs through a  formula, but the degree to which other developing countries can exempt  products from the formula and qualify for longer implementation periods  remains controversial.
Country preferences for the formula and application of special and  differential treatment provisions continue to reflect those advocated prior  to Cancun and are largely based on the varying tariff profiles among WTO  members. Similar to conditions in agriculture, tariff profiles for non- agricultural goods suggest that (1) developed countries have bound almost  all of their tariffs at relatively low levels, though certain products are  characterized by tariff peaks; (2) products where developed countries have  high tariffs tend to be among those of export interest to developing  countries such as textiles and apparel or leather and footwear; and (3)  developing countries, in many but not all cases, have limited tariff bindings  and relatively high bound tariffs, though currently applied tariff rates tend  to be far lower than bound tariff rates.
Developed country members that have relatively low tariffs want  significant tariff liberalization in order to access new markets in developing  countries that have relatively high tariffs. The United States, for example,  is strongly pressing for an industrial market access agreement that would  effectively lower tariffs in key developing countries for which an estimated  71 percent of foreign duties on U.S. manufactured exports are assessed,  according to the National Association of Manufacturers. To achieve this  result, the United States, the EU, and other developed country members, as  well as some developing country members that have autonomously  liberalized in the past, continue to support a Swiss-type formula – a  harmonizing nonlinear formula that would reduce high tariffs by a larger  percentage than low tariffs. Such a formula would also address tariff peaks  and escalation.  To account for special and differential  treatment, the United States has proposed that developing countries could  apply a different coefficient within the Swiss formula than developed  countries, implying more moderate liberalization. The EU and Norway have  proposed a “credit-based approach” where the flexibility in the formula  coefficient for developing countries would be determined uniquely for each  country based on credits for commitment to apply the formula without  exception or participation in sector agreements, for example.
In contrast, some developing countries emphasize that due to their higher  average tariff rates, harmonizing formulas that reduce higher tariffs more  than lower tariffs would result in greater percentage cuts for developing  countries than developed countries—a result that they argue contradicts  the principle of special and differential treatment. As such, they continue to  support a Girard type formula—a non linear formula proposed by the  former Chair of the industrial market access negotiating group that is based  on each country’s average tariff rate and allows countries with higher initial  tariffs to reduce those tariffs at a lesser rate than countries with lower  initial tariffs. They also support a more extensive application of special  and differential treatment exceptions such that developing countries can  maintain the flexibility to pursue industrial policies to promote growth of  new industries and protect themselves against some of the adjustment  costs of ambitious liberalization commitments.
Continued disagreement on the tariff reduction formula is significant  because variations in the type of nonlinear formula chosen, the formula  coefficients, treatment of unbound tariffs, and exceptions to the formula  could result in widely different results. For example, both the World Bank  and UNCTAD have analyzed the Swiss and Girard non-linear formulas by  using hypothetical coefficients and have found that:   Swiss formula reductions tend to be larger than Girard formula  reductions, particularly for the high tariff rates found in developing  countries.
While effective at reducing developed country tariff peaks, the Girard  formula may also entail greater tariff cuts than the Swiss formula for  developing countries that have lower average tariffs resulting from  autonomous liberalization.
The wide wedge between bound and applied tariff rates in developing  countries limits the amount of trade liberalization achieved through any  formula.
Nonetheless, echoing our analysis of market access negotiations in  agriculture, the actual degree of liberalization that is achieved through  these formulas or any other formula will strongly be affected by the degree  of ambition within the formula, as determined by the coefficients, and by  exceptions to the standard tariff reduction schedules that will be offered  through special and differential treatment.
section_title: Sectoral Initiatives
paragraphs: WTO members also remain divided over sectoral initiatives. The July  framework states that sectoral agreements should supplement the tariff  reduction formula with an aim to eliminate or harmonize tariffs in key  sectors of interest to developing countries. The United States and other  members have proposed the notion that participation should be based on a  principle of “critical mass,” meaning that countries that account for the  majority of trade in a sector should participate such that mutual gains are  obtained without problems of free-ridership from nonparticipants.  However, we were told that key developed and developing country  members disagree strongly over whether sector agreements should be  included in an industrial market access agreement.
The United States has specific objectives for industrial market access as set  out by its Trade Promotion Authority legislation: to focus on improving  market access for U.S. exports and to increase global participation in  sectoral agreements that reduce or eliminate barriers in key sectors, such  as textiles and apparels and civil aircraft. Developed country members  such as the United States, New Zealand, and Japan strongly support the  inclusion of sector agreements because they can result in greater  liberalization outcomes than even ambitious formula cuts. Specifically,  they argue that only cuts that bring bound rates below currently applied  rates would actually liberalize trade. Such members have conducted  education and outreach with developing countries regarding potential  requirements and flexibilities for sectoral agreements, as well as the likely  economic benefits they could receive from ambitious trade liberalization.  Nonetheless, certain developing countries, such as Brazil, do not support  this method of liberalization and remain concerned about potentially  mandatory participation. They argue that sector agreements could create  an overly ambitious pace of reform.
section_title: Services
paragraphs: Accounting for 78 percent of private sector GDP and 80 percent private  sector employment in the United States, services constitute a core priority  for U.S. negotiators. Initially thought to be a lynchpin of the Doha Round,  services talks have taken a backseat position relative to other issues.  Nevertheless, the inclusion of services in the July 2004 text on an equal  footing with the key market access pillars of agriculture and industrial  market access resulted from efforts by both developed and developing  country members and industry coalitions. Although some developing  countries are reticent about services negotiations, generally perceiving  them as a developed country interest, many developing countries have a  particular interest in obtaining commitments under mode 4, which governs  the temporary movement of service-delivery professionals.  Notwithstanding these points of contention, since July, talks on the  domestic regulation of services have shown signs of progress, as have  technical negotiations on market access. However, these have yet to  translate into improved offers. An opportunity for significant services  liberalization could be foregone if negotiations do not intensify.
Services negotiations aim to reduce barriers to international trade by  improving the General Agreement on Trade in Services (GATS) which (1)  ensures the increased transparency and predictability of international trade  rules and domestic regulations governing services industries (rulemaking);  and (2) promotes progressive liberalization of services markets through  bilateral negotiations (market access). The Doha Declaration states that  members shall submit initial services offers by March 31, 2003, a deadline  that many members missed. Following the Cancun ministerial, and in the  run up to the July framework, services negotiations made slow progress.  Rule-making talks were stalled, and although the 2003 deadline had long  past, pending market access offers outnumbered those submitted.  Observers said there lacked a “critical mass” of offers for market access  talks to make substantial progress. Those offers that were tabled were  characterized as being of poor quali1ty. Movement had become contingent  upon advances in other areas, particularly agriculture.
subsections: section_title: July Framework Sets New Deadlines
paragraphs: Nevertheless, the final version of the July framework placed services on an  equal footing with agriculture, industrial market access, and the other areas  considered essential to a final Doha Round package. Initially, services were  absent from the text. However, a specific section and annex on this sector  were added after several developed and developing countries, as well as  industry coalitions from the U.S., the EU, Australia, India, Hong Kong,  China, Japan, Brazil, and Canada argued for their inclusion. Specifically,  the July framework reasserts the importance of achieving services  liberalization and urges members to intensify their efforts to conclude the  negotiations on rulemaking. With a view to providing market access to all  members, the text calls upon members to submit high-quality offers,  particularly in the sectors and modes of supply of export interest to  developing countries. It specifically names mode 4 as being among these,  and sets May 2005 as the deadline for members to table new offers.
subsections: section_title: Progress Since July
paragraphs: After they agreed to the July framework, members held several multilateral  and bilateral meetings and discussed rules, domestic regulation, and  market access with renewed momentum. Technical talks were ongoing on  all fronts. On the rule-making side, members initiated new discussions on  emergency safeguards, subsidies and government procurement, but none  of these issues came close to resolution. Certain East Asian developing  countries continued to advocate creation of an emergency safeguard  mechanism for services, reflecting concerns over their experience with the  1997 financial crisis. However, many WTO members reportedly see an  emergency safeguard for services as being technically unfeasible and/or, in  the case of the United States and most other developed countries,  undesirable. Discussions on domestic regulation were more promising.
Several proposals triggered constructive debates on regulatory disciplines  and transparency.
On the market access side, talks were said to be progressing on a technical  level. After July 2004, a few more developing countries tabled initial offers,  bringing their number up to 52, and bilateral talks seemed to have regained  momentum. One gauge of movement was embodied by the intensification  of informal meetings held by so-called Friends groups, which assemble  subsets of member countries around issue-specific concerns such as  financial services, energy services or mode 4. However, WTO officials said  that sufficiently detailed negotiations on specific services sectors had still  yet to begin. Moreover, a general concern with the current offers is that  they do not fully bind, let alone deepen, the level of liberalization that  members have already, de facto, achieved outside of the WTO. Another  potential problem is that these offers do not systematically schedule  commitments in every service sector. Some have signaled notable absences  and weaknesses in financial, insurance, communication, audio-visual, and  professional services—sectors of interest to the United States—but also  maritime services and others of interest to different members. In response,  a number of countries are pushing for the universal adoption of minimum  requirements, or “benchmarks,” in given industries such as financial  services. Approximately 40 developing countries have not submitted initial  services offers at all—not counting LDCs. According to one WTO official,  their failure to table services offers does not strictly reflect a lack of means,  though in some cases it may. WTO officials felt that the outcome of  intensified bilateral and informal talks would only become clear after May  2005, the deadline for tabling new and revised services offers.
Forward movement in the months leading up to the Hong Kong ministerial  and beyond will depend on members overcoming four challenges. First,  several officials we spoke with stated that insufficient technical capacity  could prevent a number of developing countries from tabling initial or  revised services offers before the Hong Kong ministerial. Second, resolving  the contentious, mainly North-South disagreement over the extent of  liberalization under mode 4 may be crucial to achieving progress in market  access. The temporary movement of service-delivering professionals is a  politically sensitive issue for many developed countries, and their offers  under mode 4 are generally unsatisfactory to most developing countries  with ambitions in this area, such as India. Despite their demands, the U.S.  government has clearly expressed its reticence to grant other members  more extensive market access under mode 4 than is reflected in its existing  commitments. According to U.S. negotiators, certain commitments under  this mode could involve modifying domestic immigration law, and certain  countries are simply not prepared to make this move within the WTO  framework. Given the priority placed on obtaining mode 4 concessions,  this discord may become increasingly problematic.
A third factor that could affect progress in services negotiations is the  question of balance. Malaysia, Thailand, and the Philippines allegedly want  a concession on emergency safeguards before fully engaging in market  access bargaining. Brazil has tied its willingness to press forward in  services talks to obtaining satisfaction in agriculture. Continuing to tie  progress in services talks relative to other areas could be problematic, as  the request-offer approach to negotiating services liberalization is  inherently and comparatively slow. Moreover, the greater complexity of  identifying and dismantling often opaque barriers to trade in services slows  the speed of services talks. The head of the WTO Secretariat’s services  division thinks that members will take 18 months to reach a meaningful  agreement once they start negotiating on a more detailed level than they  are currently. Finally, there is wide agreement that negotiators need to  summon more political and technical resources from their capitals to  conclude a meaningful services agreement. More than in other areas of  trade, barriers to trade in services often occur behind borders, such that  dismantling these measures requires involvement on the part of national  ministries, subfederal level regulators, and various authorities not normally  involved in trade policy. This poses a problem for many small developing  countries.
section_title: Economic Incentives for Doha Negotiations
paragraphs: The Doha trade negotiations aim to increase international trade in order to  improve member countries’ economic growth and development.  Economists have used trade models to generate numerous studies that  estimate potential economic gains from trade liberalization for developed  and developing countries alike. These estimates vary significantly,  depending upon the extent of trade liberalization assumed and other key  characteristics of the models. Several studies find that estimated  worldwide economic gains accrue to both developed and developing  countries. However, the distribution of economic gains may vary within  and between countries, creating perceived winners and losers. As such, the  individual economic incentives that countries face may differ, thereby  affecting each country’s negotiating goals within Doha.
subsections: section_title: Doha Round Liberalization Is Expected to Yield Benefits and Costs
paragraphs: A primary rationale driving the Doha liberalization agenda is the belief that  international trade can positively benefit a country’s overall growth and  development. Potential benefits occur as international trade increases  competition and specialization, provides greater access to technology, and  expands export markets. Over time, a more liberal trading regime may  reduce costs on both imported manufacturing inputs and exported final  products that create incentives for foreign producers to invest in new  production – benefits typically referred to as dynamic gains from trade.
While the role of international trade in fostering growth and development  has become more widely accepted, economists have also argued that trade  liberalization can involve significant adjustment costs. Adjustment costs  may include unemployment in sectors that are not internationally  competitive or costs of fiscal reform as governments heavily dependent on  trade taxes shift toward income or production taxes. Additionally,  international trade may yield an uneven distribution of economic gains,  creating temporary winners and losers between countries as well as within  them. As each country participates in the Doha negotiations, it is working  to achieve a balanced package of commitments that will be politically  acceptable to its various domestic constituencies.
Nevertheless, without considering distributional issues, several studies  predict that both developed and developing countries stand to benefit  economically from multilateral liberalization. Developed countries are  positioned to receive gains from trade liberalization since they are large  traders and currently face relatively high tariffs for exports into developing  countries, particularly for industrialized goods. Developing countries stand  to receive gains from trade liberalization due to the fact that developed  countries often have pockets of high average tariffs on products that  developing countries tend to export. High developed country tariffs tend to  apply to agricultural and processed agricultural goods as well as to light  manufactures such as textiles and clothing. When weighted by the amount  of trade occurring under them, these tariffs translate into significant trade  barriers for developing countries. Developing countries also stand to gain  significantly from liberalization by other developing countries. The share of  developing countries’ agricultural exports going to other developing  countries rose from 28 percent in the 1980s to 37 percent in 2001. However,  in many cases, barriers imposed by developing countries on goods from  other developing countries are even higher than those they face from  developed countries, impeding potential South-South trade between  developing countries.
section_title: Economists Use Trade Models to Estimate Economic Gains
paragraphs: Economists often estimate the benefits and costs of easing trade  restrictions by examining a recent period and estimating how trade and  economic welfare would have been different under a scenario where  certain trade restrictions were eased. Concurrent with the WTO and other  trade negotiations, numerous trade models have been used to simulate  liberalization of trade policies and calculate the likely range of effects on  variables such as exports and imports, tariff revenues, production, prices,  and income. Many of these studies use a computable general equilibrium  (CGE) model called the Global Trade Analysis Project (GTAP) model.  GTAP is a global general equilibrium model that describes the relationship  between all sectors within an economy and all economies worldwide. In its  general form, GTAP is a static model, which means that it simulates how  economies will respond only to the trade policy change being examined.  Results generated from GTAP should be interpreted as order-of-magnitude  results rather than single point best estimates because the assumptions  regarding how responsive economic variables are to policy changes drive  the results.
Extensions of GTAP and other CGE models have been made to take into  account how economies will grow over time. These dynamic versions of  GTAP may include information on growth rates of capital, investment, and  productivity. Additionally, while the general form of GTAP includes an  assumption of perfect competition and constant returns to scale,  extensions of GTAP have incorporated characteristics readily observed in  manufacturing, such as imperfect competition and increasing returns to  scale. In these cases, trade liberalization can lead to greater specialization  and increased economic gains over time. However, information on how  firms respond to market changes in the long run is inherently more difficult  to measure with certainty and, as such, results yielded from these models  should be viewed with this limitation in mind.
section_title: Estimated Economic Gains from Trade Liberalization Vary
paragraphs: Table 2 provides a listing of various estimates of the economic gains from  trade liberalization under selected trade liberalization scenarios. The table  is not comprehensive but is intended to illustrate the wide range of results  estimated through trade models – economic benefits ranging from $22  billion to $574 billion worldwide. Results vary depending upon the type of  model (static vs. dynamic), key assumptions in the model (perfect  competition or imperfect competition), and the ambition of the  liberalization scenario.
For example, the level of tariff cuts and sectors included for liberalization  determine the ambition of the liberalization scenario and are one important  factor accounting for variation in the results in table 2. Anderson et al.  estimate gains of $254 billion with a full removal of tariffs on agricultural  and industrial goods, while Cernat estimates gains of $40 billion with a 50  percent reduction. An OECD model on liberalization in agriculture,  manufacturing, and services shows that as tariff reductions are increased  from a 50 percent linear tariff cut to a more ambitious Swiss formula tariff  cut, to a 100 percent tariff cut, economic gains rise from $117 billion to $159  billion to $174 billion, respectively. Several studies suggest that  liberalization of agriculture will provide significant benefits to developing  countries, despite the small size of agriculture in global output. Models by  Anderson et al. and the World Bank estimate that roughly two-thirds of  global economic gains from the liberalization of agricultural and industrial  goods come from agricultural liberalization. The study by Brown et al.,  however, estimates that the largest economic benefits, $414 billion, come  from liberalization of services and that there is an actual global net loss of  income from agricultural liberalization of $3 billion.
Several studies in table 2 also find that the distribution of economic  benefits between developed and developing countries may be relatively  even (ranging from 40 percent to 60 percent for each). Such benefits as a  share of GDP, however, would be much larger for developing countries. For  example, according to estimates by the World Bank, liberalization of both  agricultural and industrial tariffs would provide $385 billion in economic  benefits that would be equally divided between developed and developing  countries. However, relative to their income levels, developing countries  would gain 1.5 percent of GDP compared to 0.5 percent of GDP for  developed countries. Several studies emphasize that the majority of gains  for developed countries derive from lowered tariffs by other developed  countries – a finding that is true for developing countries as well.
In addition to caveats previously discussed, three limitations of trade  models should be acknowledged:  Difficulty in measuring current levels of protection. Many trade model  estimates are based on analysis of current levels of trade protection that  are difficult to measure due to the presence of nontariff barriers, non-ad  valorem tariffs, and gaps between bound tariffs and applied tariffs. In  some cases, data on tariffs may not be current enough to include  information relating to preferential tariff rates or country accessions to  the WTO. As a result, economic benefit estimates yielded from these  data may be overstated because they account for tariff reductions that  have already taken place. Economic benefit estimates may also be  overstated if the analysis is focused on reductions in bound tariffs rather  than reductions in applied tariffs – wrongly assuming that any reduction  in the bound rate would translate into an equal reduction in the applied  rate.
Costs of adjustment. Many trade model estimates do not take into  account adjustment costs to trade liberalization, such as a rise in  unemployment or consumer prices during a transition period to the new  trade policies. The more ambitious the liberalization scenario, the  greater the long-term economic gain—as well as the short-term  economic costs—are likely to be. Development institutions such as the  World Bank, IMF, and United Nations have placed recognition on these  costs, though there is presently limited understanding of the extent of  such costs.
Structural features of some economies. Many trade model estimates use  general assumptions regarding industry characteristics, which may not  account for positive effects due to industrial policies. Some economists  have noted that under certain conditions there are potential benefits in  using tariffs to support growth in new industries.
section_title: Trade Liberalization May Create Both Winners and Losers
paragraphs: While many studies estimate that trade liberalization is likely to result in  economic benefits worldwide, there is likely to be differentiation in  economic gains between and within individual countries. In the short run  when adjustment costs are present, liberalization is likely to create winners  and losers. For example:  Net food exporters vs. net food importers. Regions that are significant  agricultural exporters are expected to gain significantly from the  agricultural liberalization measures being negotiated in Doha. However,  the estimated gains are smaller and sometimes negative in regions that  are large net importers of food because the potential removal of  developed country subsidies may increase world food prices. The IMF  estimates that major net exporters of food in Latin America and sub- Saharan Africa could gain between 0.3 percent and 0.6 percent of GDP  from agricultural liberalization, while major net food importers in North  Africa and the Middle East could lose 0.3 percent of GDP. Other large  net food importing countries include South Korea, Russia, and  Venezuela.
Countries that do not receive trade preferences vs. those that do.
Certain developing countries are offered nonreciprocal trade  preferences into developed country markets. Under multilateral trade  liberalization, those preferences may be eroded as overall tariff rates are  reduced. As such, countries that do not receive trade preferences may  gain a competitive advantage over developing countries that currently  participate in preference programs. Potential economic costs associated  with erosion of preferential access are difficult to determine, however,  given the mixed empirical evidence on program benefits. The IMF notes  that erosion of sugar and banana preferences could be a concern.  Mauritius, for example, benefits substantially from preferential access  for its sugar exports, and Caribbean nations benefit from preferential  access for banana exports.
Traders vs. non-traders in tariff revenue dependent countries. For  countries that are dependent on tariff revenues to finance government  operations, the tax burden on importers who pay those tariffs may be  relatively high compared with the burden on consumers or domestic  industries that pay consumption or production taxes. As tariffs are  reduced through trade liberalization, tariff revenues may also be  reduced if there is not a sufficient increase in the quantity of imports in  response to lower tariff rates. In such cases, the burden of financing  government operations may shift away from traders and toward non- traders within an economy. For African least-developed countries that,  on average, rely on tariffs for 34 percent of government revenue, the  potential distributional consequences from lower trade taxes is likely to  be an important adjustment cost to trade liberalization.
section_title: Trade Negotiating Interests and Affiliations of Leading Merchandise Exporters
paragraphs: Exports by Sector (%)
Top 50 merchandise  exporters in 2003 (in rank  order of dollars exported)
X (Continued From Previous Page)
Exports by Sector (%)
Top 50 merchandise  exporters in 2003 (in rank  order of dollars exported)
C(m)
Non-WTO members are shaded.
X* indicates that the country participated in the group or the action as a member of the European  Union.
Other members of the Cairns Group are Bolivia, Colombia, Costa Rica, Guatemala, New Zealand,  Paraguay, and Uruguay.
Other members of the G-20 are Bolivia, Cuba, Egypt, Pakistan, Paraguay, Tanzania, and Zimbabwe.
Other members of the G-10 are Bulgaria, Iceland, Liechtenstein, and Mauritius.
Other members of the G-33 are Antigua and Barbuda, Barbados, Belize, Benin, Botswana, Congo,  Cote D'Ivoire, Cuba, Dominican Republic, Grenada, Guyana, Haiti, Honduras, Jamaica, Kenya,  Mauritius, Madagascar, Mongolia, Mozambique, Nicaragua, Pakistan, Panama, Peru, Senegal, St.  Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Sri Lanka, Suriname, Tanzania,Trinidad  and Tobago, Uganda, Zambia, and Zimbabwe.
C indicates that Turkey is a candidate for membership in the European Union.
section_title: GAO Contacts and Staff Acknowledgments
subsections: section_title: GAO Contacts
section_title: Staff Acknowledgments
paragraphs: In addition to the individuals named above, Michelle Munn, Kendall  Schaefer, Emilie Cassou, Ann Baker, Mark Keenan, Jose Martinez-Fabre,  Jonathan Rose, Jamie McDonald, and Ernie Jackson made key  contributions to this report.