Why is the Doha Round Failing? Lessons for the Future

Arvind Subramanian (PIIE) and Aaditya Mattoo (The World Bank)
May 19, 2011 12:30 PM

At least some of Doha's cheerleaders of yesterday—with the zeal of the newly disenchanted—are becoming today's executioners. In a new and widely discussed essay in Foreign Affairs, for example,  Susan Schwab, the former United States Trade Representative in the last Bush administration, argued that it was time to perform last rites (although she was not explicit on this and she even suggested the possibility of harvesting some gains from the round in a smaller agreement) on the Doha Round, and she blamed the larger emerging market countries—Brazil, China and India—for that failure.

But was she right in assigning blame? In a new Peterson Institute Policy Brief [pdf] ("The Elephant in the "Green Room": China and Doha," we (along with Francis Ng of the World Bank) highlight what we believe to be an arguably larger factor — and one that has become more salient over the course of the most recent trade negotiations.

In our view, China's global trade dominance has changed the dynamic of the Doha Round of multilateral trade negotiations, which has been languishing for nearly 10 years. Whereas Doha faced from the beginning a lack of enthusiasm from the private sector, today it is the fear of competition from a dominant China that inhibits progress. Progress now hinges critically on greater market opening, not primarily in services or agriculture, but in manufacturing.

In manufacturing, China is a large supplier to all the major markets. Indeed, China's presence has grown significantly over the course of the Doha Round negotiations. China looms especially large in the markets of major trading partners in sectors where protection is greatest. China's share in these sectors in Japan is more than 70 percent, in Korea more than 60 percent, in Brazil about 55 percent, in the United States, Canada, and the European Union about 50 percent each. Liberalization under the Doha agenda, especially in the politically charged, high-tariff sectors, would increasingly require other countries opening their markets to Chinese exports, and becoming increasingly dependent on China for their goods.

China has achieved trade dominance to a large extent through its successful growth strategy. But the problem is the strong political perception among China's trade partners that China's export success has been achieved, and continues to be sustained, in large part by an undervalued exchange rate. It seems unlikely and politically unrealistic to expect China's trading partners to open further their markets to China when China is perceived as de facto (via the undervalued exchange rate) imposing an import tariff and export subsidy not just in selected manufacturing sectors but across the board.

Unless Chinese currency policy changes significantly, and unless there can be credible checks on the use of such policies in the future, concern will remain in many countries, both industrial and emerging-market, about the increased competition from China that liberalization under Doha might unleash. This link between trade and exchange rates is not new.

In the European context, bilateral exchange rates were always seen as a matter of "common interest" right from the Treaty of Rome. The key argument was that without bilateral exchange rate stabilization, political support for deeper integration would not be forthcoming. The push toward a common currency received significant impetus after the major devaluations of sterling and the Italian lira in the early 1990s highlighted the need to avoid sharp changes in competitiveness. Hence the slogan marketed in the 1990s, "One market, One money."

There are some signs that China has slowly but surely embarked on a process of internationalizing its currency. Such a step would over time eliminate the undervaluation of the renminbi. But the horizon for that process is as yet unclear. It is uncertain whether it can happen over the next year or two.  But meanwhile, instead of blaming one another for the current impasse, countries need to confront Chinese trade dominance to revive Doha or look beyond it.