Bernard Hoekman* on strengthening the global trade architecture for economic development This week trade ministers are meeting in Hong Kong to assess the progress made in implementing the mandate they gave to their negotiators in Doha, Qatar, at the end of 2001. This mandate called for the pursuit of multilateral negotiations to significantly reduce the use of trade- distorting policies and to bolster the development relevance of the World Trade Organisation (WTO). The round has been dubbed the Doha Development Agenda, and the challenge confronting WTO members is to agree to a deal that delivers on development. Averting an impasse is important. An ambitious outcome that substantially liberalises access to markets will generate significant global gains. By enhancing trade opportunities for competitive suppliers and reducing prices for consumers everywhere, it can help to achieve the Millennium Development Goal of cutting global poverty in half by 2015. What is needed is well understood by participants: significant reductions in trade- distorting policies in OECD countries, especially agriculture, abolition of tariff "peaks" -- very high tariffs on "sensitive" products of interest to developing countries in agriculture and manufactures such as clothing, and reducing barriers to trade and investment in services -- including outsourcing and the temporary movement of people supplying services to firms wherever they are based. In the Doha deliberations, defensive vested interests that seek to maintain the status quo have dominated the negotiating positions of all WTO members, rich and poor. As a result, despite three years of multilateral negotiations, development objectives have yet to be seriously addressed. A recent international research project identified three areas for action that could help deliver an ambitious deal on market access liberalisation -- which is the most direct and powerful way the WTO can support economic development prospects. - Recognise that there will be adjustment costs and losers. The benefits of global reform will be distributed unequally across countries and generate some losers within all countries. Countries -- rich and poor -- need to put in place mechanisms to assist those groups who will lose. - Support the poorest countries to put in place measures to enhance productivity. A significant increase in "aid for trade"-- that is, development assistance dedicated to increasing the recipient country's capacity to trade -- would help to ensure that more countries benefit from trade opportunities. - Adopt an approach to negotiations that helps developing countries benefit from implementation of WTO rules. This means shifting away from the current approach of defining "special and differential treatment" for developing countries purely in terms of exceptions from WTO rules. This has arguably been ineffective in promoting development. Adjustment costs in developing countries are an inevitable outcome of an ambitious Doha round. The more ambitious their reforms, the greater the medium- term benefits for incomes, but the greater, too, are the short-term adjustment costs, including in the area of fiscal policy, in response to reduced trade tax revenues. Some developing countries may stand to lose from trade reforms that will enhance global welfare -- in particular from deep non-discriminatory trade liberalisation that will erode the value of the trade preferences they currently receive, or increase the import prices they pay for some staples. For poor countries that have not diversified their economies and depend on preferential access to major markets, there may be little immediate gain, especially those that do not undertake own reforms in trade and domestic economic adjustments to improve their competitiveness. Aid for trade is an additional instrument. An ambitious freeing of market access will benefit developing countries as a group. However, some countries -- especially the poorest -- may not gain much even from an ambitious round, given the discouraging environments they provide for investment and business. Many are ill equipped to take full advantage of trade opportunities. Improved market access without the ability to supply export markets competitively is not much use. Similarly, to gain from liberalising their own trade policies developing countries need an environment that allows mobility of labour and capital and facilitates investment in new sectors of activity -- requiring, among other factors, an efficient financial system and good transport/logistics services. Countries that depend heavily on tariff revenues for fiscal resources will need to reform their tax systems. Inevitably most poor countries will need to make complementary reforms prior to -- and in conjunction with -- trade reforms. This suggests that to carry out the promise of the so-called "development round", action is needed to significantly expand dedicated grant-based funding, through an "aid-for-trade" integration mechanism, to address adjustment costs, trade capacity constraints and improve competitiveness on a country-by-country basis. Non-trade instruments, not just bilateral development assistance but also private foreign direct investment, can be much more effective in attaining the goal of development of exports than trade policies such as selective preferential access to markets. Many of the poorest countries of today have not managed to diversify and expand exports even with the preferences they receive, because they lack the necessary supply capacity or are not competitive. Aid for trade can never substitute for progress on market access or unilateral domestic reform. But it can greatly increase the benefits of trade opportunities for many poor countries by supporting their own reforms and can help to deliver the global public good of substantially freer trade. Trade is a good use of some of the additional aid that OECD countries have agreed to provide at recent international meetings -- in effect redistributing an increment of the gains from liberalisation to help developing countries bolster their trade capacity. The modalities of how additional funding should be administered, allocated, and monitored will need to be resolved, but the basic principles that should be satisfied by an aid-for-trade integration mechanism are simple: support should take the form of grants, be credible and predictable, be based on a process of identification of trade capacity needs that is truly country-driven and owned, and have its processes and outcomes independently monitored. One of the important questions facing policy-makers in the Doha round concerns the circumstances, if any, under which developing countries should be allowed to use trade policies to pursue development (for example by using import barriers to protect domestic industries). Providing exemptions for the use of trade policies by developing countries -- the traditional WTO approach and the focus of much of the Doha negotiations on special and differential treatment -- is not the best way to help achieve development objectives. Instead of focussing exclusively on exemptions to allow the use of trade policy instruments, a more active approach to help developing countries to attain their trade-related objectives is desirable. This would put the focus more strongly on a country's identification and pursuit of a national trade agenda and priorities and link this to the proposed expanded aid- for-trade program. The objective would be to reduce governments' perceived need to use costly and often ineffective trade policy tools, to place the implementation of WTO disciplines in a national context and to monitor the effects of trade and related policies. Different complementary options can be considered to operationalise this idea. The most limited is to link implementation of negotiated WTO disciplines to assistance having been given to help do so. More ambitious is to establish a multilateral mechanism to help developing countries to pursue national objectives through instruments that do not distort trade. Agreement to consider options that would move in this direction is one way in which the WTO can help achieve the goal of greater policy coherence for development. A commitment by all WTO members -- North and South -- to undertake far- reaching multilateral liberalisation of market access is the most direct way the WTO can promote development. Achieving an ambitious outcome from the Doha round can be facilitated through a complementary credible commitment to use alternative, non-trade-distorting instruments to assist groups who will lose from trade policy reforms that enhance global welfare. Improved market access is necessary, but by no means sufficient, to bolster growth prospects in all developing countries. * The writer is senior adviser, Development Research Group, at the World Bank's.
