Carnegie study: Most developing countries would be net losers under Doha Round

A new study on the impact of global trade liberalization on real incomes under the current WTO Doha round has challenged conventional wisdom, showing the benefits for the world economy are lower than usually touted and some developing countries, rather than seeing benefits, come out losers in many scenarios.

As talks under the World Trade Organization are nearly stalled over disagreements on agriculture protections, trade officials frequently cite studies showing that opening markets for agricultural products would have an outsized benefit for developing countries, because they have a competitive advantage in farming.

But the study by the Carnegie Endowment for International Peace, a Washington think tank, suggests that in fact most of that farming is subsistence level and not only would not benefit, but would be harmed by liberalization.

The consistent losers under any scenario are those countries least able to afford it: Bangladesh, East Africa and Sub-Saharan Africa, according to Sandra Polaski, author of "Winners and Losers: Impact of the Doha Round on Developing Countries."

The study addresses the likely outcomes under various scenarios in the WTO talks aimed at reaching agreement on a new package of trade rules by the end of the year.

"We think that global stability, global economic growth, sustainable economic growth all require that a trade outcome provide at least some wins for all negotiating partners. Without that the trade system doesn't have legitimacy," Polaski warned Wednesday as she presented the new study.

And she rejected the suggestion by some advanced economies that the losers in a trade round can be compensated through side payments. The solution, she said, is to provide them with "real trade opportunities" by putting more focus on their "defensive interests," especially protecting their small-scale farmers.

Among the most provocative findings in the report is that the overall gains to the world economy are far more modest that usually reported, even under the unrealistic "full liberalization" scenario.

Under the so-called Hong Kong scenario which reflects the current negotiating goal of roughly equal liberalization for agriculture and manufactured goods, the world economy would see a gain in net income of about $43.4 billion with a GDP gain of 0.14%.

Under a more ambitious industrial liberalization in the central Doha scenario, the gain is $58.6 billion or 0.19%, well short of the $96 billion estimated in a widely-cited World Bank study or nearly $300 billion in the full liberalization scenario.

(Note: the Carnegie study does not factor in the impact of services trade liberalization.)

Polaski said a factor that has "not received nearly enough attention" is that the agriculture sectors in many developing nations "are dominated by small-scale, low productivity, subsistence farmers."

In many countries where well over half the population depends on farming, most are not competitive and would see a severe drop in real incomes is their markets were opened to foreign competition, she said.

"The impact of agricultural liberalization on the real world in most countries is that it hurts many, many more households and many, many more individuals than it helps," Polaski said.

A few large emerging markets with large-scale agriculture sectors -- such as Brazil and Argentina -- or those with a competitive advantage -- like Thailand's rice exports -- would benefit from opening of markets in industrial countries.

But most would suffer from agriculture liberalization alone, including China, India and Mexico.

Polaski attributed the negative impact to the fact many countries are net food importers and would see their bill increase as the removal of subsidies and supports that hold prices down, and those that have some exports would see erosion of benefits received under special preferential programs with developed economies.

Meanwhile, most of the benefit to advanced economies of opening of farm markets would come through their trade with other advanced economies, not to developing countries.

The negative impact of agriculture liberalization on developing countries would be overwhelmed for all but the poorest nations if it is accompanied by moderately ambitious industrial reforms, she said.

A loss of $63 million for the group as a whole becomes a gain of nearly $22 billion, and the gain for developed countries triples from $5.5 billion to $16.4 billion, the report shows.

This make sense since world agriculture trade amounts to $783 billion, a figure dwarfed by the $6.57 trillion trade in manufactured goods. China for example would gain over $10 billion in real income in the Hong Kong scenario, and India over $2 billion.

But the poorest continue to lose under all scenarios, which is why Polaski's report recommends that least developed nations be allowed to maintain protections on special products to protect their subsistence farmers, and that any liberalization be carefully sequenced with long phase-in times, and accompanied by development assistance.

Even the most extreme protections for products from these countries would result in only fractionally lower income gains for advanced and other developing nations, and the Group of 33 developing nations has called for protections on only 20%, she said.

U.S. Trade Representative Rob Portman responded to the report by saying it shows that the greater the trade liberalization achieved, the more "economic gains grow."

And Portman said the administration agrees on "the need to assist developing countries as they adjust to freer trade," but he does not address the seeming contradiction of the perception -- which he has often expressed -- that the primary interest of developing nations is in agriculture trade liberalization.

But he said in a statement the study underestimates potential benefits from a new trade pact, since it does not include services.