Prospects for the Doha Round -Major Challenges in the Multilateral Trading System and their Implications for Japan-

Professor I.M. DESTLER, School of Public Policy, University of Maryland, gave a presentation entitled "American Trade Politics and the Doha Round: Can the Twain Meet?"

The basic question addressed in this presentation is whether a Doha Round agreement can be successfully concluded given the current situation in American trade politics. First, in connection with the Doha Round, it is significant that Congress has just extended the president's trade promotion authority (TPA) by two years, from July 1, 2005 to 2007. This is intended to facilitate the conclusion of trade agreements, including the Doha Round. This extension involved no House or Senate floor vote and was done behind closed doors. While the extension itself is good news, it is important to note that, unlike in past rounds, this extension involved no debate or scrutiny. In any case, the president's authority has been extended by two years. Because Congress must be consulted in advance on the results of the negotiations, the de facto deadline is early March 2007.

Since the Kennedy Round, the U.S. deadline, which is determined by U.S. domestic law, has effectively functioned as the global deadline for trade negotiations. This brings up the question: Is early 2007 a realistic deadline for the Doha Round? If not, new U.S. legislation would be needed to further extend TPA. Assuming the 2007 deadline, what are the prospects that American trade politics will be conducive to the success of the Doha Round?

Since the 1980s, three big changes have occurred in American trade politics. First, traditional protectionism is at its weakest since the industrialization of the United States. Second, social issues such as labor and environmental standards have assumed a more prominent position in trade policy than in the past. Finally, while not caused by trade policy differences as such, partisan rancor has deepened in Congress.

Among these three points, I will begin with the second because social issues such as labor rights and the environment are the least important for the Doha Round. For the following reasons, labor and environmental problems will not pose serious problems or obstacles to U.S. participation in a Doha Round Agreement. First, while Republicans and Democrats have argued about labor standards in the debate on the Central American Free Trade Agreement (CAFTA), labor standards are not on the Doha agenda. Second, the environmental issues that remain after Cancun are very restricted in scope. Finally, Democrats have pressed these issues in the arena of U.S. international politics mainly in bilateral free trade agreements (FTAs).

It may be difficult to accept that U.S. protectionism is on the decline in light of the CAFTA sugar debate. However, a comparison of the 1980s and post-1995, when the U.S. was registering huge trade deficits, reveals the following. In the former period, new protectionist measures were introduced or demanded for a wide range of products including textiles, steel, autos, shoes, machine tools and semiconductors. On the other hand, only one protectionist measure involving steel was implemented during the past 10 years. Why has U.S. protectionism declined? The answer can be found in the globalization of industry. During the 30 years between 1970 and 2000, the ratio of merchandise trade to U.S. GDP has more than tripled from 0.09% to 0.29%. Manufacturers have become more globalized as their dependence on trade has increased; in turn, globalization has promoted greater trade dependence. The U.S. textile industry is particularly interesting in this respect. The U.S. textile industry has traditionally been the most protectionist, but most of the industry now supports CAFTA.

If protectionism, the principal obstacle to free trade, is declining, why have trade politics proved difficult? The main reasons are as follows: First, stubborn, protected redoubts remain in such as the sugar and cotton industries. Second, many U.S. industries are already satisfied with the existing trade environment, while other industries are eying the moves of Brazil, India and other emerging markets. Third, the debate on social issues has eroded support for trade, particularly among congressional Democrats. Finally, the most important factor contributing to difficult trade politics is the historically unprecedented level of partisan rancor as outlined below.

A recent poll on CAFTA showed no significant statistical difference between Republicans and Democrats supporting it. However, a very clear split is seen in the voting patterns of Republican and Democratic members of Congress. This reflects a broader transformation in the political structure characterized by a reasonable public and polarized elites.

The ideological distribution of the parties in the U.S. House of Representatives in 1969-70 shows a sizeable middle and a political spectrum that enabled negotiation and communication between ideologies. The ideological distribution 30 years later in 1999-2000 reveals that the middle has disappeared and that no basic overlap in partisan ideologies exists. This substantive partisan divide is not so stark on matters related to trade. However, the ideological split does imply that policy decisions will tend to be made within parties rather than by congressional committees.

The voting on withdrawal from the WTO indicates that the partisan split on trade is not extreme. However, as seen in the TPA 2001 voting process and the 2005 vote on CAFTA, the process has been thoroughly polarized in the House Ways and Means Committee. If CAFTA passes, it is likely to do so by a very slim margin, as in the case of TPA in 2001.

The question is whether the above pattern can be broken in the Doha Round. Three factors point to this possibility. First, the CAFTA outcome may force a return to a more bipartisan approach. Second, historically it has been easier for Congress to accept global deals through GATT/WTO negotiations than FTAs with developing countries. Third, Robert Portman, the newly appointed United States trade representative, enjoys bipartisan support and also has a strong personal relationship with President Bush.

From a long-term perspective, the best approach that U.S. trade policy can adopt is what I call the "new social compact," which combines full liberalization with generous programs to help the losers from globalization. According to a study conducted by the Institute for International Economics (IIE), past trade liberalization has generated $1 trillion in annual gains for the U.S. economy. This study concludes that removal of remaining the barriers would enhance the U.S. income by an additional $500 billion annually. At the same time, other studies show that liberalization harms many people and that the gains from liberalization are unevenly distributed. Large-scale programs should be created to assist displaced workers so that more people can adapt to global economic competition.

It is impossible to achieve a complete solution in the Doha Round for reasons of cost and due to the ongoing partisan rancor. Nevertheless, the most ambitious outcome possible should be sought. That is, trade should be expanded in a way that helps developing countries while also contributing to the real interests of the United States, and steps toward a "new social compact" should be taken. This is how a "win-win solution" can be achieved in the Doha Round.

ARAKI Ichiro, Professor, International Graduate School of Social Sciences, Yokohama National University, responded to Professor Destler's presentation as follows.

Professor Destler referred to the decline of traditional protectionism. I would like to consider whether the same types of changes that have occurred in U.S. trade policy have also occurred in Japan. That is, have such social issues as labor and environmental standards gained greater prominence, and has partisan rancor intensified in the Diet?

First, has traditional protectionism become weaker in Japan? Such protectionism in Japan has traditionally centered on agriculture. What we see in Japanese policy ahead of the Doha Round and the imposition of safeguard measures in 2001 is a strengthening of agricultural protectionism.

Second, regarding social issues, labor standards and environmental standards are rarely considered in the context of trade.

Third, regarding partisan rancor, there is in fact evidence of greater partisan division in Japan, and it may appear that this is affecting policy processes. However, it does not seem that partisan rancor is actually affecting Japan's trade policies.

From this I conclude that, unlike in United States, there has been no significant change in Japanese trade policy over the past 10 years.

Next, UCHIYAMA Yu, Associate Professor, Graduate School of Arts and Sciences, The University of Tokyo, gave the following comments.

Regarding the split between the Republican and Democratic parties, the "median voter theory" suggests that political parties adopt policies that reflect the preferences of voters, and that therefore the policies of the two parties will tend to converge. How then did the recent polarization in U.S. political parties occur?

Regarding the "new social compact," what conditions must be in place for a consensus to develop between the two sides? In my opinion, political leaders have a decisive role to play in this process. What is your view on this matter? What are the other factors that may affect the compact's chances of success?

Such programs will inevitably contain inefficiencies because of rent-seeking by beneficiaries. What do you think is needed to avoid wasteful use of public funds?

Next, MATSUMOTO Ken, Executive Advisor, Fair Trade Commission / President, KM International Associates, Inc., commented as follows.

Professor Destler argues that American protectionism has become weaker. However, antidumping laws constitute the most effective instrument of U.S. protectionism. Judging from how these laws are being implemented and the U.S. attitude and position on negotiations on antidumping rules in the Doha Round, U.S. protectionism does not appear to be declining.

Japan should act urgently to create a system to deal with unfair trade practice complaints. Under such a system, Japanese companies that are harmed by unfair trade practices of foreign countries could petition the Japanese government, which would then undertake an investigation. If necessary, the government would then use the dispute settlement mechanism under the WTO, FTAs or other international agreements.

From the perspective of further strengthening Japan-U.S. economic relations, I think the time has come to give serious thought to starting FTA negotiations between Japan and the United States. What is your view on this matter?

Professor Destler responded to the above comments as follows.

I basically do not disagree with the comments made by Professor Araki. However, Professor Araki presents Japan's protectionism as a 100% agricultural problem. It seems to me that there is in fact a trend toward a weakening of protectionism in Japan's non-agricultural sectors.

Professor Uchiyama asked what conditions must be met for a "new social compact" to be realized. In an environment of growing globalization, I believe it is logical for the United States to pursue the middle road. This requires an awareness of the values of leadership and reciprocity. In other words, it is very important for both sides to realize that in order to obtain what they each want they must be prepared to give what the other side wants. Professor Uchiyama also asked how inefficiency in government programs can be avoided. First of all, I believe the process of retraining is quite inefficient. It would be preferable to have wage insurance programs to encourage workers to take new jobs at lower wages. I have similar doubts about promoting corporate retraining. Another source of inefficiency that should be eliminated is the requirement in trade adjustment assistance (TAA) programs to prove job loss due to trade. Finally, I will respond to the question posed by Professor Uchiyama concerning the "median voter theory." In this connection, two changes have occurred in U.S. politics since the 1970s. First, ideological homogeneity within the two parties has advanced. Second, as a result of a decision by the Supreme Court, congressional districts must be redrawn every 10 years. Redistricting is used as an opportunity to create solidly Republican and solidly Democratic districts. Consequently, the focus of elections has shifted from inter-party competition to intra-party primaries. People who vote in the primaries are the most conservative and most liberal voters. Thus, conservative Republicans and liberal Democrats have become the median voters.

The comment made by Mr. Matsumoto concerning antidumping touches on the Achilles heel of my presentation. It is true that there has been no change in U.S. antidumping policies since the 1980s. Since most antidumping duties have been applied to such declining industries as steel, they have not seriously restricted trade. However, it remains a political mystery why antidumping laws enjoy such political support. If concessions can be made in the area of antidumping in the Doha Round, I believe this would generate important gains. Mr. Matsumoto asked about a Japan-U.S. FTA. I am very strongly in favor of a Japan-U.S. FTA that would include agriculture. In this connection, it will be interesting to observe the impact of the start of negotiations for a U.S.-South Korea FTA. In the past, the American side was not very interested in pursuing a Japan-U.S. trade agreement because of Japan's hidden trade barriers. But now it seems that the issue of agriculture for Japan poses a bigger problem.

The following questions were then taken from the floor.

I believe countercyclical payments under the U.S. Farm Security and Rural Investment Act constitute the most serious remaining problem in negotiations on agricultural goods. Because the Farm Act remains effective through 2007, it will be difficult to predict the outcome of the next Farm Bill as the current "fast track" authority nears its end. Because Congress will be working on the next Farm Bill at this juncture, I feel it will be impossible for the U.S. government to reach an agreement on this issue. What is your view on this matter?

Outsourcing has become an important issue recently. Because outsourcing ultimately affects white-collar workers rather than blue-collar workers, I think that the character of the problems that will arise will differ from those of traditional protectionism. Can the problems of outsourcing be dealt with in the same manner as traditional protectionism? If there is a difference, how should the problems of outsourcing be dealt with?

Developing countries are demanding special measures concerning the production of staple foods. I believe this to be a justified demand and a response to the negative legacy of colonialism, which sought to replace the production of staple foods with cash crops. Is the American agricultural lobby prepared to respond to this type of demand?

Professor Destler stated that traditional protectionism is declining in the United States. I wonder whether this argument is really justified when the trade deficit with China is growing and so many industrial sectors are burdened with extremely difficult problems. Regarding the win-win solution, consider Africa and some other regions. I believe these regions have already exhausted all their available concessions to the IMF and World Bank during the 1980s. Given this situation, how is it possible to achieve such a solution? I believe a true win-win solution would require the United States to reduce its farm subsidies and to use these funds to provide the developing countries with real development assistance. What is your view on this?

Professor Destler responded to the above questions as follows.

First, I will address the questions concerning agriculture. There is no question that a successful conclusion to the Doha Round requires that the Farm Bill of 2006 or 2007 move toward reducing subsidies and government support for agriculture. Whether this will materialize or not partly depends on what the U.S. government gets in return in the Doha Round. Subsidies were increased in the 2002 Farm Bill because it coincided with voting on the president's Trade Promotion Authority and Senate elections. I hope the next Farm Bill will be legislated under more favorable political conditions. An interesting approach may be available to realize this. The question is whether part of the Farm Bill can be written into the trade agreement bill, which is subject to the fast track authority. From a legal perspective, this is not impossible. Whether it is politically possible again depends on what the United States can gain in return.

Regarding outsourcing, one of the problems in the anti-outsourcing debate is that it is extremely difficult to devise concrete methods to restrict outsourcing. On the other hand, there are obvious limits to the process. For instance, outsourcing aimed at cutting medical expenses has been held back by concerns related to medical malpractice insurance.

There was a comment that developing countries have already exhausted all possible concessions available under the IMF and the World Bank. It may be true that the IMF obtained unilateral trade liberalization from the developing countries, and that some developing countries opted for policies of trade liberalization during the 1980s and 1990s. However, the fact is that trade barriers in developing countries are still higher than those of developed countries. Moreover, these barriers are particularly effective in obstructing trade among developing countries. For these reasons, I believe the developing countries do have concessions to offer in trade negotiations that will benefit themselves.

The question concerning China is obviously important. First, regarding the foreign exchange rate, there is evidence that the renminbi is undervalued, and criticisms of this China's foreign exchange policy have a certain justification. In recent years, a storm has been brewing in U.S. politics on the question of China, and it is true that this storm contains a certain amount of protectionism and nationalism. Regarding trade in textiles, however, I do not believe that there is evidence of new protectionism for the following reasons. There has been no serious effort to resurrect the Multifiber Arrangement (MFA) since its expiration. An agreement actually exists with China allowing partial restriction of imports, and most of the U.S. measures taken are in compliance with this agreement.