Look Further than Trade to Save Doha

It is now clear that the Doha Round of multilateral trade negotiations is in deep trouble. The overriding issue for the ministerial conference in Hong Kong next week is whether it can keep the talks alive.

In fact, Doha could become the first big multilateral trade negotiation to fail since the 1930s. Its collapse would have severe consequences for the world economy. It would forfeit potential gains of several hundred billion dollars a year in higher global incomes, especially in poorer countries. Since trade policy either moves toward greater liberalization or slides into increased protectionism, a collapse would produce negative economic (and foreign policy) effects instead. Part of this backsliding would inevitably include an erosion of the rules-based trading system and leadership of the World Trade Organization (WTO). There would be even greater proliferation of regional and bilateral trade deals, further undermining the multilateral regime. Hence it is critically important to save Doha.

Unfortunately, the chief barriers to success lie outside the Doha negotiations: the widespread backlash against globalization and the huge trade imbalances that now permeate the world economy. The most fundamental problem is the strong reaction against globalization in the United States and the European Union, still the two most important participants in Doha. The United States gains about $1,000 billion per year from globalization but public opinion remains evenly divided over future liberalization. Hence every congressional vote on the matter, even over minor issues such as the recent free trade agreement with Central America, is susceptible to defeat. Domestic politics in the United States will reliably support new trade agreements only when the nation's education system can equip American workers to take advantage of globalization rather than feel victimized by it-a long-term proposition-and when its social safety nets are strengthened to cushion the disruptive adjustments required by expanding international commerce.

The European backlash is equally daunting. Recent voter behavior reveals deep dissatisfaction with current economic prospects, much of which is blamed on globalization, but also unwillingness to adopt policy changes to ameliorate those conditions. The only remedy is to bring more competitive pressures to bear on the European economies, including through increased globalization but also by implementing the structural reforms of the Lisbon Agenda.

These deep-seated sources of resistance to liberalization a la Doha are intensified  in the United States by its huge current account deficit, which will exceed $800 billion for 2005, and the overvaluation of the dollar by at least 25 percent. The history of US trade policy reveals clearly that dollar overvaluation and the resulting external deficits, rather than unemployment or any other domestic indicator, are the most accurate predictors of trade protectionism because they alter the domestic politics of trade policy, adding more industries to the antitrade coalition and weakening the influence of protrade forces. The current onslaught against China already includes import restrictions in six sectors, the congressional rejection of Chinese oil group CNOOC's takeover bid for Unocal of the United States, tough legislation passed by the House of Representatives and the threat of early Senate action on the across-the-board Schumer import surcharge despite the robust growth and nearly full employment of the US economy.

The euro is also overvalued against the renminbi and other Asian currencies, exacerbating European unwillingness to liberalize. This monetary threat to Doha will rise further if the Asians, led by China, continue to block appreciation of their currencies. This is because the inevitable next round of dollar decline will then take place largely against the euro and intensify its own misalignment against Asia.

The revival of the Doha Round will therefore require new policy steps, by both the industrial democracies and key developing countries, that go well beyond the usual WTO agenda. The United States must expand its safety net and worker retraining programs, to counter legitimate criticisms of globalization, and institute a credible program to eliminate its budget deficit to cut the trade imbalance. Europe, at both the national and EU levels, must implement the central structural reforms of the Lisbon Agenda to accelerate growth and reduce unemployment. China, Japan, and other Asian countries will have to permit substantial appreciation of their currencies and offset the adverse impact on overall growth by boosting domestic demand.

The Group of Seven and the Group of 20-which bring together finance ministers from rich industrial nations and emerging market economies-have expressed strong support for a successful conclusion of Doha. The leaders of these countries must now adopt broad policy changes, such as those suggested here, to provide an environment in which trade negotiators will be able to bring the talks to fruition. They will have to make 2006 the "year of Doha" if the world is to avoid severe disruption of the trading system and the consequent risks to the world economy.