Patrick Messerlin

About Jan Tumlir: The late Jan Tumlir was a leading scholar of trade policy, with a distinctive constitutional, classical-liberal defence of free trade drawn from his reading of law and economics. A Czech by origin, Jan Tumlir emigrated to the West in the 1940s and in 1967 became the Director of Economic Research and Analysis at the General Agreement on Tariffs and Trade (GATT). He supervised the economic research of the

EXECUTIVE SUMMARY

•TherecentshiftinEuropeantradepolicytonegotiatebilateralagreementswithnoless than24countriesistakingEuropeintodangerouswaters.Incontrasttobilateralsenvisa-gedbyChile,Japan,Korea,SingaporeandtheU.S.,thebilateralsconsideredbytheEC arecharacterizedbyhightariffsandnon-tariffbarriersingoods,andbyrestrictiveregulationsinservicesandinvestment.

•MultilateralliberalizationoftradeshouldbethecentreofEuropeantradestrategy.The ECtradenegotiatorsinindustrialgoods(NAMA)shouldaim(orshouldhaveaimed)at achievingwhattheEuropeanbusinesscommunityisaskingfor-namelynosingleindu-strialtariffabove15percent.Suchatargetmakesgoodeconomicsense.Itwouldelimi-natethetariffpeaksthatconstitutethemainobstaclefacedbytheEuropeanexporters, andthatgeneratemostoftheprotectioncostsimposedontheconsumersintherestof theworld.Furthermore,itwouldincreasethecertaintyofaccesstoemergingmarkets forEuropeanexporters,andshouldmakeiteasiertonegotiateexceptionsassimpleand aspredictableaspossible.

•Appliedtoninemajoremergingcountries,thepapergivesaconcretesenseofthechanges in protection associated with this 15 percent target and to simple and predictable exceptions. The emerging countries would then exhibit average bound tariffs ranging from6.7to14.7percent,withamaximumboundtariffof50percent(butonlyatiny proportionoftheboundtariffswouldbehigherthan30percent).Effectivecutsinaverage appliedtariffsarelimitedtothreeemergingcountries,buttheaveragetariffwaterwould beeliminatedorsharplyreduced.

•TheECpositionintheWTOagriculturalnegotiationsshouldberebalancedbyamore extensivecutinthehightariffsandasmallercutofthelowtariffs.Thiswoulddeliver more economic gains to the European consumers than the current EC proposal, and it wouldleveragepoliticalbeneitssinceavastmajorityofECfarmandfoodproducers(all thoseprotectedbysmallandmoderatetariffs)wouldindtherebalancingoftheECtariff proposalfavorabletotheirinterests,comparedtothecurrentECoffer.

•Theresultsofsucharebalancedpositionwouldmeetthetwokeycriteriasetforthe DohaRound-namely,"less than full reciprocity in reduction commitments",and"comparably high level of ambition in market access for Agriculture and NAMA".

•TheECshouldpositionitselfasaWTOMemberwithalongtermviewoftheworld traderegime.Assumingresponsibilityforthefuturerelevanceoftheworldtradingsystem isasignofleadership.Europeimplicitlyassumesthatfutureroundsoftradenegotiations willfollowafterasuccessfulDohaRound. Thosefutureroundswilladdresstheuninished businessleftby(perhaps)amoremodestbuta"clean"Dohaoutcomemuchmoreeasily thaniftheyinheritaDohapackagemoreambitiousforsomeproducts,butriddledwith moredistortiveexceptionsonmanyproducts.Inshort,theECslongtermstrategyshould betopromoteaseriesofWTORoundsofliberalizationasaslowbutnonethelessperennial"peelingoftheprotectionistonion".

Introduction

The European Community (EC)isplayingakeyrole intradenegotiations.But,thisisduemuchmoretoits meresizeinthecurrentworldeconomythanbecause ofaleadershipbasedoninnovativeinitiatives.TheDoha Round negotiations at theWorldTrade Organization (WTO)haverepeatedlywitnessedanECoutoftouch withtherestoftheworld-fromdraggingitsfeetinmarket access (inagriculture)totablingschemes(suchas competition policy) much too complex for most of the very heterogeneousWTO membership. And the ECsafeguardsorambiguousattitudevis-à-visdevelopingcountriesmaketheself-proclaimed"multilateralist" credentialsoftheEClookmorelikeawayofbickering withtheUSthananaccuratedescriptionoftheECposition.

The rapid emergence ofpotentiallymuchlargerecon-omiesinAsiaimpliesthattheadvantagethattheECgets fromitsrelativeeconomicsizewillfadeaway,possibly atarapidpace.TheECtradepolicyisthusatthecrossroads.Shoulditcontinueonthecurrenttrend,withthe riskofbecominganincreasingburdenintheworldtrade forum?Orshoulditrecognizeitslong-terminterestsas those of a"diminishing giant", and launch appropriate innovativeinitiatives?

Thereisthusanurgentneedforassessingthecur-rentECtradepolicyingoods.Section1startsbyanalys-ingtherecentCommission'sproposalonbilateraltrade agreements.Itshowsthatthebilateraltradeagreements contemplatedbytheCommissionarecharacterizedby trade preferences so substantial that they could easily createseveretradedistortionscostlyforbothEuropean consumersandproducers.Bycontrast,thealternative option-asuccessfulDohaRound-wouldprovidesubstan-tialbeneitstotheECfortworeasons.TheECisoneof the world's worst offenders in agricultural protection andahighlyprotectedservicesprovider(asmostWTO Members).Asaregionwith(amuch)lowergrowththan largepartsoftherestoftheworld,theEChasacrucial interesttoremaininclosecontactwiththefastestgrowingeconomies.

TherestofthepaperassessestheECpolicyinthe DohaRoundbypresentingalternativesdetailedenough to give a concrete sense of the issues at stake and of theoutcomeswithinreach.Ifthecurrentnegotiations fail-orifthereisalastminutechangeofopinion-within thenextfewweeks,thesealternativescouldofferfresh options.Ifthecurrentnegotiationssucceed,theyoffer abenchmarkforassessingtheoutcomeofthecurrent ECpolicy.

The crux of everyRoundisthetrade-offbetweenincreasedmarketaccessandpoliticallynecessaryexceptions(convenientlydisguisedas"lexibilities"intheDoha jargon).Intheircurrenthastetodeliver,theDohanegotiatorsseemtoheadforapackagewithincreasedmarketaccessfor"easy"products(thosewithinitiallysmall ormoderatetariffs)combinedwithahostofexceptions for"dificult"products(thosewithhightariffs).Sucha mixmayincreasethechancesofgettingadeal.But,itis almostcertaintodeliveradisappointingeconomicoutcomebecauseconsumers'welfaregainsaremostlygeneratedbycutsinhightariffs,andbecauseexportersind littlecomfortifonlyforeignlowtariffsaredismantled, whiletheremaininghightariffsarefrozenuntilthenext Round.Ultimatly,aneconomicallymediocreoutcome isdoomedtohaveaheavypoliticalprice,andtogivea newblowtothe WTOreputation.

Even in such a dificult context, the paper argues thattheECcould-andshould-(have)table(d)betterproposals.Inanutshell,abolderECapproachwouldhave muchbeneitedfromfollowingthewisesuggestionof theEuropeanbusinesscommunityinindustry(Section 3) and from tapping a potential degree of freedom in agriculture(Section4).Thedetailedcalculationsmade inordertoprovideaconcretesenseofthealternatives suggest (much) higher welfare gains and-an attractive result-morepoliticalsupportthanthesupporttobeex-pectedforthecurrentECproposals.Lastbutnotleast, thesealternativesmeetthetwokeyconstraintsthatthe Dohanegotiatorshaveimposedonthemselves-the"less than full reciprocity"andthe"comparably high level of ambition in market access for Agriculture and [Industry]"conditions(section2).

The 2006 Commisson's Proposal: Triggering a World Race to Bilaterals?

Many observers argue that theWTO is so severely underminedbyalackofleadership(fromtheUSaswell asfromtheEC)that"regionaltradeagreements"arethe onlyremainingoption. TheCommission'sworkingdocument,releasedinNovember2006,echoesthisview. ThereisthusaseriousneedforassessingtheCommission'sprogramme.Indeed,itisworrisomethatthere hasbeennoimpactassessmentstudyofsuchadeepand vastchangeoftradepolicy,quitecontrarytothe2001 Gothenburg Council decision requiring the Commissiontomakeanimpactassessmentstudyofitsproposals. Before providing a preliminary assessment of the Commission's document, the"rise of regionalism" has tobeputinanappropriateperspective.

The "Rise of Regionalism": Perceptions vs R ealities 3 Supporters of an increasingrecoursetopreferential tradeagreements(PTAs)seetheirviewsjustiiedbythe increasingnumberofPTAsnotiiedtotheWTO-211as ofSeptember2006. Thisigurestronglyexaggeratesand distortsthetrueimportanceoftheriseofregionalism.

Firstly, the PTAs notiied during theWTO years (post-1995) are overwhelmingly bilateral trade agreements (hereafter"bilaterals").This is in sharp contrast withthosenotiiedduringtheGATTyears(pre-1995), whicharealmostequallysplitbetweenbilateralsand"regional" (more than two signatories) trade agreements. Thisstructuralchangeintroducesasystematicoverestimateofthepost-1995numberofthePTAs,compared to its pre-1995 level. 4 Beyond the mere counting of deals,italsosuggestsasmallereconomicimpactofthe post-1995 deals, since bilaterals are likely to be more severelyconstrainedbyrestrictiverulesoforiginthan regionaltradeagreements. 5 Secondly,morethan30percentofthecurrentPTAs notiied to theWTO consist of intra-European trade agreements(deinedasdealsbetweencountrieslocated on the European continent, excluding Belarus, Rus-siaandUkraine).Thislargenumberofintra-European dealsmirrorstheineficientway(viewedinaninstitutionalperspective)EuropeansarebuildingtheirSingle Market.AnytradedealnegotiatedbytheECgenerates almostmechanically"clone"dealsbytheEuropeancountries linked to the EC by trade agreements-the EFTA countriesandTurkey(andBulgariaandRomaniabefore theiraccessionin2007).Asaresult,everytimetheEC tradepolicychanges,avastnumberofbilateralsdisappearoremerge.Theformerwasthecasein2004when ten Central European countries joined the EC (more thanadozenbilateralsdisappearedonthespot)andit willhappenin2007whenthe24bilateralsbetweenthe eightBalkancountrieswhicharenotyetECMembers willbereplacedbytheuniqueagreementsignedinDecember 2006. Symmetrically, the number of Europerelated bilaterals will increase again if the EC decides toimplementtheabove-mentionedpolicyofbilaterals tabledbytheCommission.

Thirdly, the increase in the number of PTAs noti-iedtotheWTOrelectstosomeextenttheincreaseof theWTOmembershipitself,asbestillustratedbythe substantialnumberofbilateralsbetweenformerSoviet Union republics, which have recently acceded to the WTO.Delatingthe(increasing)numberofPTAsbythe (increasing)numberof WTOMemberssuggestsamuch lowernumberofPTAsin2006-about50,ratherthanthe 211usuallymentioned.

Fourthly,thebreakdownofthepost-1995nonintra-Europeanbilateralspresentslargecountriesasfollowersnotasleaders,insharpcontrasttogeneralbelief.There is no bilateral between the top 10 economies (the 10 largest GDPs under PPP-based exchange rates, taking into account individual EC Member states).There are only three bilaterals (on goods and services) between a top-10 and a top-20 economy (US-Australia, Japan-Mexicoand Thailand-Australia).Remarkably,theroleof theUSandtheECremainsrelativelylimited.TheECis signatoryof16percentofthepost-1995non-European bilaterals(12percentfortheUS).Thislastobservation deserves a remark.The language of the Commission's proposalsuggeststhattheECislaggingbehindinterms of bilaterals. But in fact the EC remains the most im-portantsourceofbilateralsamongthelargeeconomies, evenifoneignorestheintra-Europeandeals. 6 Lastly,theassertionthatbilateralsarequicklycon-cludedisnotsubstantiatedintheECcase.Thenegotiating time needed by the EC for concluding bilaterals withnon-Europeancountrieshasrangedfrom2years with Chile to 5 years with Mexico. Negotiations with theACPandMercosurcountrieshavealreadylasted4 and11yearsrespectively,withoutdeliveringasuccessfuloutcome.Thecomparisonisfartobeasunfavorable totheWTOnegotiationsasmanybelieve.

Assessing the 2006 Commission's initiative

The standard economic analysisofbilateralsaimsto estimate their expected net economic gains. 7 This approach has two serious limits. Firstly, it ignores what wouldhappenintherestoftheworldasaconsequence ofthebilateralexamined.Forinstance,ignoringthatthe preferencesgrantedbyabilateraltoitssignatoriesmay be eroded by new bilaterals, is a severe shortcoming, inparticularifthereisageneralizedrushtobilaterals. Secondly,thestandardeconomicanalysishasnotorious dificultiestotakeintoaccounttheintrinsiclimitsofany bilateral,inparticularthecruciallimitsimposedtoeffectivemarketaccessbythe"rulesoforigin"adoptedby thesignatories(theserulesdeinetheappropriatetariffs tobeenforcedonimports). A much more interestingapproachseemsthustobeto getasenseofwhetherthecurrentandenvisagedbilateralsarelookingfor"amarketopening"orfor"market preferences".Theformercaseisvalidforbilateralsbetweencountriesapplyinglowtariffsongoodsimported from countries other than the signatories of the deal (the"rest of the world") and enforcing domestic procompetitive regulations on services and investment. Suchbilateralsarelikelytohaveanetpositiveeffecton thesignatories,andnosigniicantnegativeimpactonthe restoftheworld-hence,theymaybesteppingstonesto worldtradeliberalization.

Insharpcontrast,the"marketpreferences"caseappliestobilateralsbetweencountriesenforcinghightariffsongoodsimportedfromtherestoftheworld,and anti-competitive domestic regulations on services and investment.Suchbilateralsgeneratehigh"preferences" tothepartners.Suchpreferencesdistorttradelowsbe-causetheyfavourtheineficientirmsoftheECpartners atthedetrimentoftheEuropeanconsumersofhighly protected European goods and services (they induce these European consumers to buy goods and services fromineficientpartnersratherthangoodsandservices moreeficientlyproducedintherestoftheworld,and viceversaforthepartners'consumers).Thehigherthe preferencesare,themoredistortedthebilateraltrade lowsmaybe,thehigherthecostsofthebilateraldeal maybefortheconsumersoftheproductsandservices importedfromthetradingpartner(comparedtoamultilateralliberalization),thehigherthelikelihoodofthe collapse of the bilateral agreement would be, and the morepainfulthe"erosion"ofthesepreferenceswould beforthesignatories.Inshort,suchbilateralsarelikely tobestumblingstonestoworldtradeopening.

Table 1 follows this approach. It aims at providing an-admittedly crude-sense of the "market opening" vs "marketpreference"natureofthe91bilateralssignedby sevencountries,andofthe100bilateralsundernegotiationorunderconsiderationbythesesevencountries. Thesesevencountriesconsistoftwo"small"economies (ChileandSingapore),onemedium-sizeeconomy(Korea),andfour"large"economies(China,theEC,Japan andtheUS Columns 6 and 7 ofTable 1 focus on non-tariff barriers, the other key instrument that could determine the level of preferences in trade in goods.As there is nodirectmeasureofsuchbarriers,Table1reliesonthe ranking of the partners of the seven countries in two respects-theeaseoftradingacrossbordersandtheease of dealing with licences, two indicators estimated by theDoingBusinessdatabase. 8 Ranksarecrudeindicators (there may be a much bigger difference between theirstandsecondrankthanbetweenthesecondand third rank, or vice-versa). However, average ranks in columns6and7exhibitdifferencesamongoftheseven countries' partners so large that they are likely to be meaningful.Onceagain,thebilateralsundernegotiation orconsiderationbytheECappearthemoreproneto marketpreferences.

Column8to10ofTable1lookatservicesandinvestments,alsowiththehelpofindicatorsprovidedby the Doing Business database.The services dimension iscapturedbytheglobalindicatoroftheeaseofdoing businesswiththevarioustradingpartnersoftheseven countriesexamined,whereastheinvestmentdimension isrelectedbytheranksinpropertyregisteringandin investors' protection among trading partners. Once again,theseindicatorsroughlyshowtheECandChina ontheonehand,andontheoppositesidetheiveother countries.Onceagain,thebilateralsundernegotiation orconsiderationbytheECappearthemoredominated bymarketpreferences.

The analysis based onTable1deservesacaveat.Itassumesthatthenegotiationsofthebilateralswilldeliver successfuloutcomes.Thisassumptionisfarfrombeing grantedtobilateralsinvolving"not-so-small"partners, such as Brazil, China, India, and Russia. In this case, therearegoodreasonstoexpectafailureofthenegotiations,oraverylimitedcontentofthedeal. 9 Thisisall themoreplausiblesincenoneofthesefourpartnersare especiallyknownforbeinganeasypartnertonegotiate with.Indeed,itremainstobeseenwhytheECwould getmarketaccessinabilateralsettingwhenitcouldnot getsucharesultintheWTOforumbyforginganalliancewithothercountries. No. 01/2007

Danger Ahead: the "Spaghetti Bowl" Turning into an "Electron Collider"

To conclude, bilaterals undernegotiationorconsideration by the recent Commission's proposal seem to be seriously biased towards substantial market preferences,creatingserioussystemicrisksintheworldtrade regime.Inparticular,theymagnifytheriskthattheaggressive approach of the Commission might trigger a racetobilaterals,byinducingtheUS,ChinaandJapan to"catchup"intermsofbilaterals.Theintentshownby PresidentBush"to negotiate more free trade deals" 10 andthe signatureoftheKorea-UStradeagreementmaybethe irstsignsofthisnewturn. 11 The November 2006 Commission's proposal is all the more strange because the EC is the only large WTOMembertohavealreadyexperiencedthenegativeshocksassociatedwiththeexistenceofmanybilaterals.Inthe1990s,followingthefalloftheBerlinWall, theECsignednewbilateralswiththeCentralEuropean economies,breakinguptherankingofpreferencesthat it had established in the 1960s-1980s among its many partnersinbilaterals(mostofthembeingdevelopingor leastdevelopedcountries).Thepoliticalstrainsofthis developmentweresoonerousfortheECthat,in1997, itdecideda"pause"initspolicyonbilaterals.Itabandoned plans of making new bilaterals, and decided to merelyconcludethealreadyongoingnegotiations-suc-cessfullysointhecaseofChileandMexico,butfailing todosowiththeMercosurcountries.

Inshort,theEChistorysendsaclearsignal-thedanger of the"spaghetti bowl" [START_REF][END_REF] turning into an"electron collider" where there are so many bilaterals that they clashagainsteachother.

Back to the Doha Round: the Two Core Criteria Deining Success

Sections 3 and 4investigatethepossibilityofbolder ECinitiativesintheDohaRound,aswellasinindustryandagriculture.Theseinitiativesshouldbeconsistentwiththefollowingtwocorecriteriadeinedbythe Dohanegotiators.

The irst criterion is embodied in paragraph 16 of the2001DohaDeclarationthatstates:"The negotiations shall take fully into account the special needs and interests of developing and least-developed country participants, includ-ing through less than full reciprocity in reduction commitments [...]".The"less than full reciprocity" condition does not make much economic sense (in fact, it may be harmfultothecountriesitissupposedtohelp,thatis,the developingcountries).Butthenegotiatorsseemtohave lostallcapacitytoputitaside,thedevelopingcountries beingadamantonthiscondition,whichtheyseeasthe minimum expression of the"development" dimension oftheDohaRound.Asthecriterionimposessomedifferencebetweenthepost-Dohalevelofliberalizationin advancedeconomiesandthecorrespondinglevelindevelopingcountries,thechallengefacedbythenegotiatorsistodeterminethemagnitudeofsuchadifference thatcouldbeacceptabletothekeyWTOMembersand thatwouldbetheleastharmfultotheemerginganddevelopingcountries.

Thesecondcriterionisembodiedinparagraph24of the2005HongKongDeclarationthatstates:"[...]we instruct our negotiators to ensure that there is a comparably high level of ambition in market access for Agriculture and NAMA." Thisstatementisexpressedintermsofgoods(contrary tothepreviousone)butitalsohasacountrydimension sinceitrequiresde factosome"parallelism"betweenthe liberalizationoftheindustrialmarketsoftheemerging countriesandtheliberalizationoftheadvancedeconomies'agriculturalmarkets.Thissecondcriterioniseconomicallyneutral.Itwillbesoundifitfuelsavirtuous circleofsubstantialliberalizationsbythetwogroupsof countries.Itwillbeharmfulifitpushesbothgroupsof countriesintoaviciouscircleoflimitingtheliberalizationscopeand/ormagnitude.

Assessing the Negotiations in Industry from the EC Perspective 13

Non-agricultural market access (NAMA) issues coveralltheindustrialsectors,exceptthefoodindustries,whichareexaminedinthesectiondevotedtothe negotiationsin"agriculture".Thecurrentbalanceinthe negotiationsbetweenliberalizationandexceptionsisas follows.

The December 2005 Hong Kong Ministerial made a giant step in improving the negotiating process in NAMAbyadoptingthe"Swissformula"asthebaseinstrumentfornegotiatingtariffcuts. 14 TheSwissformula isanextremelyeficientinstrumentfromanegotiating pointofview(itisasfaraspossiblethesimplestnegotiatingmethod,sinceitinvolvesanagreementononeig-ureonly,namelytheSwisscoeficient),fromaneconomic perspective(itcutshightariffsmorethansmalltariffs, henceitcapturesmostofthewelfaregainstobeexpectedfromliberalization,whilethepossibilitytostabilize orevenincreasetariffrevenuesiskeptopen),andfrom adomesticpoliticalpointofview(itkeepsthepre-liberalizationrankingoftariffsunchanged,soitdoesnot triggerightsamongdomesticvestedinterests).

At the same time, the Hong Kong Ministerial has openedthedoorforexceptionstotheuseoftheSwiss formula-thoughonlyfordevelopingcountries. Theneed forexceptionstoabaseformulaisanunavoidablecomponentofnegotiationsinaforumwithsomanyandso diverse Members as theWTO. 15 But, the Hong Kong Ministerial was unable to deine the exceptions more clearlythanthe2004FrameworkAgreement.Thisfail-urehasamountedtovoidtheSwissformulaofanysubstance-notonlybecausethecoverageoftheexceptions hasbeenleftopen,butalsobecausethemagnitudeof theexceptionscanbehuge.

Why is an attractivetrade-offbetweenthebaseSwiss formulaandpredictableexceptionsanoutcomesodifi-culttoindintheDohaRound?Duringthetwolastdecades,manydevelopingcountrieshavecuttheirapplied tariffs(unilaterallyorinaccordancewiththeirUruguay Round commitments) without binding their tariffs at their new, applied levels. (UnderWTO rules, bound tariffsaretheonlyonesthatcannotberaisedwithout compensatingtheaffectedtradingpartners,bysodoing deliveringlegalcertaintyinmarketaccess.) Thefactthat alargenumberofWTOMembersexhibithuge"tariff water"(thedifferencebetweenboundandappliedtariffs) makes the Doha Round very special. 16 It implies that,eveniftheydonotleadtocutsinappliedtariffs, cuts in bound tariffs have, more than in any previous Round, a huge intrinsic economic value that negotiatorstendtoundervalue-whilethebusinesscommunity isheavilyinsistinguponit.

The European Goal in NAMA: Listen to the European Business Community

It is often saidthattradenegotiatorssufferfromalack ofsupportfromtheirbusinesscommunity.Thishasnot been the case for the EC negotiators in NAMA. European irms have, clearly and repeatedly, deined the concessionstheyexpectinNAMAfromtheemerging economies,namely"no single [industrial] tariff above 15 percent at the end of the implementation period of the Doha Round (except for LDCs)". 17 Such a target is economically sound for three reasons-clearly showing that it should be adopted by the ECnegotiators.Firstly,itskeyvirtueistoeliminatethe tariffpeaksthatarethemostdetrimentaltoEuropean exports,andthatgeneratethebulkofthewelfarecosts imposed on the domestic consumers of the emerging economies. Secondly, this target would vastly increase thecertaintyofaccesstotheemergingcountries'markets for the European exporters-an outcome that is highlyvaluedbythebusinesscommunity.Lastly,thistargetisfarfromimposingabrutaltradeliberalizationon theemergingcountries(asshownbythecurrentlevel of the average applied tariffs, see column 3 ofAnnex Table2)afeaturethatshouldhelptoreducerequestsfor exceptions,andtomakethemassimpleandpredictable aspossible(seebelow).

The Base Swiss Coeficient for the Emerging Countries

Table 2 shows thatthehighestSwisscoeficientsthat would still fulil the European business target would rangefromaSwiss20toaSwiss25.Itfocusesonnine emergingeconomies,whichrepresent30percentofthe worldGDPandcanbesplitinthreegroups.Group I countriescanoffernotableliberalizationopportunities, butindoingsotheyshouldtakecaretokeeptariffwater attheircurrentlowlevel. 18 GroupIIcountriescanalso offernotabletariffcuts,but,aboveall,theyshouldoffer their trading partners substantially more certainty by cuttingtheirhighboundtariffs.Lastly,GroupIIIcountriescanofferbothsubstantialtariffcutsandcertainty (binding). TheSwiss25isthebaseSwisscoeficientchosenin thispaperforthreereasons.Firstly,almostallthepost-Doha tariffs still above 15 percent with a Swiss25 are smallerthan16percent(Indonesia)or17percent(India)-which indicates that the Swiss25 is a very limited departurefromtheEuropeanbusinesstarget.Secondly, thechoiceofaSwiss25aimsatchangingthenegotiatingdynamicsbypromotingthenotionthatamore"generous" base Swiss coeficient should be "paid" by less numerous and/or complex exceptions. For instance, adoptingaSwiss25(ratherthanaSwiss22or23which wouldcompletelyeliminatetariffshigherthan15percent)shouldbecompensatedbyamorecompromising attitude on exceptions from the EC trading partners.

No. 01/2007

Lastly -and crucially in the Doha context-the choice ofaSwiss25wouldmakethefulilmentofthe"less than full reciprocity in reduction commitments"conditioneasier, asshownabove.

Insharpcontrasttothisapproach,someECMem-berstateshaveinsistedontheuseofaSwiss15forthe emergingeconomies.But,aSwiss15wouldclearlygo beyond the European business target, since it would generatemaximumtariffsintheemergingcountriesof roughly13percent.Suchan"overshooting"haspushed the emerging countries' negotiators to look for wide andfar-reachingexceptionsinNAMA,offeringtothe ECandabouttenotherindustrialcountriestheexcuse todothesameinfarmandfoodproducts-ultimatelya self-defeatingsequenceforevery WTOMember.

Predictable Exceptions for the Emerging Economies

Exceptions should be deinedinsuchawaythatnegotiatorscouldeasilypredicttheirimpactontheinal balanceofconcessionsbetweentheirowncountryand itstradingpartners.InNAMA,simplicitysuggeststhe use of Swiss coeficient(s) for exceptions higher than thebaseone.A50percentboundtariffseemstobethe reasonablyhighestpost-Dohatariff,sincethereareonly twodozenappliedtariffshigherthan50percentinthe nineemergingeconomies.Asaresult,aSwiss60would bethehighestSwisscoeficient,sinceitcutsa300per-centtariff(thehighestexistingboundtariffforthe18 countries) into a 50 percent bound tariff. Moreover, thefollowingcalculationsassumethat2percentofthe tarifflinescouldbeeligibleforaSwiss60,andthatan additional4percentofthetarifflinescouldbeeligible foraSwiss40(anarbitrarilychosenintermediateigure betweenaSwiss25andaSwiss60).

Based on this "combinedSwissformula", Table2shows that the emerging countries would exhibit average boundtariffsrangingfrom6.7to14.7percent,witha maximumboundtariffof50percent,butwithveryfew tariffshigherthan30percent. 19 Moreover,thefactthat the number of tariff lines with a tariff higher than 15 percentdoesnotincreasenotably(compared to those inthecaseofaSwiss25alone,seeTable2)suggeststhat thecombinedSwisscoeficientisaninterestingcompromisebetweentheexceptionstobeintroducedandthe liberalization targeted by the European business community.

Table3summarizesthechangesinprotectiongenerated by such a combined Swiss formula. Firstly, the averageboundtariffwouldbecutby4to22percentage points(column1),andthemaximumboundtariffsby 15to250percentagepoints(column2).Secondly,cuts in bound tariffs would have an impact on the applied tariffs.Thisisclearlythecaseforthemaximumapplied tariffsthatwouldbecutby8to165percentagepoints (column4).Onceagain,thisisanimportantresultbe-

The Base Swiss Coeficient for the Advanced Economies and the Two Core Doha Criteria

The potential offer from the advanced economies ismostlylimitedtocutsinpeaktariffs,andtocutsin boundtariffsforAustraliaandNewZealand.Thesecuts haveahugeeconomicvaluefortheemergingeconomies becauseindustrialeconomies'tariffspeaksareconcentratedonthemajorexportsofthedevelopingcountries. But,negotiatorsdonotcapturethiseconomicvaluebecausetheyoftenmeasurethe"negotiatingvalue"ofconcessions by weighting the negotiated tariff cuts by the existingimports. Would a Swiss10 deliver enough tariff cuts from the advanced economies for them to be considered as complying with the"less than full reciprocity" criterion? Or should it be a Swiss coeficient lower than 10? It should be stressed that a Swiss coeficient, lower than 10, has a questionable economic value for the emergingeconomies.Forinstance,shiftingfromaSwiss10to aSwiss5wouldreducetheaverageboundtariffsofthe industrial economies from a range of 1.4-4.4 percent toarangeof1.0-2.8percent,anditwouldreducethe maximumboundtariffsfromarangeof5.0-8.6percent toarangeof3.3-4.6percent.Fromtheemergingeconomies' point of view, gains from such limited cuts of solowtariffsarenotveryattractive-especiallyif,once enforced,theytriggermoreantidumpingorsafeguard actions from the advanced economies against exports fromtheemergingeconomies.

An economically sound alternativefortheemerging economiesmaythusbeadealbasedonaSwiss25for theemergingcountriesandaSwiss10fortheadvanced economies-relecting the basic fact that the advanced economieshaveliberalizedmuchmoreandearlierthan theemergingcountries,andthedecisionoftheDoha negotiators not to allow exceptions on tariff cuts for theadvancedeconomies.Clearly,thistentativeconclusion depends very much upon the concessions of the advancedeconomiesinthenegotiationsinagriculture. Thedeepertheconcessionsinagriculturefromtheadvancedeconomies,themoreaSwiss25-Swiss10dealin NAMA would be acceptable to the emerging economies-indeed,themorethe"comparably high level of ambition in market access for Agriculture and NAMA" criterion wouldbemet.

Assessing the Negotiations in "Agriculture" from the EC Perspective 20

At the first glance,the"comparably high level of ambition"criterionseemstobeatargetoutofreach,since tradeliberalizationinfarmproductsissomuchlagging behindliberalizationinNAMAproducts.However,this irstimpressiondisappearswhenonerecognizesthecriticalfactthattalkingaboutnegotiationsin"agriculture" isamisnomer.Thecurrentnegotiationsdealwithmany moreagro-industrial(hereafter"food")goods(roughly 1,500tarifflines)thanwithfarmproducts(roughly500 tarifflines).Thislittlerecognizedfeatureiscrucialbecausetradeliberalizationinfoodproductsis,bynature, closetotradeliberalizationinindustrialproducts,and canthusbeneitfromthelongexperienceinthelatter. Makingacleardistinctionbetweenthesetwoverydifferenttypesofproductsthusopensawindowofoppor-tunitiesintheDohanegotiationsin"agriculture." The negotiators in farm and food products face a problem that does not exist in NAMA.The formulas, which,sofar,havebeentabledforcuttingtariffsonfarm andfoodproductsaremuchmurkierthantheSwissfor-mulaadoptedinNAMA. Thenegotiatorshaveagreedto work on complex"tiered" formulas-they are 16 times morecomplexthanaSwissformula,since,asshownby Table4,strikingadealrequiresnolessthan16decisions (three thresholds deining four tariff ranges, four percentagecutsforeachrange,andatariffcap). 21 Thus assessing the economic and political impact of thetieredformulasappearsessential.Paragraph24and commonsensebothsuggestthataSwiss-likeapproach wouldbeausefulbenchmarkforsuchatasksincethe "comparably high level of ambition" condition would be mucheasiertocheckifthesameinstrumentisusedfor cuttingtariffsinagricultureandinmanufacturing.Figure 1illustratestheECtieredofferandtwoSwissformulas, onewithacoeficientof60andanotherwithacoefi-cientof70forreasonsexplainedbelow.Thehorizontal axisgivesthecurrentECtariffs.Thedatausedarevery close to those used by the EC negotiators (since they includethead valoremequivalents,asestimatedbythe Commission,ofthemanyECspeciictariffs). Thevertical axis illustrates the post-Doha tariffs, which would beobtainedbyusingthealternativeformulas.TheEC tieredproposalisillustratedbythefourstraightlines, theSwiss60coeficientbythelowerandlongcurveline, and the Swiss70 coeficient by the higher and shorter curveline.

European Farmers Are Not the Main Beneiciaries of the EC Proposal

Figure 1 provides acrucialresultfortheECdomestic policymakers(forthesakeofclarity,Figure1ignores theoneECtariffhigherthan250percent).ASwiss-like approachwouldimposedeepertariffcutsonthecurrent (pre-Doha)highesttariffsthantheECtieredformula, and smaller tariff cuts on the currently less protected productsthantheECtieredformula.Forinstance,the Swiss60wouldcutaninitialtariffof90percentintoa post-Dohatariffof36percent(comparedto45percent incaseofthetieredformula)anditwouldcutaninitial tariffof25percentintoapost-Dohatariffof17.6percent(comparedto16.3percentifthetieredformulais used).

A Swiss-like approach wouldthusrebalancetheexist-ingECofferinaneconomicallysoundway,becausecuttingdeeperintothehighesttariffswouldgeneratemost ofthewelfaregainsthatEuropeanconsumers-especially thepoorest-wouldexpectfromaliberalization.But,its mostsurprisingresultisthatitwouldalsohaveapositiveimpactondomestic politics.Europeanproducersof thegoodsgettingsmallertariffcutswouldclearlysup-portashifttoaSwiss-likeapproach,whilethoseassociatedtodeepertariffcutswouldightagainstit.

Thus the key question is:Which producers would beneitfromsucharebalance?Usingatableofconcordancebetweeneverytarifflineandthelevelof processing --100 Sources: The EC, G20 and US proposals. Note [a]: Reference to "slightly lesser reductions" without more precision.

EC proposal US proposal G20 proposal

Table 4 Tabled propasals on farm tariff cuts, 2005

Source:TheEC,G20andUSproposals.Note[a]:Referenceto"slightlylesserreductions"withoutmoreprecision.

No. 01/2007 in farm and food products suggests several results summarized in Table5. 22 Firstly,Table5shows the strong "tariff escalation" among the initial EC tariffs-the more processed the goods, the higher their level of protection.The average tariff of the bulk farm products(19.7percent) is substantially lower than the average tariff of the processed food products(32.3percent), and,evenmorestrikingly, the highest tariff for thefarmproducts(93.6 percent)ismuchsmaller thanthehighesttariffon processed food (264.3 percent).

Secondly, the tariff cuts proposed by the

Re-balancing Tariff Cuts

That said, a better EC tariff offer should meet two conditions.Itshouldbeambitiousenoughtofulilthe "comparably high level of ambition" criterion imposed by theHongKongWTOMinisterial.And,itshouldattract domesticEuropeanpoliticalsupport-itshouldbeseen asabetterdealthanthecurrentECofferbyavastmajorityofthefarmersandfoodproducers.Thefollowing outlineshowsthatitispossible. 23 Table5suggeststhatabaseSwisscoeficientof60

(or its tiered equivalent) would be a substantial im-provementovertheECcurrentoffer. 24 Firstly,itwould generateanaverageECtariffinfarmandfoodproducts ofroughly13percent-atarifflevelsimilartotheaverage tariffinNAMAproductsofsomelargeemergingeconomies(Brazil,India,Indonesia,Mexico)andnotfaraway from the average tariff of China, the Philippines and Thailand.Inotherwords,itwouldmeetthe"comparably high level of ambition"criterion.Onecouldarguethat theECtieredproposaldoesthesame.But,theSwiss60 wouldmeetthe"comparably high level of ambition"criterioninanothercrucialrespect-andthatisnotthecase oftheECtieredproposal.TheSwiss60wouldgenerate amaximumECtariffonfarmandfoodproductsvery closeto50percent,preciselythemaximumtarifftar-getedinNAMAfortheemergingeconomies.

Secondly,aSwiss60wouldgenerateanotablere-balancing:287tarifflineswouldhavelargertariffcutsthan thosecurrentlyproposed,and1360tarifflineswould havesmallertariffcutsthanthosecurrentlytabled(364 lines would see no change). More crucially, the additionalcutswouldoccuralmostexclusively(in92percentofthecases)inthefoodsector.

In other words, re-balancing would clearly improve thesituationofavastmajorityofthefarmerscompared to their situation under the tiered proposal.Table 5 showstheveryfewbulkandhorticultureproductsthat wouldbeconcernedwithadditionalcuts,andthemany productsthatwouldbeneitfromtariffcutssmallerthan thoseimposedbythetieredformula.

Although tariffs with larger cuts are concentrated in the processed food sector, rebalancing would keep theaveragetariffofalltheprocessedfoodproductsalmostunchanged.Butitwouldcut222foodtariffsmore deeply-onaveragefrom45.5to35percent,butbymore than5percentforonly87tariffs,andbymorethan10 percentforonly46tariffs(adozenofwhicharevarious formsofwhey).Meanwhile,itwouldcut847foodtariffslessdeeply(onaveragefrom11.4to13.1percent). Avastmajorityintheprocessedsectorwouldthusgain fromrebalancing,allthemoreifthefoodmarketsinthe restoftheworldwouldalsobeopenedup.

However,itisimportanttocheckinmoredetailthe caseofthe"sensitive"productsforwhichfoodtariffsare oftensaidtohaveanimpactonfarmproducts. In the caseofpoultry,lambandbeef,veryfewlineswouldface notablylargertariffcutswithaSwiss60,comparedtoa tieredformula.Only2(outof100),3(outof30),and 4 (out of 56) tariff lines (respectively) would face ad-ditionaltariffcutslargerthan5percentagepoints-a proportionsosmallthatonewouldnotexpectserious problemsforthefarmersinvolved.Inthecaseofdairy products,40tarifflines(outof170)wouldfaceadditional tariff cuts larger than 5 percentage points, and twodozentarifflineswouldseeadditionalcutslarger than 10 percentage points (half of them being whey). Inthecaseofsugar,halfadozentarifflines(outof34) wouldfaceadditionaltariffcutslargerthan5percentage points. In short, shifting to a Swiss60 could raise problemsforlessthan50tarifflines.Moreover,asunderlinedabove,manyofthedairyproductspertaining tothissmallgroupofproductsexhibitwidedifferences inpost-Dohatariffs(underatieredformula)whichare totallyorlargelyunrelatedtofarmcoeficients-forinstance,adifferentpackagingsizeordifferentbutclose varieties. In such cases,itisveryunlikelythat,witha Swiss60,thenarrowerrangeofpost-Dohatariffswould haveanotableimpactonthefarmersinvolved.

Bearing this in mind, and in consideration of the NAMAnegotiations,thereisaneedtodeinepredictableexceptionsforfarmandfoodproducts.Currently, the Doha negotiators are considering an intensive use of "tariff-rate quotas" as the preferred instrument for exceptions.However,whendoingso,negotiatorsoften misinterpretthebasicnatureofatariff-ratequota-hence thecommitmentsthatthisinstrumentgenerates.When negotiated,atariff-ratequotalockstogetherthreecommitments: the"out-of-quota" tariff (to be imposed on the quantities imported above a given quota) the "in quota"tariff(tobeimposedonthequantitiesimported withinthequota)andthequota(whichdeinesthetariff tobeapplied).Hence,liberalizinganexistingtariff-rate quotaisathree-dimensionaloperation:cuttingtheoutof-quotatariff,cuttingthein-quotatariff,andincreasing thequota.Inshort,itdoesnotconsistinsimplycutting theout-of-quotatariff. 25 Thisobservationiscrucialforanalysingthecurrent ECproposaldealingwiththeso-called"sensitive"products.The European Commission is suggesting an increaseinthequotasoftheseproductsasacompensation forreducingtheirout-of-quotatariffsbylessthan(by half)thecutoftheout-of-quotatariffsrequiredbythe ECtieredformula.Thisproposalhastwolaws.Firstly, itdoesnotincludeanofferonthelevelofliberalization ofthetwoothercomponentsoftheinitialcommitment (thatis,thecutofthein-quotatariffandtheincreaseof thequota)noracompensationfortheabsenceofsuch offers.Secondly,theincreasesinthein-quotaquantity proposed by the Commission seem to rely on unitary elasticities (more accurate elasticities are within the rangeof3to6formostoftheproductsconcerned).

Inabroaderperspective,itisclearthatatariff-rate quota-based approach is self-defeating from the EC farmers'perspective.IftheEuropeandemandbecomes smaller than the quota, the EC price will relect the lowin-quotatariff,andtheECproducerswouldthen be (much) more strongly exposed to freer trade than expected by the negotiators. If the European demand exceedsthequota,theECpricewillbedeterminedby theworldpriceplusthehighout-of-quotatariff,generatinghugerentsforthequotabeneiciaries.Whowould gettheserents?Theanswerdependsonseveralparameters,butthereisasurebet:itwouldnotbetheEuropean farmers-but rather EC-based importing irms or foreignexportingirms(thissecondalternativeraising thequestionwhethertheserentswillgotothemosteficientexporters,ornot). ThustherearegoodreasonsfortheECfarmersto avoidthetrapofthetariff-ratequotas. Assuggestedabove for the NAMA negotiations, the best solution may be thesimplestone,whichis(a)higherSwisscoeficient(s). Table5investigatesthispossibilitywithaSwiss70(orits tieredequivalent)onthefarmbulkcommodities.Firstly, a Swiss70 would attract farmers' support because it would increase the average tariff on farm products to11.8percent,comparedto10.7percentunderthe current offer, and it would reduce only 8 farm tariffs (withlargertariffcutslimitedto4.8percentatmost). Secondly,usingaSwiss70onlyforthebulkcommodi-tiesamountstomakingexceptionsforonly5percentof thetotaltarifflinesinfarmandfoodproducts,aigure closetothescopeofexceptionsinNAMA,hencemeetingthe"comparably high level of ambition"criterion.Lastly, thiscriterionwouldstillbemetifafewadditionaltariff lines-suchassomeoftheabove-mentioned50tarifflines inthefoodsector-wereshiftedunderaSwiss70. 26 Balancing Tariff Cuts and Domestic Support Cuts theemergingeconomies).Table6suggestsasomewhat easiernegotiatingpositionfortheECthanfortheUS, becausetheEChasalreadyintroduced"decoupled"subsidies(ithasmovedroughly25billionseurosoutofthe perimeterofthe"overalltradedistortingsupport").By contrast,theUSisstillgrantingsubsidies,whichareresponsive to world prices, hence eligible totheAmber Box.AsofFebruary2007,theUSpositioninthecomingmonthsremainshardtodeciphersincethelegisla-tiveprocessforanewFarmBillhasjuststarted.

However, the large amount of the EC post-Doha domesticsupportmeansthatseriousproblemsremain. Firstly,halfoftheECAMSsupportisgeneratedbythe EC market price support scheme, the status of which criticallydependsonwhether(andtowhichextent)the Doha negotiators will narrow the scope of allowable support.Secondly,thereisagrowingrecognitioninEuropethatfarmsubsidies(includingdirectpayments)go mostlytolargefarmersforwhichfewEuropeanswant to ight. In this context, it should be stressed that the Europeans(includingtheFrench)are,onaverage,more favourabletoseriouscutsinfarmsubsidiesthanAmericans, 27 andthatsomeEuropeanfarmersarebeginning todistancethemselvesfromtheexistingCommonAg-riculturalPolicy(CAP).Lastly,decoupledsubsidieswill undoubtedly face an increasing legitimacy problem.

Astimegoesby,itwillbeincreasinglypoliticallyunsustainabletograntsubsidiesto farmers on the basis of productions they managedinanincreasinglyfarawaypast.

These EC problems (which would also emerge in the US once decoupled subsidies had been introduced) should induce theDohanegotiatorstostarttointroduce disciplines,whichwouldincreasinglylimit farm subsidies more or less to adjustment purposes (and"non-trade concerns").This is a long-term goal, but it requires some immediatedecisions,namelyastricterdeinition of the current "Boxes" in order to limittheatthemomentwide open possibility that cuts in domestic support could bemerely"box-shifting".Inthisrespect,it should be stressed that the 2003 CAP reform has decoupled EC subsidies without bringing any new notable liberalization of theEuropeanfarmsector,asbestillustrated bythefactthattheEuropeanoveralllevelof protectionmerelydecreasedfrom57to55percent,all otherthingsbeingconstant. 28 In such a context, it is crucial to evoke the worrisomeboominsubsidiesgrantedtobiofuelproductionin keyindustrialcountries-preciselywhentherecentcutin theECbasesugarpricehasjustrevealedtoeficientEu-ropeansugargrowerstowhatextenttheCAPwastheir foe.BykeepingaliveineficientEuropeansugargrowers(whoarenowturningtoalternativecrops)theCAP hasmadeitimpossibleforthemosteficientEuropean sugargrowers(suchasthoseinFranceorBritain)toenterproitablemarkets(suchastheItaliansugarmarket). Biofuelsubsidieswillsimplypushtheseeficientsugar growersfurtherawayfromwhattheyshoulddoirst-be aneficientsourceoffarmproductsforfood-attherisk oflettingthemdownwhennewsourcesofenergywill emerge(oriftheoilpricedeclinesfurther).TheDoha negotiatorsshouldthusstarttomaketheproductionof (allegedly)cleanenergydificultasanexcuseforgiving subsidiestoclearlyineficientproductions(suchasthe irstgenerationofbiofuels).

Would the Failure of the Doha Round Save the CAP?

Some European quarters are hoping to save the CommonAgriculturalPolicy(CAP)bylettingtheDoha Round fail.This is an illusion.The Doha Round-even if unsuccessful-has given a deinitive stroke to the current CAP. Firstly, theanti-farmerbiasofthetieredformulais abluntmirrorofthetruebalancebetween farmandfoodproductsthatalltheMember states'AgricultureMinistershaveagreedto.

Secondly,theDohanegotiationsaremak-ingEuropeanfarmersincreasinglyawareof the fact that the impact of common Euro-peantariffsvarieswitheachMemberstate's productionstructure.AMemberstateproducingmostlyfarmgoodsprotectedbyhigh EC tariffs is, on average,"more" protected thanaMemberstateproducingmostlyfarm goodsprotectedbylowormoderateECtariffs.Table7illustratesthispointbyweighting the Member states' production by the EC-widelevelofprotection(beitmeasured by tariffs or by the combined protection grantedbytariffsandsubsidiesasmeasured by the OECD "producer support equivalents").

Table7showsthat,onaverage,farmers inIrelandareroughlytwiceasprotectedas thoseinSouthernEuropeanMemberstates, simplybecausetheIrishproductionismuchmoreconcentrated(comparedtotheSouthernEuropeanproduction)insuchfarmproductsthatarethemostprotected bytheEC.A"uniform"protectiononallthefarmprod-uctswouldbepoliticallyappealingtoEuropeanfarmers (itwouldbemuchfairer).Itwouldbeeconomicallyinterestingforthem(itwouldinducethemtoproducethe cropsinwhichtheyarebest,notforwhichtheyreceive highsubsidies).AnditwouldbebeneicialtotheEuropeanconsumerssinceitwouldenhancenotonlyfarm eficiency,butalsofooddiversity.

Ironically,Table7showsthat,contrarytoawidebelief,Frenchfarmersarenotamongthemostprotected in Europe. French farmers would be among the key beneiciaries of successful Doha negotiations in agriculturefortwocombinedreasons.Theywouldbeneit fromrebalancedtariffs,sincetheywouldbelessdisad-vantagedthanwiththeECtieredoffer.And,astheyare oftenamongthemosteficientinEurope,theywillbe amongthemajorbeneiciariesfromadeepCAPreform, asillustratedbythesugarcase.SomeFrenchfarmersare beginningtorealizethis,andtowonderwhetherthey shouldnotsupportaswiftCAPreform. Sources:OECD,WTO,Messerlin2006.

Concluding Summary

[a]ThereisnoavailableinformationonCyprus'farmsector.

[b]PSA:Producersupportequivalentsin2002,OECD.

[c]Advaloremtariffsin2004(speciictariffsexcluded).

No. 01/2007 eficient irms of the EC partners at the detriment of theEuropeanconsumersofhighlyprotectedEuropean goodsandservices(andviceversaforthepartners'consumers).AndtheywouldforceEuropeanproducersto undergothepainfuladjustmentsrequiredbytheerosion of preferences (and possibly of their associated rents) whenthepartnerswouldeventuallyopentheirmarkets tocountriesotherthantheEC(andviceversaforthe partners'producers).

Costs and frustrations are thus the outcome be expectedfromtheCommission'sproposal. Worstofall, theCommission'sproposalcouldtriggeraworldrace tobilateralsbypushingtheUSandotherrapidlygrowinglargeemergingcountriestomakebilateralsbetween themselves-marginalizingevenmoreaEuropeaneconomyhandicappedbyitssluggishgrowth.

TurningtotheDohaRound,thepaperarguesthat the EC trade negotiators in industrial goods (NAMA) should(have)aim(ed)atachievingwhattheEuropean businesscommunityisaskingfor-namelynosingleindus-trialtariffabove15percent.Suchatargetmakesgood economicsense.Itwouldeliminatethetariffpeaksthat constitutethemainobstaclefacedbytheEuropeanexporters,andthatgeneratemostoftheprotectioncosts imposed on the world consumers. It would vastly increasethecertaintyofaccesstotheemergingcountries' markets for the European exporters-an outcome that negotiatorsheavilyundervalue,whilethebusinesscommunityisinsistingonit.And,itshouldmakeiteasierto negotiateexceptionsassimpleandaspredictableaspossible,hencetogeneratea"clean"DohaAgreement.

Focusingontheninemajoremergingcountries,the papergivesaconcretesenseofthechangesinprotection associatedtothis15percenttarget(usingabaseSwiss coeficientof25)andtosimpleandpredictableexceptions(usingSwisscoeficientsof40and60forthe2and 4, respectively, percent of tariff lines with the highest pre-Doha tariffs).The emerging countries would then exhibitaverageboundtariffsrangingfrom6.7to14.7 percent, with a maximum bound tariff of 50 percent (butonlyatinyportionoftheboundtariffswouldbe higher than 30 percent). Effective cuts in average appliedtariffsarelimitedtothreeemergingcountries,but theaveragetariffwaterwouldbeeliminatedorreduced toalowlevelinalltheothers-aresultthatwouldbe highlyvaluedbythebusinesscommunity.

The Doha negotiations in "agriculture" are dominated by two not very well-known-but crucial-facts.

Firstly,thenegotiationsdealwithmanymoreagro-industrial ("food") products than farm products. Only a quarterofthetarifflinesinvolvedarefarmproducts,all the other products are food (semi-processed or processed).Secondly,thetariffcutsofferedbythecurrent ECproposalprotectfoodproducersmorethanfarmers: thepost-Dohaaveragetariffswouldbe10.7percentfor farmproducts,comparedto16.9percentforprocessed food, while the post-Doha maximum tariffs would be 43.7and105.7percent,respectively.Lastbutnotleast, theECfoodproductsthatwouldremainthemostpro-tecteditemsaftertheDohaRoundwouldbeastrange hodgepodgeofwasteproducts(dogandcatfood,whey, etc), goods with very little potential in international trade(yoghurts)orwithquestionableimportance(cucumbers,gherkins,etc).

Insuchacontext,"rebalancing"thecurrentECtariff proposal-cutting the high tariffs more, and the low tariffs less-is an attractive alternative.As shown in de-tailinsection4,itwoulddelivermoreeconomicwelfare gainstotheEuropeanconsumersthanthecurrentEC proposal.And,itwoulddeliverpoliticalbeneits,sincea vastmajorityofECfarmandfoodproducers(allthose protectedbysmallandmoderatetariffs)wouldindthe rebalancingoftheECtariffproposalfavourablefortheir interests,comparedtothecurrentECoffer.

Lastbutnotleast,alltheseresultswouldmeetthe two key criteria imposed on the Doha Round-namely, the"less than full reciprocity in reduction commitments"condition,andthe"comparably high level of ambition in market access for Agriculture and NAMA" condition-much better thanthecurrentECproposal.Andtheapproachadoptedinthepapercaneasilybeextendedtothecountries notexamined,suchasthedevelopingcountries,which arenotemergingeconomiesoramongtheleast-developedeconomies.

AlltheabovesuggestionsassumethattheECisready to position itself as aWTO Member, by taking a longtermviewoftheworldtraderegime. Theyalsoimplicitly assumethatotherRoundswillfollowasuccessfulDoha Round. ThosefutureRoundswilltakeovertheuninished businessleftby(perhaps)amoremodestbut"clean"(ie, basedonsimpleandpredictableexceptions)Dohaoutcomemuchmoreeasilythaniftheyinheritamoreambi-tiousDohapackageforsomeproducts,whichisriddled with more distorting exceptions on many more products.Inshort,theEClong-terminterestistopromote thenotionofaseriesof WTORoundsofliberalizationas apatient"peelingoftheprotectionistonion". 29 No. 01/2007

Notes

Figure 1

 1 Figure 1Assessing the EC tier-based formula for tariff cuts

Table 1 Bilaterals: Seven Countries, Two Strategies Table 1: Bilaterals: Seven Countries, Two Strategies

 1 GDP (in USD, 2004) as a share of world GDP. [b] WTO Trade Profiles. [c] Doing Business 2007. [d] Counting as one the 10 countries having acceded to the EC in 2004. [e] Counting as one the EC.

	Number of partners current at USD 1 2 A. Bilaterals signed Singapore 10 48.5 Chile 20 79.0 Korea 14 4.1 USA 15 7.6 China 14 2.9 EC 14 [d] 6.4 Japan 4 2.7 B. Bilaterals under negotiations or consideration at PPP applied bound USD 3 4 5 39.3 4.8 9.2 70.4 5.5 8.0 5.8 7.1 21.5 6.5 7.5 19.6 5.9 8.0 25.4 8.2 9.2 18.3 3.3 10.0 27.4 Singapore 12 90.6 81.2 5.7 9.0 Chile 9 [e] 81.6 77.7 6.4 10.3 Korea 11 49.1 57.4 7.3 13.3 Japan 18 13.4 16.4 7.5 20.0 USA 14 14.9 16.5 8.8 21.3 China 12 10.4 17.0 10.1 25.5 EC 24 23.4 44.2 10.3 17.8 Average industrial [a] Market size [a] tariff [b]	trading dealing ease of across with doing borders licences business property investors regis-protec-tering ting 6 7 8 9 10 35.8 41.7 28.0 35.3 16.7 34.1 70.8 41.5 39.6 46.3 58.8 70.3 69.0 59.2 68.7 42.9 41.9 29.2 50.1 34.0 63.1 77.3 72.8 66.7 55.4 76.8 91.9 67.1 80.4 53.4 69.4 62.4 55.6 76.6 52.4 40.0 68.9 43.5 42.3 41.0 43.2 77.8 49.4 45.5 45.1 43.3 85.3 57.6 39.8 40.4 53.5 58.3 54.8 60.6 56.6 54.1 69.7 52.2 64.7 44.2 83.1 96.4 83.5 76.1 47.2 71.1 125.6 91.2 61.8 64.8 Regulatory ranking [c]

Table 2 . Calculations of possible tariff cuts, selected emerging countries

 2 Based on a Swiss factor of 25 combined with a Swiss of 40 for 4 percent of the tariff lines and a factor of 60 for 2 percent of the tariff lines. The two highest Swiss factors have been systematically applied to the currently highest applied tariffs.SourceForbes et al 2004. Author's computations.

	Average bound Number Average tariff of lines tariff 1 2 3 I. Moderate bound and applied tariffs, low tariff water: offering notable liberalization while keeping certainty high Maximum Average Maximum Average bound bound Number Average bound bound Number Average tariff tariff of lines tariff tariff tariff of lines tariff 4 1 2 3 4 1 2 3 Korea 6,0 0 0,0 13,0 6,5 0 0,0 14,9 6,7 190 18,8 South Africa 5,2 0 0,0 15,0 5,8 230 16,5 17,6 6,2 266 23,1 Malaysia 5,4 8 17,7 18,8 6,0 25 18,0 23,1 6,2 118 21,6 II. High bound tariffs, moderate applied tariffs and tariff water: offering notable liberalization while offering more certainty Philippines 8,1 0 0,0 14,3 9,0 159 16,4 16,7 9,3 384 17,7 Thailand 9,2 17 16,0 16,0 10,3 41 17,3 19,0 10,6 211 20,0 III. High bound tariffs, moderate applied tariffs, high tariff water: offering substantial liberalization and more certainty Brazil 11,6 1 16,2 16,2 13,2 1 19,3 19,3 13,4 201 20,1 Mexico 12,7 0 0,0 14,3 12,6 82 16,1 16,7 14,7 206 20,2 Indonesia 12,2 20 17,1 17,2 14,1 2692 15,4 20,8 14,4 2701 15,9 India 12,4 10 17,2 17,6 14,3 2571 15,8 21,4 14,7 2571 16,5 Notes Swiss factor = 25 Combined Swiss factor [a] Maximum bound tariff 4 22,1 30,0 50,0 27,3 34,3 22,1 27,3 34,3 42,0 [a] Swiss factor = 20 Tariffs >15% Tariffs >15% Tariffs >15%

Table 2 Calculations of possible tariff cuts, selected emerging countries

 2

	No. 01/2007

Source:Forbeset al 2004. Author's computations.

Table 3 Summary of tariff cuts generated by a " combined Swiss formula", selected emerging countries

 3

Source:Forbeset al 2004, Table

2

.

No. 01/2007

Table 4 . Tabled proposals on farm tariff cuts, 2005

 4

		definition	tariff cut	definition	tariff cut	definition	tariff cut
		of the tiers	(%)		(%)		(%)
		1	2	3	4	5	6
	Tariff cuts to be imposed on developed countries
	highest tier	>90%	60	>75%	75	>60%	85-90
	medium high	60-90%	50	50-75%	65	40-60%	75-85
	medium low	30-60%	45	20-50%	55	20-40%	65-75
	lowest tier	0-30%	35	0-20%	45	0-20%	55-65
	Tariff cuts to be imposed on developing countries
	highest band	>130%	40	>130%	40	>60%	[a]
	medium high	80-130%	35	80-130%	35	40-60%	[a]
	medium low	30-80%	30	30-80%	30	20-40%	[a]
	lowest band	0-30%	25	<30%	25	0-20%	[a]
	Other elements of tariff rates
	cap tariff (developed countries)	--	100	--	100	--	75
	cap tariff (developing countries)	--	150	--	150

Table 5 . Rebalancing the EC tariff proposal

 5

			C urrent
			ad val.		P os t-D oha ta riffs ( % )
			equivalent
			tariffs	EC	S wis s	S wis s	S wis s
			%	offer	70	60	50
	All "a gricultura l" products (2011 ta riff lines )
		average tariffs	24.4	12.9	13.9	13.1	12.2
	Bulk farm commodities (117 tariff lines)
		average tariffs	19.7	10.7	11.8	11.1	10.3
		maximum tariff	93.6	43.7	40.0	36.6	32.6
		number of tariff lines with smaller cuts [b]			65	60	42
		number of tariff lines with larger cuts [b]			8	13	31
	P roduces/horticulture products (273 tariff lines)
		average tariffs	13.6	8.0	9.7	9.3	8.9
		maximum tariff	118.9	47.6	44.1	39.9	35.2
		number of tariff lines with smaller cuts [b]			214	210	202
		number of tariff lines with larger cuts [b]			5	9	17
	Semiprocessed products (488 tariff lines)
		average tariffs	12.6	6.8	7.6	7.2	6.7
		maximum tariff	174.9	70.0	50.0	44.7	38.9
		number of tariff lines with smaller cuts [b]			262	243	226
		number of tariff lines with larger cuts [b]			24	43	60
	Processed products (1120 tariff lines)
		average tariffs	32.3	16.9	17.8	16.7	15.5
		maximum tariff	264.3	105.7	55.3	48.9	42.0
		number of tariff lines with smaller cuts [b]			949	847	749
		number of tariff lines with larger cuts [b]			118	222	318
	Notes	[a] it was impossible to allocate ** tariff lines in the three categories of products.

[b]

in case of using a Swiss formula instead of the EC tier-based formula. Source EC tariff offer in agriculture. Author's computation.

Table 5 Rebalancing the EC tariff proposal

 5

	Swiss 70
	Swiss 60
	Tier-based
	formula

Source:ECtariffofferinagriculture.Author'scomputation.

Table 6 . Domestic support in the EC and the US (billion US dollars)

 6

	U.S.	EC25

The Amber Box (the most trade-distorting subsidies)

		The Uruguay final bound commitments	19,1	89,0
		Effective amounts in 2004	13,0	42,0
		Estimated amounts in 2006-2010	[a]	26,0
		The Doha final bound commitments: proposals based
		on the EC formula	7,6	26,7
		on the US formula	7,6	15,1
		on the G20 formula	5,7	17,8
	2. Overall Trade Distorting Support [b]
		The Uruguay final bound commitments	55,0	149,0
		Effective amounts in 2004	23,0	74,0
		Estimated amounts in 2006-2010	18.0 [c]	40,0
		The Doha final bound commitments: proposals based
		on the EC formula	22,0	44,7
		on the US formula	25,9	37,3
		on the G20 formula	13,8	29,8
	Notes	[a] Unknown (depend on world price evolution).
		[b] Sum of the Aggregate Measure of Support (AMS), "de minimis"
		subsidies and Blue Box subsidies.
		[c] Estimate based on the USDA Farm Bill 2007 Proposal.
	Sources EC, G20 and US proposals.

Table 6 Domestic support in the EC and the US (billion US dollors)

 6

	Sources:EC,G20andUSproposals.Penn2005,JalesandNassar2006,
	Kutas2006.

Table 7 . Level of protection by EC Member state [a]

 7

	Member states		PSEs [b]	Tariffs [c]
		%	index	%	index
	Austria	59	103	22,9	98
	Belgium	57	99	22,7	97
	Britain	72	126	25,5	109
	Czech Rep	57	99	26,6	114
	Denmark	54	94	26,1	112
	Estonia	55	96	27,2	117
	Finland	72	126	26,5	114
	France	59	103	21,6	93
	Germany	61	106	24,5	105
	Greece	40	70	18,7	80
	Hungary	44	77	23,5	101
	Ireland	99	173	26,2	112
	Italy	45	79	19,1	82
	Latvia	59	103	25,3	108
	Lithuania	62	108	26,6	114
	Luxembourg	75	131	25,6	110
	Malta	37	65	18,6	80
	Netherlands	53	93	19,1	82
	Poland	47	82	24,5	105
	Portugal	43	75	18,3	78
	Slovakia	54	94	25,2	108
	Slovenia	57	99	21,2	91
	Spain	43	75	19,1	82
	Sweden	71	124	25,5	109
	EC-15	55	96	21,9	94
	EC-25	57	100	23,3	100

Table 7 Level of protection by EC Member state [a]

 7

  No.01/2007 This necessity has induced negotiators to use the term "lex-15. ibilities."But,theterm"exceptions"betterdescribestheeconomic consequencesofsuchlexibilities.

				27.	GermanMarshallFund2006.
				28.	OECD2004.
	EuropeanCommission2006. Wallenberg2006;Seillières2006. Outofthe143 WTOMembersonwhichthereisavailable 1. Messerlin2007a. 29. 2. information,104Membersenforceappliedtariffslowerthan 16. Forbesetal2004. 30.
	3. theirboundtariffs,with70ofthemhavinganaveragetariffwater	Thissub-sectionreliesheavilyonMesserlin2007a.
	Aregionaltradeagreementrapidlybecomesequivalenttoa largenumberofbilaterals.Forinstance,theECin1958couldbe 4. impressingaveragelevels(about100percent)[WTO2006].Out higherthan10percent.Insomecases,tariffwatercanreach ofthese70countries,21canbeclassiiedasemergingeconomies, consideredasequivalentto6bilateralsingoods(intradeingoods, theinitialECconsistedinfourcustomsterritories,Beneluxbeing therestbeingdevelopingcountries.
	17.	UNICE2006.	onesuchterritory)andto15bilateralsinservices(intradein
	18.	services,theinitialECconsistedinsixcountries). China's membership of Group I is an indirect way of relecting
	itsrecentaccessiontotheWTO.	5.	Indeed,thereisaclearshiftawayfromcustomsunionsand
	19.	towardsfreetradeareasbetweenthepre-andpost-1995periods. Under WTOrules, "bound"tariffsaretheonlyones,which
	6. cannotberaisedwithoutcompensatingtheaffectedtradingpart-	Indeed,thereislittleevidenceofaUSchangeofapproachin
	ners;hencetheyaretheonlyonestodeliverthelegalcertainty	termsofbilaterals.TheUSAdministrationhastakenfewinitia-
	thatissocrucialtogoodbusinesspractices.AlthoughTable2is	tivesintermsofbilaterals(AustraliaorKorea)andtheseinitia-
	basedontariffdatamoreaggregated(atthe6digitlevelofthe	tiveswerefundamentallydrivenbyforeignpolicymotives(the
	Irakwar).Atthisjuncture,theUShasnopending"grandvision" HarmoinzedSystem)thanthoseusedbythenegotiators,itpro-
	intermsofbilaterals.TheFreeTradeAreafortheAmericaslooks videsagoodviewofthesituation,despiteafewunderestimated
	tariffpeaks.	likeasleepingbeauty,theUScallsforanAsianPaciicinitiativeare
	20. 2007b.	incantatorybutinconsequential,whiletheChina-USdialoguewill AdetailedversionofthissectioncanbefoundinMesserlin mostprobablyreducethecurrenttradelowsbetweenAsiaand theUS,beitviaexchangerateadjustmentsbyAsiantradingpart-
	21.	nersorviaUSretaliatorymeasures.Lastly,theordealstogetthe Moreover,awkwarddiscontinuitiesappearatthepoints
	connectingtwodifferenttiers.Forinstance,aninitialtariffof	recentbilateralsapprovedbytheUSCongressandthemoodof
	89percentwouldbecuttoapost-Dohatariffof44.5percent,	thenewlyelectedCongress(revealedbytherequestforareview
	ofthebilateralsdemandedbythenewDemocratmajority)donot whereasaninitialtariffof91percentwouldbecuttoapost-Doha
	suggestthatstrategicchangesareontheagenda. tariffof36.4percent.Suchdiscontinuitiesmakeithardtogetan
	agreementondeiningthevarioustiers,andtheyfueltheneedof
	exceptionstoaccommodatesuchanagreement.
	22.	TheconcordancetableusedhasbeenestablishedbytheUS
	DepartmentofAgriculture.Itsplitsthewholeuniverseofthe"ag-
	ricultural"productsintofoursubsets:thebulkfarmcommodities,
	theproduce/horticultureproducts,thesemi-processedproducts
	andtheprocessedproducts.
	23.	It is expressed in Swiss-type terms for reasons already men-
	tioned,butitshouldbestressedthatitcouldbepresentedwitha
	tieredformula(itisalwayspossibletoapproximateacurvebya
	sequenceofstraightlines)thoughatthecostofdiscontinuitiesand
	complexitiesasthoseillustratedaboveinFigure1.
	24.	Forthesakeofinformation, Table4includesthecaseofa
	Swiss50.SuchaSwisscoeficientmaycreateproblemsinthefarm
	products,butinterestingly,thepoliticalbalancemaystillbeposi-
	tiveintheprocessedfoodproducts.
	25.	Forageneralanalysisoftradeliberalizationinthecaseof
	tariff-ratequotas,seeMartin2007.
	26.	ASwiss70maybeperceivedasatoonarrowexceptionfor
	copingwithEuropeanpressuregroups.Then,onecoulddiscuss
	ahigherSwisscoeficient(suchasaSwiss100)foraverysmall
	percentageoftarifflines(anapproachsymmetricaltotheone
	adoptedinNAMA).

No. 01/2007

No. 01/2007

Annex Table 8 Bound and applied tariffs, selected advanced and emerging economies Sources:Forbeset al2004, WTOSecretariat2007.

Annex: The set of tariff data in NAMA

The Table below summarizes the tariff data used for presenting the alternative proposal in NAMA (section 3).Asthesedataaredeinedatalevel(HarmonisedSystem 6 digit), which is more aggregated than the level used by the negotiators 30 the results presented in the paper do not relect a few tariff peaks.That said, the calculationsincludealreadysomanytarifflinesthatthe averagespresentedarelikelytoofferagoodviewofthe situation. The European Centre for International Political Economy (ECIPE) is an independent and non-proit policy research think tank dedicated to trade policy and other international economic policy issues of importance to Europe. ECIPE is rooted in the classical tradition of free trade and an open world economic order. ECIPE's intention is to subject international economic policy, particularly in Europe, to rigorous scrutiny of costs and beneits, and to present conclusions in a concise, readily accessible form to the European public. We aim to foster a "culture of evaluation" -largely lacking in Europe -so that better public awareness and understanding of complex issues in concrete situations can lead to intelligent discussion and improved policies. That will be ECIPE's contribution to a thriving Europe in an open world.

Advisory Board


Patrick A Messerlin

Mark Allegrini

William Colwell

Joe Guinan

Jennifer Hillman

Nicola Lightner

Courtney Phillips

Walking a Tightrope World Trade in Manufacturing and the Benefits of Binding

Is the Doha Round worth the efforts currently devoted to it? Many people-and in particular many industrialists in Europe and the United States-are not convinced. Recent estimates of the gains from what is on the table at the World Trade Organization (WTO) in Geneva are fueling these doubts. Indeed, such small gains should hardly come as a big surprise after two decades of industrial tariff cuts by the largest (developed and emerging) world economies. For instance, the average applied tariff of the 34 countries that account for 95 percent of world trade and GDP is roughly 7 percent in the manufacturing sector (see table 1, column 6). 2 No wonder that cuts in already low tariff levels do not result in large welfare gains. "Death by Success" would seem an appropriate epitaph for the WTO in the manufacturing sector.

Such a conclusion would be terribly wrong. First, it ignores the situation in agriculture and in services. These two sectors are highly protected and together they represent 75 percent of the GDP of rich and poor countries alike (although in very different proportions). Potential gains from liberalization in these sectors are huge-and industrialists will be among the chief beneficiaries, particularly as consumers of services.

Second, and of much more direct concern to the industrialists, such a conclusion relies on a deeply misplaced perception of the real situation facing the industrial sector itself.

Industrialists take for granted the current state of liberalization in manufacturing. It is time for them to wake up and realize, before it is too late, that the current world trade regime in manufacturing is a funabulist walking a tightrope above an abyss. To reach this conclusion

one need only look to the real gold mine in the Doha negotiations on industrial products: in the present case, gold means "certainty."

The World as it is -Really Today, all the largest economies apply mostly moderate or low tariffs in manufacturing. But most of them have never made the commitment that they will keep these tariffs at their current levels. For instance, exporters of industrial products to Singapore face an average zero tariff, but Singapore could increase this tariff to 6.3 percent at any time and without providing compensation to its WTO trading partners. Examples abound: average tariffs could surgeagain, at any time and with no penalty-from 3.6 to 11 percent in Australia, from 6.6 to 10.2 per cent in Korea, from 6.7 to 35.6 per cent in Indonesia, from 12.5 to 30.8 percent in Brazil, or from 11.5 to 36.2 percent in India (see table 1, columns 5 and 6). To keep things simple, all these examples are expressed in terms of average tariffs over all industrial products. But increases are likely to be higher for those tariffs that remain high-up to 300 percent!-and hence much more devastating for concerned foreign exporters and domestic consumers.

Are such dramatic reversals possible? WTO negotiators (and before them GATT negotiators) conclude agreements in terms of "bound" tariffs. WTO Members can apply tariffs that are lower than the agreed bound tariffs, but the bound tariffs are the only ones that, according to WTO rules, an importing country cannot raise without compensating its affected trading partners. As a result, they are the only ones that deliver the kind of legal certainty that business people cherish so much.

Table 1 illustrates the magnitude of the problem. Out of the 34 largest economies, only eight impose their applied tariffs at their bound levels. These eight (Canada, China, the European Union, Hong Kong, Japan, Macao, Taiwan, and the United States) are the only "certain" WTO Members-all the others are potential defaulters. 3 The fact that these eight economies represent between two-thirds and three-quarters of world GDP (depending upon the exchange-rate used) may seem reassuring. It is not. The "Quad" countries (Canada, the European Union, Japan, and the United States) accounted for roughly the same share of world GDP in 1980 (using PPP-based exchange rates) or in 1990 (using current exchange rates). In short, China and Taiwan have compensated for the declining weight of the "Quad" countries' share of world GDP in a rapidly globalizing world. But this does not mean that China and Taiwan are stabilizing the level of certainty of the world trade regime at its 1980 or 1990 level. The high growth of China and Taiwan is both recent and deeply intertwined-and hence very fragile. That will make it hard for these economies to produce the same level of certainty as the other "certain" WTO Members-assuming that such a level is remaining constant. If-when?-crisis strikes in China, nobody really knows what will happen, all the more because China's political stability is largely based on the government's capacity to deliver high growth and not just any growth.

The 26 other largest economies, whose tariffs are applied at rates below their tariff bindings, are also a source of severe systemic risk. Roughly half a dozen of them could be seen as generating moderate risk since their bound tariffs are merely 4 to 8 percent higher than the corresponding applied tariffs. But these small numbers are deceptive: they conceal huge trade flows that are crucial to our modern economies dominated by goods assembled from many components produced in many countries-with many border-crossings that make even low tariffs costly. The remaining countries individually represent smaller trade flows. But together they make up a substantial part of world trade in industrial goods (roughly 18 percent), exhibit an annual growth rate twice that of the Quad's, and the risks involved are much larger: their bound industrial tariffs are often 20 to 40 percent higher than their applied tariffs.

The benefits of binding in the Doha Round stem from the elimination of the possibility that the emerging economies-40 percent of the GDP of the rich countries-could increase their tariffs on average by 3.5 times (from roughly 8 to 28 percent for industrial goods, and from roughly 19 to 66 percent for agricultural products) at any time and without providing compensation to their WTO trading partners.

Why would it be different today?

In the late 1920s and early 1930s, the world trading system collapsed precisely because it could not deliver enough "certainty"-indeed, the notion of bound tariffs was created by witnesses to this collapse. However, many may argue that looking at such a distant past is irrelevant, dismissing the fact that, in the late 1920s, the world trade regime was 65 years old-roughly the same age as ours!4 Would it really be any "different" today? Two recent cases shed some disturbing light. In the early 2000s, Turkey was in the midst of a severe economic crisis, raising the prospect of tariff increases as a source of much-needed additional public revenue. However, ultimately Turkey did not raise tariffs because the country had entered into a customs union agreement with the European Union in 1995, agreeing to apply the EU tariff policy, including EU tariff bindings. Should Turkey thus be considered a "certain" WTO Member by proxy? Not until it becomes an EU Member Stateand this is a much-debated possibility. 5 The second case illustrates a much more common-and worrisome-situation. In the mid-1990s, Mexico was hit by one of the worst economic crises it has endured, very soon after the signing of the North American Free Trade Agreement (NAFTA) with the United States and Canada. Once again, this raised the prospect of tariff increases. Mexico decided not to raise its tariffs on imports from Canada and the United States, but to do so on more than 500 goods imported from the rest of the world. In case of a world economic crisis (a slump in the United States or European Union combined with a severe slowdown in China) such a "beggar-mostof-my-neighbors" possibility-exporting uncertainty to most trading partners, while abolishing it for very few others at the price of higher trade distortions domestically-would be a sure recipe for the world-wide and bitter collapse of the global trading system. The recent ban on food exports by 28 countries is ample evidence that a crisis atmosphere pushes governments to take politically expedient but economically unsound actions.

The Doha Package: The Pacificateur If adopted, the Doha Round package currently under discussion in Geneva would hugely improve certainty. In the industrial sector, the emerging economies would cut their average bound tariffs to roughly 13-15 percent, with very few tariffs remaining above 20 percent. For almost half of these products, the post-Doha bound tariffs would be lower than the currently applied tariffs. Because this is the only source of the current estimates of the welfare gains from the Doha negotiations on industrial goods, the estimates reflect only a small part of the overall gains to be had. For the other half, the applied tariffs would remain the same. But the bound tariffs would be cut by a huge amount, 15-18 percentage points on average-roughly 5 times the average cuts in applied tariffs. Such cuts would reduce current transaction costs, generating the "commercial opportunities" that negotiators are asking for and that are not exploited because of fear of sudden changes in countries' tariffs. They would deliver the certainty so much desired by the industrialists-and with it, the huge welfare gains that are ignored by current estimates of the benefits of the Doha Round. 6 The Doha Round negotiations in agriculture will have an even stronger "pacifying" impact because the uncertainty is much worse in "agriculture" than in manufacturing (see table 1, columns 9 to 11). Contrary to a widely-held belief, the agriculture negotiations concern processed food products in addition to farm commodities. Moreover, not only would the Doha package in agriculture bind these tariffs at a more moderate level, but it would also bind export subsidies at a very low level and domestic subsidies in agriculture at a level relatively similar to the tariff bindings. Of course, there is the risk of overly-generous "exceptions" to these moves toward liberalization. But clearly, the stronger the support for the Doha Round from the business community, the sounder the exceptions will turn out to be.

Taken together, all these results are very close to what European, U.S., and world businesses have been repeatedly asking for since the early 2000s. Without critical support from the business community, there is a serious risk that trade negotiators will lose control of the WTO talks, with the catastrophic consequences underlined above. Talleyrand, a famous French negotiator, kept saying to an ever more demanding Napoleon "Votre Majesté, surtout point trop de zèle" ("Your Majesty, not too much zeal"). Napoleon ignored Talleyrand's advice. He ended up at Waterloo.

Table 1 . The urgent need for consolidating the world trade regime

 1

	Total imports growth billions $ Real [c] [a] 3 4 14554 Gross Domestic Product billions billions US$ US$ [a] [b] 1 2 The 8 largest "true" WTO Members WTO Members EU27 [e]	average imports tariff billions $ tariff (%) tariff (%) water [d] bound applied [a] 5 6 7 8 simple average	average imports tariff billions $ tariff (%) tariff (%) water [d] bound applied [a] 9 10 11 12 Agriculture simple average

Table 2 . Additional estimates of tariff averages (%)

 2

Ten more countries, all Recently Acceded Members, could be added to these large Members, but altogether they represent less than 0.6 percent of the world trade and 0.3 percent of world GDP (even including Vietnam).

The fact that many countries have been quick to impose export taxes or restrictions (not banned by the WTO) during the recent food price increases shows the willingness of governments to adopt knee-jerk trade policy measures, even when these measures so obviously hurt their domestic interests.

It is hard to believe that the customs union between the EU and Turkey would last if full EU membership is not offered to Turkey. In the absence of full membership, Turkey would probably ask for (and get) a free trade agreement with the EU, recovering its autonomy in trade policy.

Economic analysis shows that benefits from tariff cuts are the function of a square of those tariff cuts. This means that the welfare gains associated with cuts in bound tariffs can still be (much) higher than those generated by cuts in applied tariffs, even if one takes into account the fact that a systemic failure of the world trade regime is not a certain event.