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July 15, 2010

WTO Doha Round: Cranking up the Deficit

Hufbauer-schott-wong5034 The pro-WTO Peterson Institute for International Economics (IIE) recently published a new study projecting the effects of implementing the WTO Doha Round tariff cuts that are currently “on the table”, i.e. cuts that are in the “negotiating modalities drafted by the chairs of the Doha Round negotiating groups.”

The study finds that these tariff cuts that are on the table will lead to an increase in the annual U.S. trade deficit by $6.6 billion. The authors also test a scenario in which customs reform and liberalization in services, chemicals, electronics, and “environmental goods” are added to the “on the table” tariff cuts, which is supposed to make the Doha package more attractive to the United States. However, the authors estimate that adding in these additional sectors will still make the U.S. trade deficit rise by $6.5 billion.

Nowhere does the study indicate that this significant increase in the deficit may be a problem, though. This is partly because the authors use an overly simplistic method to estimate the GDP gains that are supposed to accrue because of the Doha Round. All they do is sum the increased imports to and exports from a country and then multiply that sum by 0.46, which is supposed to yield the “GDP gains” that the trade generates for that country (see footnote 5 here where they explain this questionable procedure). They treat imports and exports indiscriminately, so U.S. GDP is supposed to gain substantially even though the deficit rises higher. Under their methodology, U.S. exports could stay constant or even decline under the Doha proposal and U.S. GDP would increase significantly as long as imports increased substantially. It’s pretty surprising that this massive 200-page study would use such a simple method that glosses over the crucial difference between rises in exports and imports – we should expect something more sophisticated.

This calculation method is strange given how national statistical agencies calculate GDP. GDP equals all spending by consumers, businesses, and the government, plus exports, minus imports. The authors’ GDP growth calculation procedure strangely treats imports and exports as if they have the same effect on GDP.

IIE’s decision to gloss over the impact of a rising deficit is especially irresponsible at a time when the U.S. trade deficit is skyrocketing. Trade flow data for May was released Tuesday and it wasn’t pretty. The deficit increased by 5 percent even though the price of imported oil fell. The rise was so significant that some financial services firms revised their second quarter GDP growth projections downward, according to Reuters:

A 2.9 percent rise in overall imports suggested U.S. demand was holding up better than some had feared. But with more of that demand being sated by overseas products, the widening trade gap was seen weighing on U.S. gross domestic product.

RBS lowered its estimate of second quarter U.S. economic growth to 2.8 percent, while JP Morgan cut its to 2.5 percent. Both had previously forecast it at 3.2 percent.

This rise in the deficit was largely driven by surging Chinese imports, and the IIE study indicates that the Doha Round will only exacerbate the problems of our trade relationship with China. The nonagricultural market access offers on the table, mostly consisting of tariff cuts on manufactured goods, will raise U.S. imports by $12.7 billion annually, but only boost exports by $3.8 billion (see Table 1.2 here). China, on the other hand, will enjoy an export boost of $15.6 billion from nonagricultural market access, but will only import $6.7 billion more. This is the result of the concessions being so unbalanced in nonagricultural market access: under the Doha scenario, U.S. exporters will pay only $2.5 billion less in tariffs to export to other countries, whereas foreign businesses exporting to the U.S. will pay $11.7 billion less in tariffs (see Table 2.3 here).

We need a trade policy that promotes more balanced trade, not more of the same with the WTO.

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