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November 04, 2011

Benefits from WTO Doha Round are a MIRAGE

As the next WTO ministerial meeting in December approaches, the debate over the economic effects of the Doha round proposals is heating up again, for the umpteenth time. (For previous rounds of handwringing and number-crunching, see here and here.) On Monday, CEPII-CIREM, a French think tank, published the results of a modeling exercise using the MIRAGE model that attempted to measure the global effects of the implementation of various Doha proposals. The EU, which commissioned this study, somehow convinced Reuters to publish their sunny spin on the results.

Here’s the short of the CEPII-CIREM study. Even under optimistic scenarios, many developing countries will be worse off because of the Doha Round, which (on average) would bring annual income growth of only a dollar to each of us.

Discouraging results from latest round of modeling of Doha Round impact

The main result of the study is that the Doha proposals on goods and services liberalization and "trade facilitation" will only lead to an increase in global GDP of about two tenths of one percent - $152 billion - by 2025.  (The press release of the EU Trade press office bizarrely focuses on the expected rise in trade flows, as if the movement of goods across borders with the associated environmental costs is beneficial in itself.)

Even assuming the study's predictions would come to pass, $152 billion is a paltry sum for a policy project that has soaked up so much energy.  It amounts to an average annual growth in global GDP of about $11 billion per year over the 14-year implementation period. Considering the Doha Round was launched in 2001, we should really amortize the $152 billion over a 24 year period, bringing the gain down to growth of $6.3 billion a year. Divide that by every person on the planet, and it’s not quite a dollar per year. So, you can get the Doha Round and risk losing your job or you can get a Coke. Your choice.

Compare this “gain” to what we could harvest from investing our policy energy elsewhere. The Global Financial Integrity Project of the Center for International Policy, for instance, estimates that global illicit outflows of money from developing countries due to corruption, tax haven activity, and other illegal activities amounted to $1.26 trillion in 2008. That's over ten times the global economic growth that CEPII-CIREM expects from the Doha round. In other words, taking strong action on tax haven abuse and corruption would yield much greater economic gains.

The small size of the overall impact is not the only concerning part of the results. The topline number on the supposed boost to global GDP does not delve into the distribution of these gains among countries or within countries. According to the study, the Doha proposals on goods and services liberalization will actually cause the economies of Sub-Saharan Africa, Mexico, and the Caribbean to shrink.  Both skilled and unskilled workers in Mexico will see their wages fall under all "core" scenarios - goods and services liberalization and trade facilitation measures. Workers - either skilled or unskilled - in Brazil, the Caribbean, North Africa, Sub-Saharan Africa, Paraguay, and Uruguay will experience falling wages under some scenarios.

Doha Round vs. 6 hours of stimulus spending, and more!

Some other discouraging results:

  • Six hours of stimulus spending brings more benefit than a year of the Doha Round results. Under the scenario of goods and services liberalization, the wages of skilled workers in the U.S. increase by about one tenth of one percent (0.12%) over 14 years. Let’s go ahead and make it 24 years, since Doha negotiations started in 2001. If the average skilled worker were earning the median annual wage of $26,000 he or she would only see a $1.30 increase in his or her total annual wage each year under this simulation. By comparison, the Congressional Budget Office estimated that the 2009 stimulus package boosted U.S. GDP by $600 billion in 2010, or about $2,000 per American. In other words, even optimistic projections of the Doha Round would only boost the average U.S. worker's purchasing power in the first year by what the stimulus did for each American in 6 hours of operation.
  • Worsened inequality. Notably, the wages of unskilled U.S. workers rise only one-fourth as much as wages of skilled workers with goods and services liberalization (0.03%). This suggests that the Doha round would increase economic inequality in the United States.
  • China imbalances grow. China's goods exports and economy grow more than those of any other economy under the Doha simulation. The increase in U.S. goods exports is about half the boost to China's exports. This suggests that Doha could aggravate the U.S. trade imbalance; in fact, the Peterson Institute estimates that Doha could boost the U.S. trade deficit by over $6 billion.
  • Farmers lose out. Annual U.S. agricultural exports would fall by $2.4 billion.  So much for promises to U.S. farmers that Doha would boost their sales.
  • Other negative impacts. Exports of manufactured goods from Canada and Argentina fall. Services exports from ASEAN, Japan, Taiwan, and Korea, among others, fall.

Junk in, junk out: ridiculous methodology

Beyond these disconcerting results, there are many reasons to believe that the MIRAGE model is overestimating the benefits and underestimating the costs of the Doha proposals.  First, it holds the trade balances of all countries constant, meaning that each country's exports and imports are forced to rise (or fall) by the same amount when the liberalization occurs. This assumption is clearly unrealistic when viewed in light of the doubling of the U.S. trade deficit as a share of GDP since the advent of the NAFTA-WTO era. As mentioned above, a pro-WTO study from the Peterson Institute that does not make this unrealistic assumption of a fixed trade balance predicted that the U.S. trade deficit will rise significantly with the Doha deal.

Another important flaw of the MIRAGE model is how it deals with the loss of government revenue resulting from tariff cuts. It simply assumes any lost tariff revenue will be replaced by a lump sum tax that does not affect economic behavior. This assumption ignores the political and administrative difficulty of imposing and enforcing a new tax in developing countries, where tariff revenue accounts for 10-20 percent of government revenue. As an illustration of this, the Congressional Budget office estimated that the fall in U.S. tariff revenue due to the implementation of the Korea, Colombia, and Panama deals would amount to $8.8 billion over the next ten years. The model also ignores the toll on economic growth that additional taxes may extract due to shifts in economic behavior that real-world taxes bring about.

Finally, the model does not take into account the costs of adjustment when workers are displaced from employment in sectors harmed by greater imports. It assumes that workers are "perfectly mobile across sectors," even though there is a skill mismatch between workers who, say, work in agriculture and the factory and services jobs that they are supposed to move into. It ignores the possible long periods of unemployment that these workers may experience as they try to acquire new skills.

Moreover, we end up spending lots of money to assist these to workers. A recent estimate found that Chinese imports were responsible for a rise in U.S. unemployment that led to an increase in government retirement payments, welfare, food stamps, and Trade Adjustment Assistance amounting to about $30 billion annually. Given Tea Party resistance to even these bandaid solutions, Doha could subject workers to displacement without any anesthetic.

If we can take anything away from this study, it is that the WTO Doha round will not solve the global economic crisis and it may even make it worse.

UPDATE (11/4):

The EU has been busy distorting the results of the study to push their line that the Doha round should be concluded, and Reuters has bought it hook-line-and-sinker.

Even the headline of the Reuters story is questionable. The "$505 billion" boost to world exports cited in the Reuters headline isn't even the results of the core scenario of the study. The $505 billion result is for a scenario with deep additional tariff cuts in chemicals, electronics, and machinery proposed by the EU and U.S. But even the Reuters article acknowledges that, "Previous negotiations on such tariffs cuts triggered fierce divisions among WTO members and are broadly not expected to resume soon." It's hard to understand why the Reuters story highlighted the results of a deal that it says is not feasible. It appears to be just a regurgitation of the EU press release about the study, which touted this number as well. The fact that this $505 billion number does not even appear in the study itself gives you a sense of how little importance the academic authors of the report placed on this estimate. (The number is in fact a sum of some numbers in a table deep in the report.)

Furthermore, Reuters' focus upon the "world exports" number is puzzling, since rising global exports just means that fewer goods are being consumed in the countries that they were produced. The export growth cannot be described as a benefit in itself, which is how the EU discusses it. The actual growth of the world economy from the scenario is only one-third as much as the $505 billion increase in world exports.  Plus, we cannot forget that all goods that are exported must be imported by another country, possibly causing labor dislocation in sensitive industries. So the global exports number is nothing to celebrate. Again, the emphasis of the authors of the report reveals how off-base the EU press release and the Reuters story is: The executive summary of the study only gives numbers for the GDP changes rather than the export results.

Finally, the EU press release on the study also verges on outright misrepresentation of the study. The release states, "an agreement would also lead to positive effects on tariff revenue for some regions," which is a claim that does not appear in the study itself. It's unclear how the EU came to this conclusion, because, as discussed above, tariff cuts typically lead to a decline in tariff revenue that must be made up by imposing additional taxes. The release also states, "A successful Doha agreement would not negatively affect wages of EU workers. Wages for skilled and unskilled labour would even increase by around 0.3%." It failed to reveal, however, that the study's results for skilled and unskilled labor are very different: the wages of unskilled workers grow by half the wages of skilled workers, contributing to inequality.

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