In the early hours of Sunday morning, the 18th of December, as the negotiations amongst about 30 Ministers began to conclude, the "grand bargain" that was needed for the WTO Hong Kong Ministerial Meeting to succeed was clearly in sight. However, there were significant differences in the perspectives of these Ministers, on the composition of the key elements of the bargain and the timing of the Doha deal. In this assessment we provide a perspective on the recent Hong Kong Ministerial Meeting and outline the central fault lines of this "grand bargain". Some suggestions will be made to advance the negotiations towards a successful achievement of this "grand bargain".

The central fault line or principle in the current Doha talks was clearly articulated by the Commissioner of the EU, Peter Mandelson, in his statement after the Hong Kong Meeting In this statement Mandelson agues that the EU was unlikely to make further concessions in the current Doha negotiations given the paucity of concessions, in his view, that are on offer from the EU's trading partners. He goes on to state that there was no possibility of him using the WTO to push through, further, or early, reforms of the EU Common Agricultural Policy (CAP). Although the EU at its recent summit2 had decided to review the EU CAP budget in 2008/2009, Mandelson warns that there would be no links between this and the efforts to conclude the Doha negotiations early in 2007.

He argues further that given real incentives in the Doha industrial goods and services negotiations, the EU could provide "more predictability and transparency for agricultural exporters" (referring to the demands of the CAIRNs Group, G20 and the US) and show more flexibility in the range of products that the EU has demanded should be deemed "sensitive".3 Mandelson also questioned "Lamys' view" that further progress could be made by April 2006 ie, the achievement of full modalities in the agriculture and industrial products (NAMA) negotiations.4 In this regard Mandelson states rather ominously in the same article that "the EU cannot be pushed into an agreement that simply is not there".

Mandelson's assessment above sets the stage for the complex post-Hong Kong Doha negotiations. There are three key issues, that he has raised, which need to be challenged. Firstly, the argument that the EU has done enough in making concessions in the

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1 See' Trade chief says EU united on farm stance", Financial Times, 21/12/2005, p.2.

2 The EU Summit was held on December 16th and 17th. see "EU horse-trading was humiliating - but failure would have been worse" FT 19/12/2005 p.3

3 The EU has demanded a so- called "pivot" in the tariff cutting formula i.e., the flexibility to deviate ITom the agreed percentage cut by a maximum of two thirds, with a 20 percent minimum cut. for about 70 percent of their tariff lines. In addition, the EU insists on designating up to 8 percent of its tariff lines as being "sensitive". The EU intends to make only minimal cuts in these so called "sensitive products".

4 The Hong Kong Declaration has set the deadline for the conclusion of the negotiations for full modalities to be the end of April 2006.

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agriculture negotiations is simply not true, as the current EU offer on Market Access made by Mandelson on the 28th of October, will result in no further real market opening or acceleration of CAP reforms. 5 He has argued that the only possible concessions the EU could make, notwithstanding any possible changes in the EU budget, is some additional flexibility in its demand to continue to maintain the current high levels of protection for its sensitive sectors.

Secondly, his view that other WTO members (especially the so- called "advanced developing countries") need to make real concessions in industrial goods and services for the EU to make the above additional concessions is an attempt to raise the bar above the heads of the majority of the major developing countries, and thus shift the burden of adjustment in this Round from the major agricultural subsidizers to the major developing countries. Mandelson's argument that the EU needs the major developing countries to make these concessions before the EU can make even some incremental concessions is spurious. There is no discernable major drive by the EUs industrial producers or service providers for additional market access into developing country markets. On the contrary, these interests have voiced their concern with regard to the disproportionate political influence of the EUs agricultural lobbies. There is legitimate suspicion that Mandelson's argument is an attempt to shift the blame for lack of movement in the Doha Round to the major developing countries.

In addition, a group of developing countries6 have argued that the real danger of a joint push by the EU and other developed countries (notably the US)7 to seek additional extensive concessions from developing countries in the NAMA and Services negotiations is that the development content of the Round will be turned on its head, with the developed countries making more inroads into developing country markets and with developing countries still facing high levels of protection and distortions in global markets for products of export interest to them. In a papers submitted to the Committee on Trade and Development and the Trade Negotiating Committee of the WTO, developing countries have argued that the strategic objective for this round of negotiations should be for industrial countries to reduce the protection they grant to inefficient sectors that frustrate the growth potential of developing countries. Reflecting on the recent proposals9 of developed countries they have stated that these demands in NAMA and Services will create enormous and disproportionate burdens of adjustment

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5 "Making Hong Kong a Success: Europe's contribution" European Commission. Brussels. 28th October 2005.

6 See Statement made by South Africa to the 55th session of the Committee on Trade and Development on behalf of Argentina, Brazil, India, Indonesia, Namibia, the Philippines and Venezuela. 28th of November 2005.

7 The US has stated on several occasions that it will work shoulder to shoulder with the EU to seek significant market access in the markets of advanced developing countries in the NAMA and Services negotiations. See FT…

8 "Reclaiming Development in the WTO Doha Development Round" submission made to the 55th session of the Committee on Trade and Development on behalf of Argentina, Brazil, India, Indonesia, Namibia, the Philippines and Venezuela. 28th of November 2005.

9 Making Hong Kong a Success: Europe's contribution" European Commission. Brussels. 28111 October 2005.

that developing countries would have to bear in their industrial and service sectors. In sharp contrast the EU has made insignificant offers to open its markets in the agriculture negotiations, and both the EU and US have proposed a co-efficient for developed countries in the NAMA negotiations that will require them to make no real adjustment in their industrial sectors. They have thus argued that the EU and the US are thus seeking a round for free!

Thirdly, Mandelson's assertion that the EU would not be prepared to make any significant move in offering even the minimal additional concessions that he referred to above, by April 200610, , will make the possibility of concluding the Doha Round by the end of2006, or early 2007, even less likely. In addition, developing countries will be reluctant to make significant concessions early in the post-Hong Kong period, unless the EU reflects the political will to make real concessions in the agriculture negotiations that are in line with the Doha Mandate.

There is a second fault line or a secondary set of issues which are of great importance to the majority of the poorer and smaller members of the WTO, and that are a crucial component of the Doha grand bargain. Without a successful resolution of these issues, a Doha deal or grand bargain will simply not be struck. These issues relate to addressing the trade related development challenges faced by Least Developed Countries, and the so-called "small weak and vulnerable developing countries". The specific development issues raised by these countries include, the need to provide duty free quota free market access to LDCs, cotton, preference erosion, special flexibilities for small, weak and vulnerable economies and development aid.

There was a great deal of posturing on these issues before the Hong Kong Ministerial Meeting. The EU trade Commissioner Peter Mandelson, in a letter to WTO members written in October 2005, challenged Ministers to provide a development package on these issues in Hong Kong.11 There was great suspicion amongst developing countries that the EU was again trying to divert attention from the core issues of development in tl1e Round, which related to developing country demands for developed countries to remove their trade distorting subsidies and protection of agricultural products. In addition, the US delegation was suspicious that in focussing on these development specific issues, the EU was attempting to divert attention to the US inability to deliver concrete results on the cotton issue and on the issue of duty free, quota free market access for LDC’s.

After 6 days of intense negotiations in Hong Kong (13th to the 18th of December), Ministers managed to cobble together an agreement late on Sunday night, the 18th of December, several hours past the agreed deadline. For the major developing countries in

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10 The Hong Kong Ministerial Declaration calls for full modalities in Agriculture and NAMA to be agreed by the end of April 2006.

11 Letter dated 9th October 2005.

the G20 the agreement was no major breakthrough¹², but a small and significant step forward in the Doha Round. For LDCs and other small, weak and vulnerable developing countries, there were some incremental gains made in the Hong Kong Declaration, but no breakthrough emerged on their major demands. We briefly evaluate the results of the negotiations in Hong Kong below.

In Agriculture, the EU had reluctantly agreed to table an offer to eliminate its export subsidies by 2013. After much difficult negotiations in the chairman's consultative group in the final hours of the negotiations, the G20 members in the meeting agreed to this offer provided that "the substantial part is realized by the end of the first half of the implementation period". Before the Hong Kong Ministerial Meeting there was great pressure on the EU to decide on this issue in Hong Kong, as the G20, CAIRNS Group, the Africa Group, the ACP, LDC Group and the US, all called for export subsidies to be eliminated by 2010.

There was no substantial advance in the Agriculture negotiations in Hong Kong since the July 2004 Framework Agreement. In addition to re-stating the decisions already reached in the July Framework agreement, the final draft of the Hong Kong Declaration reflected some significant movements by WTO members in the technical work undertaken in Geneva, since then. These issues related to the conversion of specific tariffs to their ad valorem tariff equivalents and some convergences reached to use three bands for cuts in domestic support subsidies and four bands for the tariff cuts envisaged in the market access negotiations.

In the NAMA negotiations, several of the major developing countries including South Africa, India and Brazil were of the view that the decisions reached on NAMA at the Hong Kong Ministerial Conference did not represent a roll back of gains made in Doha or in the July 2004 Framework agreement. Indeed some of these gains made in the NAMA negotiations, for example, on flexibilities agreed to in the July 2004 Framework, were under threat in the past few months in Geneva. Whilst the [mal draft of the Hong Kong Declaration reflected members agreement to adopt a Swiss Formula, the option to use different types of Swiss formulae still remain to be decided and are not foreclosed. The major advance for developing countries in this text was the decision to link the ambition in the market access negotiations in Agriculture with NAMA This allows developing countries to argue that WTO members would need to produce a formula in the market access negotiations in agriculture that is "balanced and proportionate" to that in the NAMA negotiations.

On Services, the existing GATSI6 development friendly methodology in the services negotiations were under threat of being fundamentally altered by proposals made in the first draft of the Hong Kong Ministerial texe7. Developed countries, and a few developing countries were attempting to substantially change the methodology of the services negotiations in an attempt to raise the ambition of the negotiations, in a manner that would increase the pressure on less competitive developing countries. There was widespread opposition to these attempts by the African Group, the ACP and several ASEAN countries.

In the Draft Ministerial textl8 that was forwarded to the Ministers, the quantitative targets insisted on by the ED was deleted. There were a number of remaining problems that these countries, including South Mica, had with this text. Firstly, the chapeau of the

Ministerial draft text did not state that the new methodology proposed in the annex (Annex C) was not agreed. Thus, at the insistence of those countries that had substantive objections to some elements of Annex C, the chapeau of the Ministerial text that referred to Annex C was bracketed.

Negotiations in Hong Kong focussed on the changes needed by these countries before they agreed to remove the brackets. In the course of the negotiations in Hong Kong these members succeeded in making two significant changes to Annex C. Firstly in the section on Objectives the words "strive to achieve the following objectives" was replaced with

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13 See TN/MAIW/65 "Market Access for Non-Agricultural Products. Flexibilities for Developing Countries" Communication from Argentina, Bolivarian Republic of Venezuela, Brazil, China, Egypt, India, Indonesia, Namibia, Pakistan, Philippines and South Afiica. 8th November 2005.

14 See letter by the above countries, including Tunisia, sent to the Chairman of the Conference and the Director General at the Hong Kong Ministerial Conference.

15 See WT/MIN (05)/W/3/Rev.2. Para 24 of the "Draft Ministerial Declaration". Doha Work Programme. 18th December 2005.

16 The current methodology for the negotiations in Services is based on the General Agreement on Trade in Services (2000) and the GATS negotiating guidelines agreed by the WTO in 2001. These agreements call for a positive list approach where countries choose the sectors they wish to make concessions in and the extent to which they wish to open their markets. Secondly, the current negotiating methodology that is largely by members is a bilateral request and offer method although a p1uri1ateral approach is also provided for by the above guiding documents.

17 See WT/MIN (05) W/3 "Draft Ministerial Text". Doha Work Programme. 7th December 2005.

18 WT/MIN(05) W/3. "Draft Ministerial Text". Doha Work Programme. 7th December 2005

"should be guided, to the maximum extent possible, by the following objectives". Most developing countries viewed these objectives as being too ambitious and prescriptive. Secondly, these countries also objected to the prescriptive language of the proposed methodology for plurilateral negotiations in services. The compromise struck underlined the fact that the existing flexibilities provided for in the GATS and the Negotiating Guidelines would still remain the bases for the negotiations in services.

There were 5 key development specific issues identified by the EU19 and other members in the period before Hong Kong: a development package for LDCs, Cotton, preference erosion, the specific concerns of small, weak and vulnerable countries and the question of an "Aid for Trade" envelope to support the needs of developing countries. Despite intense negotiations on both the LDC duty free, quota free issue and the need for an early harvest on cotton, the so-called "Development Package" proposed by the EU failed to materialize in Hong Kong.

For the LDCs the compromise offered by the US after 6 days of intense negotiations, to provide duty free, quota free market access for up to 97 percent of tariff lines and to progressively increase this, with no obligation to reach 100 percent, was not acceptable to LDCs. The US argued that it could not offer to extend full product coverage to countries such as Bangladesh and Cambodia which were competitive in some products, such as Textiles, as this would displace African countries existing preferential market access provided under the US AGO A preferential scheme. Pakistan surprised most members by arguing that it would not accept a deal for LDCs which did not provide some comfort for its fear that preferential textile exports from Bangladesh, in terms of the proposed deal, could displace a significant part of its exports into the US market.

LDCs decided not to accept the US offer as they argued that the 3 percent exemption would allow the US to exclude almost all the products of export interest to them. In the statement made to WTO members at the fmal plenary on Sunday evening (18th December 2005) the co-ordinator of the LDCs, Minister Patel of Zambia, thus called for the Annex on LDCs to be part of the ongoing negotiations in Geneva and to be used as a bases to develop modalities to conclude the negotiations on LDCs.

The four West African cotton producing countries pleaded passionately for an early harvest in the cotton negotiations. In response, the US delegation, insisted that they did

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19 See Letter by Peter Mandelson sent to WTO Trade Ministers dated 9th October 2005. Mandelson identifies five deliverables for Hong Kong in this letter, including the so-called implementation issues. In their subsequent position paper, dated the 28th of October (referred to above), the EC supported the need for "specific actions to overcome the distortions to trade on cotton" and "early implementation" of such actions.

However, on the most significant demand of the C4 countries and other members, ie the need to reduce trade distorting cotton subsidies, the US did not agree to an early harvest. As part of the final agreement, both the USTR and the four West African cotton subsidies, the US did not agree to an early harvest.

As part of the final agreement, both the USTR and the four West African cotton producers (C4 countries) agreed to continue the negotiations in Geneva, in the post Hong Kong period, with the C4 countries still maintaining their demand for an early harvest not linked to the Doha agriculture negotiations.

On the issue of erosion of preferences and the special needs of small, vulnerable economies, the ACP group succeeded in gaining some further recognition of these concerns in the NAMA negotiations and a commitment to address these issues in the ongoing Doha negotiations.²⁰

Thus there was no significant movement or early harvest on any of the 5 identified development specific issues in Hong Kong. Whilst some incremental advances were made on the so-called development package, greater political will is required to advance these issues in the post - Hong Kong period. In most cases it has become clear that there will, or can, be no early harvest on these issues as the political will and capacity of the major countries to deliver on these issues will depend on the ambition to be agreed on the core issues in the Doha negotiations viz, Agriculture, NAMA, Services and the related disciplines. Thus for these countries to make some gains from the Doha Round and

advance their issues, there will need to be an early conclusion to the Doha Round as a whole, with a high level of ambition on the core issues. 23

The post - Hong Kong work programme and the timing for the conclusion of the Doha Round did not obtain much consideration by Ministers in Hong Kong. Ministers simply

assumed that the Round should be concluded by the end of 2006. Thus the timetable for the achievement of full modalities in Agriculture and NAMA was decided to be 30 April 2006 and the completion of schedules based on these modalities was set for 31^st July 2006.

There was no discussion of how the political will to complete the task of achieving full modalities on Agriculture and NAMA by the end of April 2006, could be developed within the next four months. Already the EU Commissioner, Peter Mandelson, has signalled that the EU does not have the will to finalize full modalities in a manner that will require them to make significantly new concessions in the agriculture negotiations (discussed above). Notwithstanding this, the EU will continue to pressure others, particularly, the major developing countries to make additional onerous concessions in the NAMA and Services negotiations.24 A failure to achieve any real movement on these core issues of the negotiations and resolve the fundamental fault line in the Doha Round is also likely to have a detrimental effect on any possible resolution of the specific development issues of interest to the majority of least developed and small weak and vulnerable developing countries.

Advancing the Doha negotiations in the post - Hong Kong period will require renewed political commitment and political will by the major developed and developing countries. The US will need to play its part in making more significant offers to reduce its trade distorting subsidies and discipline its farm support in line with new WTO rules. The US will also need to display greater political will to address the needs of the Least Developed Countries and small weak and vulnerable members of the WTO. Without an ambitious effort by all WTO members to address these specific issues of interest to these members of the WTO, a grand bargain is unlikely to emerge.

The major developing countries represented in the G20 and the "NAMA 11" have displayed a firm resolve to maintain the high level of ambition of the Round and defend the development content of the Doha Round thus far. They have called for more open and undistorted trade and have signalled their willingness to make a contribution in this regard provided this is proportionate to their level of development and the contribution of the developed countries. In their recent paper they have committed themselves to also making a contribution towards addressing the development challenges of the Least

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23 See also Ismail, F. "How can Least Developed Countries and other small, weak and vulnerable developing countries also gain from the Doha Development Round?" forthcoming in Journal of World Trade. February 2006.

Developed Countries and the small, weak and vulnerable countries.25 Their leadership in advancing these objectives and engaging effectively with developed and other developing countries to build the consensus needed for the round to succeed will be crucial in the year ahead.

There was renewed optimism that developing countries will be able to manage and resolve their differences whilst keeping the pressure on developed countries to deliver on the development content of the round in Hong Kong when the major developing country groupings including the G20, the G33, the ACP, the LDCs, the African Group and the Small Economies met at Ministerial level. These groups agreed that agriculture is central to the round and to development and were united in calling for export subsidies to be eliminated by 2010. The all agreed to address the specific development challenges facing developing countries in the Doha Round. In exchange for the strong support of the G20 countries for their concerns in the Round, including that of preference erosion, the least developed countries and the small, weak and vulnerable countries should not obstruct or delay the market access needs of G20 and other more competitive developing countries.

At this stage, however, the EU stands to be the main obstacle to progress in the Doha Round. Unless significant political pressure is brought to bear on the EU member states in the next few months the WTO is set to miss its next deadline of achieving full modalities, by April 2006 and will certainly not conclude the Round by the end of 2006. The EU will hope that the resolve of the demandeurs (in the G20, Cairns Group and the US) for further agricultural reform in the EU will wane and that they will settle for a lower ambition nom the Doha Round. For the G20 and other developing countries accepting such a reduced ambition will mean that the development content of the Doha Round will have little, if any, meaning and the WTO will continue to be seen to be unfair and imbalanced and having failed to address the needs of developing countries yet again!

Faizel Ismail

23rd December 2005.

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