World Trade Organization: Cancun Ministerial Fails to Move Global Trade Negotiations Forward; Next Steps Uncertain

World Trade Organization: Cancun Ministerial Fails to Move Global
Trade Negotiations Forward; Next Steps Uncertain (15-JAN-04,
GAO-04-250).

Trade ministers from 146 members of the World Trade Organization
(WTO), representing 93 percent of global commerce, convened in
Cancun, Mexico, in September 2003. Their goal was to provide
direction for ongoing trade negotiations involving a broad set of
issues that included agriculture, nonagricultural market access,
services, and special treatment for developing countries. These
negotiations, part of the global round of trade liberalizing
talks launched in November 2001 at Doha, Qatar, are an important
means of providing impetus to the world's economy. The round was
supposed to be completed by January 1, 2005. However, the Cancun
Ministerial Conference ultimately collapsed without ministers
reaching agreement on any of the key issues. GAO was asked to
analyze (1) the divisions on key issues for the Cancun
Ministerial Conference and how they were dealt with at Cancun and
(2) the factors that influenced the outcome of the Cancun
Ministerial Conference.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-04-250
ACCNO: A09115
TITLE: World Trade Organization: Cancun Ministerial Fails to
Move Global Trade Negotiations Forward; Next Steps Uncertain
DATE: 01/15/2004
SUBJECT: International trade
International trade regulation
Internal controls
International organizations
Agricultural policies
Developing countries
Policy evaluation
Cancun (Mexico)
Doha (Qatar)

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GAO-04-250

United States General Accounting Office

GAO Report to the Chairman, Committee on Finance, U.S. Senate, and to the

Chairman, Committee on Ways and Means, House of Representatives

January 2004

WORLD TRADE
ORGANIZATION

Cancun Ministerial Fails to Move Global Trade Negotiations Forward; Next Steps
Uncertain

GAO-04-250

Highlights of GAO-04-250, a report to the Chairman, Committee on Finance,
U.S. Senate, and to the Chairman, Committee on Ways and Means, House of
Representatives

January 2004

WORLD TRADE ORGANIZATION

Cancun Ministerial Fails to Move Global Trade Negotiations Forward; Next Steps
Uncertain

Ministers attending the September 2003 Cancun Ministerial Conference
remained sharply divided on handling key issues: agricultural reform,
adding new subjects for WTO commitments, nonagricultural market access,
services (such as financial and telecommunications services), and special
and differential treatment for developing countries. Many participants
agreed that attaining agricultural reform was essential to making progress
on other issues. However, ministers disagreed on how each nation would cut
tariffs and subsidies. Key countries rejected as inadequate proposed U.S.
and European Union reductions in subsidies, but the U.S. and EU felt key
developing nations were not contributing to reform by agreeing to open
their markets. Ministers did not assuage West African nations' concerns
about disruption in world cotton markets: The United States and others saw
requests for compensation as inappropriate and tied subsidy cuts to
attaining longer-term agricultural reform. Unconvinced of the benefits,
many developing countries resisted new subjects-particularly investment
and competition (antitrust) policy. Lowering tariffs to nonagricultural
goods offered promise of increasing trade for both developed and
developing countries, but still divided them. Services and special
treatment engendered less confrontation, but still did not progress in the
absence of the compromises that were required to achieve a satisfactory
balance among the WTO's large and increasingly diverse membership.

Several other factors contributed to the impasse at Cancun. Among them
were a complex conference agenda; no agreed-upon starting point for the
talks; a large number of participants, with shifting alliances; competing
visions of the talks' goals; and North-South tensions that made it
difficult to bridge wide divergences on issues. WTO decision-making
procedures proved unable to build the consensus required to attain
agreement. Thus, completing the Doha Round by the January 2005 deadline is
in jeopardy.

Trade Ministers at Cancun Unable to Attain Satisfactory Balance among
Differing Priorities for Developing and Developed Countries, Preventing
Agreement on Any Issue

www.gao.gov/cgi-bin/getrpt?GAO-04-250.

To view the full product, including the scope and methodology, click on
the link above. For more information, contact Loren Yager at (202)
512-4347 or [email protected].

Differing Priorities Issues

Developed country priorities o Agriculture

o Agricultural market access

o Lowering tariffs on manufactured goods o Market access

o New subjects for WTO commitments

o Services liberalization o Special and differential treatment

Developing country priorities o New subjects for

o Agricultural subsidies WTO commitments

o Cotton market disruption

o Special and differential treatment o Services

o Implementing prior commitments

liberalization

Sources: GAO and MapArt.

Outcome No agreement No agreement

No agreement

No agreement No agreement

Contents

Letter

Results in Brief
Background
Stalemate Loomed on Eve of Cancun Ministerial, as Preparatory

Process Was Slow to Yield Progress Differences on Key Issues Remain
Unresolved after the Cancun

Ministerial Several Factors Cited in the Talks' Collapse Concluding
Observations Agency Comments and Our Evaluation

1 2 3

10 27 33 35

Appendixes

Appendix I: Appendix II:

Appendix III: Appendix IV:

Appendix V: Objectives, Scope, and Methodology

Significant Events in the WTO Negotiations before and during the Cancun
Ministerial Conference

"Developing Countries" in the World Trade Organization

Comments from the Office of the U.S. Trade Representative

GAO Contacts and Staff Acknowledgments

GAO Contacts
Staff Acknowledgments

49 49 49

Table Table 1: "Developing" World Trade Organization Members as of July
2003

Key Milestones through the Fifth Ministerial
Figures Figure 1: Conference, as Planned at the Beginning of
Negotiations 5
Figure 2: Comparison of Harmonizing Formula to
Across-the-Board Tariff Cut 13
Figure 3: Chairman's Proposal Based on Average Bound Tariffs 20
Figure 4: Key Negotiating Deadlines Missed Before September
2003 Cancun Ministerial 28

Contents

Abbreviations

ACP African, Caribbean, Pacific
CAP Common Agricultural Policy
EU European Union
GNI gross national income
LDC least developed country
NGO nongovernmental organization
TNC Trade Negotiations Committee
TRIPS Agreement on Trade-Related Aspects of Intellectual Property

Rights USTR Office of the U.S. Trade Representative WTO World Trade
Organization

This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
its entirety without further permission from GAO. However, because this
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copyright holder may be necessary if you wish to reproduce this material
separately.

United States General Accounting Office Washington, D.C. 20548

January 15, 2004

The Honorable Charles E. Grassley
Chairman
Committee on Finance
United States Senate

The Honorable William H. Thomas
Chairman
Committee on Ways and Means
House of Representatives

Trade ministers from 146 members of the World Trade Organization (WTO),
representing 93 percent of global commerce, convened in Cancun, Mexico,
in September 2003. Their goal was to provide direction for ongoing global
trade negotiations. These negotiations, part of the global round of trade
liberalizing talks launched in November 2001 at Doha, Qatar, are an
important means of providing stimulus to the world's economy by lowering
barriers to international trade in goods and services.1 However, the
Cancun
Ministerial Conference ultimately collapsed without ministers reaching
agreement on any key issues, thus impairing progress toward concluding
the round by its scheduled completion date of January 1, 2005.

Because of the collapse of the ministerial in Cancun, Mexico, in September
2003, you asked us to analyze the progress and status of the Doha Round
negotiations and the factors contributing to the meeting's ultimate lack
of
success. In this report, we describe (1) the overall status of the
negotiations
on the eve of the WTO ministerial conference at Cancun, (2) the divisions
on key issues for the Cancun Ministerial Conference and how they were
dealt with at Cancun, and (3) the factors that influenced the outcome of
the
Cancun Ministerial Conference.

To address these objectives, we met with and obtained documents from a
wide variety of World Trade Organization, U.S., and foreign government
officials in Washington, D.C., and Geneva, Switzerland, the WTO's
headquarters. In addition, we met with officials from private sector
groups.
We also attended the Cancun Ministerial Conference. A full description of
our scope and methodology can be found in appendix I.

1The negotiations are formally called the Doha Development Agenda but are
commonly referred to as the Doha Round.

Results in Brief On the eve of the World Trade Organization's Cancun
Ministerial Conference in September 2003, the Doha Development round
negotiations were behind schedule, and their successful completion was in
doubt, based on our analysis and interviews with officials participating
in the talks. The Cancun ministerial had symbolic and practical importance
to the Doha Round of WTO negotiations, which, according to official status
reports, had seen limited progress since its launching at the last meeting
of trade ministers in November 2001. The Cancun ministerial meeting had
two important goals, one symbolic and one practical. Symbolically, the
Cancun meeting afforded ministers an opportunity to regain momentum
necessary to conclude the Doha Round of negotiations by the scheduled
January 2005 deadline. Practically, ministers needed to provide direction
to negotiators on key issues that had thus far eluded consensus. With
stalemate in the ongoing global trade negotiations looming, by July 2003,
it was clear that a long list of required action items faced ministers at
Cancun. However, only in the final weeks before the ministerial did
countries begin to make concessions and move away from their long-held
positions.

Hopes for breakthroughs still accompanied their September 2003 meeting,
but ministers from WTO members ultimately were unable to bridge the wide
substantive differences on key issues that faced them coming into Cancun,
and as a result these key issues must still be dealt with for the round to
continue. They recognized that making progress on agriculture was key to
achieving progress in other areas. However, agreement on detailed methods
to accomplish the goal of achieving significant agricultural reform
through cuts in tariffs and subsidies proved impossible. Meanwhile,
efforts by the European Union (EU), Japan, and others to add new issues
such as investment to the global system of trade rules continued to
engender strong resistance, particularly from those developing nations
that remained unconvinced that the gains would outweigh the costs. On
nonagricultural market access, discussions never resolved the key
questions of how deeply developing nations, particularly the more advanced
ones, would cut tariffs and what flexibility they would retain to insulate
sensitive sectors. Ongoing services negotiations failed to receive a
needed boost in participation, and many developing countries remained
dissatisfied with proposed responses to their demands for special
treatment and for relief from difficulties they were still experiencing in
implementing existing WTO obligations.

Several other factors influenced the outcome of and contributed to the
impasse at Cancun. The agenda for Cancun itself was large and complex

because WTO members had missed earlier deadlines for decisions. As a
result, ministers were asked to achieve in 5 days what had proved
impossible to accomplish in the prior 22 months-all without the benefit of
agreement to use the text provided as a starting point for discussion.
Meanwhile, the sheer number of participating countries and emerging
alliances made consensus-building difficult. For example, the assertive
approach to agricultural reform by a group of key developing nations led
by Brazil put the United States and the EU, traditionally at odds over
agriculture, on the defensive together against calls for cuts in their
domestic support payments. North-South tensions between developing and
developed countries, already latent in the declaration that launched the
round, became exacerbated. Noting that the ongoing talks are termed the
"Doha Development Agenda," developing countries stressed their vision that
the focus should be on addressing their needs and demands. However,
developed nations were not prepared to liberalize their policies
unilaterally and argued that lowering trade barriers is pro-, not anti-,
development. Additionally, an initiative for immediate reform of the
cotton sector, an issue of economic importance to several West and Central
African nations, was difficult for the United States and others to deal
with, in part because it is tied to the broader and more long-term
question of agriculture reform. Facing wide substantive divergences and
limited decision-making procedures, the WTO proved unable to build the
consensus required for attaining agreement at Cancun.

Background The WTO administers rules for international trade, provides a
mechanism for settling disputes, and offers a forum for conducting trade
negotiations. Such negotiations periodically involve comprehensive
"rounds," with defined beginnings and ends, in which a large package of
trade concessions among members is developed and ultimately agreed on as a
single package. A total of eight rounds have been completed in the trading
system's 56-year history. Each of the last 3 rounds cut industrial
nations' tariffs by about one-third overall.2

WTO membership has increased since the organization's creation in 1995 to
146 members, up from 90 contracting parties of the General Agreement on
Tariffs and Trade (the WTO's predecessor) when the Uruguay Round of
negotiations was launched in 1986. WTO membership is also diverse in

2See WTO, Cancun Briefing Notes, "Facts for the Fifth,"
http://www.wto.org/english/thewto_e/minist_e/min03_e/brief_e/brief24_e.htm.

terms of economic development, consisting of most developed countries and
numerous developing countries. The WTO has no formal definition of a
"developing country." However, the World Bank classifies 105 current WTO
members, or approximately 72 percent, as developing countries. In
addition, 30 members, or 21 percent of the total, are officially
designated by the United Nations as "least developed countries."3

The ministerial conference is the highest decision-making authority in the
WTO and consists of trade ministers from all WTO members.4 The outcome of
ministerial conferences is reflected in a fully agreed-upon ministerial
declaration. The substance of these declarations is important because it
guides future work by outlining an agenda and deadlines for the WTO until
the next ministerial conference. The WTO General Council, made up of
representatives from all WTO members, implements decisions that members
adopt in between ministerial conferences. Decisions in the WTO are made by
consensus-or absence of dissent-among all members rather than on a
majority of member votes, as it is in many other international
organizations.

At the fourth ministerial conference in Doha, Qatar, in November 2001, WTO
members were able to reach consensus on a new, comprehensive negotiating
round, officially called the Doha Development Agenda.5 The Doha Round is
the first round of global trade negotiations since the conclusion of the
Uruguay Round in 1994. The Doha Declaration sets forth a work program for
the negotiations on agriculture, services, nonagricultural market access,
and other issues. In addition, the work program emphasizes the development
benefits of trade and the need to provide assistance to developing
countries to help them take advantage of these benefits. The Doha
Declaration also sets forth a structure and series of interim deadlines
for the negotiations. Specifically, it established a Trade Negotiations
Committee (TNC) open to representatives from all WTO members to oversee
the negotiations, as well as several subsidiary bodies. In addition, it
laid out several deadlines and other milestones through the

3The 30 least developed countries are listed in appendix III. WTO rules
provide these nations special treatment.

4According to WTO rules, ministerial conferences are to be held at least
once every 2 years.

5For additional information on the fourth ministerial conference and the
Doha Development Agenda, see U.S. General Accounting Office, World Trade
Organization: Early Decisions Are Vital to Progress in Ongoing
Negotiations, GAO-02-879 (Washington, D.C.: Sept. 4, 2002).

next ministerial conference by which time negotiators were to make
decisions on issues under negotiation. In the months following Doha, WTO
members agreed that the next ministerial conference would occur in Cancun,
Mexico, in September 2003. Figure 1 presents key milestones through the
Cancun Ministerial Conference.

Figure 1: Key Milestones through the Fifth Ministerial Conference, as
Planned at the Beginning of Negotiations

aModalities include rules and guidelines for future negotiations.

The Doha Declaration also set several general goals for the next (Cancun)
ministerial conference, namely, to take stock of progress at midpoint of
the Doha negotiations, to provide necessary political guidance, and to
make decisions as necessary. However, at their fifth ministerial
conference held in Cancun, Mexico, from September 10 to 14, 2003, WTO
ministers were neither able to achieve these goals nor bridge wide
differences on individual negotiating issues. They concluded the
conference with only an agreement to continue consultations and convene a
meeting of the General Council by mid-December 2003 to take actions
necessary to move toward concluding the negotiations.

Stalemate Loomed on Eve of Cancun Ministerial, as Preparatory Process Was
Slow to Yield Progress

The Cancun Ministerial Conference provided an opportunity for both
symbolic and practical progress in the Doha Round of negotiations. These
opportunities were of heightened importance because negotiators had by
their own admission failed to make sufficient progress to meet interim
deadlines set out in the Doha Declaration, at least in part because
members were awaiting the results of the agricultural reform efforts in
the EU. Consequently, real give-and-take did not truly begin until the
final weeks before the ministerial, leaving little time to bridge the
substantial differences that existed on key issues.

Cancun Ministerial Held Symbolic and Practical Importance for the
Negotiations

The September 2003 WTO Ministerial Conference held in Cancun, Mexico, had
symbolic and practical importance for the Doha Round of negotiations. On
the symbolic level, several WTO officials we met prior to the meeting
noted that the Cancun Ministerial Conference might be a means to regain
the momentum needed to bring the Doha Round to a successful conclusion.
The Doha Round promised to be the most comprehensive round of global trade
negotiations yet, involving a commitment to further liberalize trade,
update trade rules, and further integrate developing countries into the
world economy. The Cancun Ministerial Conference occurred at roughly the
midpoint in the 3-year negotiations. However, based on our meetings with
country delegations and WTO officials in Geneva and public statements by
WTO officials, on the eve of the ministerial there was a sense true
negotiations had not really begun. In particular, although WTO member
governments had succeeded in actively submitting and discussing many
proposals to achieve the general goals laid out at Doha, they had been
less successful in narrowing their differences on these proposals or
coming up with workable plans for developing specific national commitments
(or schedules) to lower trade barriers.

WTO members held differing views on the symbolic importance of the Cancun
Ministerial Conference. For instance, U.S. and some other member country
officials, as well as WTO officials, expressed hope that the Cancun
Ministerial Conference would create the political will to achieve a
meaningful and ambitious agreement by the deadline that would benefit all
participants. WTO officials we spoke with, for example, stressed that
Cancun needed to provide a "boost" of fresh momentum to the flagging
talks. Other members planned to use the meeting to focus on the centrality
of agriculture reform. However, some members downplayed the symbolic
importance of the ministerial and viewed it merely as an opportunity to
take a mid-point assessment of the negotiations.

At a practical level, Cancun was viewed as critical to provide negotiators
with direction in key areas that had thus far eluded consensus, according
to WTO and member country officials. With just 16 months before the
agreed-upon deadline of January 1, 2005, for concluding the negotiations,
working-level progress in resolving outstanding issues was effectively
stalled. Breaking the logjam hinged upon receiving clear ministerial
direction in several key areas. For example, guidance was needed on the
specific goals and methods that would be used to liberalize trade in
agriculture.

Lack of Progress in Negotiations Required Scaling Back Expectations for
Cancun

Progress on narrowing substantive differences in advance of the Cancun
ministerial proved slow. As late as July 2003, observers and participants
in the negotiations noted that WTO members were simply restating long-held
positions on key issues and had yet to engage in real negotiations. For
instance, in July 2003, the WTO Director General said that negotiators had
been waiting to see what others are willing to offer without showing
flexibility themselves. The chairmen of some of the negotiating groups
repeated this sentiment in their statements to the July meeting of the
Trade Negotiations Committee. (See app. II for a discussion of significant
events in the WTO negotiations before and during the Cancun Ministerial
Conference.)

A key factor hindering the progress of Doha Round talks had been the pace
and extent of reform of the EU's Common Agricultural Policy (CAP).6
Agriculture was considered by many WTO members to be a linchpin to
achieving progress in all other areas of the Doha negotiating agenda.
After considerable internal debate, on June 26, 2003, the EU agreed to CAP
reform. Among other things, the reform would ensure that for many
agricultural products, the amount of subsidy payments made to farmers
would be independent from the amount they produce. Yet even after the EU
CAP reform was announced, other members stated that they were still
waiting to see the EU's internal reform translated into a significantly
more ambitious WTO negotiating proposal. The EU resisted making a new WTO
proposal, arguing that in effect it was being forced to pay for reform
twice

6CAP is a set of rules and regulations governing agricultural production
in the EU. CAP rules cover most aspects of agricultural activity,
including support to farmers, production methods, marketing, and controls
over quantities of food that different agriculture sectors can produce.

by reforming its internal policy once and then being asked by WTO
negotiators to reform again to be able to conclude an agreement.

Another factor hindering overall progress was perceived linkages between
various negotiating topics.The Doha Round's outcome is to be a "single
undertaking," meaning a package deal involving results on the full range
of issues under negotiation such as agriculture, services, and
nonagricultural market access. As a result, trade-offs are expected to
occur among issues to accomplish an overall balance satisfactory to all
members. Thus, it is difficult to make progress on one issue without
achieving progress on other issues. For example, many developing nations
consider agriculture their number one priority and have been unwilling to
make offers to open up their services markets until they see more progress
on agricultural reform. On the other hand, the EU and Japan, who expect to
make concessions on agriculture, wanted a commitment at Cancun to begin
negotiations on several issues that were new to the trading
system--investment, competition (antitrust), government procurement, and
trade facilitation- which are collectively known as Singapore issues.7

By our mid-July meetings in Geneva it was clear that expectations for
Cancun were being scaled back because of the overall lack of progress.
Instead of issuing "modalities," (numerical targets, timetables, formulas,
and guidelines for countries' commitments), for example, WTO officials and
country representatives we met with suggested that "frameworks," or more
general guidance on what types of concessions each participant would make,
might be a more appropriate goal for Cancun. In other words, instead of
ministers agreeing on some specific target, such as "all nations will cut
tariffs by one-third," they would agree to something more general, such as
all nations are expected to cut tariffs by a certain method and with the
following kinds of results (e.g., substantially liberalizing trade and
reducing particularly high tariffs).

7The term Singapore issues originated from the work program of the 1996
ministerial conference in Singapore, which created three working groups on
the issues of trade and investment, trade and competition policy, and
transparency in government procurement. Trade facilitation was also
highlighted as a priority in the Singapore Declaration.

Real Negotiations Finally Began in the Weeks Just Before the Cancun
Ministerial

The negotiations began to make some progress at the end of July, when
trade ministers from a diverse group of approximately 30 WTO members met
in Montreal, Canada, to discuss the status of the negotiations. During
this meeting, ministers encouraged the United States and the European
Union to provide leadership in the negotiations by narrowing their
differences on the key issue of agriculture. The United States and the
European Union agreed to do so, and in August they presented a joint
framework on agriculture.

In addition, in late August, the General Council removed a potential
obstacle to progress at the Cancun ministerial by approving an agreement
involving implementation of the Agreement on Trade-Related Aspects of
Intellectual Property Rights (TRIPS) and public health declaration adopted
in Doha.8 The Doha TRIPS and public health declaration directed WTO
members to find a way for members with insufficient pharmaceutical
manufacturing capacity to effectively use the flexibilities in TRIPS to
acquire pharmaceuticals to combat public health crises. U.S. and WTO
officials and representatives from other WTO members we met with had
identified this as an important symbolic issue for the WTO as an
institution, especially for WTO members from Africa. They had urged its
prompt resolution to create a more favorable climate for the Cancun
ministerial meeting. Despite resolving the TRIPS issue and attaining some
movement on agriculture in the final weeks before the Cancun ministerial,
differences persisted on other key issues in the negotiations on the eve
of the meeting.

8WTO members were unable to reach consensus by the mandated December 2002
deadline due to U.S. insistence that certain protections for
research-based pharmaceutical companies be included in an agreement.
Consultations on the issue intensified during the summer, as WTO members
concluded that it must be resolved by the Cancun Ministerial Conference.
At the end of August, the General Council approved a decision on
implementation of paragraph 6 of the Doha Declaration on TRIPS and public
health with an attached statement by the General Council Chairman
regarding WTO members' shared understanding of the interpretation and
implementation of the decision. The agreement waived certain provisions of
the TRIPS agreement that prevented countries from exporting generic copies
of patented medicines.

Differences on Key Issues Remain Unresolved after the Cancun Ministerial

The Cancun Ministerial Conference failed to resolve substantive
differences on key issues: agriculture (including cotton), the "Singapore
issues," market access for nonagricultural goods, services, and
development issues that included special and differential treatment for
developing countries. Key countries' principal positions were far apart,
and certain aspects of each issue were particularly contentious. Although
many looked to the Cancun ministerial to provide direction that would
enable future progress, it ultimately ended without resolving any of the
members' wide differences on these issues.

Progress on Agriculture Was Central to Movement on Other Issues

Agriculture is central to the Doha Round of trade negotiations, both in
its own right and because many WTO members say that progress on other
negotiating fronts is not possible without significant results in
agriculture. The Doha Declaration calls for negotiations to achieve
fundamental agricultural reform through three "pillars" or types of
disciplines (rules): (1) substantially improving market access; (2)
reducing, with a view to phasing out, all forms of export subsidies
(export competition);9 and (3) substantially reducing trade-distorting
domestic support (subsidies).10 Additionally, the declaration imposed two
interim deadlines on WTO agriculture negotiators: a March 31, 2003,
deadline for establishing modalities (rules and guidelines for subsequent
negotiations), and a deadline to submit draft tariff and subsidy reduction
commitments at the Cancun meeting. Negotiators missed both deadlines. As a
result, the goal for the Cancun ministerial was to adopt a framework and
set new deadlines for subsequent work on the three main pillars of the
agriculture negotiations. The delay in EU CAP reform, as well as the 2002
U.S. Farm Bill,11 which was projected to increase U.S. agricultural
support spending complicated resolution of these issues. Many WTO members
felt this bill undermined the relatively bold negotiating stance the
United States assumed in the WTO, which called for making substantial
reductions in trade-distorting domestic support and tariffs.

9Export subsidies are subsidies contingent on export performance. For
example, they include cost reduction measures, such as subsidies to lower
the cost of marketing goods for export, and internal transport subsidies
applying to exports only.

10Domestic supports are payments made to farmers that raise prices or
guarantee income. They include such measures as government buying at a
guaranteed price and commodity loan programs, or making direct payments to
farmers.

11The Farm Security and Rural Investment Act of 2002 (P.L. 107-171, May
13, 2002).

Various countries or groups of countries differ in their objectives for
the agriculture negotiations. The Cairns Group12 of net agriculture
exporting countries and the United States envisioned an ambitious
agricultural liberalization agenda. The United States proposed a two-phase
process to reform agriculture trade in the WTO. The first phase of the
proposal would eliminate export subsidies and reduce and harmonize tariff
and tradedistorting domestic support levels over a five-year period. The
second phase of the proposal is the eventual elimination of all tariffs
and tradedistorting domestic support. Other developed country members such
as the EU, Japan, Korea, and Norway favored a more limited agenda. This
group and several other small developed countries argued for flexibility
to maintain higher tariffs in order to protect their domestic agriculture
production. Finally, many developing countries wanted a reduction in
developed country agriculture subsidies and market access barriers while,
at the same time, wanting less ambitious obligations to liberalize their
own market access barriers.

Differences on Agricultural Domestic support. Arguing that such programs
resulted in lower world

"Pillars" Remained Wide prices and displacement of their producers from
global markets, many developing countries forcefully pressed the developed
countries to make significant cuts to their trade-distorting domestic
support programs, particularly the United States and the European Union,
which in 1999 totaled $16.9 billion and 47.9 billion euros ($45 billion at
1999 exchange rates), respectively.13 Although they agreed in principle on
the desirability of reducing trade-distorting subsidies,14 both the United
States and the European Union resisted further disciplines on their
abilities to support domestic agriculture in ways that present WTO rules
consider to be nontrade distorting. For example, they opposed calls to cap
and reduce subsidies that are not currently subject to spending limits
under the WTO. The EU argued that its CAP reform already addressed
developing country demands by making domestic support payments independent
of

12The members of the Cairns Group are Argentina, Australia, Bolivia,
Brazil, Canada, Chile, Colombia, Costa Rica, Guatemala, Indonesia,
Malaysia, New Zealand, Paraguay, the Philippines, South Africa, Thailand,
and Uruguay. The group takes its name from the city in Australia where
members first met in 1986.

13This is the latest year that WTO data are available.

14The WTO classifies agricultural domestic support into three categories
identified by "boxes": green (permitted), amber (trade-distorting
subsidies that must be reduced), and blue (production limiting). Thirty
WTO members have commitments to reduce their tradedistorting amber box
supports. All the rest of the WTO members are capped at zero.

production, in principle making the payments less trade distorting, even
though total expenditures will not be lowered. However, several WTO
members indicated that the reforms were not ambitious enough. In addition,
the United States said that it would not reduce its domestic support for
agriculture unless other members, namely the EU, made cuts that
substantially reduced the wide disparities in allowed trade-distorting
domestic support. The United States also demanded that developing
countries provide something in return for cutting subsidies, such as
lowering their tariffs on U.S. exports.

Market access. The United States viewed attaining additional market access
as an important objective in the negotiations. U.S. and Cairns Group
negotiators proposed a harmonizing formula for tariff reduction known as
the Swiss formula that would subject the higher tariffs to larger cuts.
Other members, including the EU, Japan, and Korea, favored an
across-the-board average cut and a minimum cut per product (tariff
line).15 As illustrated in figure 2, this approach would generally result
in less liberalization than if the harmonizing formula were used. Many
developing countries, and the Cairns Group, proposed substantially less
liberalizing developing country tariff reductions, in part to counter
continued use of subsidies in developed countries. Finally, according to
their official statements, numerous smaller developing countries
emphasized the importance of trade preferences to, and the negative
effects that erosion of trade preferences would have on, smaller, more
vulnerable economies.

15This is also known as a "Uruguay Round" formula, because it is the same
approach to cutting agriculture tariffs that was used during the prior
round of global trade talks.

Figure 2: Comparison of Harmonizing Formula to Across-the-Board Tariff Cut

aAssuming an across-the-board cut of 25 percent.

bAssuming a "Swiss 25" formula.

A harmonizing formula reduces high tariffs more aggressively than
across-the-board average tariff cuts. In the above example, for a given
initial tariff (with the exception of low tariffs), the harmonizing
formula leads to a lower final tariff than the across-the-board average
tariff cut. The difference between the final tariff r tes is highlighteda
.

Export competition. The United States, the Cairns Group, and many
developing countries wanted to eliminate export subsidies for agricultural
products. The EU, the primary employer of export subsidies, envisioned a
substantial reduction and elimination of export subsidies for certain
products but not a total elimination. It also tied any cuts in export
subsidies to the adoption of stricter disciplines on U.S. food aid and
export credits.16

16Export credit guarantee programs are programs that offer loan guarantees
to buyers in certain countries where credit markets are not fully
developed.

Like the United States, the EU also sought stricter disciplines on export
state-trading enterprises.

As previously noted, the United States and the European Union had
responded to calls to provide leadership by narrowing their differences on
the three pillars of agricultural reform before the Cancun meeting. In a
mid-August framework, the U.S. and the EU proposed reductions in
tradedistorting domestic agricultural support, with those members with
higher subsidies making deeper cuts and a three-pronged strategy to reduce
agricultural tariffs. With respect to export subsidies, the framework
eliminated export subsidies for some agricultural products and committed
members to reduce budgetary and quantity allowances for others. Reaction
to the framework was negative and swift, in part because it implied less
ambitious reductions in domestic support17 and market access barriers than
the original U.S. proposal, which U.S. officials emphasize is still on the
table, and did not completely eliminate export subsidies. For example,
within a week a newly formed group of developing countries, commonly
referred to as the Group of 20 (G-20)18 for its 20 members, presented a
counter framework that implied deeper cuts in domestic agricultural
subsidies by developed countries, a tariff reduction formula that allowed
developing countries to make less substantial cuts, and the total
elimination of export subsidies. The draft ministerial declaration
presented to ministers in late August contained elements of both
proposals.

Although extensive discussions on agriculture did occur at Cancun, they
ultimately failed to bridge the substantial gaps that remained. Sharp
divisions remained on the extent to which the developing countries should
be required to open their markets and whether it was possible to eliminate
all export subsidies. On domestic support, divisions remained concerning
the extent of cuts in trade-distorting domestic support and the question
of whether additional disciplines on non trade-distorting support were
desirable. Furthermore, the prominence of the G-20 of developing countries
relative to the more diverse Cairns Group at the meeting imposed

17Importantly, the U.S.-EU framework included a provision that would
modify current WTO regulations on "blue box" subsidies (see fn. 14). The
U.S.-EU framework would modify the definition such that U.S.
countercyclical payments (those payments made to producers when the price
received by farmers for a commodity is less than the target price)
authorized under the 2002 Farm Bill could be counted in this category.
Many countries reacted negatively to this aspect of the U.S.-EU
compromise.

18The group had 20 members originally, but its membership has fluctuated
since tabling the agriculture framework.

Cotton Issues Involved Subsidy Elimination and Compensation

a North-South dynamic on the agriculture negotiations. Specifically,
several developed countries criticized the G-20's negotiating tactics,
including their failure to offer market access concessions such as tariff
cuts in exchange for substantial cuts in developed country subsidies and
their demands for a long list of changes to the Conference Chairman's
draft text, even though very little time remained to negotiate. Meanwhile,
representatives from the G-20 argued that the developed country proposals
and framework offered very modest gains and maybe even some steps backward
in efforts to liberalize world agricultural trade.

In addition to the three main agricultural pillars that were the agreed
focus of the Doha agriculture negotiations, the Sectoral Initiative in
Favour of Cotton put forward by four West and Central African countries
figured prominently in the Cancun ministerial discussions. The initiative
was added to the ministerial agenda in the weeks leading up to Cancun and
does not appear in the Doha Declaration. The proposal by these cotton
exporting countries singled out three WTO members--the United States, the
European Union, and China--as the primary cotton subsidizers. They claimed
that these subsidies were driving down world prices and that many of their
farmers no longer found it profitable to produce cotton, a concern given
their contention that cotton plays an essential role in their development
and poverty reduction efforts.

The cotton initiative's guidelines called for immediately establishing a
mechanism at Cancun to eliminate all subsidies on cotton and a
transitional mechanism to compensate farmers in cotton-producing least
developed countries (LDC) that suffered losses in export revenue as a
result of cotton subsidies. Specifically, the proposal called for reducing
all cotton support measures by one third annually for 3 years, thereby
eliminating all support for cotton by year-end 2006. In addition, the
proposal stipulated that any cotton-subsidizing WTO member would be a
potential contributor to a proposed transitional compensation mechanism.
The transitional compensation mechanism would last up to 3 years. The
sectoral initiative did not specify the total amount of compensation to be
paid but cited a recent study that the direct and indirect losses for the
3 years-1999 to 2002-were $250 million and $1 billion, respectively, for
the countries of West and Central Africa.

The cotton initiative was discussed at length in Cancun; however, there
was no resolution. The reason for the failure was that certain members had
difficulty supporting a transitional compensation mechanism within the
context of the WTO and saw the issue of cotton as hard to separate from

the larger agricultural agenda. U.S. efforts to respond to the region's
immediate concerns on cotton by broadening the original initiative made
little headway, despite some evidence that falling world cotton prices
were also attributable to other factors such as competition from manmade
fibers. The failure to resolve the cotton initiative to the satisfaction
of the developing countries had a negative impact on the overall tone of
the Cancun meeting, because certain developing countries viewed the issue
as a litmus test for the WTO and thought the proposed response fell far
short of addressing their pressing needs. The issue also took on symbolic
importance, becoming a political rallying point for a number of countries'
frustrations.

Singapore Issues Remained Contentious

The Doha Declaration established a deadline for deciding how to handle
negotiations aimed at adding four new issues, called the Singapore issues,
to the global trading system. The four Singapore issues are investment,
competition (antitrust), transparency (openness) in government
procurement, and trade facilitation (easing cross-border movement of
goods). According to the draft ministerial text presented to ministers
before Cancun, ministers were to decide by explicit consensus the basis
for starting actual negotiations on these issues, or to continue
exploratory discussions on them. However, the wording of the Doha
Declaration left unclear what was to specifically occur in Cancun. Certain
members thought the declaration implied that formal negotiations were to
begin in Cancun and that the only issue for Cancun was the type of
negotiation. Others thought the declaration implied that formal
negotiations could only begin if there were explicit consensus among the
members at Cancun to do so.

Key players' positions were divided into three main camps. A group of
developed and developing country members led by the European Union, Japan,
and South Korea strongly advocated starting negotiations on all four
issues, including investment and competition, which were particularly
controversial. These nations had succeeded at Doha in getting the four
issues included as part of the round's overall package but only on the
condition that explicit agreement be reached at Cancun on the parameters
to negotiate these issues. Many developing countries, on the other hand,
had consistently expressed their strong opposition to the inclusion of the
Singapore issues in the WTO negotiating agenda and several viewed Cancun
as their opportunity to block negotiations on these issues. For example,
India argued that for many of these countries, undertaking new obligations
in these areas would have presented too great a burden, since

they were still having difficulty implementing their Uruguay Round
obligations. They also were not convinced of the development benefits that
would result. A third group of countries, including the United States and
some developing nations, were willing to negotiate but wanted each issue
considered on its own merit. However, some of the developing countries
linked their willingness to negotiate with progress in other areas such as
agriculture. The United States had been pushing the issues of transparency
in government procurement and trade facilitation. The United States was
also willing to negotiate on competition policy and investment, but had
some concerns that included whether negotiations could call into question
its enforcement of strong antitrust laws and match the high standards that
are a feature of its bilateral investment agreements.

The discussions at Cancun on the Singapore issues were contentious and
contributed to the breakdown of the ministerial. Early in the week, a
group of 16 developing countries argued that because there was no clear
consensus on the modalities for the negotiations as required by the Doha
Declaration, the matter of whether to add these four new issues to the
negotiations should be dropped from the Cancun agenda and moved back to
Geneva for further discussion. The draft text issued later that week
called for beginning negotiations on two issues and setting deadlines for
trying to reach agreement on possible bases for addressing the other two
issues. This text was discussed on the last day of the conference, but in
the end, compromise on this divisive subject proved impossible.

Proposed Tariff Formulas for Nonagricultural Market Access Were Divisive

Lowering barriers to market access of nonagricultural goods was also an
important point of contention leading into the Cancun ministerial. The
Doha Declaration stated that negotiations on nonagricultural market access
should be aimed at reducing or, as appropriate, eliminating tariffs for
nonagricultural products, including reducing or eliminating tariff peaks19
and tariff escalation,20 as well as nontariff barriers. The Doha
Declaration also said that the liberalization of nonagricultural goods
should take fully into account the principle of special and differential
treatment21

19Tariff peaks are tariffs that exceed a selected reference level.
National tariff peaks are considered to be those tariffs that exceed three
times the national mean tariff.

20Tariff escalation is a practice that countries often use, whereby they
increase tariffs in relation to the degree of processing found in a
product.

21An extensive discussion of special and differential treatment appears
later in this report.

for developing countries, including allowing for "less than full
reciprocity" in meeting tariff reduction commitments. Because WTO members
missed a May 31, 2003, deadline for reaching agreement on modalities for
nonagricultural market access that would govern preparation of national
schedules of barrier-cutting commitments, the goal for Cancun was to
establish a "framework" or basic approach to tariff and nontariff barrier
liberalization that would then be supplemented by more detailed modalities
later.

Even though there are important differences in the situations and
individual positions of various developing countries-a fact the United
States likes to emphasize--WTO members were largely divided along
North-South lines in nonagricultural market access talks going into the
Cancun meeting. The United States and other developed countries were
pushing for substantial cuts in tariffs and wanted the high overall
tariffs of key developing countries like India and Brazil to come down.
For example, India has an average bound tariff of 34 percent on
nonagricultural products, while China and Cote d'Ivoire have average bound
tariffs of 10 percent or less. The United States also aimed to seek a high
level of ambition in opening markets and expanding trade for all countries
through a harmonizing formula that cuts tariffs in all countries. In
addition, it wanted to reduce wide disparities among members' tariffs as
well as reduce low tariffs. Publicly, the developing countries were fairly
united in saying that any liberalization needed to leave them sufficient
flexibility to address their special needs and should involve greater cuts
by richer countries than poor ones. In May 2003, the chairman of the
negotiating group on market access issued a "chair's proposal," attempting
to reconcile WTO members' various positions, including on tariff cutting
formulas, sectoral liberalization, and special and differential
treatment.22

Coming into Cancun, two major proposals for cutting tariffs--one from the
market access chairman and another from the United States, EU, and
Canada--were under active discussion, though all of the numerous original
proposals submitted by WTO members remained "on the table." These two
proposals differed in the type of mathematical formula that would be used
to determine how much each member would be expected to reduce its tariffs.
The proposed tariff formula developed by the chairman as a compromise
would largely differentiate among countries according to their current
overall average bound tariff rate. Specifically, a country with higher

22The chair's proposal also addressed elimination of low duties and
non-tariff barriers.

average bound tariffs would have to reduce its bound tariffs at a lesser
rate than a country with lower average bound tariffs. To use an
illustrative example, Brazil, with higher overall bound rates to begin
with, would have to cut a 10 percent bound tariff on a particular product
to approximately 7.5 percent, or by 25 percent. Malaysia, with lower
overall bound tariffs, would have to slash a 10 percent bound tariff to 6
percent, or by 40 percent (see fig. 3).23 Proponents argue that this
formula would recognize each country's differing starting points for
liberalization while still accomplishing significant cuts in bound tariff
rates. Some officials counter that average bound tariffs are not a direct
or good indicator of development status or needs. Moreover, they expressed
concern that this formula would require more reduction from nations that
have lower overall bound tariffs. The United States was concerned that
this would effectively punish countries that have previously liberalized,
while rewarding countries that had not liberalized. In addition, the
United States was concerned that this proposal was based on average bound
tariff rates, which would not necessarily lead to lower applied rates.
Many developing countries' bound tariff rates are higher than the tariffs
they currently apply. For example, Brazil has an average bound tariff of
31 percent and a 15 percent average applied rate. Real liberalization will
only occur if countries reduce bound tariffs to below currently applied
rates.

23If a coefficient of 1 was used in the chairman's formula. This GAO
calculation is based on overall average tariff rates of 30 percent and 15
percent, respectively. See appendix I for further details. The chairman
did not specify coefficients to be used, and Malaysia presented a proposal
that different coefficients be used for different countries.

Figure 3: Chairman's Proposal Based on Average Bound Tariffs

Note: Assumes a coefficient of 1 is used for all countries.

aUsing an average tariff of 4 percent.

bUsing an average tariff of 15 percent.

cUsing an average tariff of 30 percent.

The Chairman's proposal implies that countries with a high average tariff
are required to lower their tariffs on a given product by a lesser amount
than countries with a low average tariff. In figure 3 above, Brazil is not
required to reduce any given tariff as much as Malaysia.

On the other hand, the United States, the European Union, and Canada
developed an alternative framework for negotiations. This framework calls
for all countries to use a single harmonizing formula, such as a Swiss
formula, where the coefficient of reduction does not depend on a country's
average bound tariff rate. For example, if a Swiss formula using a
coefficient of 8 were used, all countries would have to cut a 10 percent
tariff on a particular product to 4 percent. Nevertheless, the U.S., EU,
Canada framework does foresee some differentiation among countries. For
example, it suggested that countries could be rewarded for "good behavior"
by giving credits to countries that commit to do things that are
considered sound trade policy, such as putting a ceiling on, or binding, a
high

percentage of their tariffs.24 According to U.S. Trade Representative
(USTR) officials, the credits would allow them to lower tariffs by a
lesser amount than that implied by the formula. Developing countries,
however, say this approach is inconsistent with the Doha mandate, which
states developing countries as a whole will be allowed to make lesser
commitments. In addition, they fear that they would have to cut tariffs
much more than developed countries in absolute terms. As a result, just
prior to the Cancun meeting, a few nations such as India reasserted their
interest in an across-the board or linear approach to cutting tariffs on
nonagricultural goods, similar to that depicted in figure 2. Under a
linear approach, all tariffs would be cut at the same rate and therefore
the results would not be harmonizing. The discussions at Cancun never got
into the detailed proposals that had been debated before Cancun and failed
to bridge these gaps on tariff formulas.

At Cancun, WTO members were also considering the complete elimination of
tariffs in to-be-agreed-upon sectors, including ones that are particularly
important to developing countries. However, the issues of choice of
sectors and participation in the elimination remained controversial. Many
developing countries wanted sectoral elimination to be voluntary. Also
under debate was whether sectoral elimination should result in zero
tariffs, harmonization, or a differentiated outcome for developed versus
developing countries. The United States and many other countries thought
that sectoral initiatives were an important way to supplement the general
tariff cutting formula and to achieve their ambitious liberalization
objectives. The United States wanted to make sure all countries
competitive in a given sector would participate in sectoral elimination
regardless of their level of development.

Consistent with the Doha mandate, WTO members were also considering
special treatment for developing countries and new entrants such as
recently acceded members in implementing their tariff commitments. This
included longer periods to implement the tariff reductions,
differentiation in how sectoral initiatives would be applied, and not
making reduction commitments mandatory. The developed countries recognized
that many nations, particularly least developed and other vulnerable
economies, need

24Additional flexibility would be available to the least developed and
International Development Association (IDA) only countries. IDA-only
countries are countries that are eligible to borrow from the IDA, a
concessional World Bank lending facility for the world's poorest
countries, which are not also qualified to borrow from the Banks' regular
lending facility, the International Bank for Reconstruction and
Development.

flexibility to deal with sensitive sectors and other adjustment needs.
However, they opposed across-the-board flexibility for all developing
countries, including the more advanced ones.

At Cancun, some steps were taken to address the inherent trade-off between
committing to ambitious tariff liberalization and retaining flexibility.
The World Bank and the International Monetary Fund, for example, provided
assurances that they were prepared to work with developing nations to help
offset lost tariff revenue and address concerns related to erosion of
preferences. Nevertheless, ministers did not resolve the debates over
tariff-cutting formulas, the mandatory nature of sectoral elimination, and
the degree of flexibility to accord to developing countries. Progress was
not made on these issues because progress was not made or expected in
agriculture nor on the Singapore issues.

Energizing Services Negotiations Was a Key U.S. Goal for the Cancun
Ministerial

The Doha Declaration set a deadline for WTO members to complete the work
they had initiated in January 2000 to further open services markets under
the General Agreement on Trade in Services. In contrast with agriculture
and industrial market access, the services group had already agreed on how
to conduct these talks, 25 which are under way. The goal for
Cancun-particularly for the United States-was to energize the ongoing
services negotiations and to set a deadline for submission of improved
offers26 to lower barriers to services. According to a WTO official, only
38 (counting the EU as one member) of the WTO's 146 members had submitted
offers before the Cancun ministerial.27 Although 18 of these

25See document #S/L/92 - http://docsonline.wto.org The guidance and
procedures for the negotiations included two key principles: (1) no
sectors should be excluded from the negotiations, and (2) negotiations to
further open services markets can occur in bilateral, plurilateral, or
multilateral groups, mainly using a request-offer method, with results
applied to all WTO members equally on a most-favored-nation basis.

26In the context of the services negotiations, members' offers in services
include the addition of new sectors, the removal of existing limitations
or the binding of modes of supplying services not currently committed, the
undertaking of additional commitments, and the termination of exemptions
that deny equal treatment to foreign services suppliers.

27These members had submitted initial offers before Cancun: Argentina,
Australia, Bahrain, Bolivia, Canada, Chile, China, Chinese Taipei,
Colombia, Czech Republic, Fiji, Guatemala, Hong Kong-China, Iceland,
Israel, Japan, Korea, Liechtenstein, Macao-China, Mexico, New Zealand,
Norway, Panama, Paraguay, Peru, Poland, Senegal, Singapore, Slovak
Republic, Slovenia, Sri Lanka, St. Kitts & Nevis, Switzerland, Thailand,
the European Union, Turkey, United States, and Uruguay. See appendix III
for a list of developing countries.

offers were from developing countries, as defined by the World Bank, many
large developing countries such as India, South Africa, Egypt, and Brazil
had not submitted offers. Some of these nations, as well as others such as
Argentina, China, and Mexico had their own market access ambitions,
including further easing of the temporary movement of their services
suppliers across national borders.

Services negotiations regained some momentum before Cancun due to two
important events. First, the language contained in the draft Cancun
Ministerial Declaration incorporated several of the demands from
developing countries such as the need to conclude negotiations in
rulemaking in areas such as emergency safeguard measures28 for services.
Second, the adoption of modalities on September 3, 2003, for the special
and differential treatment29 of LDCs was expected to boost the
participation of LDCs in the services negotiations. However, little
progress was made in the services negotiations at Cancun because advances
on other issues under negotiation, especially in agriculture, were needed
in order to enable further movement.

Special Treatment Was Many developing countries were greatly concerned
about receiving special Highest Priority for Many treatment in the form of
making lesser commitments in ongoing global Developing Country trade talks
and receiving assistance in implementing existing WTO

agreements. Global trade rules have long included the principle that

Members developing countries would be accorded special and differential
treatment consistent with their individual levels of development,
including the notion that they would not be expected to fully reciprocate
tariff and other

28These measures are provisions in trade agreements that permit a party to
suspend its obligations when imports cause or threaten to cause serious
harm to domestic producers. The General Agreement on Trade in Services
does not yet have such provisions, although article X requires
negotiations on this matter.

29Special and differential treatment includes, among other things, the
concept that exports from developing countries should be given
preferential access to markets of developed countries and that developing
countries participating in trade negotiations need not fully reciprocate
the concessions they receive. See document # WT/MIN (01)/DEC/1-Paragraph
44 - http://docsonline.wto.org

concessions made by developed countries.30 In the Doha Declaration, WTO
members agreed that all special and differential treatment provisions in
existing WTO agreements should be reviewed with a view to strengthening
them in order to make them more precise, effective, and operational. The
declaration requires the WTO's Committee on Trade and Development to
identify those special and differential treatment provisions that are
mandatory and those that are nonbinding and to consider the legal and
practical implications of turning the nonbinding ones into mandatory
obligations. According to USTR officials, part of the continuing
difficulty of this work has been the problems of separating work on
special and differential treatment from the work underway in actual
individual negotiating groups (e.g., agriculture) and the lack of progress
on related issues such as graduation/differentiation,31 which is also part
of the Committee on Trade and Development's work programme.

Also, as part of the Doha Declaration, WTO members committed themselves to
address outstanding implementation issues32 and set a December 2002
deadline for recommending appropriate action on them, but they missed that
deadline. Although there was agreement on a number of implementation
issues at Doha, outstanding issues remain in areas like trade related
investment measures, anti-dumping rules, and textiles. These issues have
proved divisive, even among developing countries.

30Specifically, paragraph 8 of article XXXVI of the General Agreement on
Tariffs and Trade merits special mention. It states that developed
countries do not expect reciprocity for commitments they make in trade
negotiations to reduce or remove tariffs and other barriers to the trade
of developing countries. An interpretative note clarifies that the
sentence "do not expect reciprocity" means that developed countries do not
expect developing countries, in the course of trade negotiations, to make
contributions that are inconsistent with their individual development,
financial, and trade needs.

31Graduation and differentiation proposals would establish different
levels of flexibilities for Members at different levels of development,
and set some criteria for countries to graduate out of these
flexibilities.

32Implementation issues refer to a set of issues relating to developing
countries' ability to implement existing WTO agreements. First, many
developing countries considered their Uruguay Round obligations to be too
heavy for them. Second, developing countries believed that there should be
negotiations to redress the unfair balance of the responsibilities they
carried. Third, developing countries argued that in order to meet some of
their obligations, they needed additional technical assistance and
extended deadlines. Under these circumstances, some developing countries
argued that new obligations should not be negotiated until they could
fulfill their current ones.

At Cancun, ministers were asked to endorse and immediately implement a
subset of the numerous proposals for special and differential treatment as
well as to set a new deadline for resolving outstanding special and
differential treatment and implementation issues.33 For some developing
countries, progress on these issues at Cancun was key to their willingness
to negotiate further market liberalization in other areas. In addition,
the African Group34 in particular wanted to better ensure that the needs
of the WTO's poorest member countries would be satisfactorily addressed in
the overall package of Doha Round results.

However, developed and developing countries fundamentally disagreed in
their interpretation and use of special and differential treatment. For
example, government officials from several developed countries echoed
their desire to better target special and differential treatment by
adopting a needs-based approach. According to these officials, special and
differential treatment provisions should be tailored to match the various
levels of development and the particular economic needs of developing
countries.35 Many developing countries, on the other hand, wanted an
expansion of special and differential treatment. Their expansionist
ambition was reflected in 88 proposals for additional special treatment
obligations, mostly from the African Group and the group of least
developed countries. Among other things, the proposals sought additional
technical support and called for an exemption for developing countries and
LDC members from requirements to comply with existing WTO obligations that
they believed would be prejudicial to their individual development,
financial, or trade needs or beyond their administrative and institutional
capacity. Developed countries and more advanced developing countries
considered many of these demands to be problematic because some changes
proposed would alter the balance of the Uruguay Round agreements.

33See document # Job(03)/150/Rev.1 - paragraph 11 and 12
http://docsonline.wto.org.

34The members of the African Group include Angola, Benin, Botswana,
Burkina Faso, Burundi, Cameroon, Central African Republic, Chad, Congo,
Congo (Democratic Republic), Cote d'Ivoire, Djibouti, Egypt, Gabon, The
Gambia, Ghana, Guinea, Guinea Bissau, Kenya, Lesotho, Madagascar, Malawi,
Mali, Mauritania, Mauritius, Morocco, Mozambique, Namibia, Niger, Nigeria,
Rwanda, Senegal, Sierra Leone, South Africa, Swaziland, Tanzania, Togo,
Tunisia, Uganda, Zambia, and Zimbabwe.

35Levels of development among developing countries vary significantly.
Based on that fact, the World Bank makes a distinction among developing
countries by categorizing them as low-income, lower-middle income,
upper-middle, and high-countries. However, WTO rules contain no such
distinction. See appendix III.

In the end, however, developed countries and some developing countries
appeared ready to move forward on some of these proposals at Cancun, had
the ministerial proved successful. The General Council Chairman worked
carefully with a diverse group of key countries to put this package
together. A total of 24 special and differential treatment proposals,
including some related to implementation issues, were included in the
draft Cancun Ministerial Declaration sent to Cancun from Geneva. An
additional three proposals were added during the course of the Cancun
meeting. While some developing nations argued that these proposals were of
little economic value and felt agreeing to these proposals at Cancun would
create a false sense of progress, other developing countries were willing
to accept the package in return for assurances of future advances.

As for implementation issues, discussions on developing country proposals
in this area were overshadowed at Cancun by another issue--a push by the
EU and other European countries to secure greater recognition and
protection of geographical indications (place names) for specialty
agricultural products.36 Many countries, including the United States,
Australia, New Zealand, and some Latin American nations, strongly
resisted, because they produce and market products under widely used terms
such as "Champagne" and "Roquefort cheese" that the European nations were
seeking to protect and monopolize.

In the end, no agreement was reached at Cancun on special and differential
treatment or on implementation issues.

Cancun Meeting Ended without Resolving Any Major Issue

Despite a full ministerial agenda of issues requiring resolution, the only
actual decision taken relating to the negotiations at Cancun was that the
WTO's General Council should meet by December 15, 2003. The closing
session on Sunday, September 14, adopted a short ministerial statement
expressing appreciation to Mexico for hosting the talks, welcoming
Cambodia and Nepal to the WTO, and stating that participants had worked
hard to make progress in the Doha mandate but that "more work needs to be
done in some key areas to enable us to proceed toward the conclusion of
the negotiations." To achieve this, the concluding ministerial statement

36Geographical indications are names that identify a good as originating
in a country, region, or locality where a given quality reputation is
essentially attributable to its geographical origin. The TRIPs Agreement
currently protects geographical indications, but the EU and others have
sought to increase those protections in several parts of the current
negotiations.

directed officials to continue working on outstanding issues with a
renewed sense of urgency and purpose. The failure to make progress in
resolving the major substantive issues at Cancun left the Doha Round in
limbo and resulted in a major setback that will make attaining an overall
world trade agreement by January 1, 2005, more difficult, according to WTO
Director General Supachai and key WTO member country representatives.
Specifically, no further negotiating sessions have been scheduled,
although informal efforts to get the talks back on track have continued.

The Cancun ministerial declaration directed the Chairman of the General
Council to coordinate this work and to convene a meeting of the General
Council at the senior officials level no later than December 15, 2003 "to
take the action necessary to move toward a successful and timely
conclusion of the negotiations." However, on December 9, WTO General
Council Chairman Perez del Castillo notified the heads of delegation that
there was a lack of "real negotiation" or "bridging of positions" in the
informal talks. Because he believed insufficient convergence had occurred
to take "necessary action to conclude the round," he presented a Chair's
report outlining key issues and possible ways ahead. He also recommended
that all negotiating bodies be reactivated in early 2004, after new chairs
are chosen. The December 15, 2003, General Council meeting generally
accepted this recommendation, according to the chairman's closing remarks.

Several Factors Cited
in the Talks' Collapse

According to government officials, trade negotiations observers,
authoritative reports, and GAO observations and analysis, several other
factors contributed to the Cancun meeting's collapse. The ministerial
agenda was complex, and unwillingness by some nations to work with the
text presented by the General Council Chairman hampered progress. In
addition, the large number of participants and emerging coalitions
influenced the meeting's dynamic. Competing visions and goals for the Doha
Round, particularly between developed and developing countries, and a
high-profile initiative on cotton, fueled North-South tensions. Meanwhile,
the WTO's cumbersome decision-making process did not lend itself to
building consensus.

Complex and Full Agenda The agenda for Cancun was not only complex, it
was also overloaded. This situation was due to the stalemate that had
characterized the Doha Round

Presented

up to Cancun, in which the negotiators had missed virtually all
selfimposed deadlines. The Doha Declaration already had specified that
certain items were to be on the agenda for the next (Cancun) ministerial,
such as deciding how to handle negotiations on the Singapore issues (see
fig. 4). But as interim deadlines came and went without agreement, other
issues were added to the Cancun agenda.

Figure 4: Key Negotiating Deadlines Missed Before September 2003 Cancun
Ministerial

Although the goal of reaching agreement on these issues for achieving
trade liberalization had eluded negotiators during the previous 22 months
of work in Geneva, they proposed to reach agreement on all of them in
Cancun, even though they had just 5 days to do so.

No Agreed Starting Point for Adding to the complexity of the task, the
Cancun ministerial began without

Discussion an agreed-upon text as a starting point for discussion. In late
August, the General Council Chairman issued a revised draft ministerial
declaration. This version included draft frameworks for modalities for
agriculture, nonagricultural market access, and the Singapore issues.
These draft frameworks still included multiple bracketed items (items to
be agreed

upon) and lacked specific details in several areas. However, not all WTO
members agreed to use this draft as the basis for ministers' discussion in
Cancun.

Efforts to produce a new text of a ministerial declaration from which to
work took considerable time at Cancun. The first 3 days of the 5-day
conference were devoted to formal and informal meetings. The Conference
Chairman, the Mexican Foreign Minister finally presented a draft text at a
meeting on the fourth day of the 5-day conference (September 13). Just 30
hours remained until the scheduled close of the conference, yet ministers
needed 6 hours to study the new text. The meeting to obtain reactions to
the text took another 6 hours. More than 115 nations spoke, one after the
other, with most ministers criticizing various points of the draft and
repeating well-established positions. A WTO spokesman later reported that
the only consensus evident that night was that the text was unacceptable
to many WTO members. The U.S. Trade Representative advocated moving
forward when he took the floor about halfway through the meeting. He
expressed willingness to work with the draft, urged a collective sense of
responsibility, and warned fellow trade ministers that they should not let
the perfect become the enemy of the good. Certain other members such as
Sri Lanka, Uruguay, Chile, and China were among the few other countries
that made positive statements. After another several hours of critical
interventions, however, the Conference Chairman closed the meeting,
expressing concern that with less than 15 hours remaining, members did not
appear to be willing to reach a consensus. A WTO spokesperson later
reported that they could see a clear problem emerging because differences
in positions were hardening.

Large Number of Participants and New Developing Country Coalitions Add
Complexity

Achieving consensus at Cancun was a very complex undertaking due to the
large number of participants and the emerging coalitions that affected the
meeting's dynamics. Participants in the WTO talks at Cancun included 146
members with vastly different economic interests, levels of development,
and institutional capacities. Moreover, the number of delegates at Cancun
was substantially larger than the number of delegates at the Doha
ministerial, which occurred shortly after September 11, 2001.
Nongovernmental organizations (NGO) were also participating. The 1,578
registered NGO participants included business as well as a range of public
interest (labor, environment, consumer, development, and human rights)
groups, and both were active in seeking to influence the negotiations. For
example, NGOs, such as the development advocacy group Oxfam, underwrote
the literature being distributed on the cotton initiative, and

poverty relief organization Action Aid's press release immediately called
the Conference Chairman's draft text "a stab in the back of poor
countries."

The emergence of two developing country coalitions also affected the
dynamics of the Cancun meeting. Brazil was widely seen as the leader of
the G-20 group of developing countries pressing for bigger cuts in
developed country agricultural subsidies. The United States and the
European Union, traditionally at odds over agriculture, complained that
the group was engaged in confrontational tactics that were more directed
at making a point than at making a deal. However, the group claimed that
it took a businesslike and professional approach to the negotiations and
had succeeded in highlighting the centrality of agricultural reform to the
Doha Round's success. Another strong coalition that emerged in Cancun was
a group of 92 countries made up of the African, Caribbean, Pacific (ACP)
African Union /LDC countries. This group's main objective was to ensure
that the WTO's poorest countries' interests were taken into account. In
the end, their views were decisive, as their refusal to accept
negotiations on the Singapore issues and other members' insistence to
negotiate these issues triggered the Conference Chairman's decision to end
the ministerial.

Developed and Developing Countries Had Competing Visions of Doha's Promise

In addition to a complex agenda and volatile meeting dynamics, the
participants appeared to have competing visions of what the round had
promised. Noting that the negotiations were titled the "Doha Development
Agenda," developing countries still expected that the talks would focus
primarily on their needs. For many, this meant progress on agriculture,
while others stressed meaningful accommodation of their special needs.
U.S. officials, on the other hand, told us that they would like to see
further differentiation of the as-yet-undefined term "developing
countries." Some U.S. officials told us that developing countries'
reluctance to open their markets is contrary to sound development
policies, because lowering trade barriers is pro-, not anti-development.
Moreover, various studies had shown that a significant share of the
estimated economic benefits of the Doha Round would be due to an expansion
of trade between developing countries as they reduced their trade barriers
to each other's goods.

As the days of the ministerial wore on without consensus, frustrations
increased. The developed nations accused the developing countries of
grandstanding and of not making an effort to reach agreement. Officials
from some developed countries complained, for example, that developing
countries had not approached the negotiations in the spirit of reciprocity
but instead were focused on making demands without expecting to make

concessions. In essence, developing countries were not seen as negotiating
in good faith.

Developing countries also felt frustrated and believed that the lack of
progress in the negotiations was due to an absence of political will by
the developed countries to fulfill the promises at Doha. For example,
developing countries believed that the developed countries had not offered
enough on agriculture, the issue that many developing countries cared
about the most.

The differences in expectations are illustrated in reactions to the cotton
initiative, which served as a focal point for concerns about developed
country agriculture subsidies. The WTO Director General personally urged
ministers to give the matter full consideration and held consultations
with the interested parties in an attempt to forge a compromise. While the
African proponents believed that agreement on this issue would have been a
sign of good faith, the United States viewed the request for monetary
compensation as inappropriate and better suited to a development
assistance venue. When the Conference Chairman issued his draft text, many
countries reacted negatively to the proposed compromise on cotton. Brazil,
speaking on behalf of the G-20, referred to the proposal as totally
insufficient. The Chairman's text did not mention the elimination of
subsidies but instead suggested that West African countries diversify out
of cotton. The fact that the cotton initiative is one of the four key
issues that the General Council Chairman has focused on after the
ministerial, along with agriculture, industrial market access, and the
Singapore issues, demonstrates its continued importance.

WTO Consensus-Building Process Broke Down

Finally, certain participants have also cited the WTO's cumbersome process
for achieving consensus as contributing to the collapse of the talks. The
WTO operates by consensus, meaning that any one participant opposing an
item can block agreement. In the EU Trade Commissioner's closing press
conference in Cancun, he expressed frustration that there was no reliable
way within the WTO to get all 146 member nations to work toward consensus.
Relatively few formal meetings involving all members actually occurred in
Cancun, although plenary sessions and working groups took place. Moreover,
formal negotiating sessions involving all members were not conducive to
practical discussion or to achieving consensus. Instead, they often
involved formal speeches. As a result, small group meetings were used to
obtain frank input and conduct actual negotiations. Although efforts were
made to keep the whole membership involved through daily

heads of delegations meetings, certain members expressed a sense of
frustration and confusion as epitomized by indignation by some members at
the subjects being discussed during the green room meeting on the last
day.

The Conference Chairman's decision to make the controversial Singapore
issues, and not agriculture, the first and last item for discussion on the
last day of the ministerial conference caused a backlash by a group of
developing countries that ultimately precipitated the meeting's collapse.
As opposed to the day-to-day negotiations, which are overseen in Geneva by
the Director General acting as the head of the TNC and by the General
Council Chairman, WTO ministerial conferences are unusual in that the
Conference Chairman is the only person with the power to call and adjourn
meetings, to invite participants, and to choose the topics for discussion.
At Cancun, after the heads of delegations meeting the night before, the
Chairman decided, after consulting with certain ministers, that he needed
to see if there was any way to reach consensus on the Singapore issues,
which seemed to him to be intractable. As a result, he convened a
closeddoor meeting of about 30 ministers broadly representative of the
whole WTO membership on the morning of the final day of the conference to
discuss them. According to reports, the EU representative reiterated at
the beginning of this final, closed-door meeting his long-standing
position that all four Singapore issues must be negotiated. Some
developing countries, on the other hand, opposed starting negotiations on
those issues. As the meeting progressed, the EU agreed to drop two
(investment and competition), maybe even three (government procurement),
of the Singapore issues-leaving trade facilitation on the table. This EU
concession reportedly prompted some traditional opponents such as Malaysia
and India to show some flexibility. The Chairman then recessed the meeting
and asked the ministers to confer with other ministers who were not
present in the "green room" to see whether there was consensus to
negotiate on at least one of the Singapore issues.

During the break, at a meeting of the African, Caribbean, Pacific (ACP),
LDC, and African Union members, many of the ministers present voiced
surprise and indignation over the sequencing of topics under discussion in
the closed-door meeting. They were upset that the Singapore issues were
being discussed rather than agriculture. The Singapore issues were seen as
rich members issues, while agriculture and cotton resonated with the
poorer countries. Finally, members of the ACP/African Union/LDC coalition
believed that no deal was better than a bad deal, and a deal on the
Singapore issues in the absence of any agreement on agriculture or the

cotton initiative was deemed a bad deal. As one country member
rhetorically asked during the debate- "What are we taking home for the
poor? We must say no."

When the 30-country meeting reconvened, Botswana reported the decision of
the ACP countries to the group, indicating that they could not accept
negotiation on any of the Singapore issues, including trade facilitation,
because "not enough was on the table." According to reports, Korea, on the
other hand, said it could not accept dropping any of the Singapore issues.

The Conference Chairman then said that consensus could not be reached and
decided to close the conference without agreement on any issue. At a press
briefing later that afternoon after the collapse of the talks, the
Chairman explained that he had begun with the Singapore issues because of
the dissent voiced on that issue during the meeting the night before. He
further explained that he had decided to end the ministerial because it
was clear to him that consensus could not be reached. Some countries,
including certain EU member states and some developing countries, however,
complained about what they saw as a precipitous decision to end the talks.

Concluding Observations

The Cancun Ministerial Conference highlighted the challenge of meeting the
high and sometimes competing expectations created at Doha of both
developing and developed countries, particularly with respect to
negotiations on critical agricultural issues. While the issue has been
contentious for many years, the Cancun experience demonstrates that
forward movement on agriculture is central to the possibility of making
further progress in the Doha Development Round. Although the Cancun
meeting ended because of the lack of consensus on negotiating the
Singapore issues, what many developing nations wanted from the developed
world were concessions on agriculture, in particular dramatic reductions
in export subsidies and domestic support.

At this point, it is difficult to predict how the setback at Cancun will
ultimately affect the Doha Development Round negotiations. There are some
signs that both developed and developing countries are rethinking their
positions. The United States and the European Union have shifted away from
taking an active leadership role, but have recently signaled some
willingness to engage in further negotiations. Although a number of G-20
members have abandoned the group or made statements undercutting its
unanimity of views, the group's founders still appear intent to play a

leadership role in pushing for global agriculture reform. While progress
remains possible, political events scheduled to occur over the next year
may add uncertainty to the negotiating process. For example, in the United
States, the 2004 presidential and congressional elections are looming, and
protectionist pressures are rising along with the U.S. trade deficit.
Elections in Europe and in one of the largest developing countries, India,
may also have an impact on the negotiations. Finally, how WTO members
handle long-simmering disputes on such topics as corporate tax subsidies
and steel could also affect the negotiating climate. In this regard,
President Bush's recent decision to lift safeguard tariffs on steel may be
viewed as an important development.

As we have noted in previous reports, the WTO has often found it difficult
to achieve consensus and bridge its members' strongly held, disparate
views on politically sensitive issues, in part because it is an
ever-growing, more complex, and diverse organization.37 Various devices,
such as interim deadlines, were put in place for the first stage of Doha
negotiations to redress these significant organizational challenges, but
they fell short of achieving desired progress. The WTO Director General
and General Council Chairman have been given the green light to work with
WTO members to narrow differences on key issues in hopes that they can
still salvage an agreement by the January 1, 2005, deadline. However, the
failure to achieve substantive progress by mid-December casts further
doubt.

One important consideration is that the delay in WTO negotiations could
intensify momentum for concluding bilateral, subregional, or regional
trade agreements. This has already happened in the United States, which,
though remaining engaged in the WTO, has recently concluded three such
agreements (Chile, Singapore, and Central America), is currently
conducting negotiations on three others (Australia, Morocco and Southern
African Customs Union), and has committed to begin negotiations on five
others (Dominican Republic, Bahrain, Thailand, Panama, and the Andean
region) as well as the 34-nation Free Trade Area of the Americas.
Additional possibilities are in the wings. The effect that a proliferation
of these kinds of agreements would have on the WTO is unclear.

37See U.S. General Accounting Office, World Trade Organization: Seattle
Ministerial Outcomes and Lessons Learned, GAO/T-NSIAD-00-86 (Washington,
D.C.: Feb. 10, 2000) and U. S. General Accounting Office, World Trade
Organization: Early Decisions Vital to Progress in Ongoing Negotiations,
GAO-02-879 (Washington, D.C.: Sept. 4, 2002).

Agency Comments and Our Evaluation

We requested comments on a draft of this report from the U.S. Trade
Representative, the Secretary of Commerce, the Secretary of Agriculture,
and the Secretary of State, or their designees. USDA's Foreign
Agricultural Service agreed with our report's factual findings and
analysis. Commerce's Deputy Assistant Secretary for Agreements Compliance
provided us with technical oral comments on the draft, which we
incorporated into the report as appropriate. The Secretary of State
declined to comment on our report. The U.S. Trade Representative provided
formal comments (see app. IV), indicating that many of the issues
identified in GAO's analysis are consistent with the U.S. assessment of
issues that must be addressed to put negotiations back on track in 2004.
He stressed the United States is ready to exercise leadership provided
other countries are prepared to negotiate meaningfully. The Assistant U.S.
Trade Representative for WTO and Multilateral Affairs and other USTR staff
also provided us with oral comments. While agreeing with much of the
report's information, they provided a number of factual and technical
comments, which we incorporated as appropriate. In addition, USTR staff
expressed some concern that the overall tone of the report placed too much
emphasis on the importance of the Cancun ministerial itself and on the
North-South divide, particularly given the meeting's mandate from Doha and
individual country positions. While we stand by the overall balance struck
in our report, we did add some information to reflect the diversity within
developing country ranks evident on certain issues.

We are sending copies of this report to interested congressional
committees, the U.S. Trade Representative, the Secretary of Agriculture,
the Secretary of Commerce, and the Secretary of State. We will also make
copies available to others upon request. In addition, the report will be
available at no charge on the GAO Web site at http://www.gao.gov.

If you or your staff have any questions about this report, please contact
me
at (202) 512-4347. Additional GAO contacts and staff acknowledgments are
listed in appendix V.

Loren Yager
Director, International Affairs and Trade

Appendix I

Objectives, Scope, and Methodology

The Chairman of the Senate Committee on Finance and the Chairman of the
House Committee on Ways and Means asked us to analyze (1) the overall
status of the World Trade Organization's (WTO) negotiations on the eve of
the WTO's ministerial conference at Cancun, Mexico, in September 2003; (2)
the key issues for the Cancun Ministerial Conference and how they were
dealt with at Cancun; and (3) the factors that influenced the outcome of
the Cancun Ministerial Conference.

We followed the same overall methodology to complete the two first
objectives. From the WTO, we analyzed the 2001 Doha Ministerial
Declaration and related documents, the July and August versions of the
draft Cancun Ministerial Declaration, and other speeches and proposals
from WTO officials, as well as some negotiation proposals from WTO
members. From the WTO, U.S. government agencies, and foreign country
officials, we obtained background information regarding negotiating
proposals and positions.

We met with a wide variety of U.S. government and private sector
officials, foreign government officials, and WTO officials. Before the
Cancun ministerial, we met with officials from the Office of the U.S.
Trade Representative (USTR) and the U.S. Departments of Commerce,
Agriculture, and State. We also met with officials from the Grocery
Manufacturers of America and the Pharmaceutical Researchers and
Manufacturers of America. In addition, we met with representatives from
developed and developing countries in Washington, D.C., including
Australia, Malaysia, Brazil, and Costa Rica. Further, we traveled to the
WTO's headquarters in Geneva, Switzerland, where we met with WTO officials
and member country representatives from developed and developing
countries, including Australia, Canada, the European Union (EU), Japan,
Brazil, China, Malaysia, Mexico, and India.

To analyze the factors that influenced the outcome of the Cancun
ministerial, we attended the Cancun Ministerial Conference in Mexico in
September 2003. In Cancun, we attended USTR congressional briefings and
went to press conferences and meetings open to country delegates. Also, we
reviewed domestic and international news media reports; news releases on
the developments at the ministerial conference and statements about the
outcome of the ministerial conference from the WTO, the U.S. and foreign
governments, and other international organizations.

To analyze the various tariff cutting formulas being proposed, we employed
the following procedure. For agricultural market access, we compared an

Appendix I
Objectives, Scope, and Methodology

across-the-board tariff cut of 25 percent (also known as the "Uruguay

Round" formula)1 to a harmonizing or "Swiss formula" with a coefficient of

25.2 On nonagricultural market access, we analyzed the Chair's proposal.3

We employed a coefficient of 1 for the Chair's proposal. Since the Chair's

proposal includes average overall tariffs as part of the formula, we

compared how final tariffs on products with a given tariff level to begin

1A linear or across-the-the board tariff cutting formula means all tariff
rates will be reduced by the same percentage. Assume that the initial
tariff rate prior to negotiations is given by t0 and the final tariff rate
resulting from the negotiations is t1. The expression, which relates the
two tariff rates, where c is a constant parameter, would be:

t1= ct0

The final tariff rate would necessarily depend upon both the parameter c
and the initial tariff rate. The original tariff rate is not a determinant
of the rate of reduction. For purposes of this illustrative example, we
used the parameter 0.75 to represent a 25 percent across-theboard tariff
cut.

For further information, see WTO, Formula Approaches To Tariff
Negotiations (Note By The Secretariat) TN/MA/S/3/Rev.2, April 11, 2003.

2According to the WTO, the harmonizing or so-called Swiss formula that has
been used so far in tariff negotiations has the following specification.

at0

* t1= at0+

The formula has the property of being a function of both the initial
tariff and the coefficient

a. The coefficient can be negotiated. For purposes of this illustrative
example, we used a coefficient of 25.

3The chair's formula is defined as it was described in report by the
chairman, Ambassador Girard, to the Trade Negotiations Committee, WTO
Document TN/MA/12, September 1, 2003, Annex I, Para. 7, p. 8 and 9.

Bta * t0

-t1= Bta * t0

where,

t1 is the final rate, to be bound in ad valorem terms

t0 is the base rate

ta is the average of the base rates

B is a coefficient with a unique value to be determined by the
participants. For purposes of our analysis, we assumed a coefficient of 1
would be used for all countries. However, the Chair's proposal does not
specify the value of coefficient and leaves open the possibility that a
different coefficient could be used.

Appendix I
Objectives, Scope, and Methodology

with would differ for countries with average tariffs of 4 percent, 15
percent, and 30 percent. We selected the United States, Malaysia, and
Brazil as examples of countries that respectively fit into those
categories on the basis of WTO annual World Trade Report data on average
overall bound tariff rates.

We performed our work from June to October 2003 in accordance with
generally accepted government auditing standards.

Appendix II

Significant Events in the WTO Negotiations before and during the Cancun
Ministerial Conference

July 2003 Trade Negotiations Committee (TNC) meets The Chairman of the
TNC, which had been established to oversee the Doha Round of global trade
talks, reported that while the work of the TNC and its subsidiary bodies
intensified in 2003, real negotiations had not yet begun.

WTO General Council Chairman prepares draft ministerial declaration

The text is intended as a first draft of an operational text through which
ministers at Cancun would register decisions and give guidance and
instruction in the negotiations. It reflects a lack of progress on key
issues, as shown by its skeletal nature and the bracketed (disputed) items
relating to "modalities" (rules and guidelines for subsequent
negotiations) for agriculture, nonagricultural market access, and the
Singapore issues (investment, competition [antitrust], government
procurement, and trade facilitation).

Montreal mini-ministerial occurs

Approximately 30 trade ministers from WTO members meet in Montreal to
prepare for the Cancun Ministerial Conference. At the meeting, the
ministers encourage the United States and the EU to narrow their
differences on the central issue of agriculture.

August 2003 U.S. and EU submit joint agriculture framework The framework
includes reductions in domestic support, with those members with higher
subsidies making deeper cuts, a three-pronged strategy to reduce tariffs,
and reduction of export subsidies.

Group of 20 Developing countries submit agriculture counterproposal

The proposal includes substantial cuts in domestic subsidies by developed
countries, a tariff reduction formula that allows developing countries to
make less substantial cuts, and the elimination of export subsidies.

General Council Chairman and WTO Director General submit revised draft
ministerial declaration

Now 23 pages, the text continues to reflect significant differences
between members on many issues. It includes frameworks for modalities in
agriculture and nonagricultural market access as well as proposed
modalities on each of the Singapore issues. Additionally, it includes a
section related to a proposal by Burkina Faso, Benin, Chad, and Mali to
eliminate cotton subsidies and provide compensation to the four countries
while the subsidies are phased out.

General Council approves Agreement on Trade-Related Aspects of
Intellectual Property Rights (TRIPS) and public health solution

WTO members complete discussions mandated in Doha to make it easier for
poorer countries to import cheaper generic drugs made under compulsory
licensing if they are unable to manufacture the medicines themselves. The
United States, previously the only member preventing an agreement, joins
the consensus after the General Council Chairman provides a statement
regarding WTO members' shared understanding of the interpretation and
implementation of the decision.

September 10, 2003 Day 1 of Cancun Ministerial Conference Mexican
President opens the ministerial conference, and ministers start work on
key issues. The Conference Chairman appoints ministers to facilitate
discussions on key issues-agriculture, nonagricultural market access,
development issues, Singapore issues, and other issues. Ministers also
debate a proposal on cotton from four African members.

Day 2

The first informal heads of delegation meeting occurs, and the Director
General is appointed to facilitate discussions on the cotton initiative.
Group discussions also take place on agriculture, nonagricultural market
access, the Singapore issues, development issues, and other issues.

Appendix II
Significant Events in the WTO Negotiations
before and during the Cancun Ministerial
Conference

(Continued From Previous Page)

Day 3

A second informal heads of delegation meeting occurs in the morning and
includes reports by the facilitators on each issue. Working group meetings
continue throughout the day and conclude with a heads-of-delegation
meeting at night. The Conference Chairman commits to draft a new version
of the ministerial text and circulate it by the middle of the following
day.

Day 4

The Conference Chairman distributes a new draft ministerial text at a
meeting with heads of delegations and then asks them to study the text and
reconvene in the evening. After ministers reconvene, many criticize the
draft text, arguing that their particular concerns have not been included.
At the close of the meeting, the Conference Chairman warns ministers that
if the ministerial conference fails, the negotiations might take a long
time to recover.

Day 5

The Conference Chairman begins closed-door consultations with 30 ministers
representing a wide range of regional and other groups on the subject of
the Singapore issues. During these consultations, positions shift,
allowing the possibility of dropping two or possibly three of the issues.
The Conference Chairman then suspends the meeting to allow participants to
meet with their respective groups. When they return, there is no consensus
on three, and the Conference Chairman decides to close the ministerial
conference. Ministers subsequently approve a ministerial statement that
instructs members to continue working on outstanding issues and to convene
a meeting of the General Council by December 15 to take necessary action.

Source: Analysis of WTO and U.S. government documents.

Appendix III

"Developing Countries" in the World Trade Organization

The World Trade Organization (WTO) states that "about two thirds" of its
146 members are "developing countries." However, there are no WTO
definitions of "developed" or "developing" countries-although the WTO does
specifically recognize the 30 WTO members defined as "least developed
countries" (LDC) by the United Nations. Instead, developing countries in
the WTO are designated on the basis of self-selection within each
individual WTO agreement. This is not necessarily automatically accepted
because other WTO members can challenge the decision of another WTO member
to make use of the special provisions1 available to developing countries.
In fact, given the political sensitivities and potential legal issues
involved, the WTO Secretariat does not list or distinguish developing
countries in its reports; for example, it produces annual trade statistics
organized by geographical region and not development status.

The World Bank, however, does use the term "developing economies"2 in its
reports to denote the set of "low and middle income" national economies
(subdivided into lower middle and upper middle) that it classifies on the
basis of gross national income (GNI) per capita. We have used this
definition to compile the list of "developing" WTO members in table 1. The
World Bank divides all economies according to annual GNI per capita,
calculated using the World Bank Atlas method.3 The 2002 GNI ranges in U.S.
dollars for the groups are the following: "low income," $735 or less;

1Developing country status in the WTO brings certain rights. For example,
provisions in some WTO agreements provide developing countries with the
right to restrict imports to help establish certain industries, longer
transition periods before they fully implement agreement terms, and
eligibility to receive technical assistance. See article XVIII of the
General Agreement on Tariffs and Trade (GATT), articles IV, XII, and XXV
of the General Agreement on Trade in Services, and articles 66 and 67 in
the Agreement on Trade-Related Aspects of Intellectual Property Rights. In
addition, developing countries may benefit from the Generalized System of
Preferences, under which developed countries may offer nonreciprocal
preferential treatment (such as zero or low duties on imports) to products
originating in those developing countries the preference-giving country so
designate. See

Decision on Differential and More Favourable Treatment, Reciprocity and
Fuller Participation of Developing Countries, adopted under GATT in 1979.

2World Bank publications with notes on the classification of economies
state that the term "developing economies...does not imply either that all
the economies belonging to the group are actually in the process of
developing, nor that those not in the group have necessarily reached some
preferred or final stage of development."

3The Atlas conversion factor for any year is the average of a country's
exchange rate (or alternative conversion factor) for that year and its
exchange rates for the 2 preceding years, adjusted for the difference
between the rate of inflation in the country, and for 2001 onwards, that
in the Euro Zone, Japan, the United Kingdom, and the United States. A
country's inflation rate is measured by the change in its gross domestic
product deflator.

Appendix III "Developing Countries" in the World Trade Organization

"lower middle income," $736 - $2,935; "upper middle income," $2,936
$9,075; and "high income," $9,076 or more.

Table 1: "Developing" World Trade Organization Members as of July 2003

Page 43 GAO-04-250 World Trade Organization
World Lower Upper Lower Upper Lower Upper Lower Lower Central Upper Lower Lower Congo, Upper Upper Lower Upper Lower Upper Lower Lower Egypt, Lower
Country Bank Other Albania middle Angola Low LDC Argentina middle Armenia middle Bangladesh Low LDC Belize middle Benin Low LDC Bolivia middle Botswana middle Brazil middle Bulgaria* middle Burkina Low LDC Burundi Low LDC Cameroon Low African Low LDC Chad Low LDC Chile middle China middle Colombia middle Dem. Low LDC Congo, Low Costa middle Cote Low Croatia middle Cuba middle Czech middle EU/2004 Djibouti middle LDC Dominica middle Dominican middle Ecuador middle Arab middle Lower
income income income income income income income income income income income income Faso income income income Republic income income income income income Rep. income Republic income Rica income d'Ivoire income income income Republic* income income income Republic income income Republic income El middle
group Salvador income

Appendix III "Developing Countries" in the World Trade Organization

(Continued From Previous Page)

Country World Bank income group Other

33 Estonia* Upper middle income EU/2004

Fiji Lower middle income

Gabon Upper middle income

Gambia, The Low income LDC

Georgia Low income

Ghana Low income

Grenada Upper middle income

Guatemala Lower middle income

Guinea Low income LDC

Guinea-Bissau Low income LDC

Guyana Lower middle income

Haiti Low income LDC

Honduras Lower middle income

Hungary* Upper middle income EU/2004

India Low income

Indonesia Low income

Page 44 GAO-04-250 World Trade Organization
Lower Lower Low Kyrgyz Low Upper Low Upper Macedonia, Lower Low Low Upper Lower Low Low Upper Upper Low Low Lower Low Low
49 Jamaica middle 50 Jordan middle 51 Kenya income 52 Republic income 53 Latvia* middle EU/2004 54 Lesotho income LDC 55 Lithuania* middle EU/2004 56 Former middle 57 Madagascar income LDC 58 Malawi income LDC 59 Malaysia middle 60 Maldives middle LDC 61 Mali income LDC 62 Mauritania income LDC 63 Mauritius middle 64 Mexico middle 65 Moldova income 66 Mongolia income 67 Morocco middle 68 Mozambique income LDC 69 income LDC
income income income income Yugo. Rep. income income income income income income Myanmar

Appendix III "Developing Countries" in the World Trade Organization

(Continued From Previous Page)

Country World Bank income group Other

Page 45 GAO-04-250 World Trade Organization
Lower Upper Upper Papua Lower Lower Lower Upper Lower Upper Lower Lower St. Upper Upper St. Lower Lower Lower Lower Trinidad Upper Lower Lower Upper Upper
70 Namibia middle Nicaragua Low Niger Low LDC Nigeria Low Oman middle Pakistan Low Panama middle New Low Paraguay middle Peru middle Philippines middle Poland* middle EU/2004 Romania* middle Rwanda Low LDC Senegal Low LDC Sierra Low LDC 86 Slovak middle EU/2004 87 Solomon Low LDC 88 South middle 89 Sri middle 90 Kitts middle 91 St. middle 92 Vincent middle 93 Suriname middle 94 Swaziland middle 95 Tanzania Low LDC 96 Thailand middle 97 Togo Low LDC 98 and middle 99 Tunisia middle 100 Turkey middle 101 Uganda Low LDC 102 Uruguay middle 103 Venezuela middle 104 Zambia Low LDC
income income income income income income income Guinea income income income income income income income income Leone income Republic* income Islands income Africa income Lanka income and income Lucia income and the income income income income income income Tobago income income income income income income income Low
Nevis Grenadines 105 Zimbabwe income

Source: GAO analysis of WTO and World Bank information.

Appendix III "Developing Countries" in the World Trade Organization

Notes:

*=Listed by the Organization for Economic Cooperation and Development as a
"Country in Transition" receiving aid, but not a "traditional" developing
country.

EU/2004=Applicant joining European Union in May 2004.

Under the World Bank definition, the WTO membership currently has 105
developing economies, 30 of which are defined by the United Nations as
LDCs. This includes 44 low income countries; 35 lower middle income
countries; and 26 upper middle income countries. There are 40 high income
WTO members (not counting the EU's separate membership). The Cancun
ministerial also recognized that upon ratification in their national
parliaments, Cambodia and Nepal will accede to the WTO, both of which are
LDCs.

Appendix IV

Comments from the Office of the U.S. Trade Representative

Appendix IV
Comments from the Office of the U.S. Trade
Representative

Appendix V

GAO Contacts and Staff Acknowledgments

GAO Contacts Kim Frankena (202) 512-8124 Venecia Rojas Kenah (202)
512-3433

Staff In addition to the individuals named above, Jason Bair, Etana
Finkler, R. Gifford Howland, David Makoto Hudson, Jose Martinez-Fabre,
Rona

Acknowledgments Mendelsohn, Jon Rose, and Richard Seldin made key
contributions to this report.

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