World Trade Organization: Global Trade Talks Back on Track, but  
Considerable Work Needed to Fulfill Ambitious Objectives	 
(31-MAY-05, GAO-05-538).					 
                                                                 
The outcome of ongoing World Trade Organization (WTO)		 
negotiations is vital to the U.S. economy, because trade with WTO
members accounts for about one-fifth of the U.S. gross domestic  
product. The current round of trade negotiations--called the Doha
Round--was supposed to end by January 2005 with agreement on the 
key issues of agriculture, industrial market access, services,	 
and to strengthen the trading system's contribution to economic  
development. Failure to reach any agreement at the last WTO	 
ministerial meeting in Cancun, Mexico, in September 2003, put the
talks behind schedule and threatened the outcome; however, talks 
resumed in 2004, and a new ministerial conference will convene in
Hong Kong in December 2005. In light of these events, and with	 
the impending renewal decision on U.S. Trade Promotion Authority,
which streamlines the process by which Congress approves trade	 
agreements, GAO was asked to assess (1) the overall status of the
Doha Round negotiations, (2) progress on key negotiating issues, 
and (3) factors affecting progress toward concluding the	 
negotiations.							 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-05-538 					        
    ACCNO:   A25497						        
  TITLE:     World Trade Organization: Global Trade Talks Back on     
Track, but Considerable Work Needed to Fulfill Ambitious	 
Objectives							 
     DATE:   05/31/2005 
  SUBJECT:   Economic development				 
	     Foreign trade agreements				 
	     International agreements				 
	     International organizations			 
	     International trade				 
	     Schedule slippages 				 
	     Trade agreements					 
	     Trade policies					 
	     Developing countries				 
	     Agricultural policies				 
	     International economic relations			 
	     International trade regulation			 
	     Trade negotiations 				 

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GAO-05-538

United States Government Accountability Office

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

Chairman, Committee on Ways and Means, House of Representatives

May 2005

                                  WORLD TRADE
                                  ORGANIZATION

Global Trade Talks Back on Track, but Considerable Work Needed to Fulfill
                              Ambitious Objectives

                                       a

GAO-05-538

[IMG]

May 2005

WORLD TRADE ORGANIZATION

Global Trade Talks Back on Track, but Considerable Work Needed to Fulfill
Ambitious Objectives

                                 What GAO Found

During 2004, Doha Round negotiations got back on track as trade ministers
signed a framework agreement known as the "July package." By committing to
eliminate agricultural export subsidies, the agreement's main achievement
was to recognize the importance of agriculture in the round and thus
reopen talks on other issues. Since this breakthrough, negotiations are
picking up momentum, as WTO members are working toward deadlines for more
detailed agreements at the December 2005 Hong Kong ministerial conference.
Yet despite the improved negotiating atmosphere, the talks are behind
schedule, and considerable work remains on the numerous issues that must
constitute a final agreement.

Progress has been uneven on the six negotiating issues identified as
central to the Hong Kong meeting-agriculture, trade facilitation (customs
reforms), industrial market access, services, WTO rules, and development
issues. The United States has particular reform interests in the first
four of these issues. Progress has occurred on two of them: in
agriculture, based on agreements in the July framework, and trade
facilitation, for which talks have finally been started. However, little
progress has been made on industrial market access and services, two other
issues of interest to the United States.

Several factors could affect progress in the critical period leading up to
the December 2005 Hong Kong ministerial. Achieving consensus among the
WTO's 148 members is a challenging task, and diverse economic incentives
and competing visions add complexity to the negotiations. Cooperation by
the United States, the European Union, and some of the developing
countries is also seen as key to a successful conclusion before U.S. Trade
Promotion Authority expires in mid-2007, an implicit deadline for the
talks.

                 United States Government Accountability Office

Contents

  Letter

Results in Brief
Background
Doha Round Behind Schedule but July Framework Injected New

Momentum into Trade Talks after Failed Cancun Ministerial Negotiators Have
Made Uneven Progress in Key Issue Areas Several Factors Pose Challenges to
Successful Negotiations in Hong

Kong Concluding Remarks Agency Comments and Our Evaluation

1 2 4

8 15

20 27 28

Appendixes                                                              
                Appendix I:       Objectives, Scope, and Methodology       29 
               Appendix II:                  Agriculture                   31 
              Appendix III:            Industrial Market Access            43 
              Appendix IV:                     Services                    49 
                Appendix V:   Economic Incentives for Doha Negotiations    54 
                             Trade Negotiating Interests and Affiliations  
              Appendix VI:                    of Leading                   
                                        Merchandise Exporters              62 
              Appendix VII:     GAO Contacts and Staff Acknowledgments     67 

Tables  Table 1: Overall Goals for the Doha Round Negotiations from the 
                          Doha Declaration, U.S. Trade Promotion Authority 
                                Legislation, and USTR                       7 
            Table 2: Trade Weighted Average Ad Valorem Agricultural Tariff 
                    Rates for Selected Countries and Products. (Tariffs in 
                                      percent)                             39 
              Table 3: Models Estimating the Economic Benefits from Tariff 
                           Reduction in the WTO Doha Round                 57 
Figures             Figure 1: Timeline of Significant Events in the WTO    
                   Negotiations from the Cancun Ministerial to August 2004 11
              Figure 2: Key Milestones in the WTO Negotiations in 2005 and 
                                       Forward                             14 
                Figure 3: Types of Domestic Supports-WTO Definitions       34 

Contents

Figure 4:	Recent Amber Box Spending Patterns for the European Union and
United States, as Measured by Aggregate Measure of Support 35

Figure 5: Tariff Reduction Formulas Considered for Improving Agricultural
Market Access 41 Figure 6: Potential Special and Differential Treatment
Provisions Discussed in the July Framework on NAMA 44 Figure 7: Various
Formula Specifications for Tariff Reductions Considered with the NAMA
Negotiations 45

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.

A

United States Government Accountability Office Washington, D.C. 20548

May 31, 2005

The Honorable Charles Grassley Chairman Committee on Finance United States
Senate

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

U.S. trade with members of the World Trade Organization (WTO) totaled $2.1
trillion in 2004, accounting for almost one-fifth of U.S. gross domestic
product. As such, the United States has a considerable stake in WTO
negotiations launched in November 2001 that aim to liberalize trade by
lowering tariffs and other distortions to global trade in agriculture,
industrial goods, and services and to strengthen the trading system's
contribution to economic development. Officially known as the Doha
Development Agenda, the talks are being conducted under the auspices of
the WTO and are the latest in a series of negotiating "rounds" among its
members, which now number 148 nations and customs territories. Past GAO
reports have highlighted the ambitious list of 19 substantive issues being
addressed in what is now known as the Doha Round and the challenges WTO
members have faced in making progress. Notably, the failure of the
September 2003 meeting of trade ministers at Cancun, Mexico, set back the
talks and made meeting the original January 2005 deadline for conclusion
impossible. The President recently requested a 2-year extension of Trade
Promotion Authority (TPA) from Congress, which streamlines congressional
approval of trade agreements, for purposes of pursuing a final Doha Round
agreement, among others. TPA legislation allows for such an extension
unless a disapproval resolution is passed by either House of Congress by
June 30, 2005. The U.S. Congress will also consider the 5-year WTO
membership review, as called for in section 125 of the Uruguay Round
Agreements Act.1

1Section 125 of the Uruguay Round Agreements Act requires the U.S. Trade
Representative to report once every 5 years on the effects of the WTO
agreement on the interests of the United States and the value of continued
U.S. participation in the WTO. It sets forth a procedure whereby
congressional approval of U.S. participation in the WTO could be
withdrawn.

Given the importance to the United States of the WTO Doha Round and
Congress's present TPA renewal decision, you asked GAO to provide a status
report on the WTO negotiations. In this report, the latest in a series, we
assess (1) the overall status of the WTO Doha Round negotiations; (2)
developments on key negotiating issues since the previous (January 2004)
GAO report; and (3) factors affecting progress in the negotiations.

To address these objectives, we met with and obtained documents from a
wide variety of WTO, U.S., and foreign government officials, as well as
academic experts and private sector groups (including business
associations, law firms, and civil society groups), both in Washington,
D.C., and Geneva, Switzerland. We also reviewed international tariff and
trade data from the WTO and the United Nations. We determined that these
data were sufficiently reliable for the purposes of our analysis. Appendix
I provides a full description of the scope and methodology of our work. We
conducted our work from March 2004 through March 2005 in accordance with
generally accepted government auditing standards.

Results in Brief	Overall, the Doha Round is behind schedule, but the
global trade talks have regained their footing and achieved some forward
momentum since the failed Cancun ministerial. Leadership by both developed
and developing nations, an improved process, hard work, and a willingness
to compromise resulted in a July 2004 framework agreement widely credited
with putting the Doha Round back on track. The negotiating participants we
spoke with are generally pleased that a July 2004 framework agreement and
its breakthrough in agriculture reform has succeeded in demonstrating
broader commitment to success and effectively breaking the deadlock in the
negotiations. Agriculture remains the top issue for many participants, and
dissatisfaction with progress on agriculture has held up movement on the
other 18 issues on the negotiating agenda. Negotiators report that the
July framework has enabled technical negotiations to proceed in a much
improved atmosphere, despite political transitions in some countries
during the fall of 2004. Nevertheless, those with whom we spoke
universally stressed that considerable work remains to be done if the Doha
Round's promise is to be realized-particularly because simultaneous
agreement on all issues is required for agreement. Moreover, progress thus
far in 2005 has proved slower than hoped, causing WTO Director-General
Supachai Panitchpadki to sound a warning over prospects for success in
Hong Kong.

For its part, the United States has made it clear that issues besides
agriculture are important to satisfy its balance of interests. It is
seeking evidence of others' commitment to liberalize barriers to
industrial goods and services by the pivotal December 2005 Hong Kong
ministerial, whose goal is to set the stage so final bargaining can occur
in 2006. Such progress is also vital to attaining U.S. Trade Promotion
Authority objectives-and realizing U.S. economic gains-for the Doha Round.

Progress has been uneven among the six negotiating issues identified as
key to the Hong Kong ministerial-agriculture, trade facilitation,
industrial (nonagricultural) market access, services, development issues,
and WTO rules. Two issues the United States has advocated have progressed.
Discussions on agriculture are the most advanced, with the July 2004
framework capturing the important new commitment to eliminate all export
subsidies at an agreed-upon date. The formal launching of talks on trade
facilitation-the simplification and streamlining of customs
procedures--also is progress on an issue increasingly seen as a "win-win"
proposition for developed and developing countries alike. Little progress
has been made on two other issues of interest to the United States. First,
on industrial market access, the primary achievement has been to establish
an agenda for discussion, though disagreement persists on the two main
methods being considered for achieving substantial liberalization. Second,
the current number and quality of offers on opening access to national
services markets are still inadequate, according to participants. The
remaining two issues are being pressed by other WTO members and also have
not progressed very far. Debate over the July framework showed WTO members
are still divided over how to best approach development issues, but more
ready to consider practical accommodations to address concrete problems.
Meanwhile, negotiations on various trade "rules" have intensified, with
the United States and other members who are users of trade remedy laws
facing calls for considerable change to their antidumping and
countervailing duty regimes-measures used to counter unfairly priced and
subsidized imports.

Several interrelated factors could affect progress in the critical months
culminating in the Hong Kong ministerial. Achieving agreement among the
WTO's large membership has long been recognized as complicated, given its
consensus-based decision making structure. The task before WTO negotiators
is particularly difficult, partly due to differences in the economic
benefits and costs countries expect from trade liberalization. For
example, some developing countries that currently benefit from
preferential access to developed country markets are resisting ambitious

reduction of multilateral trade barriers out of fear that it will erode
their margins of preference and reduce their exports. Coalitions have been
instrumental in consolidating views among like-minded members, but the
active participation by developing countries that sometimes have competing
visions to developed countries has added to the complexity of achieving
consensus. Progress at the WTO still depends on strong leadership by-and
good relations between-the United States and the European Union, but
political transitions have preoccupied them into early 2005. Analysts
agree that action on high-profile WTO dispute settlement cases such as
cotton and sugar could prove important to ongoing agriculture
negotiations. Moreover, proponents say the avid pursuit of trade
negotiations outside the WTO is spurring on WTO progress, but others warn
it is detracting attention and resources from the Doha Round. Several
negotiators indicated that if extended for 2 years by June 1, 2005, the
final expiration of TPA in mid-2007 is serving as the implicit deadline
for the Doha Round, and effectively means it must conclude by December
2006. Finally, preparations for the Hong Kong ministerial have begun, but
are still incomplete.

We conclude by noting that despite limited progress to date and
considerable challenges ahead, some of the trade experts we consulted are
confident that an ambitious, balanced outcome is still attainable-if 2005
results in sufficient progress. Others warn that hard decisions are
necessary and time is short if an outcome that lives up to Doha's promises
is to be achieved. We received comments on a draft of this report from the
Office of the U.S. Trade Representative and the Departments of
Agriculture, Commerce, and State indicating that these agencies generally
agreed with our findings.

Background 	The World Trade Organization (WTO) was established as a result
of the Uruguay Round on January 1, 1995, as the successor to the General
Agreement on Tariffs and Trade (GATT). Based in Geneva, Switzerland, the
WTO administers agreed-upon rules for international trade, provides a
mechanism for settling disputes, and serves as a forum for conducting
trade negotiations. There are currently 148 WTO members, up from 90 GATT
members when the Uruguay Round was launched in 1986 and from 128 members
in 1995.

The highest decision-making authority in the WTO is the ministerial
conference, which consists of trade ministers from all WTO members and
occurs every 2 years.2 The outcome of ministerial conferences is a
ministerial declaration that guides future work. The WTO General Council,
which consists of representatives from all WTO members, is empowered to
make decisions between ministerial conferences. Decisions in the WTO are
made by consensus-or absence of dissent-among all members rather than a
simple majority.

At the fourth ministerial conference in Doha, Qatar, in November 2001, WTO
members reached consensus to launch a comprehensive negotiating round, the
Doha Development Agenda or Doha Round.3 The Doha Round is the ninth round
of trade liberalizing negotiations since the trading system's founding in
1947. These rounds result in legally binding international obligations on
members both in terms of the trade barriers they are allowed to maintain,
such as tariffs (import taxes), and the trade rules (disciplines) they are
to abide by. Failure to comply is subject to binding dispute settlement
and possible trade retaliation. In the Doha ministerial declaration, WTO
members set a number of overall objectives for the round, such as the need
to ensure that developing countries, particularly the least-developed,
secure growth of world trade commensurate with their needs for economic
development (see fig. 1 for a list of the overall Doha objectives). The
declaration sets forth a work program that covers 19 negotiating areas,
including agriculture, services, and market access for nonagricultural
goods (also known as industrial market access).4 Within each of those
areas, WTO members set specific goals.5 WTO members also established a
Trade Negotiations Committee, chaired by the WTO Director General, to
oversee the round's progress. Because the Doha Round is a

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

3For additional information on the fourth ministerial conference and the
Doha Development Agenda, see GAO, World Trade Organization: Early
Decisions Are Vital to Progress in Ongoing Negotiations, GAO-02-879
(Washington, D.C.: Sept. 4, 2002).

4The 19 negotiating areas are implementation-related issues and concerns;
agriculture; services; market access for nonagricultural products; trade
related aspects of intellectual property rights; relationship between
trade and investment; interaction between trade and competition policy;
transparency of government procurement; trade facilitation; WTO rules;
dispute settlement understanding; trade and environment; electronic
commerce; small economies; trade, debt, and finance; trade and transfer of
technology; technical cooperation and capacity building; least-developed
countries; and special and differential treatment.

5A detailed discussion of the goals for each area is provided in the
appendixes of this report.

package, or "single undertaking" in WTO parlance, simultaneous agreement
on all issues is required to finalize an agreement.

In negotiating the Doha Round on behalf of the United States, the Office
of the United States Trade Representative (USTR) is also guided by certain
goals, notably the goals outlined by the Trade Promotion Authority (TPA)
granted by Congress in 2002. TPA's goals for USTR negotiators include
overall and principal objectives and promotion of certain priorities. In
addition to TPA, USTR has its own goals for the Doha Round outlined in a
required official notification to Congress in November 2002.6 (See fig. 1
for a description of the TPA and USTR goals.) In general, USTR states that
it plans to use the Doha Round negotiations to strengthen the multilateral
trading system, improve the operation of the WTO, and liberalize
international markets. USTR places special emphasis on creating new export
opportunities for the United States in agriculture, manufacturing, and
services. USTR must explain how any resulting agreement makes progress
towards TPA goals when submitting it for consideration for congressional
approval under TPA's expedited approval procedures. TPA is set to expire
in mid-2005, but provides a procedure for the President to request a
one-time extension of the authority to July 1, 2007. The President
recently requested such an extension, which is automatic unless Congress
disapproves it by June 30, 2005.

6Such notification is required by law, under the Bipartisan Trade
Promotion Authority Act of 2002 (P.L. 107-210). The issue areas USTR
specifies goals for are trade in agricultural goods, trade in industrial
and other goods, trade in services, trade in intellectual property rights,
electronic commerce, trade facilitation, trade and investment, government
procurement, competition policy, transparency/regulatory reform, labor
(including child labor), regional trade agreements, trade and the
environment, fisheries subsidies, border taxes, trade remedy laws and
disciplines, and dispute settlement.

Table 1: Overall Goals for the Doha Round Negotiations from the Doha
Declaration, U.S. Trade Promotion Authority Legislation, and USTR

Doha Declaration Goals

o  To maintain the process of reform and liberalization of trade policies,
thus ensuring that the system plays its full part in promoting recovery,
growth, and development.

o  To ensure developing countries, and especially the least-developed
among them, secure a share in the growth of world trade commensurate with
the needs of their economic development.

o  To address marginalization of least-developed countries in
international trade and to improve their effective participation in the
multilateral trading system.

o  To stress commitment to the WTO as the unique forum for global trade
rulemaking and liberalization, while also recognizing that regional trade
agreements can play an important role in promoting the liberalization and
expansion of trade and in fostering development.

o  To continue to work with the Bretton Woods institutions for greater
coherence in global economic policymaking.

o  To reaffirm commitment to the objective of sustainable development.

o  To reaffirm the right of members under the General Agreement on Trade
in Services to regulate, and to introduce new regulations on, the supply
of services.

o  To reaffirm commitment to internationally recognized core labor
standards.

o  To attach great importance to concluding accession proceedings as
quickly as possible, particularly for least developed countries.

o  To ensure internal transparency and the effective participation of all
members.

TPA Goals

o  To obtain more open, equitable, and reciprocal market access.

o  To obtain the reduction or elimination of barriers and distortions that
are directly related to trade and that decrease market opportunities that
otherwise distort U.S. trade.

o  To further strengthen the system of international trading disciplines
and procedures, including dispute settlement.

o  To foster economic growth, raise living standards, and promote full
employment in the United States and to enhance the global economy.

o  To ensure that trade and environmental policies are mutually supportive
and to seek to protect and preserve the environment and enhance the
international means of doing so, while optimizing the use of the world's
resources.

o  To promote respect for worker's rights and the rights of children
consistent with core labor standards of the International Labor
Organization.

o  To seek provisions in trade agreements under which parties to those
agreements strive to ensure that they do not weaken or reduce the
protections afforded in domestic environmental or labor laws as an
encouragement for trade.

o  To ensure that trade agreements afford small businesses equal access to
international markets, equitable trade benefits, and expanded export
market opportunities, and provide for the reduction or elimination of
trade barriers that disproportionately impact small businesses.

o  To promote the universal ratification and full compliance with the
International Labor Organization Convention Concerning the Prohibition and
Immediate Action for the Elimination of the Worst Forms of Child Labor.

USTR Doha Round Goals

o  To open markets around the globe for American workers, farmers, and
companies, with special emphasis on creating new export opportunities in
agriculture, manufacturing, and services.

o  To bring home a set of world trade agreements that enhances economic
growth and prosperity in the United States and its trading partners
(especially in the developing world, most notably in Africa) by reducing
and eliminating barriers to trade.

o  To strengthen the multilateral trading system and improve the operation
of the WTO.

                     Sources: WTO, TPA, and USTR documents.

Note: Goals for each specific negotiating area or issue were also set.

The Doha declaration also set several goals for the following ministerial
conference. However, at the ministerial conference held in Cancun, Mexico,
from September 10-14, 2003, WTO ministers were unable to achieve these
goals or to bridge wide, substantive differences on individual negotiating
issues. They concluded the unsuccessful conference with WTO members
sharply divided along North-South (developed-developing country) lines and
agreed only to continue consultations and convene a meeting of the General
Council by mid-December 2003 to take steps to move the negotiations
forward. As we noted in our January 2004 report,7 the Doha Round of WTO
negotiations had missed virtually all of the established milestones for
progress during its first two years. The breakdown at Cancun threatened to
derail the talks completely. The December 2003 General Council meeting did
not result in any agreements, except to resume talks in early 2004. As a
result, WTO negotiators missed the original deadline of January 1, 2005,
for concluding a Doha Round agreement. Thus, at the time our last report
was issued, in January 2004, the Doha Round's prospects were uncertain.

  Doha Round Behind Schedule but July Framework Injected New Momentum into Trade
  Talks after Failed Cancun Ministerial

Despite the Doha Round starting 2004 on an uncertain note, political
leadership, intensified dialogue, and a series of conciliatory gestures
resulted in adoption by WTO members of a framework agreement on key
negotiating issues called "the July framework" or "package." The framework
is credited with putting global trade talks back on track, and
participants report that they have finally begun to make progress. Recent
high-level meetings have sought to focus and accelerate work that leads up
to a December 2005 ministerial conference in Hong Kong. The Hong Kong
meeting is now hoped to result in decisions that will help determine how
ambitious the Doha Round will be in terms of cuts in subsidies, tariffs,
and other barriers. But even if negotiators reach the goal of setting the
stage for finalizing a Doha Round agreement in 2006, WTO negotiations are
about 2 years behind their original target date.

7GAO, World Trade Organization: Cancun Ministerial Fails to Move Global
Trade Negotiations Forward; Next Steps Uncertain, GAO-04-250 (Washington,
D.C.: Jan. 15, 2004).

Shows of Leadership and More Interactive Process Spur Progress

Contrary to post-Cancun gloom, 2004 witnessed a resumption of Doha
negotiations. Active leadership by the United States and the European
Union (EU) proved essential to progress, as did a more interactive process
and hard bargaining. Former U.S. Trade Representative Robert Zoellick is
widely credited with taking the initiative to resume talks with a January
2004 letter to fellow trade ministers urging them to keep 2004 from being
a lost year for the WTO and suggesting various ways to make the agenda
more manageable. He followed up on the letter with extensive foreign
travel to meet with other WTO nations and rally support for resuming
talks. WTO Director-General Supachi also traveled extensively as part of
an active outreach effort to WTO member country officials.

WTO members reactivated Doha negotiating groups in February 2004 with new
chairs intent on ensuring more fruitful member-to-member discussions.
Summing up the status after his visits with foreign officials, Ambassador
Zoellick concluded that a breakthrough on agriculture was "absolutely the
key" to progress. WTO members undertook intensive efforts to reach a
breakthrough on agriculture both in Geneva and at high	level meetings
among key nations. Observers credited the EU Trade Commissioner Lamy's
offer in May to eliminate export subsidies with providing a tangible
incentive to reach agreement on agriculture. Several conciliatory
initiatives were also taken to allay specific developing country concerns.
For example, a workshop held in Benin emphasized the importance of cotton
reform to growth and poverty reduction in Africa. To alleviate poorer
countries' concerns over adjustment costs that were holding back overall
trade liberalization, the EU suggested the WTO's poorest members in Africa
and elsewhere should be offered the "Round for Free"-that is, they would
benefit from others' concessions without having to offer much if anything
in return. The offer sparked a debate over this differentiation by making
it clear that the EU felt the Doha Round offered, and expected, more of
other developing countries.

Developing countries also took on leadership roles and actions that
contributed to progress. After Cancun, there was skepticism in some
quarters as to whether the newly-created coalitions of developing
countries would be able to maintain cohesion and play constructive roles.
However, according to other participants, throughout 2004, these groups
articulated their positions clearly and negotiated effectively with other
groups, including the industrialized countries. For example, the group of
populous developing countries with agricultural interests known as the
Group of 20 (G-20) issued a late May paper setting forth principles to
govern tariff cuts to help bridge wide differences in agricultural market
access. Malaysia

played a key role in shaping the novel terms for trade facilitation
negotiations.

The WTO negotiating process also became more effective, contributing to
progress. In our last report, we noted that the WTO's large number of
members made formal gatherings increasingly ineffective and more suitable
for speech-making or restating well-known-positions than for advancing the
negotiations. Moreover, members often focused their efforts toward
influencing the negotiating group chairmen, rather than other members. In
early 2004, a series of mini-ministerials and other smaller, informal
group meetings were used to foster direct interaction between members and
became the real venues for moving the negotiations forward. Negotiating
groups on specific issues also adopted informal meetings that featured
more direct member-to-member dialogue rather than the prior chair-driven
process.

Yet, leadership and process improvements alone were not sufficient to
attain agreement. Hard work and willingness to compromise were also
required. The wide remaining gaps on agriculture and unrealized demands on
other issues were apparent at a late June 2004 meeting of the WTO Trade
Negotiations Committee. WTO Director General Supachai Panitchpadki urged
members then, and at a ministerial among African nations shortly
thereafter in Mauritius, to seize the opportunity before them and show the
flexibility required to seal a deal. With the July 16 release of a draft
text, 2 weeks of day-and-night negotiating-often in intensive small group
settings-were begun. An ad hoc group called the Five Interested Parties
(or Group of Five)-composed of five key players in agriculture8-was
critically important in bridging developed/developing country differences
and shaping agreement (even though some members, such as the Group of 10
net agricultural importers, complained about being left out of these
deliberations). Finally, on July 31, 2004, WTO members reached a deal on a
framework agreement and adopted it formally at a WTO General Council
meeting.

8The group included Australia, Brazil, the European Union, India, and the
United States.

Figure 1: Timeline of Significant Events in the WTO Negotiations from the Cancun
                           Ministerial to August 2004

Least developed countries issue Dakar Declaration covering a number of
negotiating issues, with emphasis on development

EU Trade Commissioner indicates willingness to eliminate agricultural
export subsidies and calls for a "Round for Free" for developing countries

African Union ministers issue Kigali Declaration covering issues critical
to development of Africa

G-20 issues proposal on a framework to establish agricultural modalities

Source: GAO, based on WTO, USTR, and other information.

The main features of the July framework agreement were: establishing key
principles for each aspect of global agricultural trade reform, launching
negotiations to clarify and improve WTO rules on customs procedures (trade
facilitation), identifying the key elements of negotiations to improve
industrial (nonagricultural) market access, and stressing the importance
of liberalizing access to services markets and addressing outstanding
development concerns.9 It also set a notional December 2005 date for the
next WTO ministerial in Hong Kong but did not set a new deadline for
concluding the Doha Round. A veteran U.S. negotiator suggested they had
pleasantly "surprised themselves" in reaching agreement at the WTO on a
long-sought framework. The framework was widely praised by its key
architects and many of their stakeholders, though it drew skepticism from
some corners.

  9The full framework (World Trade Organization, "Doha Work Program: Decision
  Adopted by the General Council on 1 August 2004," WT/L/579, Aug. 2, 2004) is
                           available at www.wto.org.

July Framework Unlocks Negotiations and Improves Negotiating Atmosphere

The July 2004 framework is widely credited with putting the Doha Round
"back on track" and renewing political commitment to its ultimate success.
Up until then, it had proved impossible to make meaningful progress on any
of the other 18 issues of the round because key members linked movement on
those issues to satisfactory progress on agriculture. Several participants
went so far as to suggest that the July 2004 framework meant WTO members
had prevented failure in the Doha Round and the WTO from becoming obsolete
as a forum for liberalizing trade. A number of officials and experts we
met with maintain that the package represents important progress and
provided a sound basis for productive technical work on all issues during
an anticipated political hiatus in the fall of 2004, when the European
Commission changed and the United States held elections.

Considerable Work Remains on All Issues

While GAO's examination does reveal some progress on all fronts either in
the July framework or afterwards, participants and experts widely agree
that considerable work remains on all issues if the Doha Round is to be
concluded successfully as a package deal. Notably, experts agree that
translating political commitment into concrete cuts in agricultural
subsidies and tariffs involves grueling negotiations over myriad technical
details. Without such commitment, loopholes and exemptions could undermine
hoped-for liberalization. Moreover, agriculture is recognized as having
achieved greater progress than other issues, such as industrial market
access and services, which are essential for attaining an acceptable
balance of issue interests among the WTO's 148 members. While cautioning
that each issue will advance at its own rate and urging others not to
insist on lock-step progress, U.S. negotiators have made it clear they
must see evidence of others' commitment to liberalize barriers to
industrial goods and services by the WTO ministerial now officially slated
for December 13	18, 2005, in Hong Kong so that member-to-member
negotiations can begin in earnest. Such progress is also vital to
attaining U.S. TPA objectives-and realizing U.S. economic gains-for the
Doha Round.

Next 6 Months Will With tough battles on the details of agriculture reform
ahead and the need Determine How Ambitious for progress on other issues,
the coming 6 months are crucial. U.S. the Doha Round Will Be negotiators
are hopeful that groups will concentrate on working through

the issues and ensure they are sufficiently advanced to obtain needed
decisions by the December 2005 Hong Kong ministerial. If so, and if the
Hong Kong ministerial results in the needed decisions, there is at least a

reasonable prospect for the talks to conclude by the end of 2006 with
meaningful results.

Early 2005 high-level meetings have sought to focus negotiations ahead of
the December 2005 Hong Kong ministerial. At the late January 2005
mini	ministerial in Davos, Switzerland, and the subsequent mid-February
Trade Negotiations Committee meeting, WTO members generally agreed to
focus on six issues in Hong Kong. These six issues are: (1) agriculture,
(2) industrial or nonagricultural market access (NAMA), (3) services, (4)
trade facilitation, (5) "rules" such as subsidies and antidumping, and (6)
development. They also generally agreed that the Hong Kong ministerial's
goal is to set the stage for final negotiations in 2006.

Although there is not yet agreement about what this entails, U.S.
negotiators report that it is widely accepted that by the time of the Hong
Kong ministerial WTO negotiators should seek to finalize "modalities" on
agriculture and NAMA-that is, numerical targets, formulas, industrial
sectors for potential sectoral agreements, and technical guidelines for
countries' commitments on cutting tariffs and subsidies. By the Hong Kong
ministerial, negotiators should also have made progress in services,
market access, and rules discussions and narrowed the focus, and possibly
have begun to outline or draft texts on trade facilitation and development
issues.

These deliverables will be critical in determining how ambitious the Doha
Round will be in terms of cuts in tariffs, subsidies, and other barriers
to trade, and what the overall balance will be across various issues.
Finalizing modalities is also an important interim step before concrete
negotiations can occur among WTO members. WTO members had hoped that by
mid-July 2005 they would be able to get a sense of how well their balance
of issue interests are being met through such means as producing a "first
approximation" of the relevant texts or conducting stocktaking meetings on
negotiating progress. However, at a late April 2005 TNC meeting WTO
Director-General Supachai expressed concern about meeting these goals,
noting that across the board progress has fallen short of what is
required. He urged greater unity of purpose and warned that without better
progress, WTO members could be facing major problems for Hong Kong. At an
early May 2005 meeting of the Organization for Economic Cooperation and
Development (OECD) in Paris, ministers called for a heightened sense of
urgency in the negotiations and expedited preparations for the Hong Kong
conference. After the Paris meeting, trade officials from certain WTO
members reached an informal agreement on a technical issue-on the

method for converting specific tariffs to ad valorem10 tariffs-that was
considered significant because it had been blocking progress in the
agriculture negotiations for months.

      Figure 2: Key Milestones in the WTO Negotiations in 2005 and Forward

Paris

May 31: Services offers due July 21-22: Trade Negotiations Committee
meeting

July 27 and 29: General Council meeting

July 31: Deadline for Committee on Trade and Development to complete
review of all outstanding agreementspecific proposals and report to
General Council

            Source: GAO, based on WTO, USTR, and other information.

WTO Negotiations Are About 2 Years Behind Their Original Target Date

Even with the July framework and a successful Hong Kong ministerial, slow
overall progress and the Cancun setback means the Doha Round now is
unlikely to conclude before December 2006, 2 years after the originally
established deadline of January 2005. However, past rounds have taken

10"Ad valorem" signifies any charge, tax, or duty that is applied as a
percentage of value. An ad valorem tariff rate is a trade tax calculated
as a percentage of the value of the product being traded.

longer than originally planned, and the last two rounds-which involved
fewer countries-each took 6 or more years to complete.

Experts offer mixed views as to whether this lag is cause for concern. A
number of experts we spoke with stressed that the real question is not how
long the round is taking, but how ambitious-in terms of liberalization and
reform-the Doha Round's result will be. Some were fairly pessimistic. For
example, one USTR and WTO Secretariat veteran termed the progress to date
not only pitiful but worrying. Another expert said he did not believe the
round was on track for achieving its ambitious liberalization and
development objectives and expressed concern because the hardest issues
still have not been tackled. As a result, this expert felt that the round
would only conclude by December 2006 if work accelerates and political
engagement increases. However, other experts said it is too early to give
up on the round's success. One expert stressed that ups and downs-such as
build-ups before deadlines and let downs after missing milestones-are
typical in trade negotiations. Another expert noted that failures can
often be vital to achieving worthwhile agreements and suggested Cancun was
such an event. Both he and another expert indicated that there is still
time for the Doha Round to conclude with meaningful results in all key
negotiating issues. However, they said there is no more time to spare if a
balanced, ambitious package is to be attained because even past rounds
have required at least a year and a half of very hard bargaining to
conclude. That time is upon us, if one works backwards from the July 1,
2007, expiration of any renewed U.S. Trade Promotion Authority.

  Negotiators Have Made Uneven Progress in Key Issue Areas

Negotiating progress has varied markedly in the six issues designated as
key work areas at the upcoming Hong Kong ministerial-(1) agriculture, (2)
trade facilitation, (3) industrial (nonagricultural) market access, (4)
services, (5) development issues, and (6) rules. Some advances have been
clear in two issues advocated by the United States, agriculture and trade
facilitation, although negotiations in the latter have just begun. As
detailed in appendixes III and IV, very limited progress has occurred so
far in two other issues being advocated by the United States-industrial
market access and services. Progress has also been limited on two other
issues being advocated by other WTO members-development-related issues and
rules. Reform of WTO rules remains an area of controversy, with the United
States and other users of the trade remedy laws pitted against many other
countries over whether to maintain and even strengthen current rules.

Progress Made in All Three Pillars of Agricultural Reform, but
DifficultDebate Lies Ahead

As detailed in appendix II, negotiators pressed hard in 2004 to make some
progress on all three pillars for agricultural reform: (1) export
competition, (2) domestic supports and (3) market access. The centerpiece
of WTO member countries' efforts was the July 2004 framework agreement to
remove all export subsidies at a future date. This commitment had long
been sought by the United States and other nations, but involved a
trade	off: the agreement to negotiate disciplines in other agricultural
export competition programs, including U.S. export credit and food aid
programs, and state trading enterprises. The framework also set ceilings
on certain trade-distorting domestic supports (subsidies), though
negotiators will need to further define and set comprehensive reduction
schedules for such trade-distorting domestic supports. The framework also
establishes the principle that countries with higher trade-distorting
domestic supports and tariffs reduce them comparatively more.

Market access, the third area of reform, proved the most difficult to
negotiate. As further explained in appendix II, the July framework
established a principle of tiered and harmonized reductions in tariffs,
but did not resolve the differences on how this would be accomplished.
Negotiators still need to agree on numerous outstanding details if WTO
members are to achieve modalities at the December 2005 Hong Kong
ministerial. Technical work on issues including tariff rate quota
administration,11 export credit repayment terms, and converting tariffs
into ad valorem equivalents has begun. Yet, the months-long stalemate on
the last issue frustrated progress until May 2005. Moreover, according to
many experts, the big battles that will determine how ambitious the Doha
round will be---over whether and how trade-distorting domestic support
categories will be redefined, setting domestic support and tariff
reduction formulas, and defining the sensitive and special products that
can be insulated from tariff cuts-remain to be fought.

Launched after Years of Discussion, Trade Facilitation Negotiations in
Early Stages

WTO members finally agreed in the July framework to formally launch
negotiations on trade facilitation (customs reforms). Trade facilitation,
together with three other issues-investment, government procurement, and
competition policy-had been under consideration and intense debate by WTO
members for the past 7 years (since the Singapore ministerial).

11Tariff rate quotas are a tariff whereby lower tariffs are specified for
a specific quantity and higher tariffs are specified for quantities that
exceed the quota.

Trade facilitation is an issue that the United States is very interested
in bringing into the trading system in order to establish the transparent
and swift customs procedures that are vital to realizing the benefits of
market access concessions. The July framework contained agreement by
explicit consensus to begin negotiations on trade facilitation and
contained an annex specifying the goals, scope, and other understandings
associated with their launch.12 Notably, WTO members agreed that "the
extent and timing of entering into commitments [on trade facilitation]
shall be related to the implementation capacities of developing and
least-developed [WTO] (m)embers...." WTO members also decided to halt work
toward negotiations on the remaining three "Singapore issues" of
investment, government procurement, and competition policy for the
remainder of the Doha Round. Since the July framework, WTO members created
a negotiating group and selected a chair. The group has met several times,
and various countries, including the United States, have tabled proposals.
According to a U.S. trade official, two potentially difficult issues are
dispute settlement and technical assistance to help developing countries
defray implementation costs. While WTO members did not set specific goals
on trade facilitation for Hong Kong, the United States is hopeful that
negotiators can make meaningful progress in evaluating proposals. Some
experts we spoke with said that progress on this issue is increasingly
seen as a "win-win" proposition for developed and developing countries
alike.

Little Progress in Narrowing of Differences on Industrial Market Access

As detailed in appendix III, thus far WTO members have made little
progress in negotiations aimed at securing improved industrial market
access, a key U.S. objective in the Doha Round. The July framework for
industrial market access established an agenda for discussion and, since
July, negotiators have addressed some technical issues. However,
disagreement persists over the two main methods being considered for
liberalization of trade in industrial goods: the tariff reduction formula
and sectoral initiatives that would further reduce tariffs in agreed-upon
sectors. Such disagreement is reflected in the lack of consensus over the
tariff reduction guidance in the July framework. As of late April 2005,
disagreement continued over the type of tariff reduction formula to use,
the extent of exceptions to the formula that would be available to
developing countries, and whether or not sectoral agreements should be
included and

12See paragraph 1g. and Annex D of World Trade Organization Document
WT/L/529, August 2, 2004.

on what terms. Nevertheless, achieving a meaningful agreement in
industrial market access will be essential for the United States.

Services Talks Still Lagging
Services liberalization is also a key U.S. objective in which progress is
lagging, as discussed further in appendix IV. Initially thought to be a
lynchpin of the Doha Round, services talks have taken a back seat relative
to other issues. Although several economists and trade experts argue that
both developed and developing countries would greatly benefit from
services trade liberalization, certain developing countries perceive this
goal as a developed country priority. Nevertheless, the inclusion of
services in the July framework, on an equal footing with agriculture and
industrial market access, represented a victory of sorts and resulted from
efforts on the part of both developed and developing country members.
Since the July framework, talks on the domestic regulation of services
have shown signs of progress. Technical negotiations on market access are
also underway but have yet to translate into many new or improved offers
in the lead up to May 31, 2005, the deadline set by the July framework. As
a result, WTO members and officials remain disappointed with the number
and quality of offers. For example, many developing countries have a keen
interest in liberalizing the temporary movement of service professionals,
but developed countries have so far shown few signs of movement towards
more responsive offers.

WTO Members Still Divided Over How to Approach Development Issues

On development, WTO members are grappling with developing country concerns
in the areas of special and differential treatment (S&DT) and
implementation of their past WTO commitments in light of the July
framework's calls for decisions by July 2005. Conceptual divisions between
developed and developing countries, and among developing countries, remain
unresolved. They involve such basic issues as whether participating in
trade liberalization and abiding by the agreed-upon trade rules is good or
bad for development and whether S&DT is an across-the-board right for all
developing countries, or an ad hoc privilege available only on a
case-by	case basis to meet justified needs, particularly of the WTO's
poorest members. The chair has had only limited success to date in getting

members to move to a practical, problem-solving stage.13 However, as
negotiations on agriculture and other market access areas move forward,
specific S&DT language is being included. Certain negotiators told us that
future progress on S&DT seems increasing likely to come out of technical
negotiations within specific negotiating committees, more so than the
Committee on Trade and Development, which examines it as a systemic issue.

Negotiations on Antidumping Rules Intensifying, with United States on
Defensive

Review and possible reform of WTO "rules" for trade remedies such as
antidumping against unfairly priced imports is prominent and controversial
in the Doha agenda, though not in the July framework. Other WTO members,
notably a coalition of 15 developed and developing nations known as
Friends of Antidumping Negotiations, have advanced numerous proposals for
extensive reform of existing trade remedy rules. Some of the proposed
reforms target U.S. practices that have also been challenged under WTO
dispute settlement procedures. In 2004, WTO members participated in an
active schedule of meetings to discuss these proposals in depth.
Proponents are pushing to intensify negotiations with a view to having
rules be a major component of a Hong Kong package. According to U.S.
government officials, the United States remains committed to preserving
the effectiveness of trade remedies but wants increased transparency
abroad.

13To achieve more fruitful dialogue, the Chairman proposed that the group
adopt a new approach for discussing the outstanding proposals. First, they
would agree to keep certain principles in mind--such as the objective of
securing effective market access for products of export interest to
developing countries, the need to give developing countries flexibility
when implementing WTO commitments in certain situations, and the
desirability of a rules	based trading system. Second, they would discuss
proposals with a view towards either modifying them or coming up with
another alternative for addressing the underlying issue or concern. Third,
they would also consider cross-cutting issues such as capacity-building
and coherence in policymaking between the WTO and other multilateral
agencies. However, partly due to concerns by some of the more advanced
developing countries that this could open the door to differentiation
among developing countries, which they strongly oppose, this approach has
yet to be operationalized. See, for example, WTO, Report by the Chairman
of the Special Session of the Committee on Trade and Development, Mr.
Faizel Ismail, to the Trade Negotiations Committee, WTO/TN/CTD/11, Feb.
14, 2005.

  Several Factors Pose Challenges to Successful Negotiations in Hong Kong

Seven interrelated factors may influence the Doha Round's progress in
resolving substantive differences in the lead-up to the Hong Kong
ministerial. First, achieving internal consensus on a balanced package for
trade liberalization and successfully negotiating a result that is
acceptable to 148 members is an enormously complicated task. Second,
formation of coalitions may facilitate consensus building, but developing
countries show no signs of taking a less assertive role in pressing their
sometimes	competing vision for the WTO's Doha Development Agenda. Third,
U.S. and EU cooperation remains pivotal, but leadership transitions may
change relationships. Fourth, analysts agree that action on high-profile
WTO dispute settlement cases such as trade remedies and cotton could prove
important to ongoing negotiations. Fifth, trade negotiations pursued
outside the WTO are widely seen as affecting the Doha Round, though
opinion differs on how. Sixth, there are timing considerations, with the
mid-2007 expiration of any renewed U.S. Trade Promotion Authority acting
as an implicit deadline. Finally, preparation strategy has proved critical
to past WTO ministerial success, but there is mixed news on preparations
for the Hong Kong ministerial.

Negotiators Face a Complex Task

The complexity of the task itself could make it hard for Doha negotiators
to achieve consensus. Several experts and negotiating participants told us
that the scope of work remaining is considerable and that the current
round is more complex than past rounds because the number of countries
actually participating is larger and the issues are, in some sense,
unfinished work from prior negotiations. The fact that agriculture had not
been addressed for most of the trading system's first half century was
cited frequently as evidence of its thorny nature. The last (Uruguay)
round succeeded in the complex challenge of adding agriculture, services,
and intellectual property rights to the trading system for the first time.
The Doha Round is ambitious because it aims to cut subsidies and trade
barriers from the Uruguay Round's high levels. In industrial goods, the
Doha goal of having all members conform to specific methods for
liberalizing tariffs on all products differs from past practice of relying
primarily on member-to-member bargaining to secure tariff cuts. (Past
practice did result in substantial liberalization, but left in place high
barriers on some goods and in some countries.)

The diversity of economic costs and benefits also makes the task complex.
Studies emphasize that both developed and developing countries are
positioned to benefit from the Doha Round, but individual countries face

varying economic incentives that could affect their willingness to
compromise on issues at the Hong Kong ministerial. The Doha talks have
been fueled by the premise that international trade can positively benefit
a country's overall growth and development. As discussed more fully in
appendix V, a number of expert studies have emerged in response to the
negotiations that estimate potential worldwide economic gains exceeding
$100 billion under an ambitious liberalization scenario. However, the
distribution of economic gains may vary within and between countries,
creating perceived winners and losers. For example, several studies
estimate economic losses from agricultural liberalization for regions that
are large net importers of food, such as North Africa and the Middle East,
because the removal of developed country subsidies may increase world food
prices. Other experts point out that for countries receiving preferential
trade access the estimated economic benefits from worldwide trade
liberalization may not reflect export losses from erosion of those
preferences. Potential losses in tariff revenue may also be a concern to
certain developing countries that heavily rely on trade taxes for
government financing. In April 2004, to assist developing countries with
potential adjustment costs to trade liberalization, the IMF introduced a
new lending program called the Trade Integration Mechanism (TIM).

Maturing of Country Coalitions May Facilitate Progress, but Differences in
Visions between Developing and Developed Countries Persist

Coalitions of WTO members have been a factor in both leading and
preventing movement forward in the Doha negotiations. At Cancun, the large
number of participants proved unwieldy and the unexpected emergence of
developing country coalitions challenged traditional ways of negotiating.
Since then, country coalitions have matured and now advance common
priorities of many types. See appendix VI for a depiction of some major
groups of countries and their negotiating interests. Developing countries
in particular have become more active and influential, according to
various participants. A number of ad hoc groups have arisen around other
issues. For example, the Colorado Group has led discussion on trade
facilitation issues; a variety of "friends" groups have formed to advocate
positions in the services negotiations; and the Friends of Antidumping
Negotiations group has pressed for changes in the antidumping agreement.
This mode of operations has been particularly valuable to developing
country members, which sometimes cannot afford to maintain enough staff in
Geneva to attend all negotiating sessions that interest them. By reaching
an agreement on negotiating proposals within groups, coalitions also help
to overcome the difficulty of creating consensus in an organization as
large as the WTO. By the same token, they may strengthen opposition to
proposals that some members might not otherwise care about. Country

coalitions also have other drawbacks, according to several participants-
they cannot be relied on exclusively as interlocuters because country
interests vary and not every country is included; internal communication
is critical, but sometimes breaks down; and coalitions' efforts to forge
common positions may leave little room for negotiating maneuver.

Developing countries are not monolithic in their interests, but there is
still some evidence that developing and developed countries have competing
visions of Doha Development Round's promise and that satisfying developing
country's expectations may be difficult--factors we identified as
challenges in prior reports. While developed countries tend to stress the
development benefits projected to accrue from agriculture reform and trade
liberalization, developing country coalitions, in various formations, have
continued to emphasize the need for special and differential treatment.
The largest group of developing countries, the Group of 90 G-90), has
advanced specific special and differential treatment proposals, protection
against erosion of trade preferences, and trade facilitation approaches
that address implementation costs and capacity building issues. However,
satisfying these demands--without prejudicing the interests of other
developing countries-has proven difficult. In addition, four
least-developed African cotton-producing countries successfully lobbied in
July 2004 for a special focus on cotton within agricultural negotiations,
but have expressed dissatisfaction with progress attained since then and
called for decisive action by Hong Kong.

Leadership Critical, but U.S.-EU Political Transitions May Change
Relationships and New WTO Director-General Is Being Selected

Despite more active and positive participation by developing countries,
2004 also demonstrated that leadership and cooperation by the United
States and the EU remains essential. A special relationship between U.S.
and EU leaders contributed to the Doha ministerial's success and to the
July 2004 package. But the U.S.-EU trade principals have changed since
then. Two very important participants in the negotiations, who played
pivotal roles in launching the round in 2001 and reviving the Doha
negotiations in 2004 after Cancun, U.S. Trade Representative Robert
Zoellick, and the EU's Trade Commissioner, Pascal Lamy, are both out of
those offices. The President named a new USTR in mid-March who assumed
office on April 29, 2005. In the interim, continued direction by the
Acting USTR kept the United States engaged in negotiations. However, the
relationship that develops among new U.S.-EU leaders could influence Hong
Kong's success. Their will to lead is also vital. Over the coming months,
the United States will face important tests of its trade leadership, such
as potentially divisive domestic debates over the Central American

Free Trade Agreement (CAFTA), competition from China, TPA renewal, and
continued U.S. WTO membership. The EU, meanwhile, has made some statements
that suggest it "gave most" in 2004 and thus is expecting others to
reciprocate with ambitious offers for services and industrial market
access offers.

The WTO has been in the midst of selecting a replacement for the position
of Director-General (DG). Three WTO committee chairs are personally
conducting the vetting process whereby those candidates with the least
support from the members are expected to withdraw voluntarily. The last DG
selection became so contentious along North-South lines that the job
ultimately had to be shared by dividing the DG's six-year term between two
candidates - Mike Moore of New Zealand and the current DG, Supachai
Panitchpakdi of Thailand. To avoid a similar situation, WTO members agreed
to a selection process and timetable. Mr. Supachai's term ends on August
31, 2005; by May 31, WTO members aim to select a new Director General who
will assume the DG's position in September, just three months before the
Hong Kong ministerial. A smooth transition is necessary to ensure members
can concentrate on the difficult negotiations needed to achieve results at
Hong Kong. (It appears that a new DG has been selected

- France's Pascal Lamy -and that the process worked well avoiding a
contentious north/south divide. Specifically, on May 13, 2005, the General
Council Chair informed WTO delegations that Mr. Lamy had received the
broadest support from the WTO members and that therefore she would
recommend that WTO members appoint Mr. Lamy as the next Director General
of the WTO starting September 1, 2005. On May 26, 2005, WTO General
Council officially named Mr. Lamy, the next Director General. Welcoming
the move, current WTO Director General Supachai pledged to "make every
effort to move the Doha Development Agenda negotiations as far as possible
to ensure that we are well positioned for our Hong Kong ministerial
conference in December.")

Ongoing Disputes Could Affect Negotiating Dynamics

WTO disputes often have little day-to-day impact on negotiations, but
several ongoing disputes may affect the negotiating atmosphere leading to
Hong Kong. In recent months, Brazil won two high-profile cases against the
United States and the European Union. Both rulings are expected to
influence the Doha agriculture negotiations. In March 2005, the WTO
Appellate Body upheld a panel finding against U.S. cotton subsidies,
stating that certain types of current U.S. domestic supports result in
significant price suppression in world markets. The United States has
informed the WTO that it intends to come into compliance and is now
consulting with

Congress and stakeholders about possible reforms. The European Union has
vowed to reform its sugar sector in the wake of an adverse WTO ruling, but
is facing challenges to its proposals to reform its banana regime to
conform with another adverse ruling. The United States is also facing
calls to bring its trade remedy laws and actions into conformity with
adverse WTO rulings. With the EU and Canada both imposing millions of
dollars in retaliation starting in May because the U.S. has not repealed
the Continued Dumping Subsidy Offset Act (also known as the Byrd
Amendment), there is a risk of a negative spillover into the Doha
negotiations. In part to avoid a similar situation, the United States and
the EU have been trying to resolve their dispute over aircraft subsidies.

Free Trade Negotiations Outside of the WTO Affecting Progress

Although WTO members and experts have divergent views on the effects of
the numerous free trade negotiations that take place outside of the WTO,
they widely agree that the negotiation of preferential trade agreements
(PTA)14 have an impact on multilateral trade talks such as the Doha
Round.15 The Bush administration has actively pursued PTAs as part of its
trade liberalization strategy, and more generally, these extra-WTO
agreements have flourished worldwide since the mid-1990s. Proponents of
PTAs claim that they offer opportunities for achieving deeper and faster
liberalization than is possible in the WTO by allowing members to
negotiate with subgroups of likeminded countries. Once in place, they
argue, PTAs can demonstrate the benefits of freer trade to nonmembers,
thereby encouraging greater multilateral liberalization. In contrast,
opponents claim that the rising number of PTAs increases the
administrative and legal complexity of international trade and adds to the
difficulty of building an open, rules-based trading system. After weighing
many of the arguments in its report on the future of the WTO, a
Consultative Board to the Director General recently stated that there is
"real reason to doubt that the pursuit of multiple PTAs will enhance,
rather than undermine, the attractiveness of multilateral trade
liberalization-at least in the short and medium term."16

14Preferential trade agreements encompass several types of trade
agreements, such as free trade agreements that two or more countries
negotiate outside of the WTO framework. These include free trade
agreements, customs unions, common markets, and economic unions.

15Economists agree that PTAs either create or divert trade, depending on
circumstances.

16Consultative Board to the Director General. The Future of the WTO:
Addressing Institutional Challenges in the New Millennium, World Trade
Organization, 2004.

Among other objections, the Board expressed concern that such agreements
are diverting skilled and experienced negotiating resources and reducing
enthusiasm for the Doha Round.

Timing Constraints
Timing considerations are also relevant. WTO negotiators are keenly aware
that the United States will consider revamping comprehensive farm
legislation slated to expire in 2007 and want to make sure it includes
WTO	agreed reforms. Moreover, the duration of U.S. Trade Promotion
Authority is, in effect, operating as an implicit deadline for concluding
the Doha Round, according to numerous participants and experts. If
Congress renews TPA in mid-2005, the Doha Round agreement would be
eligible for approval under TPA provided it was signed by the President by
June 30, 2007. However, the President must fulfill a number of procedural
requirements and meet certain time frames established by TPA.17 Thus, the
WTO Doha negotiations would need to conclude by the end of December 2006
to meet TPA's statutory requirements.18 If the Doha Round agreement
required no changes to trade remedy laws, the effective deadline could
change to the end of March 2007.

17Specifically, TPA includes the following requirements:

o
at least 180 days before signing a trade agreement, the President must
report to revenue committees (House Ways and Means and Senate Finance) on
agreement provisions that might require amendments to U.S. trade remedy
laws

o  at least 90-day notice to Congress required before signing a trade
agreement

o
no later than 30 days after President notifies Congress of intent to enter
into agreement, private sector advisory committees must submit reports on
trade agreements to Congress, the President, and USTR. However, this
imposes no requirements on the President.

o
at least 90 days before entering into agreement, the President must
provide the ITC with details of the agreement and request an assessment

o
USTR must consult closely with revenue committees, the Congressional
Oversight Group, and other congressional committees with jurisdiction over
affected subject areas.

18This assessment is based strictly on these TPA procedural requirements.
It does not take into account other potential requirements.

Ministerial Preparations Under way, but Still Incomplete

A preparation strategy has proved to be critical to WTO ministerial
success (Doha) and failure (Cancun and Seattle) in the past, but there is
mixed news on preparations for Hong Kong. Ministerials are important
because unlike political summits or annual meetings of other international
organizations, actual negotiations occur and decisions are made to enable
future work. Indeed, ministerials are the only occasion when trade
ministers of all WTO members gather to provide high-level political
direction. As noted above, the December 2005 Hong Kong ministerial is
pivotal so that final bargaining on cuts in subsidies and tariffs can
occur and a Doha package can be finalized by the end of 2006.

On the positive side, although Ministers at Hong Kong will face a complex
and full agenda, WTO members are trying to narrow differences and clarify
options prior to the ministerial. Moreover, there is general agreement on
which issues will be discussed and on concrete deliverables desired. In
late January and mid-February 2005, WTO members agreed that they would aim
to make concrete progress by July on a Hong Kong package. In March, 2005
WTO members agreed on a work plan.

On the negative side, April 2005 meetings and our issue-by-issue analysis
suggest that wide substantive differences persist and progress in bridging
them is lagging, but WTO ministerials have inherent limits and drawbacks
in resolving them. First, ministerials can get out of hand if too many
unresolved issues are presented or if politically charged issues dominate.
Second, the glare of the public spotlight can make compromise difficult.
WTO ministerials are large, public events that can involve high-profile
confrontations over politically sensitive issues (e.g., labor at Seattle,
Trade Related Aspects of Intellectual Property Rights (TRIPS) and Public
Health at Doha, cotton at Cancun). The atmosphere surrounding the July
2004 framework was markedly different, in part because WTO negotiators
operated outside public view. Third, there has been no change in the
process for conducting ministerials, which is, by all accounts, unclear
and sometimes chaotic.19 Past experiences at Cancun and Seattle have shown
the risk associated with this situation.

19For example, appointed facilitators often are asked by the host country
to bridge differences over issues, but delays in naming facilitators and
the fact that they are not as familiar with the issues under debate as the
negotiating group chairs can cause delays and confusion.

Concluding Remarks
Taking into consideration that two of the three last WTO ministerials
ended in failure, we have noted some positive developments in the current
WTO negotiating environment compared to that just before Cancun. For
instance, the July framework represented progress, and since the July 2004
Framework, there has been significant activity and positive engagement by
all member countries, including developing countries. Members are very
aware of the tight deadlines and work remaining prior to the Hong Kong
ministerial. If they are successful in meeting their goals for interim
progress, the risk of arriving in Hong Kong with an overly full agenda
will be reduced.

However, as we pointed out in the report, the ministerial faces a number
of potential challenges-and some risk of falling short of its ambitious
goals without a greater sense of purpose, according to WTO
Director-Supachai's latest assessment. Furthermore, issue progress
requires compromise, but substantive movement toward convergence is still
not evident in most areas. Agriculture remains central to the round.
Despite some progress, developed country commitments to undertake painful
agricultural reform are at least partly contingent on movement on market
access. Yet, technical talks on market access are bogged down, and
meetings have only recently broken the impasse. Moreover, even with recent
proposals, there is scant evidence that key countries are willing to make
commitments to liberalize access to their markets for industrial goods and
services. But cutting barriers from today's high levels will be the source
of any projected gains from the Doha round to rich and poor countries
alike--and deemed vital to achieving balanced results. Deadlines for
deciding development issues loom in July 2005, but discussions on
outstanding proposals have yet to become fruitful. The United States,
meanwhile, is facing tests of its trade leadership at home and calls by
other WTO nations for urgent action on cotton, as well as greater
receptivity to difficult demands in services and antidumping.

With an effective deadline of December 2006, the question is whether the
rest of 2005 will see sufficient progress to enable final agreement on a
package that offers gains to all WTO members. Some experts remain
optimistic that the Doha Round can deliver its promised benefits. Others
say tough decisions are necessary for progress and warn time is short
given the substantial work remaining.

  Agency Comments and Our Evaluation

We requested comments on a draft of this report from the U.S. Trade
Representative, the Secretary of Agriculture, the Secretary of Commerce,
and the Secretary of State, or their designees. The Assistant U.S. Trade
Representative for WTO and Multilateral Affairs and other USTR staff
indicated general agreement with the report, but provided us with several
technical comments, which we incorporated as appropriate. The Department
of Agriculture's Foreign Agriculture Service agreed with our report's
factual findings and analysis, but provided several technical comments,
including data on non-ad valorem tariffs, which we incorporated as
appropriate. The Department of State's Director of Multilateral Trade,
Bureau of Economic and Business Affairs, indicated agreement with GAO's
findings and analysis, and provided a technical comment, which we
incorporated. The Department of Commerce provided written comments,
indicating that "GAO analysts have focused on the essential pieces of the
negotiating puzzle" and "accurately portrayed the broad state of progress
and existing negotiating tensions in the key areas" (see app. IV). In
addition, the Deputy Assistant Secretary for Agreements Compliance and
other Commerce staff provided us with oral technical comments on the
draft, which we incorporated as appropriate.

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 website at http://www.gao.gov.

If you or your staff have any questions about this report, please contact
me at (202) 512-4347. Contact points for our Offices of Congressional
Relations and Public Affairs may be found on the last page of this report.
GAO staff who made major contributions to this report are listed in
appendix VII.

Loren Yager Director, Interational 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 assess (1) overall progress
in the WTO Doha Round of negotiations, (2) progress in specific
negotiating areas, and (3) factors affecting progress.

We followed the same overall methodology to complete all three of our
objectives. We obtained, reviewed, and analyzed documents from a variety
of sources. From the WTO, we analyzed the 2001 Doha Ministerial
Declaration, the Doha Work Programme Draft General Council Decision of 31
July 2004, known as the "July framework," as well as numerous negotiating
proposals from WTO member countries and other documents. From U.S.
government agencies and foreign government officials, we obtained
background information and documentation regarding negotiating proposals
and positions. We also obtained information on day	to-day developments
from reputable trade publications.

We met with officials from key U.S. government agencies, including the
Department of Agriculture, the Department of Commerce, the Office of the
U.S. Trade Representative, the State Department, and the Department of the
Treasury, to obtain perspectives on progress in the negotiations overall
and individual issue areas and factors affecting negotiations. The State
Department arranged meetings with various of its country desk officers to
provide us with perspectives on key WTO participating member nations. We
also met with trade representatives from developed and developing
countries located in Washington, D.C., including Australia, Brazil,
Canada, Chile, Costa Rica, the European Union, Guyana, Japan, Malaysia,
New Zealand, Norway, Singapore, South Korea, and Switzerland. Further, we
met with private-sector representatives from specific business sectors,
including the American Sugar Alliance, the National Association of Wheat
Growers, National Corn Growers Association, the Coalition of Services
Industries, the National Association of Manufacturers, and the Zero Tariff
Coalition. We met with nongovernmental organizations (NGO), including
Oxfam America and the Carnegie Endowment; and trade experts from
institutions including the United Nations Conference on Trade and
Development (UNCTAD); Georgetown University; the Cato Institute; the
Institute for International Economics, the American Enterprise Institute;
the World Bank; Columbia University; the University of Toronto; the
Manufacturers Alliance; and the Institute for International Business,
Economics, and Law, the University of Adelaide, Australia; White and Case;
and C&M International.

Appendix I
Objectives, Scope, and Methodology

To illustrate tariff profiles for examples of developed and developing
countries, we reviewed international tariff and trade data from the World
Bank's World Integrated Trade Solution (WITS) database, which contains
member-supplied data from the WTO and the United Nations. Though these
organizations are limited in their ability to verify official country
data, we concluded that the data is sufficiently reliable for the purposes
of our analysis based on accuracy checks regularly performed on the
database and its' wide usage in the negotiations.

Prior to the July 2004 mini-ministerial, with the assistance of USTR and
the State Department, we traveled to WTO headquarters in Geneva to obtain
foreign government official, private sector, and nongovernmental
organizational views on progress. We followed this initial visit to Geneva
with another trip in late June and early July 2004, to meet with U.S. and
WTO officials and observe the Trade Negotiations Committee negotiations; a
visit in September 2004, to obtain official reactions to the July
framework; and a mid-April 2005 update. The series of visits to Geneva
resulted in interviews with WTO member country officials from developed
and developing countries including Australia, Brazil, the European Union,
India, Jamaica, Japan, and Singapore. We also met with WTO officials,
including the agriculture, industrial (nonagricultural) market access,
services, development, and trade facilitation negotiating group chairs. In
total, we conducted more than 130 interviews with negotiators and trade
experts.

We performed our work from March 2004 through April 2005 in accordance
with generally accepted government auditing standards.

Appendix II

Agriculture

Given the importance of agriculture in the Doha Round negotiations,
coalitions of countries regrouped in 2004 and focused on making progress
on the three pillars in agricultural reform of export subsidies, domestic
supports, and market access. The most notable achievement thus far has
been agreement in the July 2004 framework to remove all export subsidies
at some future date. The framework also set ceilings on certain
trade	distorting domestic support categories. However, disagreement
persists over how to define such categories and set reduction schedules,
as well as how to improve market access through a tariff reduction formula
and the definition of sensitive and special products that can be insulated
from tariff cuts.

Export Competition
The May 9, 2004, EU letter from Pascal Lamy and Franz Fischler to WTO
member countries offered to eliminate all export subsides1 --with no
products excluded - if suitable agreements were reached on market access
and domestic support. This offer was warmly welcomed by member countries;
for decades, the United States and other countries have advocated
completely eliminating export subsidies.

Lamy and Fischler conditioned their offer on what they termed "full
parallelism," meaning the commitment to eliminate all export subsidies is
linked to establishing new disciplines in other export competition
programs, including U.S. export credit and food aid programs, as well as
export state trading enterprises. The move reinvigorated negotiations,
country officials and we agreed, because the European Union had previously
offered only the substantial reduction and elimination of export subsidies
for certain products, not total elimination.

The EU's offer, valued at about US $9 billion, meant other countries with
substantial export competition programs, such as the United States, would
need to agree to undertake disciplines on them.2 The July framework
envisions new disciplines on export credits, food aid, and state trading
enterprises.

1Export 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
that apply to exports only.

2According to its 2001 notification to the WTO, the EU spent about $2.3
billion of the approximately $9 billion it is allowed to spend on export
subsidies.

Appendix II Agriculture

o
The framework is likely to force the substantial restructuring of U.S.
export credit programs, trade officials say, and our analysis supports
this conclusion. For example, the July framework language stipulates that
export credit programs may not have financing repayment periods of longer
than 180 days. The main U.S. export credit programs, General Sales Manager
(GSM)-102 and GSM-103, have repayment periods from 6 months to 3 years and
up to 10 years, respectively.3

o
All food aid programs are subject to scrutiny and could be subject to new
disciplines, with certain U.S. programs the focus of international
attention, country officials and trade experts told us. The European Union
and many African nations advocate that food aid be made only in grant
form. They also want to make sure food aid is not a mechanism for surplus
disposal when commodity prices are low and commodity stocks are high,
because this can trigger commercial displacement. This agreement would
have implications for the United States' Title I P.L. 480 food aid program
, which provides for long-term, low interest loans to developing countries
for their purchase of U.S. agricultural commodities, and the Section 416b
food aid program, which authorizes USDA to donate surplus agricultural
commodities overseas. As a result, the U.S. successfully sought changes in
a July 16 draft text for the framework agreement, which had called for
disciplines to "ensure that food aid is not used as a mechanism for
surplus disposal and to prevent commercial displacement" [italics added].
However, the framework text agreed upon in late July makes no such mention
of surplus disposal. Instead, it indicates that there will be future
discussions on "providing food aid exclusively in fully grant form."

o
Finally, the framework calls for disciplines to remove the export subsidy
components of state trading enterprises, including the government
financing of and underwriting losses of such programs. U.S. goals for the
negotiations reflect long-held concerns about the exercising of monopoly
power on imports and exports through these institutions. As a result,
Canada and Australia are likely to face tighter disciplines on their wheat
state trading enterprises, trade officials and experts told us.

3The 2002 Farm Bill authorized $5.5 billion in annual farm exports for
GSM-102 and GSM-103 programs. The legislation authorized an additional $1
billion for emerging markets through 2007.

                            Appendix II Agriculture

Domestic Supports
Many developing and developed countries are seeking substantial reductions
in developed country trade-distorting domestic support4 programs because
these programs can reduce world prices and displace otherwise competitive
producers from world markets. The European Union and the United States in
2001 together accounted for the majority of global spending in
trade-distorting domestic supports. The U.S. has publicly stated it would
significantly reduce its trade-distorting domestic support spending if
other WTO member nations agree to ambitious outcomes in other areas, such
as market access.

In July, WTO members agreed that the eventual Doha Round agreement would
contain a strong element of harmonization in reductions of
trade	distorting domestic support programs by developed countries, with
those countries with larger subsidy programs cutting more. This dovetails
with U.S. aims in the domestic supports pillar, since the European Union
still outspends the United States. The framework sets ceilings on certain
kinds of trade-distorting domestic supports and calls for the capping and
future reduction of others. The July framework also called for a
substantial reduction in the overall level of trade-distorting support
from bound levels.

To examine how these broad guidelines could affect existing European Union
and the United States programs, we have reviewed the various categories of
domestic supports, which the WTO classifies into "boxes:" amber, blue,
green, and de minimis supports. Figure 3 describes the categories of
WTO-recognized domestic support programs.

4Domestic supports (often called "`subsidies") are payments made to
farmers that raise prices or guarantee income. They include such measures
as government purchases at guaranteed prices, commodity loan programs, and
direct payments to farmers.

Appendix II Agriculture

Figure 3: Types of Domestic Supports-WTO Definitions

Source: GAO.

The WTO classifies agricultural domestic support into main categories
identified by traffic-light color-coded "boxes" that range from most to
least trade-distorting: Red, e.g. spending not permitted in these types of
supports; amber, domestic supports that are production-and
trade	distorting, the total value of which was capped and then reduced;
blue, production-limiting subsidies that have marginal trade-distorting
effects; and green, non-or minimally-trade distorting, and thus permitted.

De minimis is a category that captures other domestic supports, including
market price support measures, direct production subsidies, or input
subsidies. There is no requirement to reduce de minimis trade-distorting
domestic support for any year in which the aggregate value of the
product	specific support does not exceed 5 percent of the total value of
production of the agricultural product in question. In addition,
non-product specific de minimis support which is less than 5 percent of
the value of total agricultural production is also exempt from reduction.

Trade-distorting support is comprised of a country's expenditures in Amber
Box, Blue Box, and de minimis supports. In other words, it does not
include Green Box measures.

                            Appendix II Agriculture

For Amber Box supports, the most trade-distorting category, the July
framework calls for final bound thresholds5 to be reduced substantially,
using a tiered approach whereby members with more substantial support
programs will be placed in higher tiers and forced to cut more. As
illustrated in figure 4 below, this provision will narrow the difference
between the levels the United States and European Union are authorized to
spend versus the amount they actually spend.

Figure 4: Recent Amber Box Spending Patterns for the European Union and
United States, as Measured by Aggregate Measure of Support

 European Union - dollars in billions United States - dollars in billions 80 70

                                       60

                                       50

                                       40

                                       30

                                       20

10 0 1995 1996 1997 1998 1999 2000 2001 1995 1996 1997 1998 1999 2000 2001

Allowed Amber Box spending level Actual Amber Box spending level

        Source: GAO, based on USDA and GAO analysis of USDA and EU data.

In absolute terms, the European Union spends substantially more in Amber
Box programs than the United States and accounts for more than half of the
total amount notified by the 30 WTO members that use such domestic
supports. The U.S. is permitted to spend less than one-third of what the
EU is permitted. In recent years the European Union spent just over half
of

5Bound thresholds refer to the permitted levels of spending.

Appendix II Agriculture

what it is permitted to spend on these trade-distorting domestic supports,
and its actual spending has declined.

By contrast, trade experts and officials told us that other countries are
concerned about U.S. domestic subsidy programs due to the United States'
trend of increased spending. The United States has supplied official WTO
notifications through 2001 that indicate its Amber Box program spending
was within established WTO limits, but its actual spending in Amber Box
supports grew from $6.2 billion in 1995 to $15.6 billion in 2001, the most
recent year data are available.

Furthermore, as we reported in our January 2004 report, the 2002 Farm
Bill6 could increase U.S. agricultural support spending and shift its
composition. Specifically, the 2002 Farm Bill created a new category of
domestic support programs, dubbed "countercyclical payments," which are
income support payments to farmers when the market price for a covered
commodity falls below a legislatively-set target price. As a result, the
United States has pushed in the WTO Doha Round for a redefinition of the
WTO Blue Box, in which it currently does not spend - so that as long as
the Blue Box exists it has greater flexibility to allow access for other
programs that are less trade-distorting to count against its current,
unused ceiling for this category of domestic supports.

The July framework language regarding the Blue Box was favorable to the
United States, trade officials and experts told us. It redefines the Blue
Box to allow direct payments that do not require production limitations7
if based on certain criteria.8 This has met with sharp resistance from the
G-20 and other WTO members that seek significant reductions in all forms
of trade-distorting domestic supports. These members are concerned that by
allowing the United States to place its countercyclical payments in the
redefined Blue Box, the United States will not be forced to reduce its
trade	distorting domestic support programs and could in fact increase its
total sum of trade-distorting domestic support. As recently as March 2005,
the G-20 called for further disciplines on price-linked supports in the

6The Farm Security and Rural Investment Act of 2002 (P.L. 107-171, May 13,
2002).

7In contrast to the existing definition, which specifies that Blue Box
measures must be production-limiting.

8Criteria provisionally include fixed production conditions, such as
acreages, yields, and historical production levels.

                            Appendix II Agriculture

provisionally redefined Blue Box to allow the compensations for some, but
not all, of the difference between market and target prices, among other
proposals.

The July framework calls for a cap on the Blue Box of 5 percent of the
production value, with historical spending patterns to be determined as a
base. This could affect the European Union, trade officials and experts
told us, which in 2001 spent 23.7 billion euros in Blue Box supports, or
9.6 percent of its total agricultural production.

To ensure ambitious cuts in domestic support, the July framework also
calls for a substantial reduction in overall trade-distorting support,
specifically the sum of Amber Box spending as measured by "Final Bound
Total AMS," Blue Box payments, and de minimis programs-with a 20 percent
cut to be made in that total in the first year of implementation.9
However, the specific extent of reductions was left to future
negotiations.

Finally, on non-or minimally trade-distorting "Green Box" domestic
supports, the framework called for a review, but not a capping or cut of
these supports. The G-20 has charged that certain current Green Box direct
payments to producers contradict the Green Box criteria of being non-or
minimally trade-distorting. The United States and the European Union have
resisted caps and cuts, but agreed to examine concerns about abuse. The
United States spent about $51 billion in these types of supports,
according to its 2001 notification to the WTO, the most recent year that
data are available.

Market Access
Market access remains the most difficult pillar of the negotiations,
country officials and experts told us. Major agricultural exporters
including Canada, Australia, and Brazil want to expand their overseas
markets. The United States is the world's largest exporter of agricultural
products, is a highly competitive producer of many products, and has
significant offensive interests in this area. The United States has
conditioned domestic support cuts on gains in market access. However, many
developing countries have resisted liberalization, arguing they do not
have the means

9The United States spent about $7 billion in de minimis payments while the
European Union spent less than Euros 1 billion on these supports in 2001,
the most recent year data are available.

Appendix II Agriculture

to subsidize exports or domestic production, and that tariffs are their
only source of leverage and protection in the agricultural negotiations.

Though the July 2004 framework states that a numerical formula will be
used to cut tariffs from current bound rates, countries differ strongly
over the type of formula they prefer. The methodology for converting
specific tariffs into ad valorem equivalents10, upon which the tariff
reduction formula would be applied, also frustrated progress in the market
access negotiations for months. Such differences are based on the widely
divergent tariff profiles among WTO members. Specifically, several studies
by the Organization for Economic Cooperation and Development and the World
Bank find that for agricultural goods, developed countries tend to have
lower average bound and applied tariffs.11 However, developed countries
have a greater percentage of specific (non-ad valorem) tariffs and tariff
peaks.12 The products where developed countries have specific tariffs tend
to be those with high levels of protection and the products where they
have tariff peaks tend to be those of export interest to developing
countries. In contrast, developing countries have uniformly higher bound
tariffs, though currently applied tariff rates tend to be far lower than
bound tariff rates and specific tariffs are rare. To illustrate these
different tariff profiles, table 1 provides agricultural goods weighted
average tariff rates for a selected set of countries and products. Due to
member differences over the methodology for calculating ad valorem
equivalents, the data excludes specific tariffs.

10A specific tariff is a trade tax levied as a monetary amount per unit of
import. An ad valorem tariff is a trade tax calculated as a percentage of
the value of the product being traded. To convert a specific tariff into
an ad valorem equivalent, an import price for the product is needed. In
the market access negotiations, some members advocated using the world
input price. The EU advocated using the import price recorded by each
country. In May, 2005, members eventually agreed on a combination of both
prices.

11Bound tariffs are the rates WTO member nations are permitted to charge
and can raise only under strictly prescribed circumstances.

12Tariff peaks are tariffs that exceed a selected reference level.

                            Appendix II Agriculture

    Table 2: Trade Weighted Average Ad Valorem Agricultural Tariff Rates for
            Selected Countries and Products. (Tariffs in percent) a

                              US     EU Japan India Indonesia Kenya Venezuela 
     Average bound tariff     2.5   3.0   6.8 126.2      54.2 100.0 
    Average applied tariff    3.0   5.2   7.1 53.8        4.7  22.3 
    Maximum applied tariff   350.0 74.9  50.0 182.0     170.0 100.0 
Share of applied domestic  6%   14%    30%  11%         5%    1%        0% 
            peaks b                                                 
       Share of applied       4%   11%    28%  89%         6%   59%       49% 
     international peaks b                                          
Agricultural imports as a  4%     7%   10%  7%         12%   13%       13% 
    share of total imports                                          

Dairy Productsc

Average applied tariff 10.9 10.8 27.3 30.9 5.0 25.0

            Share of international peaks 11% 2% 55% 100% 0% 100% 91%

Yogurt - HTS Code 040310 17.3 n/a 27.5 30.0 5.0 25.0

                            Edible Fruits and Nutsc

Average applied tariff 0.1 9.5 8.5 40.6 5.0 27.7

              Share of international peaks 1% 7% 16% 94% 0% 62% 0%

Bananas - HTS Code 080300 0.0 16.0 10.2 30.0 5.0 25.0

Tobaccoc

Average applied tariff 70.6 25.4 0.1 30.0 0.3 20.8

Share of international peaks 11% 16% 27% 100% 0% 100% 56%

Smoking Tobacco - HTS Code 240310 257.0 74.9 16.6 30.0 11.7 30.0 20.0

Year of Data 2003 2004 2003 2002 2002 2001 2002

Source: WITS World Bank Integrated Database.

aNotes on data: Due to member differences over estimating ad valorem
equivalents, the data excludes specific tariffs. Since specific tariffs
tend to apply to products with higher protection levels, this exclusion
may bias the data downward in certain circumstances.

bDomestic peaks are tariffs that exceed three times the average tariff for
a country. International peaks are tariffs that exceed 15 percent.

cTariff rates for dairy products are those for chapter 4 in the U.S.
Harmonized Tariff Schedule (HTS). Tariff rates for edible fruits and nut
products are those for HTS chapter 8. Tariff rates for tobacco products
are those for HTS chapter 24.

In line with these general patterns, the table shows that developed
country members such as the United States, the European Union, and Japan
have relatively low average bound and applied ad valorem tariff rates that
range from around 2 percent to 7 percent. However, by excluding specific
tariff rates, the table does not show the full extent to which these
countries protect their agricultural sectors. According to the World Bank,
the European Union, for example, has specific tariff rates on 44 percent
of its agricultural product lines. A 2001 study by the U.S. Department of
Agriculture employed a certain methodology for converting ad valorem

Appendix II Agriculture

equivalents and estimated that the non-trade weighted average tariff rate
for agricultural goods in the United States, the EU, and Japan was 12
percent, 30 percent, and 58 percent respectively.13 Additionally, for the
example products of dairy, fruits and nuts, and tobacco, the United
States, the European Union, and Japan have relatively high tariffs and a
large share of international peaks.14 The United States' average tariffs
in the tobacco sector are extremely high, at around 71 percent.

Developing countries such as India, Indonesia, Kenya, and Venezuela have
much higher average bound tariffs, ranging from 54 percent in Indonesia to
126 percent in India. However, in each of these cases, there are
substantial gaps between the bound and applied tariff rates.

The contrast between developed and developing country tariff profiles has
fueled a sharp debate on what formula to use to conduct tariff reduction,
country officials and trade experts told us. Some developed countries,
including the United States, have advocated for a harmonizing formula
called a Swiss formula, that would reduce high tariffs by a larger
percentage than low tariffs. Developing countries and, particularly
net	exporters such as Brazil with high bound tariffs want more flexibility
than the Swiss formula would offer. As an alternative, they advocate a
banded approach, which divides tariffs into a series of bands and applies
an average tariff reduction within each band. The banded approach would
apply larger reductions to higher tariff bands-thereby addressing
developed country tariff peaks - but would be less harmonizing than a
Swiss formula. A formula that combines elements of both Swiss formula
reductions and linear reductions is a blended approach.15

13See Economic Research Service, Profiles of Tariffs in Global
Agricultural Markets, Washington: US Department of Agriculture, 2001. This
paper chose to use the world input unit value as a proxy for the input
price based on data from the Agricultural Market Access Database - which
largely draws on data from the WTO and United Nations. This methodology
differs, however, from that agreed upon in the WTO negotiations.

14The average U.S. tariff on edible fruit and nut products is an
exception, at only 0.1 percent.

15The blended formula would apply an average tariff cut to a certain
percentage of tariff lines, the Swiss formula cuts to another percentage
of tariff lines, and provide duty-free access to the remainder.

Appendix II Agriculture

Figure 5: Tariff Reduction Formulas Considered for Improving Agricultural
Market Access

Source: GAO.

The United States was among a handful of nations that in June 2004 penned
and circulated a draft market access white paper attempting to strike a
compromise. The paper called for a different type of a tiered formula
approach, where within each band a certain percentage of bound tariffs
would be cut by a Swiss (harmonizing) formula and a certain percentage of
bound tariffs would be cut by a linear percentage. A certain number of
tariff lines would be exempt from either a Swiss or linear cut. Instead,
liberalization would be handled through tariff rate quota increases. This
in effect allows member countries to shield themselves from substantial
reduction commitments for certain products by self-designating them as
"sensitive products."

Continued disagreement on the tariff reduction formula is significant
because variations in the type of formula could result in widely different
results. Recent studies indicate that for developed countries, the banded
approach reduces applied tariff rates in some instances more than the
blended approach. These studies further indicate that the blended approach
could have a greater impact in reducing bound rates in developing
countries due to the homogeneity of their bound rates at relatively high
levels. However, irrespective of the type of tariff reduction formula
chosen, the degree of liberalization will strongly be affected by the
degree of ambition within the formula, as determined by the coefficients,

Appendix II Agriculture

and by the exceptions to the formula through sensitive product
designation.

Negotiators had hoped to agree on the formula to cut tariffs in July 2004
but were unable to do so. Instead, they agreed that (1) the future formula
will be a single approach for developed and developing countries; (2) the
future formula will be tiered, with progressive reductions achieved
through deeper cuts in higher tariffs; and (3) all WTO members will have
some flexibilities in applying cuts to sensitive products that will be
used in the future. Under the framework, increased market access on
sensitive products will be achieved through expanded tariff quota rates
and tariff reductions.

Sensitive products and special products-whereby developing countries are
allowed to declare additional products exempt from standard reductions
under certain criteria, such as rural development or food security
needs-are likely to be among the most contentious battles going forward,
trade officials and experts told us. The G-20 and other negotiating groups
have stressed that the exceptions for sensitive products - whereby
countries are permitted to declare certain key commodities as sensitive
and exempt them from standard tariff reduction schedules-is at odds with
the liberalizing mission of the Doha Round. Sensitive product exceptions
could be used to protect developed country tariff peaks, these countries
say, and greatly undermine the ambitious nature of any agreement.

Appendix III

                            Industrial Market Access

Negotiators report that during the period between Cancun and the July
framework, members avoided discussing differences in industrial market
access (nonagricultural market access or NAMA) so that they could focus on
the agricultural negotiations. As a result, while the negotiating
atmosphere has improved, the July framework represents a lack of movement
on key issues in the industrial market negotiations relative to Cancun. In
fact, the framework consists simply of the text that was circulated in
Cancun with the addition of a paragraph stating that agreement on
substantive elements of the text had not yet been reached. While
negotiators are using the framework as an agenda for discussion, the
framework lacks both consensus and specificity on the two main methods
being considered for liberalization of trade in industrial goods-a tariff
reduction formula and sectoral initiatives-as well as the flexibilities
that developing countries will be offered in applying these methods. As of
the spring 2005, consensus on these substantive issues had not yet been
reached.

The Tariff Reduction Formula

WTO members remain divided over the tariff reduction formula and its
application. The July framework suggests a nonlinear formula, to be
applied line by line to bound tariff rates, with the aim of reducing or
eliminating tariff peaks and tariff escalation.1 Despite the framework's
disclaimer that agreement on the formula had not been reached, negotiators
we spoke with indicated that members have generally accepted the idea of a
nonlinear formula. Nonetheless, there remain strong differences over
countries' preferences for the type of nonlinear formula chosen and the
formula coefficients. The July framework also suggests a variety of ways
in which special and differential treatment could be provided. Negotiators
we spoke with suggest that members agree that least developed countries
(LDCs), as well as countries with a low percentage of bound tariffs, can
be exempted from reducing their tariffs through a formula, but the degree
to which other developing countries can exempt products from the formula
and qualify for longer implementation periods remains controversial.

1A nonlinear formula would apply different percentage reductions to tariff
rates at different levels. A tariff peak is a tariff that exceeds a
selected reference level. Tariff escalation is a practice that countries
often use, whereby they increase tariffs in relation to the degree of
processing found in a product.

Appendix III
Industrial Market Access

Figure 6: Potential Special and Differential Treatment Provisions
Discussed in the July Framework on NAMA

Source: GAO.

Country preferences for the formula and application of special and
differential treatment provisions continue to reflect those advocated
prior to Cancun and are largely based on the varying tariff profiles among
WTO members. Similar to conditions in agriculture, tariff profiles for
non	agricultural goods suggest that (1) developed countries have bound
almost all of their tariffs at relatively low levels, though certain
products are characterized by tariff peaks; (2) products where developed
countries have high tariffs tend to be among those of export interest to
developing countries such as textiles and apparel or leather and footwear;
and (3) developing countries, in many but not all cases, have limited
tariff bindings and relatively high bound tariffs, though currently
applied tariff rates tend to be far lower than bound tariff rates.

Developed country members that have relatively low tariffs want
significant tariff liberalization in order to access new markets in
developing countries that have relatively high tariffs.2 The United
States, for example,

2Some developing country members that are seeking access to new markets,
such as Costa Rica, Pakistan, and several Central and Eastern European
countries, also advocate an ambitious approach in NAMA. Some of these
countries belong to the informal coalition called the "Friends of
Ambition."

Appendix III
Industrial Market Access

is strongly pressing for an industrial market access agreement that would
effectively lower tariffs in key developing countries for which an
estimated 71 percent of foreign duties on U.S. manufactured exports are
assessed, according to the National Association of Manufacturers. To
achieve this result, the United States, the EU, and other developed
country members, as well as some developing country members that have
autonomously liberalized in the past, continue to support a Swiss-type
formula - a harmonizing nonlinear formula that would reduce high tariffs
by a larger percentage than low tariffs. Such a formula would also address
tariff peaks and escalation. [SIDEBAR] To account for special and
differential treatment, the United States has proposed that developing
countries could apply a different coefficient within the Swiss formula
than developed countries, implying more moderate liberalization. The EU
and Norway have proposed a "credit-based approach" where the flexibility
in the formula coefficient for developing countries would be determined
uniquely for each country based on credits for commitment to apply the
formula without exception or participation in sector agreements, for
example.

Figure 7: Various Formula Specifications for Tariff Reductions Considered
with the NAMA Negotiations

Source: GAO.

In contrast, some developing countries emphasize that due to their higher
average tariff rates, harmonizing formulas that reduce higher tariffs more
than lower tariffs would result in greater percentage cuts for developing

Appendix III
Industrial Market Access

countries than developed countries-a result that they argue contradicts
the principle of special and differential treatment. As such, they
continue to support a Girard type formula-a non linear formula proposed by
the former Chair of the industrial market access negotiating group that is
based on each country's average tariff rate and allows countries with
higher initial tariffs to reduce those tariffs at a lesser rate than
countries with lower initial tariffs.3 They also support a more extensive
application of special and differential treatment exceptions such that
developing countries can maintain the flexibility to pursue industrial
policies to promote growth of new industries and protect themselves
against some of the adjustment costs of ambitious liberalization
commitments.

Continued disagreement on the tariff reduction formula is significant
because variations in the type of nonlinear formula chosen, the formula
coefficients, treatment of unbound tariffs, and exceptions to the formula
could result in widely different results. For example, both the World Bank
and UNCTAD have analyzed the Swiss and Girard non-linear formulas by using
hypothetical coefficients and have found that:

o
Swiss formula reductions tend to be larger than Girard formula reductions,
particularly for the high tariff rates found in developing countries.

o
While effective at reducing developed country tariff peaks, the Girard
formula may also entail greater tariff cuts than the Swiss formula for
developing countries that have lower average tariffs resulting from
autonomous liberalization.

o
The wide wedge between bound and applied tariff rates in developing
countries limits the amount of trade liberalization achieved through any
formula.

Nonetheless, echoing our analysis of market access negotiations in
agriculture, the actual degree of liberalization that is achieved through
these formulas or any other formula will strongly be affected by the
degree of ambition within the formula, as determined by the coefficients,
and by

3The Girard formula, when proposed, was to be accompanied by seven
sectoral agreements. Recently, India, Brazil, and Argentina tabled a new
proposal that is based on the Girard type formula but does not mention
sector agreements.

                                  Appendix III
                            Industrial Market Access

exceptions to the standard tariff reduction schedules that will be offered
through special and differential treatment.

Sectoral Initiatives
WTO members also remain divided over sectoral initiatives. The July
framework states that sectoral agreements should supplement the tariff
reduction formula with an aim to eliminate or harmonize tariffs in key
sectors of interest to developing countries.4 The United States and other
members have proposed the notion that participation should be based on a
principle of "critical mass," meaning that countries that account for the
majority of trade in a sector should participate such that mutual gains
are obtained without problems of free-ridership from nonparticipants.5
However, we were told that key developed and developing country members
disagree strongly over whether sector agreements should be included in an
industrial market access agreement.

The United States has specific objectives for industrial market access as
set out by its Trade Promotion Authority legislation: to focus on
improving market access for U.S. exports and to increase global
participation in sectoral agreements that reduce or eliminate barriers in
key sectors, such as textiles and apparels and civil aircraft. Developed
country members such as the United States, New Zealand, and Japan strongly
support the inclusion of sector agreements because they can result in
greater liberalization outcomes than even ambitious formula cuts.
Specifically, they argue that only cuts that bring bound rates below
currently applied rates would actually liberalize trade. Such members have
conducted education and outreach with developing countries regarding
potential requirements and flexibilities for sectoral agreements, as well
as the likely economic benefits they could receive from ambitious trade
liberalization. Nonetheless, certain developing countries, such as Brazil,
do not support this method of liberalization and remain concerned about
potentially

4While the framework itself did not specify which sectors should be
included, earlier drafts provided by the industrial market access Chairman
lists among others, electronics; fish and fish products; footwear; leather
goods; motor vehicle parts and components; stones, gems, and precious
metals; and textiles and clothing. Sector representatives in the U.S. are
also interested in other sectors, such as chemicals, wood and paper
products, and processed foods.

5The notion of critical mass was first used with the Information
Technology Agreement (ITA) where, according to one trade expert, countries
accounting for 90 percent of trade in that sector were participants.

Appendix III
Industrial Market Access

mandatory participation. They argue that sector agreements could create an
overly ambitious pace of reform.

Appendix IV

Services

Accounting for 78 percent of private sector GDP1 and 80 percent private
sector employment in the United States, services constitute a core
priority for U.S. negotiators. Initially thought to be a lynchpin of the
Doha Round, services talks have taken a backseat position relative to
other issues. Nevertheless, the inclusion of services in the July 2004
text on an equal footing with the key market access pillars of agriculture
and industrial market access resulted from efforts by both developed and
developing country members and industry coalitions. Although some
developing countries are reticent about services negotiations, generally
perceiving them as a developed country interest, many developing countries
have a particular interest in obtaining commitments under mode 4, which
governs the temporary movement of service-delivery professionals.
Notwithstanding these points of contention, since July, talks on the
domestic regulation of services have shown signs of progress, as have
technical negotiations on market access. However, these have yet to
translate into improved offers. An opportunity for significant services
liberalization could be foregone if negotiations do not intensify.

Services negotiations aim to reduce barriers to international trade by
improving the General Agreement on Trade in Services (GATS) which (1)
ensures the increased transparency and predictability of international
trade rules and domestic regulations governing services industries
(rulemaking); and (2) promotes progressive liberalization of services
markets through bilateral negotiations (market access2).3 The Doha
Declaration states that members shall submit initial services offers by
March 31, 2003, a deadline that many members missed. Following the Cancun
ministerial, and in the run up to the July framework, services
negotiations made slow progress. Rule-making talks were stalled, and
although the 2003 deadline had long past, pending market access offers
outnumbered those submitted. Observers said there lacked a "critical mass"
of offers for market access talks to make substantial progress. Those
offers that were tabled were

1U.S. Department of Commerce, Bureau of Economic Analysis, Survey of
Current Business, June 2004.

2"Rulemaking" is conventionally used to refer to GATS rules and
disciplines on domestic regulation. "Market access" is commonly used to
refer to commitments on both market access and national treatment.

3Market access is typically negotiated bilaterally, following the
so-called request-offer approach, whereby members request specific
commitments from one another in a series of bilateral negotiations, and
respond by presenting an offer to all WTO members.

                              Appendix IV Services

characterized as being of poor quali1ty. Movement had become contingent
upon advances in other areas, particularly agriculture.

July Framework Sets New Deadlines

Progress Since July

Nevertheless, the final version of the July framework placed services on
an equal footing with agriculture, industrial market access, and the other
areas considered essential to a final Doha Round package. Initially,
services were absent from the text. However, a specific section and annex
on this sector were added after several developed and developing
countries, as well as industry coalitions from the U.S., the EU,
Australia, India, Hong Kong, China, Japan, Brazil, and Canada argued for
their inclusion. Specifically, the July framework reasserts the importance
of achieving services liberalization and urges members to intensify their
efforts to conclude the negotiations on rulemaking. With a view to
providing market access to all members, the text calls upon members to
submit high-quality offers, particularly in the sectors and modes of
supply of export interest to developing countries. It specifically names
mode 4 as being among these, and sets May 2005 as the deadline for members
to table new offers.

After they agreed to the July framework, members held several multilateral
and bilateral meetings and discussed rules, domestic regulation, and
market access with renewed momentum. Technical talks were ongoing on all
fronts. On the rule-making side, members initiated new discussions4 on
emergency safeguards,5 subsidies and government procurement, but none of
these issues came close to resolution. Certain East Asian developing
countries continued to advocate creation of an emergency safeguard
mechanism for services, reflecting concerns over their experience with the
1997 financial crisis. However, many WTO members reportedly see an
emergency safeguard for services as being technically unfeasible and/or,
in the case of the United States and most other developed countries,
undesirable. Discussions on domestic regulation were more promising.

4GATS contains several negotiating mandates in rule-making areas which
members felt unable to consider in detail within the time frame of the
Uruguay Round. These negotiations are conducted in two Working Parties,
one on Domestic Regulation and one on GATS Rules. The latter Working Party
is charged with negotiations on emergency safeguards, government
procurement, and subsidies.

5Emergency safeguards are measures that would allow for the temporary
suspension of market access, national treatment, and/or any additional
commitments that members may have assumed in individual sectors.

Appendix IV Services

Several proposals triggered constructive debates on regulatory disciplines
and transparency.6

On the market access side, talks were said to be progressing on a
technical level. After July 2004, a few more developing countries tabled
initial offers, bringing their number up to 52,7 and bilateral talks
seemed to have regained momentum. One gauge of movement was embodied by
the intensification of informal meetings held by so-called Friends groups,
which assemble subsets of member countries around issue-specific concerns
such as financial services, energy services or mode 4. However, WTO
officials said that sufficiently detailed negotiations on specific
services sectors had still yet to begin. Moreover, a general concern with
the current offers is that they do not fully bind, let alone deepen, the
level of liberalization that members have already, de facto, achieved
outside of the WTO. Another potential problem is that these offers do not
systematically schedule commitments in every service sector. Some have
signaled notable absences and weaknesses in financial, insurance,
communication, audio-visual, and professional services-sectors of interest
to the United States-but also maritime services and others of interest to
different members. In response, a number of countries are pushing for the
universal adoption of minimum requirements, or "benchmarks," in given
industries such as financial services. Approximately 40 developing
countries have not submitted initial services offers at all-not counting
LDCs. According to one WTO official, their failure to table services
offers does not strictly reflect a lack of means, though in some cases it
may. WTO officials felt that the outcome of intensified bilateral and
informal talks would only become clear after May 2005, the deadline for
tabling new and revised services offers.

Forward movement in the months leading up to the Hong Kong ministerial and
beyond will depend on members overcoming four challenges. First, several
officials we spoke with stated that insufficient technical capacity could
prevent a number of developing countries from tabling initial or revised
services offers before the Hong Kong ministerial. Second, resolving the
contentious, mainly North-South disagreement over the extent of
liberalization under mode 4 may be crucial to achieving progress in market
access. The temporary movement of service-delivering professionals is a

6Issues at the heart of these talks include technical disagreements on
licensing and qualification standards.

7Counting the 25 current EU members as one.

Appendix IV Services

politically sensitive issue for many developed countries, and their offers
under mode 48 are generally unsatisfactory to most developing countries
with ambitions in this area, such as India. Despite their demands, the
U.S. government has clearly expressed its reticence to grant other members
more extensive market access under mode 4 than is reflected in its
existing commitments. According to U.S. negotiators, certain commitments
under this mode could involve modifying domestic immigration law, and
certain countries are simply not prepared to make this move within the WTO
framework.9 Given the priority placed on obtaining mode 4 concessions,
this discord may become increasingly problematic.

A third factor that could affect progress in services negotiations is the
question of balance. Malaysia, Thailand, and the Philippines allegedly
want a concession on emergency safeguards before fully engaging in market
access bargaining. Brazil has tied its willingness to press forward in
services talks to obtaining satisfaction in agriculture. Continuing to tie
progress in services talks relative to other areas could be problematic,
as the request-offer approach to negotiating services liberalization is
inherently and comparatively slow. Moreover, the greater complexity of
identifying and dismantling often opaque barriers to trade in services
slows the speed of services talks. The head of the WTO Secretariat's
services division thinks that members will take 18 months to reach a
meaningful agreement once they start negotiating on a more detailed level
than they are currently. Finally, there is wide agreement that negotiators
need to summon more political and technical resources from their capitals
to conclude a meaningful services agreement. More than in other areas of
trade, barriers to trade in services often occur behind borders, such that
dismantling these measures requires involvement on the part of national

8Mode 4 is an issue in both market access and domestic regulation
negotiations.

9In a World Bank study, Chaudhuri, Matoo and Self (2004) specify that with
respect to mode 4, the GATS covers two categories of measures: "those
affecting `service suppliers' of a Member' of the GATS (i.e.,
self-employed suppliers who obtain their remuneration directly from
customers) and those affecting the natural persons of a member who are
`employed by a service supplier of a Member, in respect of the supply of a
service.' The Annex also states that the GATS does not apply to measures
affecting individuals seeking access to the labor market of a member
country, or to measures regarding citizenship, residence, or employment on
a permanent basis. . . As Winters (2003) points out, unlike with the mass
migration of less skilled workers, fears about cultural identity, problems
of assimilation, and the drain on the public purse are not really relevant
to mode 4. Host country concerns often pertain to national security, the
difficulty in enforcing temporariness, and the impact on the labor
market." The two authors note that what lacks clarity in GATS includes the
definition of "temporary movement," and the types of contracts it covers.

Appendix IV Services

ministries, subfederal level regulators, and various authorities not
normally involved in trade policy. This poses a problem for many small
developing countries.

Appendix V

                   Economic Incentives for Doha Negotiations

The Doha trade negotiations aim to increase international trade in order
to improve member countries' economic growth and development. Economists
have used trade models to generate numerous studies that estimate
potential economic gains from trade liberalization for developed and
developing countries alike. These estimates vary significantly, depending
upon the extent of trade liberalization assumed and other key
characteristics of the models. Several studies find that estimated
worldwide economic gains accrue to both developed and developing
countries. However, the distribution of economic gains may vary within and
between countries, creating perceived winners and losers. As such, the
individual economic incentives that countries face may differ, thereby
affecting each country's negotiating goals within Doha.

Doha Round Liberalization Is Expected to Yield Benefits and Costs

A primary rationale driving the Doha liberalization agenda is the belief
that international trade can positively benefit a country's overall growth
and development. Potential benefits occur as international trade increases
competition and specialization, provides greater access to technology, and
expands export markets. Over time, a more liberal trading regime may
reduce costs on both imported manufacturing inputs and exported final
products that create incentives for foreign producers to invest in new
production - benefits typically referred to as dynamic gains from trade.

While the role of international trade in fostering growth and development
has become more widely accepted, economists have also argued that trade
liberalization can involve significant adjustment costs.1 Adjustment costs
may include unemployment in sectors that are not internationally
competitive or costs of fiscal reform as governments heavily dependent on
trade taxes shift toward income or production taxes. Additionally,
international trade may yield an uneven distribution of economic gains,
creating temporary winners and losers between countries as well as within
them. As each country participates in the Doha negotiations, it is working
to achieve a balanced package of commitments that will be politically
acceptable to its various domestic constituencies.

1Some economists have highlighted that developing countries may also face
some specific challenges with trade liberalization such as greater
instability due to volatile export markets and an increased reliance on
international debt to finance trade deficits. See appendix IV in
GAO-05-150 for further discussion.

                                   Appendix V
                   Economic Incentives for Doha Negotiations

Nevertheless, without considering distributional issues, several studies
predict that both developed and developing countries stand to benefit
economically from multilateral liberalization. Developed countries are
positioned to receive gains from trade liberalization since they are large
traders and currently face relatively high tariffs for exports into
developing countries, particularly for industrialized goods. Developing
countries stand to receive gains from trade liberalization due to the fact
that developed countries often have pockets of high average tariffs on
products that developing countries tend to export. High developed country
tariffs tend to apply to agricultural and processed agricultural goods as
well as to light manufactures such as textiles and clothing. When weighted
by the amount of trade occurring under them, these tariffs translate into
significant trade barriers for developing countries. Developing countries
also stand to gain significantly from liberalization by other developing
countries. The share of developing countries' agricultural exports going
to other developing countries rose from 28 percent in the 1980s to 37
percent in 2001. However, in many cases, barriers imposed by developing
countries on goods from other developing countries are even higher than
those they face from developed countries, impeding potential South-South
trade between developing countries.

Economists Use Trade Models to Estimate Economic Gains

Economists often estimate the benefits and costs of easing trade
restrictions by examining a recent period and estimating how trade and
economic welfare would have been different under a scenario where certain
trade restrictions were eased. Concurrent with the WTO and other trade
negotiations, numerous trade models have been used to simulate
liberalization of trade policies and calculate the likely range of effects
on variables such as exports and imports, tariff revenues, production,
prices, and income. Many of these studies use a computable general
equilibrium (CGE) model called the Global Trade Analysis Project (GTAP)
model. GTAP is a global general equilibrium model that describes the
relationship between all sectors within an economy and all economies
worldwide. In its general form, GTAP is a static model, which means that
it simulates how economies will respond only to the trade policy change
being examined. Results generated from GTAP should be interpreted as
order-of-magnitude results rather than single point best estimates because
the assumptions regarding how responsive economic variables are to policy
changes drive the results.

Extensions of GTAP and other CGE models have been made to take into
account how economies will grow over time. These dynamic versions of

                                   Appendix V
                   Economic Incentives for Doha Negotiations

GTAP may include information on growth rates of capital, investment, and
productivity. Additionally, while the general form of GTAP includes an
assumption of perfect competition and constant returns to scale,
extensions of GTAP have incorporated characteristics readily observed in
manufacturing, such as imperfect competition and increasing returns to
scale.2 In these cases, trade liberalization can lead to greater
specialization and increased economic gains over time. However,
information on how firms respond to market changes in the long run is
inherently more difficult to measure with certainty and, as such, results
yielded from these models should be viewed with this limitation in mind.

Estimated Economic Gains Table 2 provides a listing of various estimates
of the economic gains from from Trade Liberalization trade liberalization
under selected trade liberalization scenarios. The table Vary is not
comprehensive but is intended to illustrate the wide range of results

estimated through trade models - economic benefits ranging from $22
billion to $574 billion worldwide. Results vary depending upon the type of
model (static vs. dynamic), key assumptions in the model (perfect
competition or imperfect competition), and the ambition of the
liberalization scenario.

2Increasing returns to scale refers to production conditions where the
cost per unit of production falls as the level of production rises. When
production for exports expands, the decrease in unit costs will create
greater economic benefits. Imperfect competition is correlated with
increasing returns to scale because firms whose production is
characterized by this condition are able to capture some monopoly powers.

                                   Appendix V
                   Economic Incentives for Doha Negotiations

Table 3: Models Estimating the Economic Benefits from Tariff Reduction in
the WTO Doha Round

                                                             Estimated annual
                                                             economic benefit
             Model Tariff reduction scenario Sectors included ($US billions)a

                 Static models that assume perfect competition

    Anderson et al              100% linear cut             Agriculture  $254 
                                                           Manufacturing 
     Cernat et al               50% linear cut              Agriculture   $40 
                                                           Manufacturing 
    De Cordoba and     50% linear cut for industrialized                 $123 
                         countries; 33% linear cut for      Agriculture  
       Vanzetti      developing countries; capped maximum  Manufacturing 
                     rate, sector initiatives; 5% of                     
                         lines excluded for developing       Services    
                                   countries                             
                         Swiss formula cut at 6.8% for                   $108 
                     industrialized countries and 25% for                
                     developing countries; 5% of lines                   
                     excluded for developing countries                   
Hertel and Martin            33% linear cut             Manufacturing $107 
     IMF and World              100% linear cut             Agriculture  $194 
         Bank                                                Textiles    
      Laird et al      50% linear cut for industrialized                  $22 
                         countries; 33% linear cut for     Manufacturing 
                             developing countries                        
                     Swiss formula cut with certain zero                      
                     tariff initiatives in chosen sectors                 $33

OECD	50% linear cut; decline in trade costs equal to 1% of trade; tariff
cuts apply if rate falls below applied level

Agriculture Manufacturing Services

                                      $117

Swiss formula cut with coefficient of 5; decline in trade costs equal to
1% of trade; tariff cuts apply if rate falls below applied level

     $159 100% linear cut; decline in trade costs equal to 1% of trade $174

    Shakur et al    36% linear tariff cut; reduction of    Agriculture    $38 
                          agricultural subsidies                        
                  100% linear tariff cut; elimination of  Manufacturing   $82 
                          agricultural subsidies                        
                  Tariff targets of 5% (10%) and 1% (5%)                $291b 
World Bank (1)           for agriculture and            Agriculture  
                  manufacturing respectively for          Manufacturing 
                  industrialized (developing) countries;                
                   capped maximum rates; elimination of                 
                                 subsidies                              

                Static models that assume imperfect competition

    Brown et al                33% linear cut               Agriculture  $574 
                                                           Manufacturing 
                                                             Services    
Francois et al Swiss cut with maximum tariff of 25%;                  
                  50% reduction in agriculture                           
                  subsidies and services barriers; decline               
                  in trade costs equal to 1.5%                           
                                  of trade                               

Agriculture Manufacturing Services

                                      $206

100% linear cut in tariffs, agriculture subsidies and services barriers;
decline in trade costs equal to 1.5% of trade

                                      $367

Dynamic models that assume perfect competition

World Bank (2) 100% linear cut; removal of subsidies	Agriculture $385b
Manufacturing

                                   Appendix V
                   Economic Incentives for Doha Negotiations

                         (Continued From Previous Page)

                                                             Estimated annual
                                                             economic benefit
             Model Tariff reduction scenario Sectors included ($US billions)a

                Dynamic models that assume imperfect competition

Nagarajan 50% linear cut; decline in trade costs equal to 1% of
trade.	Agriculture Manufacturing $385 Services

aModels rely on base year data from various years, including 1995 and
1997.

bResults are for the year 2015. Sources:

Anderson et al., "The Cost of Rich (and Poor) Country Protection to
Developing Countries." Journal of African Economies, vol. 10, no. 3
(2001): 227-257.

Cernat et al., Back to Basics: Market Access Issues in the Doha Agenda,
Geneva: UNCTAD, 2002.

De Cordoba, S.F., and Vanzetti, D., "Now What? Searching for a Solution to
the WTO Industrial Tariff Negotiations", Geneva: UNCTAD, 2005.

Hertel, T.W., and Martin, W., "Second-Best Linkages and the Gains from
Global Reform of Manufactures Trade." Review of International Economics,
vol. 9, no. 2 (2001): 215-232.

IMF and World Bank, "Market Access for Developing Country Exports -
Selected Issues", Washington, IMF: 2002.

Laird et al, "Market Access Proposals for Non-Agricultural Products",
Geneva: UNCTAD (2004)

OECD, The Doha Development Agenda: Welfare gains from Further Multilateral
Trade Liberalization with Respect to Tariffs, Paris: OECD, 2003.

Shakur et al, "How Comprehensive will be the Doha Round? Experiments with
Agricultural and Nonagricultural Reforms." New Zealand: Massey University
Discussion Paper 02.11, 2002.

World Bank (1), Global Economic Prospects: Realizing the Development
Promise of the Doha Agenda, Washington: World Bank, 2003.

Brown et al, "Computational Analysis of Multilateral Trade Liberalization
in the Uruguay Round and Doha Development Round." Ann Arbor: University of
Michigan Discussion Paper No. 489, 2002.

Francois et al, Economic Benefits of the Doha Round for the Netherlands,
the Hague: Agricultural Economics Research Institute, 2003.

World Bank (2), Global Agricultural Trade and Developing Countries,
Washington: World Bank, 2004.

Nagarajan, N, The Millennium Round: An Economic Appraisal , Brussels: CECA
Economic Papers, No. 139, 1999.

For example, the level of tariff cuts and sectors included for
liberalization determine the ambition of the liberalization scenario and
are one important factor accounting for variation in the results in table
2. Anderson et al. estimate gains of $254 billion with a full removal of
tariffs on agricultural and industrial goods, while Cernat estimates gains
of $40 billion with a 50 percent reduction. An OECD model on
liberalization in agriculture, manufacturing, and services shows that as
tariff reductions are increased from a 50 percent linear tariff cut to a
more ambitious Swiss formula tariff cut, to a 100 percent tariff cut,
economic gains rise from $117 billion to $159 billion to $174 billion,
respectively. Several studies suggest that

Appendix V
Economic Incentives for Doha Negotiations

liberalization of agriculture will provide significant benefits to
developing countries, despite the small size of agriculture in global
output. Models by Anderson et al. and the World Bank estimate that roughly
two-thirds of global economic gains from the liberalization of
agricultural and industrial goods come from agricultural liberalization.
The study by Brown et al., however, estimates that the largest economic
benefits, $414 billion, come from liberalization of services and that
there is an actual global net loss of income from agricultural
liberalization of $3 billion.3

Several studies in table 2 also find that the distribution of economic
benefits between developed and developing countries may be relatively even
(ranging from 40 percent to 60 percent for each). Such benefits as a share
of GDP, however, would be much larger for developing countries. For
example, according to estimates by the World Bank, liberalization of both
agricultural and industrial tariffs would provide $385 billion in economic
benefits that would be equally divided between developed and developing
countries. However, relative to their income levels, developing countries
would gain 1.5 percent of GDP compared to 0.5 percent of GDP for developed
countries. Several studies emphasize that the majority of gains for
developed countries derive from lowered tariffs by other developed
countries - a finding that is true for developing countries as well.

In addition to caveats previously discussed, three limitations of trade
models should be acknowledged:

o 	Difficulty in measuring current levels of protection. Many trade model
estimates are based on analysis of current levels of trade protection that
are difficult to measure due to the presence of nontariff barriers, non-ad
valorem tariffs, and gaps between bound tariffs and applied tariffs. In
some cases, data on tariffs may not be current enough to include
information relating to preferential tariff rates or country accessions to
the WTO. As a result, economic benefit estimates yielded from these data
may be overstated because they account for tariff reductions that have
already taken place. Economic benefit estimates may also be overstated if
the analysis is focused on reductions in bound tariffs rather than
reductions in applied tariffs - wrongly assuming that any reduction in the
bound rate would translate into an equal reduction in the applied rate.

3This result is partially due to the assumption of constant returns to
scale for agriculture but increasing returns to scale for nonagriculture.

                                   Appendix V
                   Economic Incentives for Doha Negotiations

o 	Costs of adjustment. Many trade model estimates do not take into
account adjustment costs to trade liberalization, such as a rise in
unemployment or consumer prices during a transition period to the new
trade policies. The more ambitious the liberalization scenario, the
greater the long-term economic gain-as well as the short-term economic
costs-are likely to be. Development institutions such as the World Bank,
IMF, and United Nations have placed recognition on these costs, though
there is presently limited understanding of the extent of such costs.

o 	Structural features of some economies. Many trade model estimates use
general assumptions regarding industry characteristics, which may not
account for positive effects due to industrial policies. Some economists
have noted that under certain conditions there are potential benefits in
using tariffs to support growth in new industries.

Trade Liberalization May Create Both Winners and Losers

While many studies estimate that trade liberalization is likely to result
in economic benefits worldwide, there is likely to be differentiation in
economic gains between and within individual countries. In the short run
when adjustment costs are present, liberalization is likely to create
winners and losers. For example:

o 	Net food exporters vs. net food importers. Regions that are significant
agricultural exporters are expected to gain significantly from the
agricultural liberalization measures being negotiated in Doha. However,
the estimated gains are smaller and sometimes negative in regions that are
large net importers of food because the potential removal of developed
country subsidies may increase world food prices. The IMF estimates that
major net exporters of food in Latin America and sub-Saharan Africa could
gain between 0.3 percent and 0.6 percent of GDP from agricultural
liberalization, while major net food importers in North Africa and the
Middle East could lose 0.3 percent of GDP. Other large net food importing
countries include South Korea, Russia, and Venezuela.

o 	Countries that do not receive trade preferences vs. those that do.
Certain developing countries are offered nonreciprocal trade preferences
into developed country markets. Under multilateral trade liberalization,
those preferences may be eroded as overall tariff rates are reduced. As
such, countries that do not receive trade preferences may gain a
competitive advantage over developing countries that currently

Appendix V
Economic Incentives for Doha Negotiations

participate in preference programs. Potential economic costs associated
with erosion of preferential access are difficult to determine, however,
given the mixed empirical evidence on program benefits.4 The IMF notes
that erosion of sugar and banana preferences could be a concern.
Mauritius, for example, benefits substantially from preferential access
for its sugar exports, and Caribbean nations benefit from preferential
access for banana exports.

o 	Traders vs. non-traders in tariff revenue dependent countries. For
countries that are dependent on tariff revenues to finance government
operations, the tax burden on importers who pay those tariffs may be
relatively high compared with the burden on consumers or domestic
industries that pay consumption or production taxes. As tariffs are
reduced through trade liberalization, tariff revenues may also be reduced
if there is not a sufficient increase in the quantity of imports in
response to lower tariff rates. In such cases, the burden of financing
government operations may shift away from traders and toward nontraders
within an economy. For African least-developed countries that, on average,
rely on tariffs for 34 percent of government revenue, the potential
distributional consequences from lower trade taxes is likely to be an
important adjustment cost to trade liberalization.

4Several studies note that benefits have been limited due to already low
developed country tariffs and poor program utilization rates. Empirical
examination of the more recent targeted programs, such as the United
States' African Growth and Opportunity Act (AGOA) or the European Union's
Everything but Arms (EBA) initiative, suggests that the economic impact
has been greater.

Appendix VI

Trade Negotiating Interests and Affiliations of Leading Merchandise Exporters

                             Exports by Sector (%)

Top 50 merchandise exporters in 2003 (in rank order of dollars exported)
EUa G-90b Agriculture

Industrial goods Services

                        Germany     X               5     81      
                  United States                     7     64      
                          Japan                     1     85      
                          China                     5     84      
                         France     X               9     70      
                 United Kingdom     X               4     64      
                    Netherlands     X              16     66      
                          Italy     X               6     75      
                         Canada                    11     76      
                        Belgium     X               8     71      
                      Hong Kong                     2     80      
                    South Korea                     2     83      
                         Mexico                     5     88      
                          Spain     X              11     54      
                         Taiwan                   n/a     n/a             n/a 
                      Singapore                     2     79      

Sweden X 6 71

Switzerland 2 73 25 Malaysia 8 78 14 Austria X 5 64 31 Ireland X 6 70 24

Thailand 14 68 18 Brazil 27 59 14 Australia 21 58 22 Norway 5 71 23
Denmark X 15 52 32 United Arab Emirates n/a n/a n/a Indonesia 14 75 10

Areas of Negotiation

         Agriculture Industrial Goods Services Trade Facilitation Rules

Cairns Groupc G-20d G-10e G-33f

Friends of Ambitiong

                                                            Tariffs over 10%h

Have tabled offersi

Core Groupj

Colorado Groupk FANsl

                 Have initiated over 75 antidumping investigations since 1995

X*X* X* X*

                                      XX X

                    X              X              X          X   X    
             X             X                      X                   
                                  X*             X*         X*             X* 
                                  X*             X*         X*             X* 
                                  X*             X*         X*             X* 
                                  X*             X*         X*             X* 
      X                            X              X          X        
                                  X*             X*         X*             X* 
                                   X              X          X   X    
                    X      X       X              X          X   X    
             X                            X       X              X    
                                  X*             X*         X*             X* 

X XX

XX XX

X*X* X* X*

               X         X         X                  X        X     
      X                            X        X                        
                        X*        X*                 X*                    X* 
                        X*        X*                 X*                    X* 

      X       X                        X       X                 X    
      X       X                        X       X                 X          X 
      X                           X            X            X               X 
                      X           X            X            X    X    
                                 X*            X*          X*              X* 

XXX XX

Appendix VI
Trade Negotiating Interests and Affiliations
of Leading Merchandise Exporters

(Continued From Previous Page)

                             Exports by Sector (%)

Top 50 merchandise exporters in 2003 (in rank order of dollars exported)
EUa G-90b Agriculture

Industrial goods Services

                           India                             9             57 
                          Poland             X               7             73 
                         Finland             X               7             80 
                  Czech Republic             X               5             80 
                          Turkey          C(m)               8             62 
                         Hungary             X               7             75 
                     Philippines                             5             87 
                    South Africa                   X         8             79 

Israel 4 69

Portugal X 7 65

Argentina 43 47

Venezuela 2 95

Slovak Republic X 5 80

Chile 29 52

                             Nigeria X n/a n/a n/a

                               Kuwait n/a n/a n/a

Appendix VI
Trade Negotiating Interests and Affiliations
of Leading Merchandise Exporters

 Areas of Negotiation Agriculture Industrial Goods Services Trade Facilitation
                                     Rules

Cairns Groupc G-20d G-10e G-33f

Friends of Ambitiong

                                                            Tariffs over 10%h

Have tabled offersi

Core Groupj

Colorado Groupk FANsl

                 Have initiated over 75 antidumping investigations since 1995

         X    X                X       X        X                     
                      X*               X*               X*                 X* 
                      X*               X*               X*                 X* 
                      X*               X*               X*                 X* 
              X                        X                         X    
                      X*               X*               X*                 X* 

XXX X

XX

                                      X XX

X*X* X* X*

XX XX

XXX X

                                  X*XX* X* X*

XX XXXX

XXX X

Source: GAO analysis of WTO documents and data, World Bank export data,
and other information

Notes:

Non-WTO members are shaded.

X* indicates that the country participated in the group or the action as a
member of the European Union.

a Other members of the European Union are Cyprus, Estonia, Greece, Latvia,
Lithuania, Luxembourg, Malta, and Slovenia. Turkey is a candidate for
membership, as are Bulgaria, Croatia, and Romania.

bThe G-90 is a large umbrella group including the least developed
countries and other countries from Africa, the Caribbean, and the Pacific.

cOther members of the Cairns Group are Bolivia, Colombia, Costa Rica,
Guatemala, New Zealand, Paraguay, and Uruguay.

dOther members of the G-20 are Bolivia, Cuba, Egypt, Pakistan, Paraguay,
Tanzania, and Zimbabwe.

eOther members of the G-10 are Bulgaria, Iceland, Liechtenstein, and
Mauritius.

fOther members of the G-33 are Antigua and Barbuda, Barbados, Belize,
Benin, Botswana, Congo, Cote D'Ivoire, Cuba, Dominican Republic, Grenada,
Guyana, Haiti, Honduras, Jamaica, Kenya,

Appendix VI
Trade Negotiating Interests and Affiliations
of Leading Merchandise Exporters

Mauritius, Madagascar, Mongolia, Mozambique, Nicaragua, Pakistan, Panama,
Peru, Senegal, St. Kitts and Nevis, St. Lucia, St. Vincent and the
Grenadines, Sri Lanka, Suriname, Tanzania,Trinidad and Tobago, Uganda,
Zambia, and Zimbabwe.

gOther members of the Friends of Ambition are Costa Rica and New Zealand.

hTariffs examined were most favored nation rates for the latest year
available from the WTO. European Union member country rates were
aggregated.

iOther WTO members that had tabled services offers, as of March 29, 2005,
are Bahrain, Barbados, Bolivia, Bulgaria, Colombia, Costa Rica, Dominican
Republic, Egypt, El Salvador, Fiji, Gabon, Grenada,Guatemala, Guyana,
Honduras, Iceland, Jordan, Kenya, Liechtenstein, Macao, Mauritius, New
Zealand, Panama, Paraguay, Peru, Senegal, St. Kitts and Nevis, Sri Lanka,
Suriname, and Uruguay, as well as other countries that are members of the
European Union.

jOther members of the Core Group are Bangladesh, Botswana, Egypt, Cuba,
Jamaica, Kenya, Mauritius, Tanzania, Trinidad and Tobago, Uganda, Zambia,
and Zimbabwe.

kOther members of the Colorado Group are Colombia, Costa Rica, Morocco,
New Zealand, and Paraguay.

lOther members of the Friends of Antidumping Negotiations (FANs) are
Colombia and Costa Rica.

mC indicates that Turkey is a candidate for membership in the European
Union.

Appendix VII

                     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, Michelle Munn, Kendall
Schaefer, Emilie Cassou, Ann Baker, Mark Keenan, Jose Martinez-Fabre,

Acknowledgments
Jonathan Rose, Jamie McDonald, and Ernie Jackson made key contributions to
this report.

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