WTO trade negotiations are not brisk endeavors. However even by the WTO’s own lethargic standards, the progress of the current Doha round has been disappointingly slow. As a new paper by Aaditya Mattoo, Francis Ng, and Arvind Subramani explains, the main reason for this is the “elephant in the green room” – China.

According to the authors, the Doha round originally suffered due to a lack of interest from the private sector – the key driver behind previous rounds. Other factors such as Indian reluctance to cut domestic subsidies and a lukewarm US attitude under Barrack Obama have also played a part.

Many hoped that the global financial crisis would inject some stimulus into the negotiations. However the authors believe that a new hurdle now impedes any serious progress – fears of competition from a trade-dominant China.

Matoo et al believe that today’s Doha negotiations centre around improved market access in the manufacturing sector. Agriculture, a key obstacle is the past, has become last salient due to record high food prices. Services meanwhile, are seen as too complex to be handled in this round.

In the nine years that Doha has been rumbling on China has emerged as a dominant source of supply to the key manufacturing importers around the world.  Today China accounts for 35% of Japan’s manufacturing imports. It also accounts for 30% and 25% of the respective EU and US figures.

What is even more crucial for Doha participants however is China’s huge market share of imports in their countries’ most protected sectors. This figure reaches 70% for Japan, 55% for Brazil and 50% for the US and the EU.  The implication is clear – if Doha cuts tariffs in these protected markets, they may see a flood of Chinese goods.

However as the authors point out, Chinese dominance in these sectors should not be an insurmountable obstacle, as long as Beijing is prepared  to open up their own markets in certain protected areas such as fertilizers.

The real problem therefore not the lack of potential for reciprocity but rather the widespread perception that Chinese trade success has been achieved, and sustained, by an undervalued Yuan. Few politicians, in any country, will be prepared to cut their own tariffs when they see China imposing an across-the-board import tariff and export subsidy (through their undervalued Yuan).

This fear of increasing currency-led market share for China’s exports is already making having implications. In 2009, 34% of developing countries’ anti-dumping cases were lodged against China. Brazil, one of the most vocal critics of currency undervaluation, has seen its currency rise 40% in the past few years. At the same time Brazil also has particularly high tariffs in certain sectors and would be expected to make cuts in Doha.

In the eyes of Doha participants the benefits of any trade concessions that they offer will be nullified by an instrument – Chinese currency undervaluation – that remains outside the scope of WTO negotiations.

The authors believe that a gradual re-evaluation of the Yuan by China  has already begun but that it will take significant time. Others like Patrick Chovanec argue that this currency undervaluation is one of the critical causes of the domestic inflation that China is currently battling. Trade enthusiasts must hope that China’s lukewarm embrace of currency appreciation gathers pace.