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Joseph Stiglitz and Andrew Charlton, 2005, Fair Trade for All: How Trade Can Promote Development, Oxford: Oxford University Press

Introduction

Recent WTO History

The Uruguay Round completed in 1994, establishing the World Trade Organisation (WTO) and drastically expanding the scope of multilateral law concerning global trading rules. In the decade since its completion, consensus has emerged that the round heavily favoured developed countries and many developing countries have suffered unexpected costs in the implementation of its provisions. The collapse of the WTO ministerial conference in Seattle in 1999 — where a new round of negotiations had been due to be launched — brought the rich world into this consensus and convinced developed countries that the WTO would have to move in a distinctly new direction if it were to convince its developing members that a new agreement was in their interests.

That consensus was formally announced at the next ministerial conference in Doha in 2001 in the form of the Doha Declaration. This conference launched the so-called 'Development Round', with developed countries promising to prioritise a rebalancing of the interests of developed and developing countries. However, developed countries as a bloc have reneged on those commitments, setting an agenda for Doha negotiations with only minimal concessions to development. This agenda focused particularly on the 'Singapore Issues', three subjects on which the WTO established working groups, and one which the WTO Goods Council was mandated to examine at the Singapore ministerial conference in 1996:

  1. trade and investment
  2. competition policy
  3. transparency in government procurement, and
  4. trade facilitation.

Developing countries, wary of entering another bad agreement after the failures of Doha, have blocked progress on developed countries' target areas. The US has largely responded to the stalemate by switching its attention to bilateral agreements with individual developing partners, a process which developing countries recognise maximise the US' power advantage.

Outline of the Book

This book attempts to outline what a true agenda for a development round should contain, based on a review of theoretical and empirical economics. The main proposals for reform of the trading system are detailed in Chapters 6 to 9. Chapter 13 examines the adjustment costs that, for some of the smallest and poorest countries, are likely to outweigh any potential benefits of multilateral liberalisation.

Trade liberalisation is supposed to deliver gains as resources are transferred from protected sectors in which a country does not have comparative advantage, to those sectors where it is more efficient and where it can export more successfully. But in developing countries the lack of resources (labour and other production inputs) available to new industries is not usually the constraint which prevents the growth of new export sectors. Developing countries have vast reserves of resources, particularly labour, which are already unemployed or underemployed. Thus trade liberalisation isn't required to 'free up' these resources for use in new industries. Unless complementary policies are used… liberalisation may, by removing the protection given to domestic industries, just leave the workers and other resources used in formerly protected industries idle in the short run. —p6

Trade Can Be Good for Development

The proposition that international trade is welfare-enhancing is one of the most established in economics, dating at least to Adam Smith (1776) and David Ricardo (1816). It has certainly played a part in the development of many countries, from Britain through Japan, North America and Australia, and more recently many Asian economies. These examples tend to show that trade is necessary but insufficient for sustained development.

However, whilst economics textbooks discuss the difference between the binary states of autarky (no trade) and free trade, real countries have had to make much more subtle choices between an infinite number of slightly varying trade regimes representing different levels of overall liberalisation. Theory is much more equivocal when it comes to these choices.

Almost every country retains some form of tariff restriction, and yet the world has been moving progressively towards greater liberalisation since the GATT (immediately following the Second World War).

Some of the developed countries that have been the most ardent advocates of trade liberalisation have been somewhat duplicitous in their advocacy. They have negotiated the reduction of tariffs and the elimination of subsidies for the goods in which they have a comparative advantage, but are more reluctant to open up their own markets and to eliminate their own subsidies in other areas where the developing countries have an advantage. As a result we now have an international trade regime which, in many ways, is disadvantageous to the developing countries. —p12

A particular twist of economic theory that has been used by the developed countries is to pretend that unilateral liberalisation by developing countries in itself is good, regardless of whether its trading partners are also undergoing liberalisation relevant to its export interests. However, the great majority of benefits of free trade for a developing country come from free access to foreign markets for products which it can export competitively; so unilateral liberalisation brings few benefits (and many problems) — the benefits of its own liberalisation fall mainly to its trading partners.

The next section will examine the assertion that trade is good for welfare and good for growth with reference to a few country histories.

East Asia (export-orientation)

The modern East Asian growth phenomenon began with Japan in the immediate post-war period, growing to be the second-largest global economy within a few decades. Many neighbours successfully followed similar development models, first South Korea, Taiwan, Hong Kong and Singapore, and more recently Thailand, Indonesia, Malaysia and China.

East Asia successfully refuted two classic propositions of development, proving that:

  1. inequality is not necessary to growth (Lewis (1955) had argued that inequality was required for the high savings necessary for growth)
  2. inequality does not need to rise in the early stages of development (as Kuznets had argued (1955))

There were important differences between the policy approach of different countries.

  1. FDI: Japan and Korea restricted FDI flows, instead using investment from domestic corporate conglomerates1), whereas Singapore and Malaysia attracted large multinational corporations and encouraged clustering.2)

They also had much in common:

  1. high rates of investment in physical and human capital
  2. rapid growth in agricultural productivity
  3. declining fertility.

Most controversial has been the role of the state in the East Asian miracle. These countries followed some orthodox prescriptions and ignored others, leading both orthodox and unorthodox commentators to claim that their success hinged on policies that they advocate.

Following orthodoxy:

  1. stability-oriented macroeconomic policy:
    1. responsible monetary and fiscal policy
    2. low inflation
    3. realistic real exchange rate
  2. reliable legal framework
  3. in sum: “free-market philosophy”

Whereas, against orthodox opinion:

  1. Japan intervened to cultivate heavy industries: steel, aluminium, automotive and shipbuilding, later electronics and semi-conductors
  2. subsidised credit to favoured industries
  3. trade policy
    1. protection for infant industries, including protection both from imports and domestic competition
    2. promotion for export-ready industries, including export marketing institutions
  4. in sum: a “strong role for the public sector”

Laissez-faire economists argue that the latter policies had no effect or were harmful, and that Asian success was a consequence of the former. Some even argue that growth would have been stronger without state intervention, although this is a “particularly unpersuasive counterfactual”3), as no country has ever achieved higher growth.

One thing is clear, that the Asian economies were highly successful without a strict adherence to the Washington Consensus and that controversy certainly remains about the effectiveness of different trade and industrial policies, and controls on capital flows in different contexts.

In this context it is inappropriate for the world trading system to be implementing rules which circumscribe the ability for developing countries to use both trade and industry policies to promote industrialisation. The current trend to force a narrow straightjacket of policy harmonisation on developing countries is simply not justified by the available evidence. —p17

Latin America (import substitution)

Many Latin American countries were inspired by the experiences of the main belligerents of World War II, who all abandoned free market pretensions in favour of intensive state planning and coordination to achieve the massive increase in output required by the war effort. The economic success of Soviet Russia and the wartime economies stood in stark contrast to the largest free-market economic failure in history across Western Europe and the US in the decade prior to hostilities.

This practical experience was supported by development economists who argued that massive government intervention was required in a 'big push' to benefit from economies of scale and demand from workers in other industries. Government intervened to:

  1. raise tariffs on manufactures that could be produced locally (import substitution)
  2. give priority to industrialists importing capital goods in foreign exchange markets

Obviously, this policy of favouring industries in which the country had no comparative advantage directly contradicts Ricardo's theory. Their critique of comparative advantage was that it's too static: it predicts a (static) welfare gain, but says nothing about economic growth or the way in which comparative advantage develops over time. The areas (particularly agriculture) in which developing countries had a comparative advantage seemed unlikely to benefit from as much productivity growth as industrial sectors: accepting their comparative advantage appeared to mean consigning themselves to a future of ever-increasing relative poverty.

[T]he theory of comparative advantage told South Korea, as it emerged from the Korean War, that it should specialise in rice. But Korea believed that even if it were successful in increasing the productivity of its rice farmers, it would never become a middle- or high-income country if it followed that course. It had to change its comparative advantage, by acquiring technology and skills. It had to focus not in its comparative advantage today, but on its long run, its dynamic comparative advantage. And government intervention was required if it was to change its comparative advantage. —p30

Latin American countries grew rapidly in the decades of import substitution (averaging 6 per cent across the region during the 1970s), but then one country after another fell into crisis in the early 1980s. They defaulted on their debt and suffered a decade without growth.

The neoliberal conclusion was that Latin America had failed due to its inferior policy: state intervention to support national industries had left them uncompetitive and inefficient, whilst permanent state support had lead to runaway inflation and unmanageable debt.

The opposing view argues that Latin America's failures had more to do with external shocks than with domestic policy. According to the South Centre, they simultaneously experienced:

  1. a demand shock to their exports
  2. a consequent fall in commodity prices and terms of trade shock
  3. an interest rate shock (their debt was denominated in dollars), and
  4. a capital supply shock.

Consequently, the blame lies with a combination of poor debt policy combined with unfortunate global circumstances. They borrowed heavily in the 1970s to avoid the global recession that followed the oil price shocks and were hit hard when the Federal Reserve raised interest rates to unprecedented levels. This reading of history is supported by the fact that all of the Latin American countries, regardless of whether they were experiencing significant problems with import substitution, were hit to a similar extent at a similar time — if the policy were to blame, a differential ability to survive the shock would be expected.

This alternative view suggests that it was Latin America's open capital markets rather than is relatively closed trade policy which led to the lost decade… LA's reliance on foreign capital flows and FDI are what made it particularly vulnerable to global economic shocks. —p22

Mexico and NAFTA

In 1994, Mexico entered the North American Free Trade Agreement (NAFTA) with the US and Canada. This was an opportunity for laissez-fair orthodoxy to prove the wonderful benefits of free trade: Mexico had access to the largest economy in the world, with no serious transport or infrastructure limitations.

Ten years on, the results have been mixed. The benefits:

  1. Mexican exports have grown around 10 per cent per year
  2. FDI has increased
  3. NAFTA helped Mexico to recover from the Tequila Crisis of 1994–5

However, in many ways NAFTA has failed to live up to its advocates' claims:

  1. growth during the first decade of free trade was slower than during the import-substitution years (before 1980)
  2. average real wages were lower a decade later than on entry into force
  3. some of the most vulnerable groups had been made worse off as subsidised US agricultural commodities depressed domestic Mexican prices
  4. inequality increased
  5. poverty increased
  6. a decade on, Mexico was losing many of the jobs it had gained to China
  7. the manufacturing sector has seen output growth but a reduction in employment

Three lessons should be taken from the experience:

  1. trade liberalisation alone does not ensure growth, and its impact may be swamped by other factors (eg Mexico's low innovation, weak institutions and corruption)
  2. Mexico's loss of tariff revenue prevented it from investing in infrastructure and education, whereas China was able to invest heavily in these and so was able to take jobs from Mexico
  3. NAFTA was not really a free trade agreement, as it did not eliminate US agricultural subsidies, enabling the US to export below the cost of production. The human implications are bleak: 80 per cent of the rural Mexican population lives in poverty, more than half in extreme poverty.

Theory: Liberalisation, Welfare and Growth

Aside from the traditional argument that trade brings a welfare gain through comparative advantage, there are four further channels through which liberalisation can bring costs and benefits:

  1. the creation of economies of scale through opening foreign market
  2. reduction of the price of inputs, lowering production costs
  3. increase in competition from foreign firms, and
  4. liberalisation may affect the rate of economic growth.

Traditional arguments for liberalisation usually focus on welfare rather than growth — ie the long-run rate of growth will not be affected.

However, the assumptions which yield the result that free trade is superior to any intermediate range of trade restrictions (Samuelson, 2962) are restrictive and often inapplicable to developing countries. The standard argument is that liberalisation improves efficiency: it drives inefficient local producers out of business, and these resources are absorbed by efficient industries. However, this assumes that the economy is initially operating at full capacity — extremely rare in developing countries. If there is spare unused capacity, then rather than transfer resources from low- to high-efficiency industries, instead previously used resources will become unemployed. On the contrary, it is not necessary to shift resources in order to build export industry, merely to mobilise unused resources. Concern about increased unemployment is one of the greatest concerns in practice, particularly understandable where safety nets are weak. It's problematic, therefore, that the models that predict welfare gains blithely assume full employment.

The second key assumption is the existence of perfect risk markets. However, international markets are highly risky, and liberal trade policy increases exposure to that risk. For instance, in a closed domestic market, if some shock reduces production of a certain good, the price will rise (due to scarcity), mitigating the loss of revenue of that producer. If the market is global, prices will not be affected by domestic production — they are likely to remain constant, they may even fall for unconnected reasons. Under free trade, risk-averse firms may prefer low-efficiency production if it protects them from the risk of higher-efficiency activities.

Under quite plausible conditions, one can show that free trade is Pareto-inferior to autarky — everyone is worse off — which is just the opposite result to that of the conventional wisdom. —p26

A third assumption is in the effectiveness of the price mechanism. However, in developing countries markets are often absent, and the price mechanism fails. Where one industry depends on inputs from another not-yet-existing industry, liberalisation may enable circumvention of the problem by importing inputs, but many inputs are non-tradables, so both industries may need to be established simultaneously, but the price of the inputs and goods of each will not be known until after that establishment. Where scale economies exist, this situation may require a restriction of competition from foreign producers to overcome irremediable market failures.

Government revenue can also provide a rationale for trade taxes, in certain circumstances. The orthodox view is based on the Diamond-Mirrlees production efficiency theorem (1971): for a small open economy it is optimal for government to raise taxes on household demand rather than border taxes. But the assumptions are restrictive and don't hold in developing countries. Often trade taxes are far less costly to collect than other forms; where this is so they may be optimal. Recently, VAT has been pushed hard by the international institutions, but where large informal sectors exist beyond the reach of such taxes (as in all developing countries), these may be welfare-reducing relative to trade taxes.

Trade liberalisation also affects inequality: there are winners and losers. Theoretical models assert that everybody “could” be made better off under liberalisation if the winners compensated the losers — but this almost never happens. Liberalisation is therefore often seen as “unfair”. Such compensation, theoretically, is assumed costless, but in fact the costs of such redistributive schemes may well be prohibitive.

Another type of market failure is based on information externalities. Market information is scarce and highly costly in developing countries — for instance, it is normal that the only means of determining whether a certain business model is profitable is to try it (with one's own capital, given the failure of capital markets). The potential value of demonstrating a business model is profitable can be enormous, but very often it is impossible for the entrepreneur to capture more than a fraction of this value. If the model fails, the entrepreneur pays all of the costs; if it succeeds, copy-cat firms capture some if not most of the gains. There are compelling real-world examples: cut flowers in Colombia, apparel in Bangladesh, software in India — in each case the entrepreneur that demonstrated the profitability of the model received a miniscule fraction of industry profits.

[I]t is no great surprise that low-income countries are not teeming with entrepreneurs engaged in self-discovery. –Dani Rodrik, 2004, cited p29

Perhaps more important than the impact on welfare is liberalisation's impact on long-term economic growth. Perhaps liberalisation will increase growth:

  1. large (export) markets increase returns to R&D
  2. technological spillovers may exist within but not between countries — then greater specialisation would lead to faster technological advances

These tend to emphasise the importance of knowledge, learning and human capital, but these are areas that often require extensive government intervention to push an economy towards comparative advantages that can capitalise on this long-term development.

The infant industry argument states that a new industry requires a period of 'learning' during which it cannot compete efficiently. It attempts to justify limited protection by government until firms in a new industry have completed this learning. Its critics argue that if the long-term profitability of the industry is larger than the short-term losses, then those firms should be able to finance their learning by borrowing.

There are two reasons that this criticism may be flawed. Firstly, asymmetric information leads to capital market failure.

Banks would have to be willing to lend to enable firms to sell below cost, in the hope that by doing so their productivity will increase so much that they will become a viable competitor. It should be obvious that such loans would be viewed, at best, as highly risky. (And banks would likely view themselves at a marked informational disadvantage in judging whether the firm's claims about its future prospects — in spite of large current losses — have credibility.) —p32

Secondly, if there are spillovers and some of the gains of learning are captured by rival firms (for instance, if employees leave to set up competitor firms), then the gains to the pioneer firm may not cover the cost of investing in their learning.

Once capital market imperfections are taken into account, then protection may be optimal, as Dasgupta and Stiglitz (1980) show. They argue, in particular, that protection may have advantages over other instruments, eg subsidies, when government has limited sources of income and limited ability to target.

An alternative approach is to create strong intellectual property rights that protect the pioneer firm both from foreign and domestic competition.4)

Empirical Evidence

The economic growth literature has been successful in demonstrating the importance of some variables for economic development, including education, institutions, health and geography. However, the relationship between trade liberalisation and growth is much more controversial. –32

Many authors have attempted to establish a reliable relationship between greater openness and higher growth. A few studies in the early nineties claimed to have established the relationship, but they themselves contained careful qualifications, and subsequent scrutiny has persuasively shown that they should be interpreted with extreme caution.

In particular the studies were identifying the negative effects of macroeconomic imbalances, instability and geographic location and misattributing them to trade restrictions. —p34

Their conclusions were not, therefore, supported by the data. It should also be noted that research has focused on openness rather than liberalisation.

Certainly, the bullishness of voices like the IMF in assuming an established relationship between liberalisation and growth cannot be supported by empirical evidence (but then international trade is not within the IMF's remit, so there is no reason that it should understand trade policy).

Policy Implications

On the right, claims that forthright unilateral liberalisation by developing countries will lead to welfare gains and economic growth are not supported by empirical evidence and often contrary to historical experience. The reforms they recommend, and in some cases coerce, “might in fact set development programmes back.”5)

On the left, a resistance to all calls for reform and an attempt to seek a complete answer to developing countries' economic problems in reform by developed countries may also be counterproductive.

Many in the left interpret the right's focus on liberalisation despite the lack of empirical evidence to support their case as evidence of the right's malevolence. This is unfair. The prescriptions are based more on the belief amongst right-wing economists that developing country governments are incapable of implementing anything but the simplest trade policy successfully.6) More complex regimes are also more likely to be corruptly implemented.

Alan Winters, Director of the Development Research Group at the World Bank:

“the application of second-best economics [ie activist trade policy] needs first-best economists, not its usual complement of third- and fourth-raters.” —p37

In the authors' view such concerns are real but overemphasised: look in particular to East Asia, where government officials proved highly competent in implementing effective and innovative activist policies. Instead of assuming government constraints to be unassailable, these constraints can be combated through good institutional design and international technical assistance.

The historical evidence that activist trade policy has always almost been used during the 'take-off period' of industrialisation, which Ha-Joon Chang has documented for all developed countries, still applies to the most recent industrialisers (although the timelines are a little more compressed than in historical examples). China began to grow rapidly in the large 1970s, but did not begin tentative trade liberalisation until the late 1980s; Indian growth increased in the early 1980s while tariffs were still rising in some areas and did not fall significantly until the early 1990s.

The Need for a Development Round

Developing Countries and World Trade

The General Agreement on Tariffs and Trade (GATT) came into force in 1948 between 23 developed countries. It was largely a response to the spiral of trade policies adopted by major economies during the Great Depression. Countries raised tariffs against their neighbours in a 'beggar-thy-neighbour' cycle. Each policy was rational in the absence of a cooperative agreement, but all policies together left all countries worse off. GATT sought to establish a transparent, reciprocal system of tariff limits, which would benefit all parties and help to protect the global economy from depression (assisted by the Bretton Woods institutions).

At its inception, the needs of developing countries were not considered. The agenda of GATT negotiations focused entirely on issues of relevance to trade between developed countries. The GATT underwent further rounds of negotiations (the most recent to complete was Uruguay in 1994), but up until the end of the 1970s there was little expansion in scope beyond goods trade between developed countries; instead, negotiations merely focused on agreed reductions in tariff levels by all parties. In the 1960s and 1970s, this tariff reduction was largely forced by the US in response to progressing European integration that threatened to cut the US out of European markets in favour of other European producers. Goods trade of interest to developing countries was mostly excluded (in particular, agricultural products and textiles fell outside of the GATT). As more developing countries gained independence it became possible for them to participate, but there was little motivation for them to do so:

  1. products of interest to them (agricultural products and textiles) had already been excluded from the agenda
  2. their markets were not of particular value to the developed countries (who were more interested in other developed markets), so they had little bargaining power
  3. developing countries obtained exemptions from GATT rules: Article XVIII permits them to use tariff protection in the interests of development, and the Generalised System of Preferences formalised tariff preferences into developed markets — by gaining these valuable exemptions any commitments they made came to be seen as meaningless, further undermining their bargaining power
  4. many countries including China, Brazil and India were still pursuing import substitution policies, and therefore had little interest in multilateral tariff reduction.

Agriculture and textiles were covered by separate agreements, whose provisions were starkly different to those of the GATT. Under the Multifibre Arrangement (MFA) developing countries bargained bilaterally for textiles quotas. Developing countries as a bloc were actively discriminated against, as developed countries could export to one another without restriction. Massive tariff protection and subsidies of agriculture remained throughout the developed world.

In the 1980s, many developing countries began to take a more active role in trade negotiations, with the launch of the Uruguay Round in 1986, for several reasons:

  1. the increasing importance of exports of the East Asian economies lead to calls for them to stop 'free riding' in the multilateral system
  2. interest in the newly industrialised countries' markets increased
  3. many developing countries were beginning to turn away from import substitution and take more interest in export-lead strategies

The Uruguay Round marked a significant expansion in the trade-related agenda, including the following areas for the first time:

  1. trade in services (GATS)
  2. intellectual property (TRIPS)
  3. investment (TRIMs)

These issues were all of interest primarily to developed countries, although their offensive interests were now both developed and developing markets. As manufacturing falls to only 14 per cent of US GDP, there had been a danger that in the long term the GATT might have proved to have been more use to China than to its original authors. In return, the developing countries were promised greater goods access in areas of interest to them (again, particularly agriculture and textiles).

As the Uruguay Round was nearing completion, many developing countries were convinced that it was in their interests to complete because of the ambitious predictions of welfare gains made by international institutions:

  1. the World Bank and US Organisation for Economic Cooperation and Development predicted gains of approximately $200 billion per year
  2. the GATT secretariat claimed gains would be at least $500 billion a year
  3. the OECD predicted a total gain of $270 billion, of which $90 billion would accrue to developing countries.

In practice, these predictions proved to be over-optimistic, particularly concerning the gains to developing countries.

Indeed many of the poorest countries in the world will actually be worst off as a result of the round. Some estimates report that the 48 least developed countries are actually losing a total of $600 million a year as a result of… Uruguay. —p47

Sub-Saharan Africa is estimated to have lost around $1.2 billion — many of the net losers are amongst the poorest countries in the world.

One reason for the predictions' failures is that they didn't correctly model the implementation and detail of the agreement. They failed to predict the way in which the US would backload textiles commitments to reduce their value. Market access improvements, once again, reflected the priorities and interest of developed countries, with the following result:

[A]fter the implementation of Uruguay Round commitments, the average OECD tariff on imports from developing countries is four times higher than on imports originating in the OECD. —p47

The commitments made by developing countries in the Uruguay Round were unprecedented, and it is now clear that few countries had any idea of the cost of implementing this wide range of new commitments (the cost of doing so was also ignored in projections of the net benefits of the Round). Developed countries had offered financial and technical assistance in meeting these commitments, but crucially developing countries had made bound commitments, whereas developed countries had made only non-binding indications that they may be willing to assist, with the result that developing countries had to beg for money every time they struggled to meet a commitment to which they were legally committed.

Unsurprisingly, in the aftermath of Uruguay, developing countries became disillusioned with the agreement. The promised benefits failed to materialise, whilst commitments in areas such as intellectual property were having unanticipated and disastrous effects, partly due to the extreme way in which they were being interpreted by developed countries.

Unfinished Business from Uruguay

Although Uruguay had laid the basis for the inclusion of agriculture within the GATT, the focus had been on converting non-tariff barriers to tariffs (tariffication). This could be done in such a way that even after tariff reductions, applied tariffs did not fall (and water remained in many tariffs), the result being that Uruguay did not bring significant reductions in agricultural tariffs. Similarly with subsidies:

In 1986–8 farm subsidies were equivalent to 51 per cent of all OECD farm production, and fourteen years later, after the implementation of Uruguay commitments… they still accounted for 48 per cent[.] —p50

Even in industrial goods there was scope for further reduction — as noted earlier, tariffs on developed country exports remained many times higher than developing country exports (averaging 0.8 per cent compared to 3.4 per cent). These figures hide important peaks:

  1. US tariffs on textiles and clothing: 15–35 per cent
  2. Processed food:
    1. Canada: 42 per cent
    2. Japan: 65 per cent
    3. EU: 24 per cent
  3. Compared with least processed food products:
    1. Canada: 3 per cent
    2. Japan: 35 per cent
    3. EU: 15 per cent

This type of tariff escalation discourages basic processing operations by creating enormous effective tariffs on value adding, and are acutely anti-development. Along with such peaks they are “manifestly unfair”.7)

New Areas of Importance

Experience with the new areas of coverage illustrated that the agenda had been highly biased towards developed countries. GATS negotiations focused on sectors of strategic importance to developed countries (such as finance and business services), whereas services that could realistically be supplied by developing countries were neglected (in particular, the movement of workers has an enormous bias towards the very high-skilled). The Singapore Issues, in the way in which they were formulated, were also of interest only to developed countries.

What Has Doha Achieved?

The Doha Round began in 2001 with the Doha Declaration laying out an ambitious developmental work programme ahead. However, progress in the two years to the next ministerial meeting (Cancún, 2003) was minimal. US and EU offers on agricultural tariffs and subsidies fell far short of developing countries expectations; meanwhile, the US passed the 2002 Farm Bill, further increasing support to American farmers, seemingly a demonstration of America's total lack of commitment to the spirit of agricultural liberalisation. The US and EU pushed the Singapore Issues hard, despite their clear lack of development benefits. The EU and US both unilaterally introduced new tariff preferences for least developing countries (LDCs, a UN classification distinct from developing countries, which covers approximately 50 of the poorest countries in the world) — respectively 'Everything but Arms' (EBA) and the 'African Growth and Opportunity Act' (AGOA). However, despite the rhetoric, the tangible results of these schemes has been negligible at best: “Brenton (2003) concludes that trade in goods given preferences for the first time under the EBA in 2001 amounted to just two hundredths of one per cent of LDC exports to the EU in 2001.”8)

The failure to make progress and strong feelings that the US had reneged on its Doha Declaration and earlier commitments were exacerbated by the negative public reaction to US-WTO attempts to use TRIPS provisions to prevent African governments from sourcing cheap generic drugs to combat the AIDS pandemic. The effects of increasing US subsidies on West African cotton farmers drew further public attention.

In 2001, rich countries provided subsidies to their farmers which amounted to six times the amount of their development aid, respectively $311 billion and $55 billion… The African countries' demands, including that the subsidies be reduced and compensation be paid to African farmers, were swiftly rejected by the US. —p62

One consequence was the formation of unprecedentedly strong new negotiating blocs amongst developing WTO members: the G20 leading negotiations on agriculture, the G90 united in opposition to Singapore Issues and the G33 pressing for the ability of developing countries to protect their agricultural issues. Greater coordination brought greater strength, and the Cancún ministerial ended in failure when developing countries refused to accept further discussion of Singapore Issues or EU-US proposals on modalities for agricultural liberalisation.

In mid-2004, the EU and US were ready to make limited concessions in the hope of salvaging the round, and all Singapore Issues apart from trade facilitation were dropped: the round would focus on core issues in agriculture, services and goods. However, by the end of 2004, the Doha Round has made little progress, and has failed to live up to the ambition contained in the Doha Declaration.

Founding Principles: The Basis of a Fair Agreement

The concept of a 'Development Round' poses a fundamental challenge to the GATT-WTO system. Throughout its history, the GATT negotiation process was motivated purely by self-interested bargaining. Each party participated only because it saw a benefit to itself, and lobbied only in favour of provisions that it saw as in its interests.

The concept of a 'Development Round' requires a fundamental departure from this approach. It requires the adoption of shared principles that can be used to judge whether any given provision is in the interests of “development”, whether or not it is in the individual interests of any party. As yet the WTO has made no serious attempt to address this issue — it has barely been discussed, and certainly no progress has been made towards agreeing a set of principles. But without such principles motivating a new approach it seems unlikely that the US-EU will be able to negotiate a 'Development Round' that also satisfies their concept of their rational self-interest — particularly if the Round also seeks to redress the unbalanced outcome of Uruguay. Following the historical GATT approach, the US-EU will refuse any genuine development agreement.

The authors propose four criteria by which to just a development round:

- Any agreement should be assessed in terms of its impact on development; items with a negative effect on development should not be on the agenda.
- Any agreement should be fair.
- Any agreement should be arrived at fairly.
- The agenda should be limited to trade-related and development-friendly issues.

Impact Assessment

Present and historical negotiations have not been lead by impact assessment. Where they are done, they are done by individual parties to inform their own negotiating positions only.

The WTO Secretariat should take on the function of providing impact assessment of proposals before they are negotiated, to determine whether they are development-friendly. Assessments should be done on a country basis, and should also take into account differential impacts on groups within each country, particularly vulnerable groups.

This assessment cannot be based on neoclassical models, which are pathologically ill-suited to developing economies:

  1. the assumption of full employment is inappropriate, and routinely produces spurious results (as discussed earlier)
  2. adjustment costs should be assumed non-zero and quantified
  3. risk and uncertainty must be assumed non-zero and their effects taken into account: there are first-order welfare effects arising from risk in developing countries, for instance a quota (whilst inefficient in a risk-free environment) may be superior to a tariff because it will reduce price uncertainty (provided there is little domestic volatility)
  4. analysis should take into account pre-existing distortions, such as distortions favouring the informal sector generated by VAT-based tax policies (which often hit the same groups as are hit by developed country agricultural subsidies)
  5. global general equilibrium must be considered, ie the effect that policies such as agricultural subsidies in large producers (the US and EU) has on world prices (these can only be safely ignored for small producers)
  6. features of developing countries that are different to the developed economies for which most models have been built:
    1. higher unemployment
    2. higher adjustment costs
    3. weaker safety nets
    4. poorer risk markets
  7. the cost of addressing any inequality generated by liberalisation, including deadweight losses stemming from higher taxation

The importance of adjustment costs also implies that WTO members should avoid bilateral agreements on the way to multilateral agreements, as these are likely to create short-term trade diversion.

WTO members also need to be honest about the fact that some provisions are redistributive rather than good, individually, for every single party. Complex theories of political economy are currently used to explain why countries are reluctant to liberalise unilaterally, but at least in many cases, it should be openly recognised that countries simply don't benefit from their own liberalisation, but only from the liberalisation of other markets.

Intellectual property rights are distinct. They increase the incomes of those in advanced industrial countries at the expense of those in less advanced industrial countries. Arguments that they lead to greater innovation are not backed by empirical evidence. Drug companies in particular develop drugs for developed markets, intellectual property rights in poor countries seem not to motivate them to greater research relevant to distinct health threats in these areas. In any case, if and when they are good for development they can be adopted unilaterally by developing countries.

Any Agreement Should Be Fair

The authors do not attempt to justify why a development agreement should be fair. There does seem to be a growing international consensus, in rhetoric at least, that it should.

Opponents of the principle argue that trade negotiations are voluntary, and therefore beneficial for all — if developing countries lost out from participation in the WTO, they would leave. There are problems with this argument:

  1. the threat of withholding aid is a powerful lever through which developed countries can gain compliance from developing countries
  2. developing countries may benefit from the 'rule of law' that the WTO provides without that law being fair (unfair law being better than total lawlessness)
  3. it may be rational for an individual country to remain a part of the WTO even if it would be rational for the same country, as part of a larger bloc, to withdraw/pursue a non-cooperative course — “The prisoner's dilemma arises not only in the case of prisoners, but also in the case of poor countries engaged in bargaining with the rich.”9)

It should be noted that, to the extent that countries are different, an agreement that applies uniformly to all countries may affect each country differently — it will not necessarily be fair. For this reason, it is important to adopt the following principle:

Any agreement that differentially hurts developing countries more or benefits the developed countries more… should be presumptively viewed as unfair… any reform [should] be progressive, ie… a larger share of the benefits [should] accrue to the poorer countries. This was almost certainly not true of the Uruguay Round. —p75–76

One key problem with this criterion is that agricultural subsidies pose massive costs for developed countries, so their elimination is likely to benefit the developed economies more than others. To address this, the only benefits and costs that are considered should be those that are granted to others (ie costs and benefits of reform for oneself should be ignored).

Fairness also requires that two failures of the dispute settlement system be rectified:

  1. the WTO system needs an equivalent of legal aid to cover the cost of disputes for developing countries — whilst imperfect this would go some way to address the problem that developing countries can often not afford to bring disputes, whereas the costs are trivial for larger countries
  2. sanctions permitted to redress wrongdoing are crippling when imposed by large economies and trivial when imposed by small ones — no solution is proposed but it is noted that global action against a large economy can be effective, as when the world responded as a bloc to increased protection of the US steel industry, forcing America to back down.
The EC, Japan and the US were complainants in almost half (143 of 305) of all bilateral disputes… between 1995 and 2002. By contrast the 49 members classified by the UN as Less [sic] Developed Countries did not bring a single challenge in that period.

A further difficulty in the application of fairness is whether to view WTO agreements in isolation from the actions of other multilateral institutions (asking that WTO agreements, in isolation, be 'fair'/progressive) or whether to attempt to ensure, through WTO agreements, that developing countries are treated fairly by 'the system' as a whole. For instance, if a certain developing country commits to a fair level of liberalisation under Doha and then, in the course of an IMF bailout, is forced into a further round of liberalisation at the insistence of the IMF, should the WTO be held responsible for the overall unfairness of the country's treatment? A more concrete example is the imposition of capital market liberalisation by the US through bilateral treaties. Capital market liberalisation increases economic volatility, which in turn raises the risk premium demanded by foreign investors. The IMF may also insist on “usurious”10) interest rates. If a government subsidises credit in order to bring interest rates down to a little over global market levels (in violation of WTO rules), should the government be held culpable and be subject to countervailing duties, or should it be regarded as simply correcting a distortion imposed by another part of the international system?

In the South, there is a tendency to view such multi-pronged attack as coordinated. Whilst such coordination may not exist, nevertheless the impact is often much the same as it would be if they were coordinated.

The high interest rates, tax policies, and trade liberalisation policies demanded by the IMF do exacerbate the adverse effects on developing countries of whatever trade liberalisation measures they agree to within the WTO. The two cannot be seen isolation. This provides the basis of one of the important recommendations that we make below.

Any Agreement Should Be Arrived At Fairly

Procedural fairness is particularly important when there is disagreement about exactly what constitutes a fair agreement. Its main components are transparency and the way in which negotiations are conducted. Historical GATT negotiations have been unduly secretive, particularly the 'Green Room' process used in the Uruguay Round, in which developed countries would hold substantive negotiating sessions to which only a handful of key developing countries were invited. Developing countries begin at an informational disadvantage compared to other members — this should be diminished to the extent possible by the open provision of information about ongoing negotiations.

Scope of the WTO's Mandate

In the Uruguay Round, the scope of the WTO's operations grew alarmingly. The WTO provides a convenient negotiating mechanism and ready-made dispute settlement architecture, but there are important reasons to be cautious about the expansion of the WTO's scope:

  1. developing countries have limited capacity to analyse and negotiate a broad range of issues
  2. experience with Singapore Issues suggest that a broad scope can make agreement more difficult
  3. increased scope permits developed countries to apply their disproportionate bargaining power to arbitrary new issues (for instance, it would have been impossible for the US-EU to have negotiated a TRIPS-like treaty with as many other countries outside of the WTO).

A 'principle of conservatism' needs to be introduced to the WTO to oppose this expansion in scope, consisting of three elements:

  1. relevance to trade flows
  2. development-friendliness, and
  3. the existence of a rationale for collective action.
[M]odern trade agreements have been extended into areas which intrude into national sovereignty with no justification based on the need for collective action and without clearly identified and fairly distributed global benefits. The presumption of consumer sovereignty is based on the premise that society should only interfere with individual choices when those choices have consequences for others, when there is a need for collective action, and the same is true in trade. —p86

Special Treatment for Developing Countries

One of the most important challenges for a development round is to develop a system that treats less developed economies differently to more developed economies, whilst remaining predictable, rules-based and fair. In the WTO context, this is known as “special and differential treatment, or SDT. Considerable SDT has been a feature of the WTO system for decades. The WTO recognises that trade policies which are likely to maximise welfare in developed countries may not have the same effect in the very different economic environment of developing countries. Common existing SDT provisions include:

  1. financial support with WTO participation
  2. aid to improve capacity to take advantage of trading opportunities
  3. exemptions from agreements or delays in the date in which they come into force
  4. permission for developed countries to provide favourable market access to developing countries (against MFN)

SDT is controversial. Whilst developing countries argue that SDT is necessary to permit them to pursue appropriate trade policies, opponents argue that:

  1. it breaks the principle of reciprocity on which the WTO is based
  2. according to neoliberal theory, protectionism that SDT encourages is inefficient and bad for developing countries themselves: they'd be better off if forced to liberalise completely (the problems with neoliberal assumptions was discussed in chapter 2)

SDT in Doha

SDT has always been an important demand of the developing countries in Doha, with the G33 its main proponent. After the Cancún ministerial walk-out, in 2004 the EU Trade Commissioner wrote to trade ministers he proposed that LDCs11) and “other weak or vulnerable developing countries” should not have to undertake further tariff reductions during Doha, whilst still benefiting from other members' reductions. These countries would have the “round for free” (RFF).

The danger of the RFF approach is that it would reduce the participation of the RFF countries in the round — indeed, its intention was surely to overcome opposition to developed country proposals by the RFF countries by reducing their incentive to get involved. The result might be that Doha came to mimic early GATT rounds in which the “GATT operated as a club for the advancement of rich-country interests.”12) Whilst it would enable poorer economies to benefit from new tariff reductions, these reductions are more likely to be on goods of interest to exporters in other developed countries, of limited relevance and benefit to RFF economies. An additional problem with the approach is that it allows RFF countries to retain a veto over a round in which they are contributing little — this could hold up negotiations, further encouraging the proliferation of bilateral agreements outside the WTO.

More importantly, the RFF approach neglects the opportunity for South-South liberalisation, which could bring developing countries real gains. South-South tariffs are currently a significant problem: Latin American manufacturers face tariffs seven times higher in other LA countries than in industrialised countries; East Asian exporters face tariffs 60 per cent higher in other EA economies than in rich nations. The World Bank estimates there could be welfare gains of $30 billion in each of agriculture and industrial goods from total South-South liberalisation.

Doha Market Access Proposal

In order to capture some of these gains, the authors set out a Doha market access proposal (MAP). This, conceptually, is very simple. Countries are ranked according to economic size (raw GDP) and wealth (per capita GDP): all members fully liberalise13) with respect to economies that are both smaller and poorer than themselves. For instance, Egypt would gain full market access to the US (which is both larger and richer) but would have to give full market access to Uganda (both smaller and poorer), whilst retaining MFN tariffs in both directions with Antigua (which is smaller but richer).

The principle is of a rules-based system based on objective criteria that is nevertheless progressive. Economic size (GDP) is used as a measure of economic scale, recognising that large economies (like China) benefit from economies of scale relative to smaller countries. Wealth (GDP per capita) is used as a measure of advancement (in technological and organisational terms), recognising that developing countries may find it difficult to compete in the short-to-medium term with more advanced competitors. All countries retain the ability to use trade policy against countries that are either larger or richer, but open up to those both smaller and poorer. The scheme has many advantages:

  1. it involves significant liberalisation (much more than the RFF approach)
  2. rules of origin would reduce the value of this liberalisation less than under other preferential schemes, because inputs would often come from other qualifying countries
  3. in particular, it involves significant South-South liberalisation, which typically suffers under SDT modalities, as evidenced by the slow progress of South-South liberalisation at the WTO
  4. obligations are distributed progressively, and all developing country members benefit. The median ratio of market access rights to obligations under MAP is 303:1, and of imports is 113:1 — in other words, the median developing country receives free market access to countries whose total imports are 113 times the size of imports of countries to which it is required to give access
  5. countries retain the ability to manage major import threats (from larger or richer countries), so they can pursue infant industry or avoid heavy adjustment costs of removing barriers until appropriate safety nets are in place
  6. MAP is consistent with the existing MFN system: existing MFN tariffs remain in all trading relations not affected by MAP, and can be subject to negotiated reduction as usual (it should be noted that the scheme does reduce the bargaining power of poorer countries in future rounds, but on the other hand by removing preferences between classes of developing countries, it destroys the incentive for some developing countries to oppose rich-country liberalisation for fear of preference erosion14))
  7. it creates well-defined obligations to replace discretionary preferential schemes, giving commitments greater certainty and value. One of the biggest problems with historical SDT (such as GSP) is that they can be unilaterally withdrawn at any time: for instance, the US withdrew $60 million worth of pharmaceutical products from its preferential scheme to punish India for its supposedly weak patent protection policy
  8. it is simple, whilst effectively differentiating: it would make the “spaghetti bowl” of GSP preferences redundant (and would “save the EU the bother of negotiating” EPAs)15)

Although not discussed explicitly, details such as adjustment periods, provisions for specific sectors and many other complexities would have to be negotiated as part of this overarching policy.

SDT in Rules

There is now wide recognition that WTO “behind the border” rules may have gone too far. Many policies proscribed by the Subsidies Agreement and TRIMs were used, arguably to good development effect, by the East Asian economies during their rapid industrialisation. The TRIPS agreement contains much that will make it more difficult and expensive for developing countries to adopt new technologies from more advanced competitors, locking in the technology gap.

Developing countries should demand exemptions from such multilateral rules, including in proposed Doha agreements on competition and investment. These agreements would restrict developing country governments from pursuing advantageous policies. Further agreements to establish binding good practice in behind the border areas should be undertaken on a (voluntary) plurilateral basis, not as part of the compulsory “single undertaking” of the WTO.

Compulsory commitments should not be made in areas where the purported gains are controversial and where implementation and opportunity costs are high. And where the gains are certain and the costs are low for developing countries (such as allegedly in efforts to liberalise some aspects of FDI regulations), there is no need for compulsion, because developing countries can be persuaded of the benefits of taking unilateral action. —p104
A blanket proscription against government subsidies to technology (industrial policies) is likely to have an adverse effect on developing countries and, indeed, it is likely in practice to be unfair: the United States conducts its industrial policy largely through the military, which supports a wide variety of technological developments that eventually have important civilian applications. And it is hard to conceive of a trade agreement that would prohibit the development of such technologies through defence programmes. (Even the EU has complained about America's use of defence expenditures as a hidden subsidy for its aerospace industry.) —p105

Priorities for a Development Round

The problem, of course, is that political globalisation has not kept pace with economic globalisation: issues of international trade agreements are seldom looked at through… the same kind of lens through which we look at domestic legislation In national economic debates, we do not demand that the poor give up and amount commensurate with what they get. Rather, we talk about social justice and equity. —p107

The current focus of Doha, on areas of dubious benefit to developing countries and neglecting important developmental areas, is inappropriate for a development round, and ignores the historical context in which developed countries have accrued far greater benefits from the multilateral system than the poor. There is an important asymmetry of power in the negotiations: the impact of concessions in developed countries will be small and easily manageable, whereas the impact of opening up markets in developing countries is large and will place significant strain on their governments.

The authors' main proposals:

  1. the market access proposal detailed in the previous chapter
  2. developed countries commit to eliminate all agricultural subsidies (production as well as export)
  3. market access commitments must not be undermined by restrictive rules of origin and other barriers

In other words, reciprocity should not be the basis of negotiations.

The authors present further, less central, proposals:

  1. sharp reduction in tariff peaks
  2. elimination of tariff escalation
  3. liberalisation in developed countries should focus on priority products, especially agricultural commodities and textiles
  4. services liberalisation should focus on labour-intensive areas such as maritime and construction
  5. low-skilled labour mobility schemes, particularly temporary migration of unskilled workers
  6. restriction of the non-tariff barriers that developed countries have developed as an alternative to tariffs

The chapter contains a detailed table of further proposals (table 7.1, p112–4), which itself summarises the analysis presented in the appendices. Some highlights (particularly those not discussed elsewhere):

  1. non-tariff barriers:
    1. eliminate dumping duties and replace with a single fair competition regime
    2. permit developing countries to subsidise infant industries
    3. permit developing countries to subsidise high interest rates
  2. development:
    1. developing countries permitted to use measures in their development interest even when restricted for developed countries, especially measures for poor farmers
  3. IP:
    1. new pro-generic drug policy
    2. greater scope for compulsory licensing
    3. higher novelty standards for patenting
    4. greater restrictions on biopiracy (patenting traditional medicines)
  4. tax:
    1. restriction of subsidies and tax concessions for foreign firms, to prevent “race-to-the-bottom” amongst developing countries
  5. arms:
    1. prohibition of arms sales
    2. criminalisation of bribery
    3. elimination of secret bank accounts
    4. commitment to repatriate corrupt funds
  6. dispute resolution:
    1. greater technical and financial assistance for developing countries
    2. multilateral enforcement (non-injured parties can also retaliate against an offending member)
    3. monetisation of sanctions (developing countries can sell the right to sanction to other members for whom the sanction would be more valuable, eg if Nicaragua won a dispute against the US, it could sell the right to impose duties to China or the EU)
  7. institutional reform
    1. creation of evaluation unit within the WTO to assess likely impact of measures on developing countries
    2. greater transparency (elimination of the Green Room, etc)

How to Open Up Markets

Services (including Labour Mobility)

The basic rationale for trade liberalisation is to increase economies of scale and improve efficiency in the allocation of resources. Efficiency gains stem from the discrepancy in factor payments across countries — where factor payments vary, an opportunity exists to improve global productivity through liberalisation. It is worth noting then, that, assuming factor payments equal marginal products, the largest discrepancies exist in unskilled labour, followed by skilled labour, and lastly capital. In other words, an agreement that liberalises the movement of unskilled labour will do the most to improve global efficiency. In addition to the efficiency gains, the movement of unskilled workers would create large development benefits.

Notwithstanding this, liberalisation of unskilled labour has lagged far behind the liberalisation of goods and services generally. It fits into the WTO framework as under the GATS as “mode 4”, the “movement of natural persons”. So far, mode 4 commitments have lagged behind the other three modes, and have focused on the most skilled workers.

In order to maximise the development benefit of migrant labour, governments (and potentially the WTO) can get involved in improving systems of remittances to make the remittance of wages cheaper, safer and more convenient (at present a large portion of remittances flow through informal channels).

There are further GATS sectors that are of particular interest to developing countries in modes 1 and 2 (the expansion of offshore outsourcing has already lead to rapid growth in some of these sectors):

  1. business services
  2. ICT
  3. health
  4. education
  5. audiovisual services

There are also non-market access reforms that could provide development benefits. Tourism is particularly important to many developing countries. Although the sector is usually liberal in developing economies, they nonetheless suffer from “rampant” anticompetitive practices in the industry, primarily in the North, which “minimise spillover and multiplier effects”.16) A multilateral anti-trust framework in tourism and maritime transport could create development benefits and support further liberalisation.

A similar situation exists in mode 3 liberalisation — many developing countries have unilaterally liberalised FDI rules, but a WTO agreement limiting the negative effects of competition between governments to provide the most attractive financial incentives to foreign investors could increase the development benefits of this liberalisation.

A final opportunity for improvement exists to provide greater scope for governments to adopt appropriate social policy. Developing countries have experienced negative consequences in the liberalisation of sectors such as the media and utility provision — governments need the space to protect vulnerable groups, prevent price rises caused by the market power of foreign firms and guarantee local content in appropriate industries (particularly the media).

Agriculture

Chapter 3 discussed the high levels of agricultural protection in the OECD and the negative effects on developing country production. However, the effects are ambiguous: by lowering commodity prices the subsidies hurt producers (often poor farmers) whilst benefiting net consumers (often better off urban classes). But the balance varies from one product to another — so reductions should be targeted to prioritise the most development friendly, and proceed more gradually (with substantial adjustment assistance) in areas that will have large impact on poor, vulnerable net-importing countries. Liberalisation should proceed thus: * Begin by reducing border protection (tariffs and export subsidies), with reduction most rapid on goods produced primarily in developing countries and those consumed primarily in developed countries (eg sugar, tropical products, cotton). * Production subsidies on price-sensitive necessities consumed widely in developing countries should be reduced gradually, with part of the savings in subsidy budgets committed to developing countries to cover adjustment costs (North Africa, Sub-Saharan Africa and Latin America (except Brazil, Argentina, Mexico) rely on imports of grains and oilseeds subsidised in the OECD). * Domestic support should switch to payment systems that do not encourage production (such as land-based payments). It's important to recognise that most “non-trade distorting” subsidies actually encourage export. Where domestic demand is price inelastic, subsidies that encourage production will also encourage export (the WTO presently makes too much of the difference). Additionally, where farmers face credit constraints, even income support can provide additional finance that farmers can use to expand production, which they could not have sourced elsewhere.

Industrial Goods

Developing country interests have been neglected in previous tariff liberalisation, and consequently serious problems remain, particularly

  1. tariff peaks on products of interest to developing countries, and
  2. tariff escalation (higher tariffs on more-processed goods)
For example, in 2001, clothes and shoes accounted for only 6.5 per cent of US imports in value terms but they brought nearly half of the $20 billion of US tariff revenue.

In analysing the impact of escalation, it is important to calculate the effective tariff rate on value adding; analysis based only on nominal rates will not reveal the true development impact. Effective tariff rates on value added in food processing, for instance, is very high.

Additionally, the liberalisation of South-South tariffs could bring large welfare gains, as discussed in Chapter 6.

Non-tariff Barriers

Legal commitments to liberalise do not eliminate protectionist sentiment or the “politics of special interests”.17) Accordingly, as the North has reduced tariffs through WTO liberalisation, its use of non-tariff barriers as a replacement has escalated. Although non-tariff barriers are primarily used by developed countries, their use by larger developing countries is also rising. They take four forms:

  1. dumping duties can be applied where a foreign exporter is (allegedly) selling below cost
  2. countervailing duties can be applied to counteract the effects of a subsidy received by a foreign exporter
  3. safeguards can be applied temporarily to protect a domestic industry from a surge in imports, and
  4. safety standards can be applied to protect food security, prevent the movement of pests, etc.

The general problem is that non-tariff barriers can be applied too easily by developed countries:

  1. in some cases (particularly dumping), the rules are too permissive, and
  2. more generally, the procedures are unable to prevent consistent misuse, especially by large rich countries.

America's misuse of dumping duties illustrates both problems. The country accused of dumping must respond in a short period of time to a demand for extensive information in English. When unable to comply, the US government acts on the “best available information” (BIA) — ie that provided by the injured American firm. Large tariffs are applied, which are often later reduced, but can nevertheless be effective in the long term in two ways:

  1. in some cases, the initially high duty is sufficient to drive the exporting firm out of business
  2. the uncertainty in the duty to be paid will discourage importing firms from using that supplier

The calculation of “cost” used to determine whether a firm is dumping is also inappropriate. Many countries use average costs, whereas economists agree that the relevant measure is marginal cost — a firm with high fixed costs, selling below marginal costs during a downturn should not be considered to be dumping. Secondly, the use of a “similar” comparator country in order to approximate production costs can be misused — for instance, “the US used Canada as the country most similar to Poland.”18)

Safeguards are overused by the United States and probably underused by developing countries.

If the richest country in the world, the United States, which a strong safety net, relatively high employment level, etc, has to resort to safety measures to protect itself against a surge of imports, how much more justified are developing countries in imposing such measures. Indeed, it is hard to conceive of many important liberalisation measures against which safeguard protections could not justifiably be invoked by developing countries.

Clearer standards are required at the international level to determine when safeguards can be applied, and these should include SDT for developing countries. For instance, a member should have to show that the loss must be of at least 1 per cent of all employment and that the country's social safety net will struggle to absorb it, with lower thresholds for developing countries.

Reform requires three components:

  1. the adoption of national treatment in this area: for instance, in the US, antitrust law protects domestic firms from one another, but the threshold for anti-competitive practices are far higher than that applied for foreign firms
  2. the creation of an international tribunal as the first court: an international panel of experts would have to endorse a plaintiff's case before non-tariff barriers could be applied, to move away from the current situation in which, “for instance, the United States… acts as prosecutor, judge and jury”19)
  3. legislation and practices should be reviewed by the secretariat to determine whether they are fair and non-discriminatory, and conform with accepted economic principles (including using marginal cost as the basis for assessing dumping cases rather than average cost)

The determination of what constitutes a subsidy also requires clarification to rectify current problems:

  1. richer countries use “hidden” subsidies unavailable to poorer countries (such as the system of hidden American subsidies through the defence industry, discussed earlier)
  2. subsidies on credit applied to counteract IMF measures forcing developing countries to raise interest rates should not be considered a subsidy
  3. the fair auction of privatised assets should be considered to extinguish any subsidy previously received (similar to the sale of assets in a bankruptcy auction), but when government effectively gives away state assets then the subsidy is not extinguished (this could have the side-benefit of encouraging more honest privatisations)

Priorities Behind the Border

Development-friendly behind-the-border measures that should be included in a Doha agreement:

  1. Restrictions on tax and incentive competition, following similar agreements in the OECD and especially the EU, could prevent deleterious race-to-the-bottom competition between developing country governments to attract investment. Three options, in order of ascending ambition:
  • disclosure/transparency requirements for firms and governments
  • cooperation between governments
  • enforceable international rules
  1. Anti-corruption policies could adopt rules laid out in, for example, America's Foreign Corrupt Practices Act:
    1. full disclosure of payments made to foreign companies
    2. agreement that only disclosed payments can be tax-deductible
    3. commitment to repatriate stolen funds
    4. restrictions on sources of illicit revenue, especially those used to finance armed insurrections
    5. agreement banning bank account secrecy
    6. strong restrictions on arms sales, especially small arms
  2. Environmental policy:
    1. the recent “Shrimp-Turtle” case between the US and India/Pakistan/Malaysia/Thailand reaffirmed that sustainable development ranked alongside the protection of international trade as an objective of the WTO
    2. WTO law should support members' use of trade policy to enforce environmental agreements, especially multilateral agreements, even on non-signatories and non-WTO-members (eg the use of trade policy by WTO members to attempt to enforce the Kyoto protocol on non-signatories)
    3. developing countries should be given assistance in abandoning subsidies on fossil-fuel-derived energy
  3. Part of the original motivation for the establishment of the GATT was to ensure a cooperative response to crises, despite the various (rarely used) safeguards that the WTO agreements contain for the use of trade policy during crises. However, rather than establish temporary barriers, a more effective response to local financial crises (such as the Argentine crisis) would be for trading partners to temporarily liberalise imports of strategic commodities
    1. An international panel within the WTO could make recommendations in such cases.
    2. The Agreement on Subsidies and Countervailing Measures (SCM) should be clarified to ensure that it does not prohibit the provision of trade finance during crises (which could currently be considered a subsidy)
    3. Multilateral mechanisms to provide trade finance, especially during crises, could be improved
  4. Developing countries should be given greater assistance to address adjustment and implementation costs.

What Should Not Be on the Agenda

The fact that the US and EU put [the Singapore Issues] on the agenda and continued to push them for so long within the so-called Development Round is of concern: were they merely bargaining chips? Was there no real comprehension about what should be meant by a Development Round? —p141

Intellectual Property

The authors believe that the balance of intellectual property rights in the US and embodied within TRIPS favours rights holders more than is beneficial for economic efficiency and development. Intellectual property rights create a form of monopoly and are therefore always statically inefficient — the trade-off is between static inefficiency and the dynamic effects of greater incentive to innovate. They note that the basic research that drives new technology is conducted by the state at public expense and would be no more successful with stronger protection. State support is justified because knowledge is a public good.

There are many development dangers from IP law that is too strong:

  1. weak patent laws are required to safeguard public health (most developed countries have at one time used laws permitting generic drug manufacture on public health grounds)
  2. the difference between marginal cost of production and price can be viewed as a tax to finance research: principles of equity demand that the poorest consumers not be taxed in this way, so the international community needs an alternative mechanism for financing this activity
Before NAFTA, Canada routinely granted compulsory licenses on pharmaceutical products for the purpose of reducing health costs through widely available generic drugs. Canada assigned royalties to the patent holders, usually of 4 per cent of the generic competitor's sales price. In sharp contrast, and despite the HIV/AIDS public health crisis, no African country has issued a compulsory license for any medicine. —p143

The authors believe that TRIPS causes such comprehensive harm that it should be rolled back. Because of the principle of conservatism discussed in chapter 5, IP should not be discussed within the WTO; governments should be represented by scientists in any discussion of IP, not trade ministers. Any new agreement should recognised that developing countries are disadvantaged in any legal dispute process.

If TRIPS is not to be eliminated, then it needs to be revised in various areas, and developing countries need further support to fully exploit its provisions. Particularly:

  1. TRIPS permits governments to authorise manufacturers to produce drugs without the consent of the patent owner: developing countries need assistance in creating administrative procedures to do so that are immune from (expensive) legal challenges by the drug companies (“the median cost of US patent litigation in 1998 was $1.2 million for each party.”20))
  2. TRIPS should be extended to permit compulsory licensing beyond national emergencies to “refusal to deal” scenarios, in which drug companies regard developing markets as too small to bother with.
  3. Article 40 should permit members to prevent anticompetitive licensing practices by patent-holders.
  4. Pursuant to Article 66.2, tangible measures need to be created to facilitate technology transfer to developing countries, such as incentive schemes for transferring firms in developed countries.
  5. Any revision to current WTO IP law should make it as quick and easy as possible for generic drugs to enter the market on the expiration of a patent (the US has been attempting to make it more difficult through recent bilateral agreements)
  6. Article 27.1 should be strengthened to protect traditional knowledge from biopiracy, perhaps incorporating the UN Convention on Biodiversity, signed by 170 countries in 1993. There should be a change in the presumptive ownership of traditional medicine, with patenting firms bearing the burden of proof that medicinal properties hadn't previously been recognised before an international tribunal.

Competition

Discussion in Doha has centred more on improving access of developed country firms into developing markets than on making markets more competitive or improving access by developing country firms into developed markets. However, there could be value in a competition agreement that harmonised anti-trust law at the highest common denominator. This ought to feature:

  1. national treatment: either dumping duties or antitrust legislation would need revision, to ensure the same standards apply to both foreign and domestic firms
  2. better application of antitrust law across jurisdictions:
    1. domestic antitrust regulators should look at the effects on foreign markets
    2. foreign consumers should have the right to take action in foreign courts
    3. cross-border class action suits should be enabled to enable consumers in multiple jurisdictions to impose sanctions enforceable in the corporation's home country
    4. consumers and governments should be able to take action (including class action) against international cartels, including those involving governments or government sanctions (ie OPEC)
  3. development policies such as affirmative action and preferences for small businesses should be permitted, even when they have a differential impact on foreign firms

Investment

According to the conservatism principle, investment should not be part of a WTO trade agreement. It is also unbalanced to negotiate an investment agreement without concomitant labour and environmental agreements. Reasons not to negotiate a pure investment agreement within the WTO:

  1. environmental restrictions affect trade: the EU restricts carbon emissions whilst the US does not, giving American firms a cost advantage
  2. labour restrictions affect trade: countries with anti-union laws enable firms to depress wages, creating a cost advantage
  3. there is no real evidence that investment agreements increase investments (all major studies have found weak or no evidence that the 2000 bilateral agreements signed by 2001 increased investment)
  4. unilateral investment liberalisation is proceeding rapidly; this enables tailoring appropriate to local circumstances
  5. liberalising the movement of capital is less important for economic efficiency than the movement of workers, particularly unskilled labour
  6. there is a strong case that liberalising the movement of capital lowers global economic efficiency, and that liberalisation causes economic instability such as the recent crises in LA and in East Asia in the late 1990s
  7. multilateral investment mechanisms already exist, such as the Multilateral Investment Guarantee Agency (MIGA)

If an agreement were to be negotiated, the most important development issue would to prevent a “race to the bottom”, so countries should be restricted in using:

  1. tax incentives
  2. labour standards, or
  3. environmental standards

as a means of attracting foreign investment.

Financial Services

Previous services negotiations had a considerable focus on financial services, which should be re-examined. Developing countries should be permitted to force banks to lend to underserved populations.

In at least some developing countries there are concerns that the purchase of local banks by foreign banks has reduced the flow of credit to small and medium-sized domestic enterprises, and thus impeded economic growth. (There is a long history of such concerns, evidenced in the US for instance by restrictions on interstate banking, intended to prevent New York and other money-centre banks from buying up other banks, thereby impeding regional, and especially rural, development.) —p152

Regulatory Interventions

Developing countries are concerned that new trade agreements will create additional barriers to the entry of their goods, particularly “blue tariffs” (impediments on labour standards) and “green tariffs” (environmental standards). Economic theory argues that weak standards do not generally improve a country's competitiveness, so such standards should not be included in a trade agreement. There are exceptions:

  1. when the global community is affected, such as in the Shrimp-Turtle case: not forcing firms to bear the cost of environmental degradation amounts to a subsidy
  2. human rights violations such as forced or child labour, or land seized from indigenous peoples: the global community should not encourage such actions by permitting firms to benefit from a consequential cost advantage
  3. actions that unfairly affect the cost of production, such as restrictions on collective bargaining that reduce wages

Whilst some argue that these would be better addressed through a channel other than a trade agreement, in reality there are few other options.

Exchange Rate Manipulation

The US has recently attacked China for allegedly manipulating its exchange rate. The situation is so complex that in almost all cases it is impossible to definitively determine whether this is truly a deliberate government policy. The threshold for action should be very high, at the least that only high multilateral surpluses be admissible as evidence.

Joining the Trading System

Article XII of the Marrakech Agreement provides for the possibility that non-members may join the WTO, but “for an organisation which prides itself on being 'rules-based', the accession process is remarkably vague.”21) In practice, developing countries as a bloc retain a veto on the accession package, and use this power to demand much greater concessions from acceding countries than have been made by existing members. As part of the Doha Round, in December 2002 the General Council adopted new guidelines for LDC accession: the process would be streamlined and simplified, and acceding LDCs would not be required to make commitments beyond existing LDC members. In practice these guidelines have been ignored. Empirical studies show that, over time, accession is becoming slower and more costly (in terms of commitments). Acceding members have been forced to accept the following:

  1. greater binding coverage than existing members (some LDCs have accepted greater binding coverage than Australia, a developed member)
  2. lower bound rates (LDCs have bound at much lower maximum rates than the US)
  3. waiver of SDT, including shorter transition times on the TBT, SPS and customs valuation agreements, as well as TRIPS, including immediately eliminating “the use of affordable new generic drugs”22)
  4. China had to accept an extraordinary right of other members to use safeguards against it (beyond GATT Article XIX and in violation of MFN)
  5. some LDCs have bound export subsidies at zero (far beyond many developed countries' commitments)

> It seems strange that the WTO's developed country members should force acceding countries, particularly small and poor countries like Cambodia and Nepal, into such strong concessions. Grynberg and Joy (2000) suggest that the motivation lies in the developed countries' desire to create a precedent that can be applied to future negotiations. —p161

The WTO urgently needs to implement the December 2002 General Council decision to make accession more transparent, and to ensure that accession terms are comparable to commitments made by members at a similar level of economic development.

Whilst Doha has floundered, the US has been aggressively pursuing bilateral treaties. These are bad for development because

  1. they temporarily divert trade (and the double-adjustment involved will be particularly painful for developing countries, and
  2. the US has greater power in these negotiations, but the results will be used as a precedent in multilateral negotiations, probably leading to an even less balanced agreement in the WTO

As discussed, there are large potential gains from the liberalisation of South-South trade. This could be achieved by permitting developing countries to establish preferential market access deals to one another, similar to the EU's Everything but Arms initiative. These would be more useful than similar schemes provided by, for instance, the US, because the political conditionality imposed by the US reduces certainty and therefore value, whereas a “South-South agreement would likely focus more exclusively on trade issues, and would not suffer from these abuses.”23)

Institutional Reforms

The result [of secretive trade negotiations without parliamentary oversight] is agreements, like Chapter 11 of the NAFTA… or the TRIPS Agreement, which contain provisions that would probably never have been accepted by a democratic parliament with open discussion in a deliberative process. —p167

Reform in the way in which trade negotiations are conducted and the WTO is structured is urgent. Many features of the current structure of negotiations disadvantage developing countries. As noted in chapter 5, the fairness of an international regime depends on its procedures as well as its outcomes. The authors propose the following:

  1. trade ministers are no longer adequate representatives of a country's interests:
    1. environmental ministers must meet (not be represented by trade ministers) to discuss the environmental impact of provisions
    2. health and science ministers must be involved if trade institutions are going to continue to discuss intellectual property
  2. although the Green Room approach has been formally abolished, there is no structured, agreed replacement and in effect elements of its process continue — these should be replaced with an agreed structure to maintain representativeness, eg the US, EU, Japan, China, two representatives of the middle-income countries, two representatives of the LDCs and one of the Cairns Group, each with a responsibility to consult and represent members of its own group
  3. a new (secretarial) body or bodies should be created within the WTO to:
    1. supply impact assessments to developing countries, to mitigate their informational disadvantage
    2. assess whether proposed trade agreements are consistent with the principle that trade diversion should be limited and less than trade creation
    3. assess countries in crisis and approve safeguard and other emergency measures
  4. assistance provided through the WTO system should be reassessed:
    1. technical assistance with implementation will continue to be needed
    2. adjustment costs are not merely institutional but in many developing countries sizeable additional financial assistance will be required
    3. legal assistance will be required to supplement an overhaul of dispute settlement to make it fairer to developing countries

Trade Liberalisation and the Costs of Adjustment

This chapter presents more supporting empirical information than previous chapters.

Understanding of adjustment costs is important because:

  1. the Development Round's cognisance of equity requires that poor and vulnerable groups be compensated significant adjustment costs fall to them, and
  2. opposition to liberalisation often comes from groups who will face the largest costs: compensating these groups may be necessary to enable liberalisation

Liberalisation brings various different types of cost:

  1. workers and capital in previously protected industries become unemployed in the short run
  2. government or workers face adaptation costs, such as training, benefits, search costs
  3. government bears implementation and enforcement costs, which are particularly high in the case of Singapore Issues (in many cases the cost of implementation may be higher than the country's entire development budget)24)
  4. investment is required to take advantage of new opportunities:
    1. by government: infrastructure such as transport and standards and conformance institutions
    2. by firms: new facilities and technologies
  5. costs associated with redistribution between factors, such as compensation by government (liberalisation usually leads factor prices to move towards international prices)
  6. reduction in tariff revenues may force governments to implement new tax regimes (notoriously difficult in developing economies, and likely also to distort the economy and undermine growth) or else cut public expenditure: “over thirty countries — mostly small and poor — derive more than 25 per cent of their public budgets from tariff revenue.”25)
  7. increased exposure to risk, for instance when quotas are tariffised

Adjustment costs disproportionately impact developing countries, because:

  1. their export industries are undiversified (often reliant on one or two commodities) and therefore vulnerable to policy shocks
  2. they require large institutional changes to comply with international standards (whereas developed countries are already closer)
  3. world trade is most distorted in industries important for developing countries, because historically liberalisation has neglected these industries
  4. they have the world's poorest people and weakest credit markets, and are therefore unable to bear even small costs

Studies quantifying adjustment costs in developed countries find that costs accrue mainly to workers, and that they are small compared with consumer benefits (eg Baldwin, Mutti and Richardson (1980) analyse a 50 per cent cut in US tariffs and find 90 per cent of costs are borne by laid-off workers (the remainder by capital stock) but that total costs are only 4 per cent of total gains — other studies give similar results). Evidence in developing countries is much weaker, but costs are likely to be much higher.

For example, liberalisation of the cashew market in Mozambique in the late 1990s led to the loss of 85 per cent of the workforce employed in the local processed-cashew industry. Recent evidence suggests that whole towns have shut down as a result of the factory closures. —p175

Costs in developing countries are exacerbated by:

  1. weak access to credit
    1. firms can't finance adjustment in production
    2. workers can't finance retraining or search for new employment
  2. high unemployment: workers find it harder to get new employment, meaning longer unemployment and probably settling for a worse job than previously held
  3. low education: studies show that costs are lower for better educated (therefore more mobile) workers
  4. reduction in tariff preferences for the poorest countries

The authors present a range of evidence suggesting that the benefits of non-reciprocal tariff preferences (both GSP and especially LDC schemes such as EBA and AGOA) are small, and more than offset by the likely benefits in MFN tariffs, especially by developing countries who don't have GSP schemes but do currently have higher tariffs than developed countries. One reason for this is restrictive rules of origin, particularly in the EU, which undermine the value of such benefits (the American scheme has much lower coverage but a higher rate of take-up — this probably reflects the costs of meeting the EU's RoO). However, the authors' analysis underestimates the value of EBA preferences as it uses Cotonou preferences as its counterfactual, not MFN tariffs (and Cotonou preferences expired in 2008). One reason that the GSP is ineffective is that it fails to compensate for a tariff regime that discriminates against products exported by developing countries — thus for the EU, Canada and Japan the (weighted) average duty paid under the GSP is still larger than the average duty paid under MFN.

In a sense the GSP only partially compensates for the discrimination by developed countries against the goods produced by developing countries. —p183

Adjustment costs vary not only by country but between different vulnerable groups within each country. For this reason (and because many ignore unemployment and weak capital and risk markets)26) most analysis currently undertaken is inadequate. A useful analysis must look at the sub-country level, take market imperfections into consideration, and analyse the effects on

  1. unemployment
  2. factor prices, and
  3. goods prices

Fiscal effects also vary a lot between countries. “Senegal pursued trade liberalisation in the mid-1980s, following which there were large revenue shortfalls. Lost tariff revenue combined with slow growth in trade volumes and weaknesses in economic management led to dire fiscal consequences.” The process had to be abandoned. Other countries have been fairly successful in replacing lost revenue. Institutions such as the IMF believe that switching from trade tax to VAT is welfare-enhancing, but recent theoretical research shows that in a country with an untaxable informal sector it is desirable to retain some trade taxes.

On the basis of proper per-country analysis, assistance must be provided to governments to improve safety nets for workers and to improve credit markets for firms (if necessary to counteract misguided IMF policy artificially inflating interest rates). Evidence suggests that even if firms' average cash flows improve, if credit markets are weak the adverse effects on losers can more than offset gains leading to overall losses. Technical assistance is currently inadequate and must be expanded and improved. Programmes must support countries in developing their own policies, unfettered by IMF conditionality, and new tax structures that undermine long-term growth based on an inadequate understanding of developing economies should not be pushed on governments. Assistance for LDCs must also help them to capture new (and existing) opportunities for export, by addressing supply constraints (often linked to capital markets and infrastructure) and product standards through participation in standard-setting and assistance for national programmes to measure and improve conformance.

Appendices

Two appendices contain empirical reviews of market access and Singapore issues.

1) FDI made up less than 5 per cent of GDP between 1987–92.
2) FDI was over 30 per cent in these countries by 1992.
3) p17
4) Historically, some economies granted patents on IP that had previously been invented and patented abroad, which would appear to be necessary in most cases. However, the authors do not discuss the compatibility of such legislation with TRIPS.
5) p36.
6) But are, of course, able to implement highly complex VAT-based taxation schemes and even more complex IP regimes.
7) p51.
8) p61.
9) p75
10) p80.
11) The UN classification recognised by the WTO: 32 of the 50 LDCs are WTO-members; eight more are in accession.
12) p93.
13) ie zero tariffs on all goods.
14) Actually, this “solves” the problem by completing all preference erosion “immediately”, which is what the poorest countries with the best market access oppose. For instance, an LDC exporting certain types of fish to the EU currently pays no duty, whilst competing developing countries must pay around 24 per cent. Under this scheme both would pay zero duty, so the LDC must “instantly” become 24 per cent more efficient in order to continue to compete with exporters in more advanced, and larger, economies. This development is opposed by LDCs, and is the main reason that many LDCs stand to be net losers from the completion of Doha, even though they are not being asked to make any further commitments. (In practice the transition would not be instant as the pace of adjustment would be negotiated.
15) p101.
16) pp118–9
17) p126.
18) p128.
19) p130.
20) p144.
21) p159.
22) p163.
23) p165.
24) Finger (2000) points out that the implementation of regulatory agreements will often draw money from the development budgets of poor countries. For this reason such agreements should be analysed in terms of their rate of return and compared to the alternative development priorities on which the same money could be spent. Finger estimated the implementation of three of the Uruguay Round's six agreements that required regulatory change… His analysis suggests that the average cost of restructuring domestic regulations in the twelve developing countries considered could be as much as $150 million. In eight of these countries this figure is larger than the entire annual development budget. —p192
25) p176.
26) ”[A]s Newbery and Stiglitz (1982) showed, trade liberalisation may make everyone worse off when risk markets are limited.” —p195
fair_trade_for_all.1275052828.txt.gz · Last modified: 2010/05/28 12:00 (external edit)