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AN AGENDA FOR THE DEVELOPMENT ROUND OF TRADE

NEGOTIATIONSIN THE AFTERMATH OF CANCUN

April 2004

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Background

Past rounds of trade talks were inherently unfair for the developing countries, both in terms of the ways trade negotiations were conducted and the outcome of the talks – they benefited only the advanced industrial countries at the expense of developing countries

In Doha, WTO members agreed to initiate a new ‘Development Round’ of trade talks to redress the imbalances of the past

The failure of Cancun meeting – Many participants felt that Europe and the United States reneged on their promises made in Doha

Developing countries’ stand in Cancun – ‘No agreement is better than a bad agreement’

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In the Aftermath of Cancun, We Should Ask….

What should a ‘Development Round’ of trade negotiations look like?

What would an agreement, based on principles of economic analysis and social justice—not on economic power and not catering to special interests, look like?

What would be an agreement, that promoted economic development and be fair, look like?

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Framework of Analysis

Principles of a ‘Development Round’ of trade negotiations

Priorities in today’s context

Specific issues that are important to developing countries

Institutional reforms needed to make trade talks more transparent and democratic

Assistance from the International communities to help the developing countries implement trade agreements and the ‘final thoughts’

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Principles of a Development Round of Trade Negotiations

A trade agreement should be assessed in terms of its impact on development

An agreement should be fair

An agreement should be fairly arrived at

The Agenda should be limited to ‘trade related’ and ‘development-friendly’ issues

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An Agreement Should be Fair.. Because of inherent differences among countries, any agreement applied uniformly will still have large differential effects

Any agreement that differentially hurts developing countries or benefits the developed countries more (the net gains/losses measured as a percentage of GDP) should be viewed as ‘unfair’ – need to be careful in measuring these gains and losses

‘Initial Conditions’ vs. ‘Historical Inequities’ as basis for fairness

Fairness and efficiency – Foreign vs. Domestic producers

Other problems in interpretation of fairness –Could countries reduce inequities with reform? How do domestic policies influence the outcome of trade agreements?

If a trade agreement increases inequality within a country, the government must be encouraged to improve its ‘redistributive welfare’ system

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An Agreement Should be Fairly Arrived at..

Process involved in arriving at international agreements is markedly different from that employed in national legislation – we need a new approach

‘Procedural justice’ is important – agreements should be arrived at in ‘open’ and ‘transparent’ manner

Transparency allows more voices to be heard in the negotiation – particularly important for developing countries where certain affected groups are often under or un-represented in the negotiating table

The adjudication and settlement of trade disputes merit the same kind of transparency and protection afforded in domestic setting

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A Fair Agenda – ‘Policy Space’ and ‘Principle of Conservatism’

There has been a tendency to expand the agenda to include all manners of international problems from intellectual property rights to protection of foreign investors

The expansion of WTO ‘Policy Space’ disadvantages the developing countries – the developed countries employ the superior bargaining power and resources to ‘concurrently’ address the wide range of issues to exploit the developing countries

‘Principle of Conservatism’ need to be introduced to check the growth of the WTO mandate

Issues should be included in the Agenda on the basis of two criteria:

a. the size of their effect on trade flowsb. their development ‘friendliness’

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An Agreement Should, as Much Possible, Respect National Sovereignty

There is no need to enforce ‘conformity’ among countries except when,

a. actions of each country affect othersb. there are cross-border externalitiesc. there are benefits to standardizationd. involves global ‘public good’

Avoid trade agreements that intrude into national sovereignty (e.g. TRIP or agreement to liberalize capital markets) but do little to increase global welfare

Need ‘International Rule of Law’ to deal with trade disputes or to prevent ‘beggar thy neighbor’ type of trade policies

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Further Considerations….

The scope of the agreements should be relatively limited, on the grounds of fairness and practicality, with first priority going to areas where collective action is absolutely required – revisit TRIP, restrict investment competition etc.

The priorities for trade liberalization should reflect the development concerns of the poorer countries – revisit

a. sectoral priorities (agriculture vs. industry)b. priorities within a sector (unskilled vs. skilled)c. the use of non-tariff barriersd. the issue of subsidiese. the issue of how countries respond to crisis

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Priorities of the Developing Countries Developed and developing countries differ not only in terms of the extent of market imperfections but also in their factor endowments

Trade liberalization has asymmetric effect on (with respect to each other) developed and developing countries

Trade negotiations, during the past half century, focused primarily on manufacturing – a sector of diminishing importance to the developed countries

Developed countries are trying to gain ‘longer term advantages’ in sectors (e.g. financial services or intellectual property rights) that are important to them

‘Development Round’ of trade talks should be centered on Europe's ‘All But Arms’ initiative – should include middle-income countries and extend the initiative to eliminate agricultural subsidies

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What Would be Best for the Developing Countries and Global Efficiency? Market Access Priorities

Facilitate movement of unskilled labor and surrogate of unskilled labor i.e. trade in commodities and services that require unskilled labor

Remove tariff and quota restrictions on textiles and other manufactured exports from developing countries

Eliminate agricultural subsidies in developed countries – pending that, allow importing/developing countries to impose countervailing duties to offset the adverse effect of subsidies

Elimination of subsidies should begin with crops where consumption benefits are small relative to production cost (e.g. cotton)

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Non Tariff Barriers (NTB)

Non-tariff barriers, such as Voluntary Export Restraint (VER), have much greater adverse effect than those induced by tariff barriers

Fear of VER can adversely affect investment in a growing export sector and consequently impact development

‘Safeguard Measures’ - another non-tariff barrier have similar detrimental effect on exporting (developing) economies – the U.S. uses this regularly

‘Dumping duty’ is another form of NTB – use of ‘surrogate country’ method and reliance on ‘Best Available Information’ (BIA) often give the imposing country an arbitrarily unfair advantage in the dispute adjudication process

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Non Tariff Barriers (NTB)

The principle of ‘national treatment’ needs to be incorporated to deal with disputes related to dumping duties – legal framework should be same for foreign and domestic firms

The focus should be on ‘marginal cost’, not on ‘average cost’ to verify dumping charges – it must be ensured that ‘dumping charges’ are actually used to preserve competition, not to eliminate threat of foreign competition

There should be an International Tribunal to deal with dumping charges to ensure fairness and non-discrimination

Problems posed by non-tariff barriers (NTB), and their elimination, should be high on the agenda of any ‘Development Round’

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Intellectual Property Rights Intellectual property rights provide temporary monopoly to the inventors – it is argued, this provides greater motivation for inventive activities

There is little evidence that stronger intellectual property protection generates a greater flow of basic ideas

Knowledge is a public good – hence government has the responsibility to support it. Since knowledge is the most important input into research, higher level of ‘intellectual property protection’ may actually impede the research process

The intellectual property regime must balance concerns about incentives for research with the costs of the inefficiencies; it must balance the interests of some producers of knowledge, with the interests of other producers of knowledge, of consumers, and of the society, in general

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Intellectual Property Rights

TRIPS agreement, especially in the area of pharmaceutical research, greatly undermines efficiency and equity considerations

TRIPS should be amended to provide for licensing of life-saving drugs or drugs that control epidemics

The disparity between market price and the marginal cost of producing medicine can be viewed as tax, used to finance research. The poorest of the world are largely and unfairly bearing this tax burden

Each country should make a contribution to finance research in medicine and the level of contribution should be based on national income

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Special and Differential Treatment for Developing Countries

‘Generalized rules of differential treatment’ is preferred and beneficial for developing countries

Principle of ‘Single Undertaking’ should be upheld- allow developing countries to selectively accept provisions of a trade agreement in line with their own national development policies

Developing countries should be given:

a. longer adjustment periodb. greater latitude for providing subsidies,

especially for new technologyc. differential treatment in case developed

countries retain non-tariff barriers

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Other Issues of Importance

Fair competition – there should be an international agreement to limit competition for foreign investment. International businesses unfairly benefit from competition among developing countries trying to attract investment

Anti-corruption policy - non-bribery agreements (e.g. America’s Foreign Corrupt Practices Act) should be made part of an international agreement. There should be full disclosure of all payments by foreign companies

Anti-civil strife policy – trade agreements should aim at curbing trade in arms or in goods that facilitate and finance armed conflicts and insurgencies

Pro-environment policy – global environmental concerns must be incorporated in new trade agreements. e.g. The Shrimp-turtle case

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Other Regulatory Interventions

Developing countries fear that ‘blue tariff’ (labor standards) and ‘green tariff’ (environmental standards) will further impede their market access

Standard economic theory suggests that poorer standards do not necessarily improve country’s competitiveness – hence, trade agreements should generally ignore these issues

However, international community or trade agreements have the right to take action:

a. if country’s action affects global public good or has cross border externality (global environment – e.g. Shrimp-Turtle case)b. if it’s labor practice grossly violates human rights – e.g. prison labor or child laborc. if a country unfairly reduces the cost of production, by restricting collective bargaining or other measures

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Competition Issues

As many companies operate across national borders, competition policy in one country can affect companies in other countries

Often national ‘anti-trust’ laws are applied in a discriminatory way to hurt foreign companies

To begin with, ‘Development Round’ should aim on incorporating the principle of ‘national treatment’ in new trade agreements

National authorities also need to take into account ‘anti-competitive’ effects outside their jurisdiction

Governments and consumers in all countries should be able to take actions (including class action suits) against international cartels

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What Should Not be on the Agenda?

If improving ‘investor protection’ attract capital, then developing countries will do so on their own – there is no need for an international agreement on investor’s rights

The ‘Development Round’ should focus on the “rights of labor” than on the “rights of capital”

Free movement of capital is far less important for global efficiency than free movement of unskilled labor

Capital market liberalization should not be in the Agenda – there is little evidence that it enhances economic growth. On the contrary, there is mounting evidence that full mobility of short-term capital (hot money) actually increases economic instability, hence hinder development

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Responding to Crisis

One of the original motivation for GATT was to avert ‘beggar thy neighbor’ sort of policies in times of economic crisis

There are provisions (although never used) within WTO framework that allow countries to take ‘emergency measures’ during a crisis

Countries should be allowed to take protectionist measures if in crisis, while encouraging other countries (those not in crisis) to open up – ‘help thy neighbor’ instead of ‘beggar thy neighbor’

An international panel within the WTO should assess whether the country is in ‘crisis’ to allow it take ‘protectionist measure’

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Institutional Reforms The increase in membership and growing demand for more inclusive bargaining process have made the current structure of WTO inadequate, if not ineffective

Trade is too important to be left with trade ministers alone - negotiating team must include other national stake-holders too

The principle of ‘representativeness’ must be applied in the next round of trade talks. A couple of countries should represent the interest of a whole group (categorized by income or other criteria)

The developed countries should continue the kind of support they have provided to help the developing countries participate more effectively in negotiations

There should be an ‘Independent Trade Assessment’ body that would look objectively at the consequences of alternative trade proposals for all the countries of the world

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Practical Agenda: Final Thoughts

The ‘Development Round’ must accept that less developed countries deserve special and differential treatment, both because they have been disadvantaged in the past, and because of the differences in their current circumstances. This will entail a movement away from the principles of reciprocity and bargaining which influenced the previous rounds of trade negotiations

This will entail ‘unilateral’ concessions by the developed countries, both to redress the imbalances of the past and to promote development of the poorest countries of the world

There should be strict enforcement of restrictions on regional and bilateral trade agreements, intended to ensure that the benefits of such agreements arise mainly from ‘trade creation’ rather than ‘trade diversion’

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Practical Agenda: Final Thoughts

The ‘independent trade assessment’ body, as mentioned before, should evaluate each proposed trade agreement to assess its impact on development

The new round should prohibit the use of ‘political conditionality’ in trade agreements, other than a commitment to democratic processes

‘Development Round’ should recognize the right of developing countries to subsidize domestic firms, on a temporary basis, to promote the development of new industries

The new round should allow developing countries to control foreign banking, and in particular to impose lending requirements, particularly to encourage lending to small and medium sized enterprises (SME)

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The new round of negotiation should eliminate all tariffs on all manufactured goods from low income countries

The ‘Development Round’ should seek an agreement that there should be no restrictions on off-shore contracting of internet-based services

There will be an agreement that further negotiations for liberalization of services in skilled intensive areas will be put on hold until the imbalance of previous rounds of negotiations have been fully redressed

The new round should advance the interests of developing countries in acquiring new technology, to close the “knowledge gap,” that separates them from the more advanced countries

Practical Agenda: Final Thoughts