How Free Should Trade Be?

1. Linda Young POLS 400 International Political Economy Wilson Hall – Room 1122 How Free Should Trade Be? Fall 2005

2. Tension Between the gains from trade and other national objectives A trade-off or an imperative? Case studies: • trade in genetically modified organisms (GMOs) • agricultural tariffs and subsidies • government procurement • right of establishment

3. Sanitary and Phytosanitary Agreement of the GATT Import regulations based on science, use risk assessment Based on international regulations – not likely to be successfully challenged Higher standards if consistent Restrictions: least trade-restricting as possible

4. GMOs Trade rules and restrictions based on based on the characteristics of the good in question, not the characteristics of the production process GMOs have same characteristics in the product –indistinguishable, but a different production process

5. European Union • De facto moratorium on imports of GMOs • ended recently with some approvals • approved canned sweet corn – first GMO approved in 5 years, ‘The maize imports, authorised for a period of 10 years "have been subjected to the most rigorous pre-marketing assessment in the world," according to EU Health and Consumer Protection Commissioner David Byrne.’ • October 2004 – EC approved Monsanto’s Round Up Ready maize for human consumption • Strict process for approval • Huge controversy with consumers, activists, environmentalists

6. US Concerns • Lost export market for corn • most US corn consumed domestically • Estimate for corn – around 600-700 million bushels of corn sales lost between 1994-2003, at $2.50-3.50/bushel • Concern over labeling – should the WTO uphold requirements that all products with more than .9 of 1% of GMO material be labeled as such?

7. The Question Given uncertainty, should the WTO have allowed the EU to have a moratorium on imports of GMOs? Should the EU be forced to modify its regulatory process?

8. Subsidization of Agriculture The US, EU and Japan all subsidize agricultural production – at high levels Movement to de-coupled support, but still high levels of production-inducing support Cotton case as an example Should developing countries open their borders more?

9. OECD Producer Subsidy Equivalents (PSEs)by Country 73% 69% 48% 45% 42% 42% 35% 30% 20% 16% 10% 9% 1986-88 1997 Additional Information

10. Outcomes of the Uruguay Round Agreementon Agriculture (URAA) Least-developed countries do not have to make commitments to reduce tariffs or subsidies. The base level for tariff cuts was the bound rate before January 1, 1995; or, for unbound tariffs, the actual rate charged in September 1986 when the Uruguay Round began. The other figures were targets used to calculate countries’ legally-binding “schedules” of commitments. Source

11. Total Domestic Support Note: Data relate to 1998-00 for Canada and Korea, 1999-01 for the EU, Norway and the United States, and 2000-02 for Japan. National currency values converted to U.S. dollars at the average exchange rate applicable to the base period for each country. Source: David Blandford, “Disciplines on Domestic Support in the Doha Round,” Trade Policy Issues Paper 1, The International Agricultural Trade Research Consortium and International Food and Agricultural Trade Policy Council, July 2005, p. 14.

12. WTO Export Subsidy Notifications (Value), 1996 EU 84% South Africa – 9% Switzerland – 4% United States – 1% Rest of World – 2% Source

13. What are developing countries worried about? Small holdings Poor infrastructure Production volatility Food security Barriers to their exports Cheap, subsidized “dumped” imports

14. Jamaica Case Study of Jamaica Oxfam claims that trade liberalization in Jamaica (1990) resulted in imports of subsidized EU milk powder Imports grew from 2000 tons/year 1990-1993 to 4,000 in 1995-1998 • EU exporters received four million euros per year in subsidies Jamaica: substitution of skim milk powder for fresh in dairy industry • Devastating local business, many women-owned businesses

15. Jamaica: Milk Production, Imports and Consumption (1985-2003) Source:FAOSTAT. Taken from Mario Jales, “Tariff Reduction, Special Products and Special Safe Guards: An Analysis of the Agricultural Tariff Structures of G-33 Countries,” ICTSD, Geneva, Switzerland, June 2005, p. 26.

16. What Happened? Liberalization: 1990s as part of structural adjustment • 1992 Jamaican Commodity Trading Corporation lost import monopoly • Import tariffs reduced • Subsidies for local producers abolished Imports actually fell Per capital consumption fell 41% • 86.8 kg/inhab/year 1986-1990 to 48.6 kg/inhab/year Imports per capita fell by more than consumption Other factors to blame

17. Jamaica: Chicken Meat Production, Imports and Consumption (1985-2003) Source:FAOSTAT. Taken from Mario Jales, “Tariff Reduction, Special Products and Special Safe Guards: An Analysis of the Agricultural Tariff Structures of G-33 Countries,” ICTSD, Geneva, Switzerland, June 2005, p. 27.

18. Jamaican Jerk Chicken

19. Jamaica: Vegetable Oil Production, Imports and Consumption (1985-2002) Source:FAOSTAT. Taken from Mario Jales, “Tariff Reduction, Special Products and Special Safe Guards: An Analysis of the Agricultural Tariff Structures of G-33 Countries,” ICTSD, Geneva, Switzerland, June 2005, p. 28.

20. Imports Did Replace Jamaican Production • Vegetable oil, onions, potatoes • Many causes at work: high interest rates on farm loans, less investment in farms, adverse weather, no credit to enable planting • Should developing countries be able to keep high tariffs as long as developed countries have trade-distorting domestic support?

21. Government Procurement • Accounts for 20% GDP • OECD estimates 4,733 billion US$ • Close to 80% of 1989 goods and services trade • All levels of government are large purchasers • Subtract defense then smaller 8-12% GDP

22. Government Goals • Value for money: promoted by open and transparent systems • Desire to keep government dollars in the economy • price preferences • whole or partial import bans • selective tendering favoring foreign suppliers • technical specifications biased to domestic producers

23. Buy America Act Passed in 1933 – preference for American goods over foreign President has authority to waive – reciprocal agreements US provides access to other countries in specific agreements, but not generally

24. Social Policy Discrimination in favor of regions or groups • Quota for suppliers with particular qualifications • Firms hired to provide services may have to hire an “equal opportunity officer”

25. Treatment in GATT/WTO • Discussed since 1947 – excluded government procurement from national treatment • Tokyo Round in 1981 – 26 members included agreement on government procurement for contracts over SDR 130,000 for central government entities – not inc. defense • URA in 1996 – plurilateral agreement – European Commission and 12 other countries • Non-discrimination: must give foreign suppliers treat no less favorable than to own suppliers • Must not treat local supplier less favorably due to a foreign affiliation and ownership

26. URA Agreement (con’t) • US kept small business program as exception • Canada excluded procurement by provincial and local government • Positive lists – only what's on the list is covered (different than exceptions)

27. What’s more important? Domestic policies – transparency, no corruption, competition or Trade liberalization ?

28. Your opinions: What would it be like to have government goods procured by imports? School lunches from Canada, state highway patrol cars from Japan, and etc?

29. Foreign Direct Investment (FDI): The Right of Establishment OECD negotiations 1995 – failed in 1998 • OECD like minded countries, not WTO • Developing countries could have signed Multilateral Agreement on Investment • We discuss foreign direct investment only • Pre-establishment rights, so that governments could not • Raise barriers to foreign investors seeking to establish subsidiaries • Could not discriminate once established Governments could file exceptions

30. National Treatment of FDI Draft clause in the OECD “Each contracting party shall accord to investors of another Contracting Party and to the investments, treatment no less favorable than the treatment it accords [in like circumstances] to its own investors and their investment with respect to the establishment, acquisition, expansion, operation, operation, management, maintenance, use, enjoyment, and sale or other disposition of investments” Source: Edward M. Graham, Fighting the Wrong Enemy, Institute of International Economics, September 2000, p. 58.

31. Do we need it? FDI is growing anyway Total stock of FDI increased 6 times between 1985-1998

32. Examples of Barriers to FDI Restrictions on foreign ownership • Limiting shares of equity ownership fornon-residents • For example, airlines in EU and North America • Telecommunications in Japan • Iceland bans foreign ownership in fishing and energy sectors • Mexico (oil sector)

33. Examples of Barriers to FDI (con’t) Screening and approval procedures • Stipulations of demonstrating economic benefits • in Japan, and Mexico for ownership of more than 49% Constraints on foreign personnel and operational freedom • Nationals must be majority on board of directors • Insurance companies in EU, financial services in Canada

34. FDI Restrictions in OECD Countries, 1998-2000: Breakdown by Type of Restriction1