Fair Trade for All: How Trade Can Promote Development May 2006

1. Fair Trade for All:How Trade Can Promote DevelopmentMay 2006 Joseph E. Stiglitz

2. Outline • The need for a development round • Trade liberalization has not lived up to its promise • The failures in practice • Theory • The Development Round is not a True Development Round • The Dangers of a “false” development Round • The Dangers of a failed development round • The growth of bilateral and regional trade agreements

3. Outline (II) • Overview of major results of Fair Trade for All • Road to the Hong Kong WTO meeting: • Development’ Round: Is it only rhetoric? • Principles of a Development Round • 11 Priorities of a Development Round • Adjustment costs • Adjustment assistance • Conclusion

4. The need for a development round (I) Past rounds have been unfair • The Uruguay Round agenda focussed on the interests of rich countries; it included • Services - but not unskilled labor intensive services; • Subsidies - but not agricultural subsidies; • Intellectual property rights; • Most of its projected benefits accrued to the rich countries • 70% of gains to developed countries • The 48 Least Developed Countries were actually left worse off

5. The need for a development round (II) The trading system is unbalanced • The system is stacked against poor countries • The average OECD tariff on goods from poor countries is 4 times higher than on goods from other OECD countries • Rich countries cost poor countries three times more in trade restrictions than their total development assistance to them. • There has been little progress on agricultural issues • OECD countries continue to subsidise agriculture by 48% of total farm production, just 3% lower than 1986; and maintain high tariffs • Intellectual property rights disadvantage poor countries • Exacerbate north-south knowledge gap; and restrict technology transfer • Do not protect indigenous knowledge

6. Trade liberalization has not … … produced the expected benefits in practice, even when specifically directed at helping developing countries • EU’s Everything But Arms (EBA) initiative • Did not lead to significant increases in exports from poor countries, partly because of low export capacity/weak infrastructure and complex rules of origin • US AGOA initiative • Only benefitted a few countries and those will diminish after restrictions (e.g. use of US cotton) come into force

7. Explaining the Failures • Trade liberalization has not been asymmetric • But even theory is qualified in its support of trade liberalization • With imperfect risk markets, trade liberalization may be Pareto Inferior (Newbery-Stiglitz, 1982) • With growth, argument for trade liberalization even weaker • Most of growth is related to technological progress (Solow, 1957) • Market failures are pervasive (Arrow, Stiglitz) • Historically, most successful countries developed behind some protectionist barriers

8. The Infant Economy Argument for Protection • Often trade-offs between static and dynamic efficiency (patent system) • Model postulates • (uncompensated) spillovers from industrial sector to agricultural sector within a country • both in technology and in institutional development • Innovations concentrated in industrial sector • Among the important determinants of pace of innovation in industrial sector is its size

9. Two sector two country model; large efficient developed country; small developing country with comparative advantage in agriculture • Without protection, it specializes in agriculture, remains stagnant, falling increasing behind developed country • Protection results in short run losses, but long run gains • Model robust • Results strengthened if there are interindustry cross border technology flows in the industrial sector

10. Argues for broad based protection • Generates revenue to finance education, research • Avoids special interest protectionism • Consistent with south-south regional trade agreements From Bruce Greenwald and Joseph E. Stiglitz, “Helping Infant Economies Grow: The Foundations of Trade Policies for Developing Countries” American Economic Review, May, 2006 (forthcoming)

11. Development Round as it has evolved is not true development round • Central message of our book Fair Trade for All How Trade Can Promote Development • Lays out a comprehensive agenda of trade liberalization that would promote development • That agenda is very different from that set out in Doha • And even more different from what has evolved since • With the current agenda, the Development Round does not deserve that name • Hong Kong avoided a disaster—but only by lowering expectations • And even then exposed the advanced industrial countries to charges of hypocrisy • And of reneging on the promises of Doha • But showed new and diverging interests of developing countries

12. The Dangers • An agreement that would make many developing countries worse off • An agreement that would be treated as a true development round, so that efforts at redressing imbalances of past would be diminished • The U.S. bilateral strategy—moving away from multilateralism and the multilateral trade system

13. The dangers of bilateral and regional trade agreements • Not just undermining multilateral system • And making progress towards a more liberal global trade regime more difficult • But a move towards a trade regime which is even more unfair to developing countries • And which undermines principles of the market economy

14. Bilateral trade agreements have been based on a dream • That signing an agreement with the U.S.—a “good housekeeping” seal of approval—would bring untold investment and growth • But the reality has been far different

15. NAFTA—if there was ever an agreement that should have worked --it was NAFTA, with Mexico so close to huge U.S. market • NAFTA ten years later … • Mexico has lower growth than ten years before • High inequality, low innovation, low wages growth and some of the poorest worse off as a consequence of US agricultural subsidies • Shows at the very least dream has not been realized

16. Problems • NAFTA was not really a free and fair trade agreement • With massive US agricultural subsidies • With retention of non-tariff barriers • Which were used when Mexico made inroads into America’s market • NAFTA intruded into basic areas of national sovereignty • Chapter 11 made environmental regulations more difficult • Not really intended for basic investor protection • Trade is important, but trade isn’t everything • Trade liberalization is important, but it isn’t everything • Difficulties in competing with China • Making Mexico more dependent on US • Significant loss of revenue from loss of tariffs • Revenue needed for public investments in infrastructure and education • Major impediment to economic success

17. Bilateral trade agreements likely to be more unfair… • Need for TRIPs minus, instead TRIPs plus • Morocco • Going into areas which should not be on agenda and may make development more difficult • CML (Chile: ironic, especially given role it played in protecting Chile from global financial crisis) • Bubble gum (Singapore) • Environmental regulations (Chapter 11)

18. Bilateral agreements bad for global efficiency • Principle of single price at core of efficiency of market economy • Underlays MFN principle (most favored nation) • Which underlay global trade system for past fifty years • Bilateral agreements undermine this

19. Bilateral agreements undermine global efficiency • Much of gain based on trade diversion, rather than trade creation • Should be enforcement of WTO regulations, assessing overall impact • And in long run may increase costs of adjustment • Especially important for developing countries • Movement into advantaged area, only to lead to a movement out, when advantage is eliminated

20. Bilateral agreements make progress towards global trading system more difficult • In spite of fact that they are sometimes sold to the contrary • Those with preferences will see any multilateral agreement as hurting them • Putting up obstacles for global liberalization

21. Perhaps worst danger… • Spaghetti bowl of agreements will undermine market economy • With complicated rules of origin • Undermining normal basis of competition, the price system • Huge costs of administration • And subject to administrative abuse

22. And undermining basic objective of development round • Development is a global concern • Global commitment to meeting Millennium Development Goals • Trade is a major instrument • Enhancing opportunity • “Hand up” rather than hand out • Aid and Trade complements

23. NOT ALL BILATERALI AND REGIONAL TRADE AGREEMENTS ARE EQUALLY BAD • Agreements among developing countries are more likely to be fair—agreements among equals • Meaning developing countries are more likely to gain • Even though “economics” of such agreements might suggest that the potential scope for gains is smaller

24. In Fair Trade for All • We explain how trade can promote development • And that would be fair for all • We explain what a true development round would look like • And the assistance that is necessary to enable developing countries to take advantage of the opportunities that are opened up.

25. Road to the Hong Kong WTO meeting: • Clinton attempts to launch ‘Millennium Round’, but the meeting fails amid street riots • Launches the ‘Development Round’ with the goal of completion in Jan 05 • Supposed to ‘evaluate progress’ but no progress was made in key areas, so the developing countries walked out • Attempt to put the round back on track by reducing the ambition of the agreements • Seattle ’99 • Doha ’01 • Cancun ’03 • July mini ‘04

26. ‘Development’ Round: Is it only rhetoric? • The Doha declaration made bold but vague promises to developing countries • But did the agenda reflect the real concerns and interests of developing countries? • Or was the agenda hijacked, with the proposed agreements actually making the developing countries worse off • What would a development agenda really look like? • Conclusion: The agenda as it evolved was not pro-development

27. ‘Development’ Round: Is it only rhetoric? • The agenda of the ‘Development Round’ as it evolved did little for the developing countries • It did little to address concerns in agriculture • It did little to address problems posed by non-tariff barriers • It went only a little way in addressing concerns about intellectual property • It did little to advance a developing country service sector agenda • There were no reforms in basic procedures • The proposed agenda’s new issues were not those of central concern to the developing world • Procurement—developing countries unlikely to be successful in procurement (e.g. defense) in advanced industrial countries, but • US wanted capital market liberalization • Competition policy which restricted development and socially oriented preferences

28. Principles of a Development Round • A trade agreement should be assessed in terms of its impact on development • An agreement should be fair - it should have fair outcomes

29. Principles of a Development Round • An agreement should be fairly arrived at • Current procedures put developing countries at a disadvantage • Developed countries have resisted more fundamental reforms • Increase openness and transparency of negotiations • Symmetric enforcement system

30. Principles of a Development Round 4. It should be limited in scope • Expansive negotiations put developing countries at a disadvantage • Principle of conservatism. Only issues that 1) are relevant to trade flows, 2) are development-friendly, 3) involve a rationale for collective action • Since decision process not democratic, and there is some loss of sovereignty, there should be positive benefits for developing countries: should focus on areas that are of essential concern e.g. where cooperative action is necessary

31. 11 Priorities of a Development Round 1. Liberalization and protection of labor flows and labor intensive services • More important for global efficiency than capital market liberalization • Without imposition of adverse risk effects • Improves living standards through remittances • $32 Billion in remittances in 2002 in Caribbean and Latin America far greater than total ODI and only slightly less than FDI

32. 11 Priorities of a Development Round • 2. Liberalization of agricultural market, • - especially of those goods for which there will be limited adverse consumption effects • 3. Liberalization of industrial goods • - elimination of tariff peaks, and tariff escalation

33. 11 Priorities of a Development Round 4. National treatment of anti-competitive practices • Eliminating discriminatory treatment against foreign producers through dumping duties • Single regime for anti-competitive practices for both foreign and domestic firms 5. Explicit recognition of rights to use industrial and other development policies • Including government’s right to provide to capital at “reasonable” interest rates • Including use of “CRA” requirements to ensure access to finance

34. 11 Priorities of a Development Round 6. Restrictions on tax competition to attract investments 7. TRIPS minus—rebalance intellectual property rights • Foster the transfer and dissemination of technology • Protection of traditional knowledge

35. 11 Priorities of a Development Round 8. Fairer mechanism for enforcement • Threat of small, LDCs imposing trade sanctions against US not very effective • Trade losses compensated with financial payments or from international auction of retaliatory rights 9. Expanding agenda to concerns of developing countries: Anti-corruption policies and arms sales restrictions • International non-bribery legislation 10. Extend “unilateral disarmament” • i.e. Everything But Arms agreement, but make it meaningful — rules of origin—and broader

36. 11 Priorities of a Development Round 11. Institutional reforms • More transparency in negotiating process • Principle of representativeness • Independent office for the assessment of the impact of proposed trade provisions on development and developing countries • and assessment of ‘trade diversion’ vs. ‘trade creation’ affects of bilateral and regional agreements

37. Adjustment costs • Much larger for many developing countries than for advanced industrial countries • Developing countries are vulnerable to policy shocks because their export industries are least diversified • Developing countries need to make the largest changes to comply with regulations • The trade structure is most distorted in the industries of importance for developing countries

38. Adjustment costs • Loss of preferences: • Small countries with less diversified industries may face large adjustment costs • Tariff reduction has serious fiscal consequences for many developing countries • Developing countries face high implementation costs: taking away resources needed elsewhere

39. Adjustment assistance • Adjustment costs impact on the poorest people and divert resources from other development priorities • Provision of compensation wins political support for reform • Technical assistance is needed to improve trade performance through policy and institutional strengthening • Technical assistance commitments were non-binding for developed countries • And many countries did not live up to the commitments

40. Conclusion • The round of trade negotiations that began in Doha does not deserve epithet of a “Development Round” • In present set-up, for developing countries, no agreement may be better than a bad agreement • International community should resolve to have a true development round • International community needs to provide the assistance both to help developing countries to adjust and to take advantage of new opportunities

41. Conclusion • International community should reform procedures of negotiations • Such reforms are likely to lead to a reform in outcomes—to outcomes that are fairer to developing countries and more likely to promote rather than hinder their development

42. New book: Fair Trade For All FAIR TRADE FOR ALL: How Trade Can Promote Development 8th December 2005 Oxford University Press