Two Principles for the Next Round or, How to Bring Developing Countries in from the Cold

1. Two Principles for the Next Roundor, How to Bring Developing Countries in from the Cold Joseph E. Stiglitz World Bank April 1999

2. Preface: Political barriers to liberalization • Free trade benefits society as a whole, but liberalization is difficult; why? • Two important groups lose out: • Import-competing firms • Workers who • Would lose rents • Have industry-specific human capital • Would be displaced • Are unskilled

3. Addressing the political barriers: Benefits of trade • Usual strategy: Create a constituency for free trade through reciprocity • Export industries become advocates • Must be careful about political rhetoric: • Intellectual incoherence about trade and jobs • Fallacy about the balance of payments • Better approach: focus on actual gains from trade • Result: can negotiate toward the right goals

4. Addressing the political barriers: Costs of trade • Recognize costs and attempt to deal with them: • There are adjustment costs borne by losers • Greater openness can mean greater vulnerability to shocks • For these reasons, even advanced countries have “surge laws”, AD duties, CVDs • These are often abused; trade adjustment assistance is probably preferable • On balance, benefits of trade outweigh costs for society as a whole

5. Trade liberalization: A developing-country perspective • Openness to trade and FDI is even more important for developing countries • Inefficiencies in autarky are much greater for developing countries • Protectionism impedes development transformation • Therefore it is crucial to make the case for liberalization, countering demagogues

6. How developed-country rhetoric and actions impede liberalization • Historical context: Past unfair treaties, colonial history doubts about intentions • Protectionist and mercantilist actions by developed countries reinforce these fears: • Anti-dumping used as protectionist tool • Asian crisis seen as pretext for forcing market-opening • Developed countries’ unwillingness to use or abide by WTO dispute-settlement mechanism

7. Developed-country protectionism: A personal view • US trade policymakers spend so much time dealing with egregious cases of special interests • This has been true even in 1990s, as the economy boomed • Concern: possible surge of protectionism when unemployment next increases • Danger: return to situation of early 1980s

8. Two principles for the next Round • Fairness • Especially fairness to developing countries • But increasing fairness requires next principle • Comprehensiveness • Include negotiations on sectors, instruments and factors that are important to developing countries • Need to improve on Uruguay Round, which • had negative effects on Africa • left high tariffs in agriculture

9. Comprehensiveness across sectors • Sectoral comprehensiveness increases the chances for success: • Creates constituencies of “gainers” in developing countries who will push for broad liberalization • Sector-by-sector negotiating approach is cause for concern • Breaks up constituencies for reforms • Chooses sectors on political, not economic, grounds

10. Comprehensiveness across instruments • Protectionism that is deflected in one area finds an outlet elsewhere • New forms of NTBs constantly arise: • Example 1: Anti-dumping • Wealthy-country AD use finally fell after 1993 • But by now, developing countries are imitating developed-country use of AD • Developed countries need to take lead in renouncing or circumscribing use of AD

11. Comprehensiveness across instruments • Example 2: Contervailing duties • Case for CVDs against firms in transition economies lacks economic logic • In this case, CVDs are often simply NTBs • Example 3: Campaigns that align protectionist interests with other groups: • Restrictions on genetically engineered plants • Environmental and labor standards for trade (better to use treaties, other instruments first)

12. Comprehensiveness: Trade facilitation • Beyond removing NTBs, trade negotiations need to include trade facilitation: • Promote competition, both within developing countries and in international markets • Improve customs clearing

13. Comprehensiveness across factors • Next Round should be more comprehensive in its coverage of factor movements too • Past Rounds have focused on movement of goods, services, and capital • This Round should move toward allowing greater movement of labor • Corollary to liberalization of services • Greater labor movement would benefit developing countries

14. Fairness • Focus so far has been on comprehensiveness as way to increase perceived fairness • But there are other aspects of fairness: • Credit for unilateral liberalization by developing countries • Sensitivity to special needs of developing countries: • transition costs • human needs • support for long-term development

15. Concluding remarks • Comprehensiveness will increase fairness • Incorporating both principles will: • Increase developing-country buy-in to trade negotiations • And, by lessening perceptions of hypocrisy, increase support for market-oriented reforms • Stakes are high: developing countries must seize the opportunities offered by liberalization