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

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Fair Trade for All How Trade Can Promote
Development May 2006
Joseph E. Stiglitz
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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

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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

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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

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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

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Trade liberalization has not

• produced the expected benefits in practice,
  even when specifically directed at helping
  developing countries
• EUs 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

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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

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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

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• 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

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• 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)
  

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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 disasterbut 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

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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 strategymoving away from
  multilateralism and the multilateral trade system

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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

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Bilateral trade agreements have been based on a
dream

• That signing an agreement with the U.S.a good
  housekeeping seal of approvalwould bring untold
  investment and growth
• But the reality has been far different

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NAFTAif 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

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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
  Americas 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 isnt everything
• Trade liberalization is important, but it isnt
  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

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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)

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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

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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

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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

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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

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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

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NOT ALL BILATERALI AND REGIONAL TRADE AGREEMENTS
ARE EQUALLY BAD

• Agreements among developing countries are more
  likely to be fairagreements 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

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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.

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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

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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

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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 agendas new issues were not those
  of central concern to the developing world
• Procurementdeveloping 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

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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

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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

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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

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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

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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
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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 governments right to provide to
  capital at reasonable interest rates
• Including use of CRA requirements to ensure
  access to finance

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11 Priorities of a Development Round

• 6. Restrictions on tax competition to attract
  investments
• 7. TRIPS minusrebalance intellectual property
  rights
• Foster the transfer and dissemination of
  technology
• Protection of traditional knowledge

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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 originand broader

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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

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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

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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

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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

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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

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Conclusion

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

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