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Fair Trade for All: How Trade Can Promote Development

BeijingMarch 2008

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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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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• Past rounds have been unfair– Underlying it was a grand bargain

• Developed countries wanted IP, services– Especially important with declining role of manufacturing– But from beginning, thought about issue from their perspective

» Services are, in general, labor intensive

• Developing countries wanted textiles, agriculture• Developed countries got what they wanted• Developing countries got almost nothing in agriculture

– Promised further action– In fact, U.S. raised subsidies

• Developing countries were asked to wait ten years on textiles– After which the developed countries said they were still unpreparedf

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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

• 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 benefited a few countries and those will diminish after

restrictions (e.g. use of US cotton) come into force

Developing country share of global trade shrinking

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Trade Frameworks: Old and New

• Old framework:– Trade liberalization led to more trade

– More trade led to more growth• Trade liberalization necessary and almost sufficient for growth and

development

– Growth led everyone to be better off• Provided resources to fight poverty

• Trickle down economics

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New Trade Framework (I)

• Trade liberalization often does not lead to increased trade– Experiences with EBA– Share of least developed countries in global

trade declining

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• Trade liberalization may not lead to increased growth and well-being– Growth related to technological progress (Solow, 1957)

• Even more important for developing countries—closing knowledge gap

• Central question is how does liberalization affect diffusion of knowledge

• Trade liberalization may have adverse effects • Analogous to patents: short run distortion for long term

growth• Historically, most successful countries developed behind some

protectionist barriers

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The Infant Economy Argument for Protection

• 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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Other reasons that trade liberalization may not lead to increased welfare

• High adjustment costs– Some of which are not just temporary (increased exposure to risk, lower

tariff revenues) • With imperfect risk markets, trade liberalization may be Pareto Inferior

(Newbery-Stiglitz, 1982)• 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, so reform will impact on them disproportionately– Developing countries have weaker markets and suffer from greater

imperfections– Developing countries have weaker social safety net

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1. Fiscal losses– Trade liberalisation reduces tariff revenue– Tariff revenue is around 1% of government budgets in rich

countries, and around 30% in LDCs– Shifting to VATs will have adjustment costs

• And may be administratively inefficient• May increase economic distortions• And have regressive distributional impacts

2. Net Food Importing Countries– Will suffer as the world price of food rises following the

elimination of export subsidies– Urban poor people (net consumers of food) will be the hardest

affected

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3. Preference Erosion– Net losses from MFN liberalisation for preference recipients

depend on the difference between lost trade diversion, and gained trade creation as global tariffs come down

– Will severely affect a small number of industries in a small number of products

4. Implementation Costs– For poor countries, trade liberalisation involves large costs which

should be weighed among other development expenditure priorities--taking away resources needed elsewhere

– The Uruguay Round imposed large implementation costs on developing countries

– New trade facilitation regimes will be expensive

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Absence of relationship between trade and growth

– Consistent with empirical study focusing on relationship of trade liberalization (not trade) on growth

• Most often cited studies flawed, problems of causality, focus on wrong question

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Distributive Consequences

• Trade liberalization may lead to increased inequality– Distributive effects are inherent (Samuelson-Stolper)– Adverse effects even in developing countries

• Especially with asymmetric trade liberalizatoin

– Standard analysis only said that with trade liberalization, gainers could offset losses of losers, not that they would

– In fact, globalization has resulted in pressures to weaken safety nets, compounding problems

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Case Study: NAFTA

• 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

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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 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

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Explaining the Failures

• While economic theory has more nuanced message about benefits of trade liberalization

• We have not really tried true liberalization

• Trade liberalization has not been asymmetric

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Explaining Failures (ii)

• Internal barriers to trade more important for developing countries– Market access affected by trade infrastructure

• Supply constraints- Any agenda promoting trade for developing

countries must address these problems• Necessary if developing countries are to be

able to take advantage of new opportunities– Trade can be important component of

development strategy– Needs to be complemented by aid (aid-for-trade)

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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 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

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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 strategy—moving 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

– 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

• But a move towards a trade regime which is even more unfair to developing countries– 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 undermine principles of the market economy

• 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

• Rules of origin added costly new complexity to global trading system

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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 approval—would bring untold investment and growth

• But the reality has been far different

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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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Road to the Hong Kong WTO meeting:

• Seattle ’99

• Doha ’01

• Cancun ’03

• July mini ‘04

• 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

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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 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

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Trade can promote development..

• We argue that there is a rich agenda of trade reform, going well beyond agriculture

• If developed countries are serious about helping developed countries through aid

• They should be even more serious about helping them through trade– A hand up rather than a hand-out– It costs developed countries nothing– But aid will be needed to complement new

opportunities

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Principles of a Development Round

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

2. An agreement should be fair

- it should have fair outcomes

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3. 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

Principles of a Development Round

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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 government’s 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 minus—rebalance 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 origin—and 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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• 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

Conclusion

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• 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

• A true development round would lead to an increase in global economic efficiency and greater global equality

• And is necessary for Making Globalization Work (forthcoming book, Fall, 2006)—to make globalization live up to its potential.

Conclusion

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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