Fair Trade Nafta

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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 ofFair 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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(I) Past rounds have been unfair

The Uruguay Round agenda focussed on the interests ofrich 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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(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 inpractice, even when specificallydirected at helping developingcountries

EUs Everything But Arms (EBA) initiative Did not lead to significant increases in exports from poor

countries, partly because of low export capacity/weakinfrastructure 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 tradeliberalization With imperfect risk markets, trade liberalization may be

Pareto Inferior (Newbery-Stiglitz, 1982)

With growth, argument for trade liberalization evenweaker

Most of growth is related to technological progress (Solow,

1957) Market failures are pervasive (Arrow, Stiglitz)

Historically, most successful countries developed behind someprotectionist barriers


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The Infant Economy Argument for

Protection

Often trade-offs between static and dynamicefficiency (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 ofinnovation in industrial sector is its size


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Two sector two country model; large efficientdeveloped country; small developing country withcomparative advantage in agriculture

Without protection, it specializes in agriculture,remains stagnant, falling increasing behinddeveloped country

Protection results in short run losses, but long run

gains Model robust

Results strengthened if there are interindustry crossborder 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 tradeagreements

From Bruce Greenwald and Joseph E. Stiglitz,Helping Infant Economies Grow: TheFoundations of Trade Policies for DevelopingCountriesAmerican Economic Review, May,2006 (forthcoming)


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Development Round as it has evolved

is not true development round

Central message of our bookFair Trade for All HowTrade 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 truedevelopment 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 approval

would 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 tohuge U.S. market

NAFTA ten years later Mexico has lower growth than ten years before

High inequality, low innovation, low wagesgrowth and some of the poorest worse off as a

consequence of US agricultural subsidies

Shows at the very least dream has not beenrealized


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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

Bil l d lik l


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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 agendaand 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 favorednation)

Which underlay global trade system for past

fifty years

Bilateral agreements undermine this

Bil l d i


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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, assessingoverall impact

And in long run may increase costs of adjustment

Especially important for developing countries

Movement into advantaged area, only to lead to amovement 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 anymultilateral 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 administrationAnd subject to administrative abuse

A d d i i b i bj ti f


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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 outAid 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 equalsMeaning developing countries are more likely

to gain

Even though economics of such agreementsmight 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 wouldlook 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:

Seattle 99

Doha 01

Cancun 03

July mini 04

Clinton attempts to launchMillennium Round, but the meeting

fails amid street riots

Launches the Development Roundwith the goal of completion in Jan 05

Supposed to evaluate progress but

no progress was made in key areas,so the developing countries walkedout

Attempt to put the round back ontrack by reducing the ambition of theagreements


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The Doha declaration made bold but vague promises todeveloping 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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The agenda of the Development Round as it evolved didlittle 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 inprocurement (e.g. defense) in advanced industrial countries, but

US wanted capital market liberalization

Competition policy which restricted development and socially orientedpreferences


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1. A trade agreement should be assessed interms 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 morefundamental reforms

Increase openness and transparency ofnegotiations

Symmetric enforcement system



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4. It should be limited in scope

Expansive negotiations put developing countries ata disadvantage

Principle of conservatism. Only issues that 1) arerelevant 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 bepositive benefits for developing countries: shouldfocus on areas that are of essential concern e.g.where cooperative action is necessary


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1. Liberalization and protection of labor flows andlabor intensive services

More important for global efficiency than capitalmarket liberalization

Without imposition of adverse risk effects

Improves living standards through remittances

$32 Billion in remittances in 2002 in Caribbean andLatin America far greater than total ODI and onlyslightly less than FDI


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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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4. National treatment of anti-competitivepractices

Eliminating discriminatory treatment against foreignproducers through dumping duties

Single regime for anti-competitive practices for bothforeign and domestic firms

5. Explicit recognition of rights to use industrialand other development policies

Including governments right to provide to capital atreasonable interest rates

Including use of CRA requirements to ensure accessto finance


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6. Restrictions on tax competition toattract investments

7. TRIPS minusrebalance intellectualproperty rights

Foster the transfer and dissemination of

technology Protection of traditional knowledge


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8. Fairer mechanism for enforcement Threat of small, LDCs imposing trade sanctions against

US not very effective

Trade losses compensated with financial payments orfrom international auction of retaliatory rights

9. Expanding agenda to concerns of developingcountries: 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. Institutional reforms

More transparency in negotiating process

Principle of representativeness Independent office for the assessment of the

impact of proposed trade provisions ondevelopment and developing countries

and assessment of trade diversion vs. tradecreation affects of bilateral and regionalagreements


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Adjustment costs

Much larger for many developing countries than foradvanced industrial countries

Developing countries are vulnerable to policy shocks

because their export industries are least diversified

Developing countries need to make the largest changesto 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 facelarge adjustment costs

Tariff reduction has serious fiscal consequencesfor 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 anddivert resources from other development priorities

Provision of compensation wins political support for

reform Technical assistance is needed to improve trade

performance through policy and institutionalstrengthening Technical assistance commitments were non-binding for

developed countries And many countries did not live up to the commitments


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The round of trade negotiations that began in Dohadoes 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 adjustand to take advantage of new opportunities

Conclusion


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International community should reform procedures ofnegotiations

Such reforms are likely to lead to a reform in

outcomesto outcomes that are fairer to developingcountries and more likely to promote rather thanhinder their development

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

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