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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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The need for a development round
(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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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 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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Development Round: Is it only rhetoric?
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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Development Round: Is it only rhetoric?
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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Principles of a Development Round
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
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 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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11 Priorities of a Development Round
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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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-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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11 Priorities of a Development Round
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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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 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 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 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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