Friday, January 23, 2009

world trading system

the meanig of world trading system
Should not connote same participation by all nations
Should not be taken to mean just trade in goods and services; FDI and migration are important too
Should not be taken to mean that there is some overarching mechanism or group of people that control all of these commercial transactions or state-to-state interactions

Typically refers to
•the flows of goods, services, and non-financial investments across national borders; and
•The policy regimes that governs these economic activities Policymakers that care about their firms’ interests are concerned about the impact of foreign nations’ policies
NGOs care about impact of these transactions and policies on environment, labor, etc.
nIn sum: multiple actors, different motives, different laws, and various business practices

Why care about the international rules that govern trade

Absence of rules has been historically associated with economic turmoil and war
•Great Depression and World War II
Rules reduce uncertainty in planning international transactions and operations
•Imagine what would happen if any productivity increase was matched 1-for-1 by a tariff increase
Negotiations over trade policies can result in greater access to foreign markets
Rules can protect foreign investments
Rules can improve the allocation of resources

Trade rules: the legalese

Basic idea, fancy language
Two fundamental rules against discrimination of foreign firms or investors
•“National treatment” provision
•“Most favored nation” provision (“MFN”)
•codified as “bindings”
•Historically specified what governments will not do; but more recently include commitments to take action
Many exceptions: including regional trade agreements like NAFTA and sectors like agriculture

Explanations for the factual record

Principal explanations

Supply side factors
Policy changes
Interaction between these two explanations

"Death of Distance”
•Falling international transportation costs
•Ease of communication
•Recent doubts on the importance of these factors
Factor accumulation and changing production structure
Reductions in trade barriers
Relative importance: 2/3 policy; 1/3 other factors

Growth in FDI

“Death of distance”
Rise of export platforms
Rise of international outsourcing which, in turn, reflects
•Falling trade barriers
•Greater ability to enforce contracts with suppliers
•Changes in management thinking
Substantial liberalisation of inward FDI regimes
Less aversion to foreign takeovers and acquistions
Privatisation and deregulation reforms

Growth in international migration

Greater information flows and impact on aspirations
Large cohorts of younger people in the developing world
Falling cost of international travel
Increased premium on skill in industrialised world
Greater education opportunities in industrialised world
Aging populations in industrialised world


World Trade Organisation: India is one of the (out of 104) founder members of the WTO. The GATT was not an organization but it was only a legal agreement. On the other hand WTO is designed to play the role of watchdog in the spheres of trade in goods, trade in services, foreign investment, intellectual property rights

Uruguay Round: Unintended Consequences

It could perhaps be plausibly argued that in all significant government policies the unintended consequences overwhelm the original policy objectives. The Uruguay Round is a particularly striking example of this dictum.
The Uruguay Round was the eighth negotiation under the auspices of the GATT (General Agreement on Tariffs and Trade), created in 1948 as part of the post-war international economic architecture. The primary mission of GATT was to reduce or eliminate the border barriers which had been erected in the 1930s and contributed to the Great Depression and its disastrous consequences. The GATT reflected its origins in the postwar world in that it provided rules to buffer or interface between the international objective of sustained liberalization and the objectives of domestic policy, primarily full employment and the creation of the welfare state. This paradigm appeared to be based on a consensus among the major players termed “embedded liberalism.” But there was less of a consensus between the Europeans and the United States than appeared at the creation. More of that later.
Before the Uruguay Round, GATT worked very well. Tariffs and non-tariff barriers were significantly reduced and trade grew faster than output as each fed the other. From the 1960s on the rounds were essentially managed by the European Community and the U.S. (The Big Two) though smaller countries were able to play a useful mediating role. The developing countries were largely ignored as players, although that began to change in the 1970s, of which more below. Agriculture was virtually excluded from negotiations. The Common Agricultural Policy (CAP) of the European Community was enshrined in the Treaty of Rome in 1957 and regarded as the heart of European integration, an implicit contract between France and Germany. And the United States secured a GATT waiver for its agricultural support schemes. So the transatlantic alliance, sans agriculture and helped by the Cold War’s constraint on trade frictions, was the effective manager of the international trading system.
The Uruguay Round was a watershed in the evolution of the system. Agriculture was at the centre of the negotiations. The French-German “deal” (French agricultural products for German manufactured products) was increasingly tenuous. The German market was simply not big enough for the vastly expanded European production nurtured by the CAP intervention on prices and incomes and so exports became the “solution.” By 1979 the Community became a net exporter of temperate foodstuffs. But exports required subsidies because of oversupply engendered by high internal prices. And this also required considerably more import protection. And so by the 1980s the Community’s insulation from world trade ended. The honeymoon with the Americans ended as U.S. exports to the E.C. diminished and E.C. exports flourished and even penetrated the American market. Anger at the “unfair competition” of subsidized products exploded. For the U.S. government there was only one answer. The CAP had to be reformed. And only one way to do it. A multilateral trade negotiation.
That was much easier said than done. A U.S. call for negotiation started in 1981. The Uruguay Round was launched at Punta del Este in September 1986. The delay was due to the endless foot-dragging by the Community involving complex maneuvers not only in the GATT but also the OECD and Economic Summit. This foot-dragging spawned a new single-interest coalition, the Australia-led Cairns Group, which included Southern Countries from Latin America and Asia determined to ensure that liberalization of agricultural trade would not be relegated to the periphery as it always had in the past. (And this provided a glimpse of the future as we shall see below.)
But the role of a group of developing countries, tagged the G10 hardliners and led by Brazil and India, was in many ways even more important in the Uruguay Round’s transformation of the system. The G10 were bitterly opposed to the inclusion of the so-called “new issues”--trade in services, intellectual property and investment--central to the American negotiating agenda.
Although the “new issues” are not identical -- obviously negotiations on telecommunications or financial services differ from intellectual property rights -- they do have one common or generic characteristic. Thus, they involve not the border barriers of the original GATT but domestic regulatory and legal systems embedded in the institutional infrastructure of the economy. The degree of intrusiveness into domestic sovereignty bears little resemblance to the shallow integration of the GATT with its focus on border barriers and its buffers to safeguard domestic policy space. Thus, for example, the barriers to access for service providers stem from laws, administrative actions or regulations which impede cross-border trade and investment. Intellectual property negotiations covered comprehensive standards for domestic laws, private property rights of legal persons and also detailed provisions for enforcement.
The inclusion of the new issues in the Uruguay Round was an American initiative and this policy agenda was largely driven by American MNE’s (multinational enterprises) who were market leaders in the services and high tech sectors. These corporations made it clear to the government that without a fundamental rebalancing of the GATT they would not continue to support a multilateral policy but would prefer a bilateral or regional track. But they didn’t just talk the talk, they also walked the walk, organizing business coalitions in support of services and intellectual property in Europe and Japan as well as some smaller OECD countries. The activism paid off and it’s fair to say that American MNE’s played a key -- perhaps even the key -- role in establishing the new global trading system. This merits a brief digression.
While initially opposed to the inclusion of the new issues, the E.C. later came to support negotiations especially in services and trade-related intellectual property (TRIPS). This change was almost entirely due to the policy activism of the American private sector. In Europe the role of MNEs was far weaker at the level of the Commission and was largely directed to national governments. For the E.C. the most important issue was to “broker” the policy pressures emanating for member states not private interest groups. This inward-directed focus became even stronger because of the Europe 1992 project to create a single market.
In the United States the private-sector advisory process established in the 1970s for the Tokyo Round of Multilateral Trade Negotiations was designed to cope with or broker interest group pressures acting on Congress. But in the Uruguay Round its impact spread well beyond its original objective. The U.S. service sectors were world leaders and the same was true in investment and technology. American MNEs controlled 40% of the world’s stock of foreign investment at the outset of the 1980s and the American technology balance of payments was well over $6 billion while every other OECD country was in deficit. This was high-stakes poker and the MNEs launched the game. The U.S. Advisory Committee for Trade Policy and Negotiations (ACPTN), in cooperation with other U.S. business groups, undertook the task of convincing European and Japanese corporations to lobby for the new issues. In the services sector U.S. activism extended well beyond the two trading powers. Nine country service coalitions were organized and met regularly with the GATT secretariat. In the case of intellectual property the U.S. group, called the Intellectual Property Rights Committee or IPC, working through UNICE (Union of Industries of the European Community) and the Keidanren in Japan, persuaded their counterparts to table, in Geneva, a detailed trilateral proposal for an intellectual property agreement drafted by American legal experts. This bore a remarkable resemblance to what came out of the Uruguay Round. Be that as it may it’s important to note that only in these two instances, services and intellectual property, did European business play a role in the Uruguay Round negotiations. The high profile of the American MNEs, however, was to have some unintended consequences (of which more to follow).
If the word tortuous is not too strong for the launch it could also describe the negotiations. The Round almost collapsed at a mid-term Ministerial in 1988. It was supposed to be concluded by 1990 at a Ministerial in Brussels. The transatlantic divide over agriculture was at the heart of the problem. But by the onset of the 1990s the G-10 had disappeared, decimated by the debt crisis of the 1980s and chastened by the IMF and the World Bank. French opposition to any reform of the CAP was finally overcome in Washington with the so-called Blair House Accord on agriculture between the E.C. and the U.S. at the end of 1992.
The Uruguay Round was completed in the following year. What might be called a North-South Grand Bargain was completed and was quite different from old-time GATT reciprocity -- I’ll open my market if you’ll open yours. It was essentially an implicit deal: the opening of OECD markets to agriculture and labor-intensive manufactured goods, especially textiles and clothing, for the inclusion into the trading system of trade in services, intellectual property and (albeit to a lesser extent than originally demanded) investment. Also--as virtually a last minute piece of the deal--the creation of a new institution, the WTO, with the strongest dispute settlement mechanism in the history of international law and with virtually no executive or legislative authority (apart from negotiations). (The Canadian proposal to create a new institution was supported by the E.U. as a way of curbing American unilateralism.) Since the Uruguay Round consisted of a “single undertaking” (in WTO legal-ese) the deal was pretty much take it or leave it for the Southern countries. So they took it but, it’s safe to say, without a full comprehension of the profoundly transformative implication of this new trading system (an incomprehension shared by the Northern negotiators as well I might add).
The Northern piece of the bargain consisted of some limited progress in agriculture, with a commitment to go further in new negotiations in 2000; limited progress in textiles and clothing with most of the restrictions to be eliminated later rather than sooner; a rather significant reduction in tariffs in goods in exchange for deeper cuts by developing countries with higher tariffs. On the whole not great but not bad when compared with previous rounds centred on traditional GATT – type market access negotiations. But this was not a GATT negotiation as the Southern piece of the deal so amply demonstrates. The essence of the South side of the deal – the inclusion of the new issues – requires a major institutional upgrading and change in the infrastructure of most Southern countries. These changes take time and cost money. Implementation thus involves considerable investment with uncertain medium-term results.
There were two significant unintended consequences to the Uruguay Round Grand Bargain (or Bum Deal). One is a serious North-South divide in the WTO. While the South is hardly homogenous there is a broad consensus that the WTO Round was asymmetric and the system must be rebalanced. The débacle of Seattle in 1999 ended with the walkout of virtually all the developing countries. It’s more than symbolic that the outcome of the Ministerial Meeting in Doha, Qatar, in 2001 was termed a “development agenda” and not a round. The main objective of the Doha meeting was to avoid another Seattle: thus its great success was that it didn’t fail. Both the EC and the US visited Africa to woo Ministers and the Declaration repeatedly refers to technical assistance and capacity-building. Pushed by the successful NGO (Non-governmental Organization) campaign about Aids in Africa the Americans even seemed willing to antagonize Big Pharma. So Doha was unique in its focus on the South and development. But, of course, there were many other items on the Doha agenda – including agriculture and the so-called Singapore issues of competition, investment, government procurement and trade facilitation. And, finally, the Doha Declaration was a masterpiece of creative ambiguity so the devil remained in the details of the negotiations. More about that when we get to Cancun, the next Ministerial Meeting.
But before then, it’s important to note the second and equally unintended consequence of the Uruguay Round, i.e. the rise in profile of the MNEs due to their crucial role in securing inclusion of services and intellectual property into the trade regime. The active role of the corporations made them and the WTO a magnet for what came to be called the anti-corporate globalization movement of NGOs.
This is not the time for a review of the history and role of the NGOs in the trading system. Nor am I asserting that there is a homogenous set of institutions called NGOs. My major concern has been the role of advocacy NGOs whose main objective is to shape policy and the policy agenda. But there are different groups of advocacy NGOs, for example groups rich in technical and legal expertise who usually consult “inside” the system; NGOs dedicated to assisting and advising Southern governments, a “virtual secretariat” as it were; groups centred on establishing business codes of conduct on corporate social responsibility. All these are rather different from what I’ve termed the mobilization networks, for whom a major object is to rally support for dissent at a specific event – a WTO ministerial meeting, or a meeting of the World Bank and International Monetary fund, or a G-8 Summit and so on. The NGOs have effectively utilized the internet and thus have made the market for policy ideas contestable. And they created, in effect, a new service industry: the business of dissent. They were the activists on TV in Seattle, Washington or Genoa. Dissent attracts violence and extremists, however, and after Genoa, where one protester was killed and then, of course, the terrorist attack of 911, the mobilization networks and other advocacy groups recognize the need for a new strategy. One seems to be a new anti-war movement, which has produced demonstrations around the world. Their axis of evil is the US and Israel and it’s not clear how it will evolve.
But another trend is now evident. Dissent as a brand is becoming tarnished. And there is no coherent strategy emerging from the movement. And growing criticism from supporters. As Todd Gitlin, a 1960s activist, succinctly puts it: “a bumper sticker is not an argument.” Or, as participants at the 2003 World Social Forum in Mumbai, India noted: “Delivering an hour long litany of worn conspiracy theories… Noam Chomsky almost managed the incredible feat of putting a full stadium of jubilant young people to sleep”. A yearning for some Edenic past of self-sufficient communities begins to wear thin. As does the romance of Spanish anarchism. So a move from dissent to dialogue and debate is now apparent. And the new name for the movement appears to be “the global justice movement” – read anti-poverty. Moreover, and of great significance, during the decade of the 1990s the spread of global civil society into the South was remarkable. Indeed the expansion of NGOs in low-income countries was higher than in the OECD.

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