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도하-Bhagwati Transcription-세계경제연구원(20020719)

294_도하-Bhagwati Transcription-세계경제연구원.doc

The Doha Round: Objectives, Problems & Prospects
-By Jagdish Bhagwati

The following is a transcription of a speech given at the Institute for Global
Economics’ Distinguished Lecture Forum on Wednesday, July 10, 2002.

What I will do today is raise a few questions and talk about the problems and challenges
facing the implementation of the Doha Round of trade agreements. Those of us who were in
Seattle came away devastated. Doha was a much more invigorating event, though it too was
touch-and-go until the very last moment. But it went through. Now, we are speculating and
wondering, trying to remain optimistic about its conclusion in some form.

Many of these rounds, when started, cause shivers and goose pimples. As you go through
them, the negotiations are always complex. It is very easy to see all kind of danger
points. So when I talk about the problems here, remember that it has to be put into
historical perspective. No round has ever finished that easily. There are always
problems. Particularly when you have so many issues and so many countries, the problems
become more complex. I simply wanted to mention that, so that you do not attach excessive
importance to the issues I will be raising here today concerning what might bedevil and
plague the evolution of the round.

Failures with the Seattle Round

First, let me go back to Seattle. In Seattle, the intention to launch the first WTO round
failed. Every failure, like success, has many fathers and many mothers. But I would pick
three in particular where I think Doha managed to override and then surmount these
failures.

Non-Governmental Organizations (NGOs)

One was, of course, the opposition by the non-governmental organizations, the NGOs or
civil society, which is sometimes cynically called the un-civil society, particularly out
in the streets. In Seattle, that opposition was very strong. Some people anticipated a
few demonstrations, but not to the same degree in which it materialized. The host country
had not anticipated this.

I have visited Seattle many times since then, and I have gotten a feeling for the place.
I used to live in Massachusetts, which is a very liberal state as most of you know. Quite
possibly the most liberal state. But the city of Seattle is actually to the left of
Massachusetts. The city itself, though not the state of Washington, is ultra-liberal.
Surely the president’s advisors should have known that this would likely have been the
case. The advisors should have known that they would not get the support from the city
government that they needed. There was also a bit of incompetence in handling the NGOs,
not anticipating their behavior, not being fully informed, and being complacent. It was
certainly badly managed.

The European Union

The other one was the European Union’s unwillingness to agree to agricultural
liberalization concessions on the subsidies. I do not know how much importance to attach
to that because we were so overwhelmed by the other factors. But I was told by people who
were actually negotiating in Seattle that it would have been a “breaker”, though I do
not think that it was actually the “breaker“.

Presidential Remarks

Thirdly, I think President Clinton actually clinched the incompetence by
mentioning trade sanctions half way through, before he even came to Seattle. Trade
sanctions are associated with labor standards. Whether he was just throwing a bone, or if
he really meant to impose sanctions for other things, I do not know. But he did goof up.

That raises another issue—which I will come back to in relation to Doha—that a lot of
developing countries were concerned about labor standards. Their sensibilities had been
enhanced by the fact that you also had a number of trade unions marching in the streets,
particularly Teamsters. You had these overfed, unhealthy workers—the Teamsters—with
their big bellies and hard hats, marching, and claiming that they were representing the
malnourished and underfed workers of poor countries. This was a little upsetting and
jarring. Many people feel that, maybe, the NGOs represent certain broad interests which
cut across countries. But at the same time, these demonstrators were selecting their own
culture, their own politics. Nobody is truly a Martian watching from above at the whole
planet. Everybody is grounded, whether they like it or not. I am making a lebensraum kind
of point. But everybody is grounded in their own cultures and in their own interests to
some extent. So Clinton having made that remark about labor standards made many people
unhappy.

Why did Doha Work?

Sept. 11 Shock

At Doha, all those elements were fewer. It is not that we learned by the undoing of
Seattle, but it was just the natural evolution of all parties involved. Both the U.S. and
EU ,managed to capitalize on the Sept. 11 event. That was the “breaker”, as it were.
People wanted to reemphasize their commitment to democracy, open markets, and so on. This
is what is now called the “Washington Consensus”, which clearly reached Washington
eventually but was not intellectually invented there. This consensus includes markets,
democracy, and economic and political freedom. Attendants at Doha managed to utilize this
good will, one of the more creative outcomes of the Sept. 11 event. So in Doha, you had
the leadership, America’s Robert Zoellick and Europe’s Pascal Lamy, behind that consensus.

Civil Society Developed

Of course NGOs could not make it in the same degree to Doha, which in Qatar, in which
they were able to make it to Seattle. They were not present in the same way. But the
differences between the two rounds go deeper than that. Civil society itself has now
changed character. It has bifurcated into those who want to be simply heard from the
streets, and those who want to be listened to, who want to sit down with us and bring
their own perspectives to bear. Those two very different societies, or types of groups,
have really bifurcated now, whereas in Seattle everything was all mixed together.

You saw the get together in Porto Alegre, in Brazil, where this year’s World Social
Forum, an anti-establishment counterpoint to the World Economic Forum in New York, was
held. That is where the crazies go. They have their own playing field. They do hold up
their alternative view, but if you look at it in terms of policy, besides the Tobin Tax,
there is not much they have to offer. Mostly it is demonstrations in the streets of
Brazil. As you know the Tobin tax is a small levy on foreign-currency trades, with the
aim of shielding poor countries from the whims of financial markets. My teacher Paul
Samson used to say that we should thank heaven that—as you who are familiar with Marxist
literature know—there is a translation problem with Marx’s writings, because it keeps
all Marxist theorists tied up and out of our hair trying to figure out what he said,
letting us continue doing what we want to do.

The people who want to sit down and talk, people like Oxfam or Amnesty International, are
fully in the game. They are not in the game of demonstrating or making “anti-
globalization”, or anti-free trade noises. That is part of the new setup we saw at Doha.
It does not mean that there are not going to be any problems. I will come back to them.
These people also have a voice, but usually they are not informed, contrary to what
colleagues of mine like Joe Stiglitz say. I think words like that are just comfortable
things to say. When you meet them, you think that people like that are very well
informed, even better informed than I am. But from my experience, frequently when you
meet them, they are not. But they do have a halo around their heads. Certainly at Doha,
that was not a factor. One could negotiate without difficulty.

Labor Standards Off the Table

I think that labor standards work when they are off the agenda. Everyone was careful not
to raise the matter. It is not again clear, like in Singapore, how many standards exactly
there are, but they are certainly not “on”, in any serious sense.

EU/U.S. Acquiescence

The EU finally agreed on a formula to finally go ahead and discuss the big steps toward
the elimination of export subsidies. Additionally, the Americans managed to come around
on the big issue of anti-dumping.

Intellectual Property Rights Agreement

On intellectual property protection, you had a declaration which I think was actually
good for the pharmaceutical companies. Seeing the way that AIDS or anthrax is working
out, the companies would have had a far worse outcome in the public policy space. Bob
Zoellick actually played well for them. What they got in that agreement is actually
better then what they would have gotten in the public policy space, outside. To me, it
seems rather paradoxical that the pharmaceutical companies did better by having an
agreement while creating the impression that they were really making a lot of concessions
to the NGOs.

So on the whole, if you look at the way in which it worked out, these are the reasons why
Doha did work out. Everybody went out, except for the very fringe elements, thinking this
was really a greater start. We are really off to a good start. But now we are in the
game. And now there are problems. And that is what I want to talk about.

What are Doha’s Problems?

Deadline too Short

First, it is not clear that starting out with a three year deadline is a very
smart idea. If I was Mike Moore, I could not say that. But the point is, the three year
implementation schedule came because of Mike Moore’s three year term and the fact that
Supachai is coming in. As successive rounds increase in complexity and number of players,
it now takes years to close a round. The last one took seven and a half. The one before,
the Tokyo Round, took four and a half years. Each time it has gotten worse. Suddenly, now
we say three years. I think it can only be because of the three year terms.

It does not really make much sense to have such a short deadline. It may create
problems. The minute you start running into problems in negotiations, as you well might,
you introduce too early the notion that it is going to fail. Almost every round has that
trough, and This is unnecessarily buying into it. I hope I am wrong on that.

Lapse in World Economic Growth

The three year deadline also runs into the problem that the world economy,
which was quite robust in both Seattle and in Doha, is now not doing quite as well. There
is a lot of uncertainty as to which way things will work out for the world economy. I
will not go into the details here. You read about it all the time. But, there are sources
of weakness in Japan. In the U.S. economy itself there are serious doubts whether its
fundamentals will remain strong.

Given all that, it seems to me that we have to worry about an old problem: that it is
very difficult for people to liberalize when economies are not doing too well.
Politicians quite naturally find it easier to move forward in terms of trade
liberalization when the economies are strong. So if we had this launch during Seattle, we
would be well on our way. But as it turns out, I am not so sure because I think that
everything is up for grabs. That accentuates the problem of having an excessively
Stakhanovite sort of deadline.

No Standstill

The other problem, which is well known, is that the U.S. itself is a leader in this,
along with Mr. Lamy and the European Commission of course, and when it behaves in an anti-
free trade manner, the world gets upset. In the Uruguay Round you had a standstill as
part of the formal agreement. But you do not have that now. The legal status of these
agreements at Doha is not a strong legal status. They are more political statements of
intentions to launch the round and actually launching it.

There was no formal standstill signed. So when the United States wrongly claims that it
is okay for them to do everything they are doing, like the farm bill and increasing
subsidies, the steel action, Canadian lumber. Those are probably WTO legal and WTO
consistent. In some cases, they will be taken to court and have their action disputed,
like on steel.

But it is not enough to say that it is consistent. Suppose there was no dispute about it,
that the U.S.’ action was completely legal, as if you had a binding which is way above
your actual tariff. In principle, you are allowed to go up to your bound level. But you
do not do it if you have a standstill because that conveys exactly the wrong message,
which is starting a rollback, as it used to be called, which means further
liberalization. Then you start by using every WTO compatible action to raise your trade
barriers. That is inconsistent. This is what I call in my old book on protectionism the
distinction between first difference reciprocity—meaning reciprocity at the margin—and
full reciprocity. America’s contentions with Japan and so on, tend generally to be that,
“We are basically open. You guys have higher tariffs, or higher subsidies,” like in the
EU case, “and therefore you have no right to talk to me about it.” That is the
underlying argument of the Americans in all their negotiations.

They are confusing exchanging concessions on the margin with whether you are on the
average more open than in totality than the other country. Americans are convinced—
probably rightly though it is always hard to measure these barriers effectively—that
they are more open than the rest of the world. They feel, then, free to ask for
unrequited concessions or to be able to raise their own barriers if need be. You see that
in some of the explanations Mr. Zoellick gives in defence of the acts.

But what he misses completely is that it is inconsistent with the spirit of a rollback
and of a new negotiation. That is what one has to tell them, that this is not in their
interests. They are fouling up the atmosphere. The poor today, that is developing
countries, which are now major players in the whole show, have been told consistently—
and this is the theme of my The Economist article of last week—that the world is
unfairly stacked against them, that there is all this rich country protectionism, and so
on, and that everything is unfair. Well, in that context you then see the United States,
actually raising certain barriers. That comes in very handy to some people because they
are conditioned to think that all the problems are in the rich countries. The World Bank
leadership and everybody joins in with this business of attacking rich country
protectionism without putting it into context and getting into why it is this last
residual form of protectionism in the West. The West has opened up in a big way, a very
big way. It is not true that they are closed, on the average, with a lot of protectionism.

We must ask why they are still hanging on to those labor intensive manufacturing
industries. That brings deep political, ethical and other problems. You cannot just say
this is hypocritical. That is the wrong word to use. It is a political problem for these
countries. You have a huge amount of openness in these countries, after the post-war
rounds of opening.

Let’s try to identify what are the obstacles and push them. Instead, Wolfensohn and all
these people just go around saying, “Rich country protection. Rich country protection.”
In that context, it does not help in the least to have the U.S. actually increase
protection, even though they might turn out to be WTO-allowed. That is simply adding fuel
to the fire, making everybody think that rich countries are just a bunch of good-for-
nothing hypocrites. It is very incendiary. Countries like my original country, India, and
so on might take advantage of this. NGOs are also very much into this now, creating this
kind of issue without understanding.

For the U.S., being the biggest dog on the block and always talking in geopolitical free
trade terms, to do something like this really makes the life of people who want to push
forward the leaders of poor countries and say, “Let’s strike a deal,” much, much
harder. I am a little worried about the ethos which will develop around this U.S. action,
however much they may be justified. When the Americans say, also, “Look, there are
domestic politics that require these moves,” people are bound to say, “Well, what about
our politics. We also have our own politics.”

This has always been a problem with Americans. In general, the Americans negotiating
approach has been, “Our politics requires us not to make certain concessions,” and then
to go a little easy on other people’s politics. This negative feeling always gets
reinforced. The U.S. actions have been unfortunate. They came at entirely the wrong time.
The reasons for them are several, but, of course, I have no time.

No Trade Promotion Authority (TPA)

Then of course the trade promotion authority of the United States is also a big problem.
We will know soon which way it is going to work out, but it was a big fight. The Congress
vote was just by a majority of one, and then the Senators, though they have been more
agreeable, now have problems of their own. We do not know what is going to come out of
it, but let’s be optimistic.

There are certain aspects of it which bother me also, but I will mention just three. One
is well known, the Dayton-Craig Amendment, which proposes we take anti-dumping out after
the trade promotion authority (TPA). That is a big issue for many countries, but here I
would just like to mention one thing, which may be treated as a plus or minus. If you
take anti-dumping action, you see that it is spreading across the world, and in my The
Economist article I point out that if you take some of the big developing countries, like
India or South Africa, the number of actions initiated on anti-dumping by them already
exceeds the number of actions done by the traditional countries like the European Union
and the U.S. Now, theses are not of course important by weight. I am just trying to say
that the number of actions have increased. All of this machinery has been well
established.

Some people say that anti-dumping will simply disappear and that we will be able to
constrain it all because the United States and European Union will understand that what
they do to others can be done back to them. But I think that this is a little too
simplistic. We may wind up with a whole lot of anti-dumping authorities around the world,
as well as the lobbies around them that support them, because it will pay for each lobby
to do its own anti-dumping. It may be more like an epidemic, the way multilateral free
trade agreements (MFAs) spread.

You know my views on preferential trading areas, and bilaterals in particular. Bilaterals
have spread in exactly the same way. Unfortunately, the Europeans were doing quite a bit
of those. I do not mean the European core, with Eastern Europe as an extended core, but I
mean the spokes in the wheel, each with their own FTA. It all started basically in
European countries in the EU. Then, instead of going to the WTO, or the GATT at the time,
and saying, “Let us put a stop to Article 24. We should not have bilaterals like this
continuing,” the Americans broke ranks. They could have provided the leadership role.
Instead the followed the EU, or at least tried. TPA builds in authority for bilaterals
equally with multilaterals as if they were symmetric.

Now, East Asia is really holding out. In APEC you have essentially what is most favored
nation (MFN) status. It amounts to unilateral trade liberalization, though I cannot
remember what the exact phrasing was. This is old history now, but anyone who liberalized
in concert along with everybody else, would be on an MFN basis. That is all gone now.
When you see the European Union doing it, and now America doing it, and when you see
everyone breaking out, it is very hard for anyone to go to their prime ministers and say,
“We should not do it.” It is partly about developing bargaining power vis-à-vis the
others. So you now have dozens and dozens of possible plans here. You have a case almost
like the expansion of MFN.

My fear is anti-dumping will spread and become just a moot issue. It will just be a
matter of putting in a few details here and there, changes in the anti-dumping
regulations. Many of us economists have wanted to constrain anti-dumping for a long time
and remove it. But that is not going to be on the cards. This will probably be a non-
issue down the road, although it is made much of. If everybody is sitting, who is going
to throw a stone? Nobody is. That is another unfortunate outcome, rather than role
reversal or the fact that I am going to hit you back, which would make you reduce it.
That is my view.

Intellectual Property Rights (IPR)

I heard in Washington that these intellectual property (IP) agreements have no binding
status. The IP agreements have no legally binding status from the Doha declaration. This
might unravel. The Agreement on Trade-Related Investment Measures (the TRIMs Agreement)
might unravel. This could be a big problem with NGOs in particular, and I think it could
be a blow to the WTO. I do not know how it is going to play out. I was a bit worried
about Merck disclosing yesterday, or was it the day before, that it had US$ 14 billion
worth of misrepresented profits which did not exist. That is a lot of money. And Merck is
a big player in Africa, initiating a number of projects. In Botswana for example they
have done a number of works with NGOs. If they suddenly go into trouble and are unable to
spend the kind of money they are promising, that again could create some problems. If all
the companies are in financial trouble, who knows? I do not know about Pfizer, but
certainly Merck has come out with this.

If the pharmaceutical industry runs into financial problems, like energy and telecoms
have done, that could also mean that in the end they would get a lot tougher in holding
on to what they have as opposed to making compromises of the type they agreed to at Doha.
So the way in which politics ran in Doha, it is a little worry I have, given the fact
that people said that Washington is now under serious pressure even before the Merck
disclosure, to tighten what was given away. And to be a little more stingy. That will
create reactions. In my own view, the IPR agreement should not have been part of the WTO.
It should have been a self-standing treaty, with trade sanctions if you like, but not
part of the WTO because that creates problems for the WTO. It is better to put it
somewhere else.

In fact in my view, all the aid and other problems that arose later have given the WTO
unnecessarily a bad name. The WTO should not have been involved in that in the first
place. It is a trade institution. It is not a royalty collection institution. It should
not be part of that. But in the Uruguay Round we had to close the round, and the
pharmaceutical and the software firms insisted that without that, there was no round, no
closure. There is a little weakness there.

Labor Standards

On labor standards, it is not clear to me. TPA has language which says that the president
will have to make a good faith effort to get labor standards into the final agreement. It
is emasculated. It is language very similar to a number of other trade bills going back
to 1974. But today, the climate is very different in the sense that, with the Democrats
being quite important in this game. In the olden days, if the president came back and
said, “I tried in Doha to get something on labor standards as the TPA requires , but I
couldn’t get anything,” that was it. He tried. And the other countries did not agree.
But today, it is not clear to me that the same language can be read in the same way.
Today, the fact that he does not come back with something may be much more problematic,
given the status of the U.S. Here, it is not clear. You can say that this is a way to buy
off opponents with some language that is not going to amount to anything very much. Or it
could be a real problem. Only time will tell. But it is there. There is also a clause in
the house and senate drafts that it will be enforced in the same way as everything else
in the system. This means they are some enforcement possibilities that they have in mind
which are pretty strict. That means sanctions, because other WTO measures also call for
sanctions. It is not clear what the interpretation will be. The Economist and FT editors
I have discussed this with say that it just introduces flexibility, and that the
Republicans will be able to get away with it. I am not so sure at all. I just do not
think the political context can be treated as being so manageable by Republicans without
any kind of consequence.

So if so, what will be the outcome? I think it would weaken the multi-lateral. I do not
see at the moment—and there are many people here who are more knowledgeable on the
actual negotiations than I am—developing nations, when signing up to multilateral
negotiations like Doha, letting labor standards to come on board. Whereas in the
bilaterals, it is very easy. The U.S. is a big country and when you are signing with,
say, Chile, you sign on or you do not get it. They will sign on in some form. Take Jordan
for example. Jordan would have probably signed on to anything. It was looking for a
political affirmation of its security ties. They simply asked Charlene Barshefsky, “What
do you want? Draft it. We will sign it.” As I testified in the Senate, at that time it
was clear on the Jordan bill. The Jordanians had no independent view on these matters at
all. So Charlene Barshefsky put in whatever she wanted from the Democratic side,
including poor labor standards—right in there—and enforcement. They were trying to turn
this into a mold, or template, because once having it established there, they wanted to
use it elsewhere saying that this is the way it has to be done. That is the way that that
game is played.

My worry is only that if this really means something, as against the alternative opposite
view that it only introduces flexibility by way of cheating, then we in the United States
would be moving more rapidly on bilaterals where it is possible to satisfy this
constraint on labor standards, and not at all on multilateral, which may become a big
issue. I just have a slight worry there. I do not have a definite answer, but this is
something where Zoellick may be too optimistic. One of the things, while he has been
director so far, that have been really good is that in Washington, Bob Zoellick is
supposed to be Baker’s boy. Baker was supposed to provide the politics, and he was
supposed to provide the economics. But now he is on his own. This is Baker of Florida
fame, Secretary Baker. They say, though, that now Zoellick does not have much political
savvy. But so far he has done pretty well. So I do not agree with that. But that is the
prevailing argument.

Business’ View of Doha

What about the business lobbies? Will they be playing for it? Well, that is one of the
problems which you get when you have too many bilaterals going on. You have generals,
people like us probably—trade ministers, and so on—who want the round. But where are the
troops? If the troops, the business lobbies, are getting their kicks through the
bilaterals—U.S.-Mexico, so Mexico manages to get into the U.S. under NAFTA, or Chile-
U.S., where Chile gets into the U.S.—they are not going to be spending money or time on
multilateral agreements.

There is also a free rider problem. If I spend $100 on trying to open up a market under a
bilateral, I get all the returns because I get that market. But if I go in on an MFN
basis, then the Japanese, the Koreans, and everybody else gets it. So my return is
diluted. This is what we call in economics a free rider problem. The return to me is not
as good if other people can move in who are free riders who are not investing in opening
that market. There is already a problem when you open up bilaterals, particularly when
big existing trade volumes are involved, what is called the “natural allies” hypothesis
or the “natural trading partner” hypothesis. This takes the players out of the
political arena for the multilateral system. People are not going to be pushing for the
multilateral, people who are lobbying money and so on. They are going to be more likely
to be spending on bilaterals in the major markets they are interested in.

The more bilaterals multiply, the more we have this problem: that the troops will be
active on another front, or another set of fronts, and it is hard to bring them and say,
“Look, let’s go to Geneva and negotiate this multilateral.” You have to look at the
politics and the economics. This is one thing that, again, bothers me. This time around
you have already some 150 bilaterals notified and agreed to., because everything is
automatically agreed to, as you know, under the Article 24 enabling clause. And there are
about 400, by one estimate, agreements being plotted by trade ministers with somebody or
other on a bilateral basis. There are so many. Actually, once I wrote an article, just a
funny one, making up two countries, saying that they were going by oceans, then rivers,
then bays, all sorts of waters and so on. I made up two. Then by the time the article was
published there were already a reality. So everyone is looking for things to do with
their neighbors, including across the oceans, rivers, etc.

That is taking up a great deal of business interest. I am not worried about the diversion
of bureaucratic interest. Bureaucrats are like Marx’s reserve army of labor. They are in
elastic supply. You create more as necessary. Only the first rate bureaucrats could get
diverted, because many of these issues are so complex they need absolutely superb talent
to negotiate and so on. So that could be a problem, if you have too much going on.

Poor Countries’ View of Doha

But what about the poor countries? This is where there is a lack clarity that could
create a lot of problems. At the moment, we have tension between the principals, which we
learned about special and differential (S&D) trade agreements. An S&D agreement is not a
great idea. The Generalized System of Preferences (GSP) did not really work out too well,
in terms of giving genuine benefits to people. Two, the S&Ds essentially presume that you
cannot hack it in world markets if you are somehow behind the curve in terms of per
capita income and so on. That violates the basic idea of the ladders of comparative
advantage, which we teach in economics.

I often tell my African friends, “Why are you so pessimistic that without special and
differential agreements you cannot compete in world markets, because you will find
something to do?” I refer to Korea. “Korea did not have any special and differential
agreement. The Far Eastern countries did not use such agreements in the ‘50s and ‘60s,
and they did it.” Today in African countries you have an entrepreneurial class. It is a
mistake to believe that they do not. They have political problems, internal
infrastructure problems, political infrastructure problems, a lot of civil wars, and so
on. But if they can surmount those, which are problems of traction essentially, then they
can actually export without having special preferences. All kinds of free riders and
limitations imposed on them. In my The Economist article, I point out several of them.
But everybody who has studied the problem knows that special and differentials are a kind
of self-limiting, often exploitive way of handing out access to markets. That being the
case, most developed countries now understand this.

Developing countries have now suddenly lapsed into thinking, like in the early Prebisch
days when we were thinking about these things, that this is the only way that poor
countries can compete, by having special crutches. I think that is a mistake. Given
another five years or so, when the same obligations kick in regarding trade obligations
or whatever it is you agreed to, that is a different matter. That is going to be an
issue. I do not know which way it is going to work out. It is something we need to
address clearly as we go in because this is a “development” round. What are we going to
mean? What do developing countries expect from a “development” round? Do they expect a
whole lot of exceptions to be built into the next one? Because if you do, that is going
to create problems.

It goes contrary to what we learned over the last thirty years about S&D, meaning that
there is a different development theory, a different trade theory, which applies to poor
countries. That is the regress of knowledge and know-how. That will come up as an issue.
Otherwise, if we cannot build in huge concessions of that kind which do not make any
sense, developing countries will come out thinking they are not getting what they thought
they would be getting because it is supposed to be a “development” round. So if they
feel cheated, that they are not getting a whole lot of preferential concessions of one
kind or another, then it is going to be a problem. That is my worry. We have to address
that issue right away and say, “All right. We will give you preferential aid,
preferential technical assistance, but you have to learn how to compete. And you can
compete. There is no problem with that. You will find something to do. Economists will
not be able to tell you what to export.” One of the lessons of post-war development
experience is that when economists like us sit down and say, “What will Korea export,”
or, “What will India export,” you become pessimists. No economist knows how to export
anything. And typically when exchange rates are right, whether the IMF brought it about
or the EU brought it about, or whether you did it unilaterally, there are a lot of ways
it happens. Somehow people learn to. All kinds of things crawl out under incentives.
Usually, it is that miscellaneous item in the export categories. That is what takes off.
Nobody could foresee that. So I say, let the markets work here. We cannot do it. Even the
existing econometric estimates tend to produce what we call elasticity pessimism. The
technology of forecasting itself creates a pessimism.

That being the case, we need to tell these countries, instead of being patronizing that
you cannot export unless you have all kinds of special privileges which in any case are
self limiting ones they start exporting banks and the rules of origin and Spain, or
somebody, gets upset. Then you intercede and say to the poor country that you have to
graduate now. You are already exporting too much. That means that investors will all of a
sudden come, and the market gets cut off. We get all kinds of complaints like that. These
non-trade items are real problems that we have to address.

This is where many developing countries are now worried on environmental issues like
shrimp turtle and so on. These issues have to be addressed because some of these have to
come into the WTO. Many countries do have good labor standards. It is not as if they do
not. The legislation is also quite strict in many poor countries. But they oppose this.
Why? Because when you say something like “poor labor standards”, and I am just
illustrating with one non-trade issue, and you say “the right to unionize must be
there”—that is like MFN for the ILO—what MFN is to us in trade, this is the super core
of labor, the right to unionize, and quite correctly done. But then you look at the
details of it. You have to look at the right to strike. You have to look at the case of
“essential” industries. And there are all kinds of details that a thorough legal
training will tell you how to deal with. So it is hard for us to even imagine it. There
are large books, tomes, on the right to unionize and how to regulate it, so on and so
forth.

The human rights watchers have brought out a report on the right to unionize in the
United States. That says that millions of workers, and I am quoting, are denied the right
to unionize. They simply mean the Taft-Heartly Act of over fifty years ago. The right to
strike is crippled. So the union, in their sense, is a paper tiger. A union without the
right to strike is not particularly a union which is able to exercise any real rights.
They are allowed to hire replacement workers freely, which means that it is easy to break
a strike. Many strikes are not allowed, so on and so forth. They have very tough laws.

So what happens when you put something like core labor standards into an agreement, which
sounds very good? How could you be against that? How could you be against sisterhood,
liberty, and everything that is good in life? Right away, the large countries do not have
anything to worry about right away because they can kick you in some other dimension if
you try to bring a suit against them. But the little countries could be taken to dispute
settlement on this, and they do not even know what they are being taken in for. This is
the sort of thing that worries me.

Take shrimp turtle. They overturned the dolphin tuna case of ten years ago and said,
essentially, that the U.S. or any country could unilaterally require turtle excluding
devices to be used. But the smart thing for the United States to do would have been to
say, “Look, lets extend CITES,” which is the treaty overseeing the international trade
in endangered species. We have already excluded trade in turtle and turtle parts. But
because if you do not use TEDs, or turtle excluding devices, narrower nets so that the
turtles do not get in, as you are shrimp farming, then we should be able to proscribe
that. Then like in Kyoto and elsewhere if those nets have to be bought, we could use some
of the aid funds. If you are willing to do it for Kyoto and spend hundreds of millions of
dollars, why not here? This is a tiny sum, about two million dollars worth of nets. Then
we could buy them and distribute them to poor countries that are asking for this. There
are better solutions than the ones out there.

We are not looking at the problem directly in its own context and saying how do we best
achieve this. Instead, the approach is to use legislation to make it stick at the WTO,
which is exactly the wrong approach. What was interesting was that this decision was
overturned on dolphin tuna, so you could not do this for shrimp turtle, by citing
eventually the preamble in Marrakech which calls for sustained development. That was used
to say that we now are going to interpret Article 20 so as to include something like
requiring the use of turtle excluding devices.

This is just a general phrase. To me, a preamble—and I think this is true in Anglo-Saxon
law, though I am told that in European law preambles mean more—is like an overture in an
opera. That is time you are still talking to your friends, getting settled, reading
through the libretto and making a little noise. It is all allowed until the curtain
rises. But now you do not only have to think about that fine print, but about the
preamble as well. The shrimp decision, which cited the Marrakech preamble, is now cited
itself in the Doha preamble. I do not think anyone is watching. This is how it goes on.
Like something closing in. And the poor countries have neither the lawyers nor the
bureaucrats to handle all of this. If it was going on in Rio de Janeiro or somewhere,
outside of trade negotiations, then fine. You have time. You are more relaxed, and so on.
But this is high power negotiations with everything closing in on you ultimately. And you
do not know what you are buying into. And trade sanctions follow. That is all the fear
behind the WTO, the trade sanctions. This is creating a whole series of problems for the
poor countries. They feel they are perfectly able to handle, in my opinion, trade barrier
reduction and so on, but when it comes to intellectual property protection—which has a
whole lot of things also going with it—and with labor standards and some environmental
problems, though not all of them, then they are beginning to worry. They wonder what they
are buying into. For most of these things really had very little input themselves because
it is beyond them. It is too complicated. Then when they see all of this being included,
whether it is under NGOs or some lobby pressure, they begin to worry that they are
signing onto things that are going to cause problems for them down the road. This is a
worry that we are really going to have to address.

The World Order & Conclusion

We tend to see a conflict between lobbies, or NGOs, versus governments, or versus
corporate lobbies. That is the way this is all set up. But I think there is also the
problem that when you put in things like this, it creates problems for poor countries.
They begin to see the WTO as an assault on the poor countries through these things, even
if they are not being intended as such, rather than in the defense of the weak, which in
terms of trade issues they are supposed to be. We have managed to get them away from
UNCTAD and into the GATT/WTO system because they felt that multilateralism is the defence
of the weak, we always teach that. But on this one, when they see more and more issues
coming into this, they begin to worry.

Things like competition policy do belong. I have no problem with the European
Commissioner on that one. But I do have a little worry again—and this is the last point
I will make—on the multilateral agreements on investments (MAI), or the version of MAI
concerning investment policy. I think it is a bit imprudent to have it now largely
because my understanding of most NGOs is that, to them, many of them, even if they resent
my saying it when I do say it, are basically anti-capitalism, anti-globalism—which is an
extension of capitalism if you have read your Lenin and Bukharin and so on and so forth,
or Wallerstein today. This is outward expansion of capitalism. To them, corporations are
the B52s of capitalism and globalization. MAI collapsed in France in the OECD largely
because of this kind of feeling. The kids go around continuously agitating against
corporations. Ralph Nader is popular because he is a big symbol of anti-corporate. If you
look at all the movies, “Erin Brokovich” with Julia Roberts or “The Insider” with
Russell Crowe, these are little guys taking on big corporations. All of this is very
popular because there is this great anti-corporate feeling.

Given that, my view is simply that there is some sense toward order, common rules and
something, right now most countries are opening up and, if anything, competing for
investment. There are very few who do not want foreign investment today. There are still
some, but they are going to fall behind. So the doors are opening. True, they are opening
in different ways, at different speeds, so there is no uniformity or set of rules, but if
they are opening and if the people who are passionately against trade and globalization
are so focused against multi-nationals and so on, is it wise—that is all I am asking—is
it wise for Mr. Lamy, and it is not even his position as he inherited it from Leon
Brittan to be fair, and why Leon Brittan wanted it, I do not really understand. At first,
I though Pascal Lamy being French was both Cartesian and Utopian and therefore wanted to
order the world. But like all good theories, that does not work. And so it goes back to
Leon Brittan. But he is the only one who is pushing for it. The Americans gave in to it
on the investment side because Americans themselves have had problems for so-called
Chapter 11 bankruptcy with NAFTA. This is a really big political hot-potato and hardly
anybody wants to touch it. But they agreed to it because Lamy said otherwise we do not
deal. There is no lobbying pressure, as far as I know, in the European Union either on
the part of businesses saying we must have it. So I think it is an easy position. I also
think it is a mistaken one. I think that could be a problem. It is not on the first
track, as we all know. It is on the second track. But I would put it on the fourth or
fifth track, until things settle down and we get back to normal. I wish we had focused on
the EU side only on competition policy, which I think does belong to trade
liberalization. It relates to what I call the distinction between opening a market and
its penetrability. You may open a market, but if there are all kind of obstacles to
actually getting in, then effective market access is impede, like Tarzan’s jungle in the
movies. The jungle is open, but there is all this grass, and you have to use natives to
cut it down, and there might be traps laid for animals and you might go right into them.

All of those relate to what I call competition policy issues, because they are ways of
cutting off market access even thought the door is open. So I think those things belong.
I think Lamy and Brittan are absolutely right in saying competition counts. But on
grounds of prudence, I would not touch investment now, and I hope we will go slow on
that. That is the last little worry I have. That we might reactivate all the crazy NGOs
into massive opposition if we just do something about investment. That is a red rag to
the bulls. Thank you.

Questions & Answers

Question #1: I would like to ask a question related to the theory of international
trade. As a most ardent supporter of free trade, if Country ‘A’ restricts their trade,
what is the optimal policy for Country ‘B’? Is it optimum to open or to counteract by
retaliating.
My second question, you have been a very active critic of FTA, or PTA. As you
pointed out, multinational agreements are very difficult. In view of that, do you believe
that NAFTA, for example, has had some contribution or that it has been entirely negative?
Answer #1: On the first one, my old teacher Joan Robinson used to say that if you
have rocks in your harbor, that is no reason to throw rocks into my own, because then
everyone is hurt twice over. If you have actually thrown rocks into your own harbor, or
are doing so, then you should not do it. That was her basic argument. Now, this does not
apply, as you know, in oligopolistic competition necessarily because you can have a tit-
for-tat strategy. But that does not really apply particularly with several markets,
fairly wide open. It has sort of gone behind us. That was an ‘80s and ‘90s issue, with
trilateral powers. Today, manufacturer protectionism is really down. Rather than to go
into that issue, I will simply say that the Joan Robinson argument does hold.
If I can get you to go with me, we get double advantages, rather than getting
me to go by myself. There is now, though, one additional strand. This is part of a recent
book of mine called Going Alone. I said in the book that you might have sequential
reciprocity as opposed to simultaneous reciprocity. That maybe I cannot persuade the
European commission to do it right away, but then I may, by lowering my own tariffs ahead
without insisting on not doing it just because the EU does not do it, I might be able to
convince the EU that it is a good idea. This goes back to Prime Minister Robert Peel and
France in 1848. Peel said that he was sick and tired of trying to convince the French to
go with him on all these bilateral trade reciprocal treaties. He believed in free trade,
as he had been convinced by Adam Smith and David Ricardo and so on, and he wanted to go
alone. So he unilaterally abolished the Corn Laws. He actually made some very interesting
speeches at the time saying that England is going to prosper so much because of free
trade that the French will follow suit because they will see the advantage that we have
gotten just by learning by our own doing. In that case, the French government itself may
supply less protection. They may actually do it.
There is also an additional argument that the actual demand for protection in
France may fall off too because in a political system where you have import competing and
export promoting interests, if I liberalize I am going to expand your export sector.
Therefore, its importance in domestic politics may be greater. And that may then lead to
the demand for protection in your country also falling off. So we have lots of arguments
about what is sequential reciprocity. It may be advantageous to go it alone because you
are not going to be alone for long. You are going to get reciprocity through these
mechanisms. There are a lot of examples like that one could produce.
Now your second question on FTA and preferential trading agreements—let’s call
them bilaterals—the problem is partly that you are actually sidetracking and undermining
the support for multilaterals. That is my view. Business lobbies do get sidetracked into
these other ways of doing it. In terms of assessing the overall view, the reason why we
started on this in America is not just the European example, but it was also because the
multilateral system was not working at that time. We did not have the Uruguay round. When
the Americans tried to start in 1992, as you remember, the Europeans and some developing
countries said no. At that stage, the American government—James Baker, as secretary of
the treasury, and William Brock, as secretary of labor, both under Reagan—decided to
move into the regional route. Of course they found Canada a willing partner. Then much
later on, they moved to Mexico. Essentially it was because the multilateral system at
that point was blocked.
But I do not think it is blocked now. It is difficult. It is not blocked. Even bilaterals
take a long time to negotiate. The Uruguay Round took seven and a half years. NAFTA took
almost as much, with Mexico, from the initial beginning of discussion of it. So it is not
so clear that bilaterals go like a snap and multilaterals are stuck in the mud. There is
a negative, malign interaction.
The thing that really bothers me is what I call the spaghetti bowl problem. There are so
many of these crisscrossing rules of origin, and so on, I mean almost every country in
the world, except five of them, has some special treatment on its treatment of tariffs.
Of course those five include Japan and the United States, but I once told Pascal Lamy
that if only five countries are on MFN, you should really call it the “LFN”, or least
favored nation clause because everybody else gets some special deal on some FTA or
something like that. That is chaotic. Each FTA, things go down on a different regime, a
different structure, different rules of origin. It is not uniform.
This is a particular concern for the poor countries. As Alec Erwin, the minister for
trade and industry in South Africa, once told me that for a small country, or a small
corporation, to handle so many different rules and tariffs rates and so on, is very
chaotic. Some of the big firms also tell me that for them it is also getting quite
chaotic. They want some order. They are for this order. I call that the spaghetti bowl
because I cannot handle spaghetti when I come to a country that handles noodles so well.
Those systemic issues are also beginning to worry. When Professor Weiner wrote about it,
he had in mind one or two PTAs. When Article 24 was written, we never thought they would
be all over the world. There is a problem there. It is hard to assess the totality. Maybe
it is balanced not so bad. But I would rather not see it go on like that because the more
chaos you get, the more difficult it is to extract yourself from that.

Question #2: In that connection, do you see any possibility of strengthening
Article 24?
Answer #2: Perhaps. Similar to the PTAs being contemplated here, it allows for
exceptions like agriculture. Japan going in with Singapore does not have to leave out
agriculture, but in effect Singapore is not an agricultural power house. In some other
cases, I am told agriculture will be left out. The original Article 24 stated that you
should go like a Roman legion, all lock in step, taking everything down. But nobody has
ever taken everything down at the same pace because of the politics. We do not even do it
for the multilateral trade negotiations (MTNs). But here, it gets bogged down in bargains
and some very special things are always put in. Then you go to another country, and you
have another special set of things put in. That is what multilaterals avoid.
We could tighten some rules. Some people recommend that after some time, say
five or ten years, all agreements become MFN, wherever you are at. But I do not think
those will happen. But we have to try. There is no other possibility. One answer is to go
faster on MFN and multilateral trade negotiations. If you can. Where are the troops, as I
said? But if you move faster, it becomes a ratio. Preferences are relative to MFN. But if
MFN goes to zero, meaning we really liberalize world wide trade on an MFN basis, then the
preferences go to zero. If you want to work on a ratio, you can work on the nominator or
the denominator. I do not think anybody expects to stop bilaterals from multiplying all
over the world. There are so many for political reasons that will always go on. Two,
since you are not going to be able to affect that, move faster on MFN status. Reduce that
to zero.
Many of us have written on that. Maybe now, to take down the downside of the
preferences, it is important now to be really pro-Doha, pro-negotiations, until we get
what might be called a borderless world in that sense. But you know the old story of
Beryl Sprinkel who was chief economic advisor to President Reagan. Once he was
exacerbated by the Europeans and he said, “Let the Europeans look after their exchange
rates and we’ll look after ours.” That is a good exam question. He did not understand
what a ratio meant.

Question #3: I have two questions. In your presentation this morning, you detailed
a full list of problems plaguing the Doha round. But you did not give us any bright spots
in the clouds. Where is the sunshine? I am wondering if you could balance your
presentation with some reasons to be positive. What opportunities could we utilize to
bring this round to a successful conclusion?
My second question relates to FTA in this particular region. You know, East
Asia is one region where FTAs have not proliferated. But in recent years, there have been
very active talks about bilateral trade between Korea and Japan, and some others have
talked about a trilateral agreement with China, and so on. In today’s world environment,
with FTAs and TPAs and spaghetti all over, does it make sense for East Asians to still
say that we do not want to go along that route?
Answer #3: Let me take the second one first. I think from that point, it is very
hard not to joint the rest of the world in joining these things. There is one argument
that if everyone else is going it, your markets are being strained to some extent. As
long as MFN is not zero, there will be some trade diversion away from you. In that sense,
the bargaining becomes important. If Asia then says that to be able to pry open the
external tariff of, say, the NAFTA or the big trade area that will break out in the
Americas, then it is not possible for Japan, or Korea, or China by themselves to do
anything. The argument then becomes political in terms of being able to bargain for
mutual reductions. That is important.
The other thing is from an economic point of view. For a country like
Singapore, joining anything, it will not be hurt by trade diversion. What is it buying by
getting into an FTA? It is simply buying market access. But its own market is completely
open. By going in with Japan it is not going to divert trade from the United States which
is cheaper. Everyone gets in for free. So for small countries, and I think Korea, despite
its great success from your perspective, as long as your external barriers are low, like
in Chile, Singapore, and so on, like when I go to my own country, India where the
external trade barriers, tariffs barriers, are at 35% on average, I say that if you go
into a bilateral agreement, like it is trying to with Bangladesh and Pakistan if peace
breaks out—and Pakistan does not even give GATT treatment or MFN to India—the external
barriers of each country in the region are so high that there would be an enormous trade
diversion from one for another. So a precondition for going into these agreements without
hurting yourself and actually only improving your market access, is that your external
barriers be low.
So I was advising the Singapore people when I lectured them some four years
ago, you are not big enough to set any example for anybody. I am not talking to Lamy or
Zoellick. The U.S. sets an example. The EU sets an example. But Singapore is just
maximizing its own wealth. Since your own trade barriers are virtually zero, go ahead and
sign as many agreements as you can. Be promiscuous. Lie in every bed. Enjoy it. But to
India, I said do not do it. Because you would end up in bed with somebody you should
really not be in bed with. This is the main lesson.
The overall bargaining power, of course, is a different point. But this is
something that politicians are bound to think about. Like the Brazilians in MERCOSUR.
MERCOSUR is essentially a balance to NAFTA, and of course Brazilian economics is run
mostly by foreign service people. They are all foreign service people. So it is very much
a foreign service oriented, diplomatic oriented, politics oriented economic policy.
On the bright side, the generals around the world are interested. The bright
story would be simply that the U.S. TPA does actually pass, because they are working hard
at it. And that the politics will ease up after the election at the end of the year. But
if it goes the other way, who knows? Maybe we just have to wait another two years or
something. If you take a three year perspective, it is very hard. But I think it is a
freak thing, the three year perspective. I think we will go far. At the negotiating
level, you have very good people. Especially with Supachai coming in with Harbinson, that
is also good. They can stand on Mike Moore’s shoulders now and push it forward. There is
enough leadership interest, in my judgment, and that is half the game. All of these will
have to be surmounted in one form or another. I was just pointing out what the downsides
might be as we push ahead.
Ultimately, for the final outcome, I am optimistic, but whether it will be five
years, or seven, as long as it does not exceed seven and half you should be happy.

Question #4: So would it be fair to characterize your view as cautiously optimistic
or cautiously pessimistic?
Answer #4: I would say cautiously optimistic because you can only be reasonably
optimistic if you recognize what the problems are. If you are just optimistic without
knowing what the problems are, you will not be able to address the problems. The first
secret of success is to know who your enemies are and try to cork them in some way.

Question #5: About China’s accession to the WTO, considering all these
difficulties you mentioned with regard to the Doha round, what are the implications for
the Chinese accession and to the WTO operations as well as the Doha round negotiations.
Answer #5: About China in the WTO, I think it will wind up playing fairly
responsibly. There is nothing on record of China wanting to join an institution like this
to wreck anything. They are very practical people. They want to belong. And they have
other interests in international events, like sports, Olympics and so on. I do not see
them as basically having any revolutionary fervor. If anything they are conservative
right now. Also, the Party wants to continue. If it is radical, it will not be able to
continue. So I see no evidence right now that they will do it.
I know that Dr. Supachai as said that there are some 20 committees in the WTO dealing
with different aspects of post-Chinese accession problems, but I do not think that that
is either here or there. There is a fear that they will clog up the dispute settlement
system, but in that case simply expand it. Add three more judges. Or six more judges. Or
add more benches, as they do. So I personally feel that that cannot really be the
defining point at all.
The other way, that the WTO obligations will not be met at all by the Chinese system, of
course they need to set up a legal system and so on. I know people who throw their hands
up saying that China will never do it. But how have they absorbed so much investment in
the past few years? You set up your own arbitration system, if the regulatory system does
not work. Make up your own little courts where you refer your problems. They will not
necessarily take all of them to the WTO, but they will apply WTO rules and maybe not use
a dispute settlement system to clog it all up. Just have arbitration systems as you
already have.
There are so many ways in which you can handle it. This also used to be said about Japan.
If Japan starts using the system, they will start clogging it up because they do not have
enough lawyers, and so on and so forth. But nothing like that has even happened with
Japan either. There are a lot of people who know a whole lot about China who feel that
this will not be a major problem, that they will make a lot of changes as they go along.
We are not going to create either impossible obligations on China or the other way
around, that it will be a smoother process.
I am on the optimistic side and I know that Supachai is also on the optimistic side. I
think there are people who look at the legal systems much too deeply, and they do not
understand that it is an evolving system. I am on the board of a Shanghai WTO
institution, and they are turning out, I think somebody said, 100 people per year,
bureaucratic experts dealing with this. Probably in 5 years you will have 500 Chinese
experts per year. They might even be able to loan them to the developing countries to
handle their problems. The WTO itself is training lawyers as well. This is an evolving
system which China is now really part of, along with other countries.
The main fear is on the part of unions, I know. I was talking to John Sweeney, a U.S.
member of Congress, and he really feels that on things like social clauses, labor
standards, that the Chinese will be the final block, though India might come around. In
my opinion China will just be another vote. I do not see the other developing countries
automatically looking to China. It may want to be a leader, but it has no followers. It
has a different political system, and I do not think many people admire that one. People
are also fearful of competition. So China will not become a leader.
Like my daughter who is a Marine on Okinawa, she tells me that, “Daddy, you are a great
leader but you have no followers.” Well, it is the same with China. China will not play
that role until it becomes democratic. Right now, China is seriously handicapped in terms
of public perception because of its politics, including in developing countries.

Homepages

If you are interested in finding out more about the above topics and people, we list
below some homepages which might be of interest.

l Amnesty International: www.amnesty.org
l APEC Secretariat: www.apecsec.org.sg/
l Prof. Bhagwati’s Personal Homepage: www.columbia.edu/~jb38/
l Convention on International Trade in Endangered Species of Wild Fauna and
Flora: www.cites.org
l Columbia University: www.columbia.edu
l Doha Development Agenda: www.wto.org/english/t

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