Fair Trade for All:

How Trade Can Promote Development

May 2006

Joseph E. Stiglitz

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 of Fair 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 of rich countries; it included
Services - but not unskilled labor intensive services; Subsidies - but not agricultural subsidies; Intellectual property rights;

Most of its projected benefits accrued to the rich countries

70% of gains to developed countries The 48 Least Developed Countries were actually left worse off

The need for a development round

(II) The trading system is unbalanced
The system is stacked against poor countries
The average OECD tariff on goods from poor countries is 4 times higher than on goods from other OECD countries Rich countries cost poor countries three times more in trade restrictions than their total development assistance to them.

There has been little progress on agricultural issues

OECD countries continue to subsidise agriculture by 48% of total farm production, just 3% lower than 1986; and maintain high tariffs

Intellectual property rights disadvantage poor countries

Exacerbate north-south knowledge gap; and restrict technology transfer Do not protect indigenous knowledge
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Trade liberalization has not produced the expected benefits in practice, even when specifically directed at helping developing countries
EUs Everything But Arms (EBA) initiative
Did not lead to significant increases in exports from poor countries, partly because of low export capacity/weak infrastructure and complex rules of origin

US AGOA initiative
Only benefitted a few countries and those will diminish 6 after restrictions (e.g. use of US cotton) come into force

Explaining the Failures

Trade liberalization has not been asymmetric But even theory is qualified in its support of trade liberalization
With imperfect risk markets, trade liberalization may be Pareto Inferior (Newbery-Stiglitz, 1982) With growth, argument for trade liberalization even weaker
Most of growth is related to technological progress (Solow, 1957) Market failures are pervasive (Arrow, Stiglitz) Historically, most successful countries developed behind some protectionist barriers
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The Infant Economy Argument for Protection

Often trade-offs between static and dynamic efficiency (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 of innovation in industrial sector is its size
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 Two sector two country model; large efficient developed country; small developing country with comparative advantage in agriculture Without protection, it specializes in agriculture, remains stagnant, falling increasing behind developed country Protection results in short run losses, but long run gains Model robust
Results strengthened if there are interindustry cross border technology flows in the industrial sector
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Argues for broad based protection Generates revenue to finance education, research Avoids special interest protectionism Consistent with south-south regional trade agreements From Bruce Greenwald and Joseph E. Stiglitz, Helping Infant Economies Grow: The Foundations of Trade Policies for Developing Countries American Economic Review, May, 2006 (forthcoming)
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Development Round as it has evolved is not true development round

Central message of our book Fair Trade for All How Trade Can Promote Development Lays out a comprehensive agenda of trade liberalization that would promote development That agenda is very different from that set out in Doha And even more different from what has evolved since
With the current agenda, the Development Round does not deserve that name Hong Kong avoided a 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 true development 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 to huge U.S. market NAFTA ten years later
Mexico has lower growth than ten years before High inequality, low innovation, low wages growth and some of the poorest worse off as a consequence of US agricultural subsidies Shows at the very least dream has not been realized
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Problems
NAFTA was not really a free and fair trade agreement
With massive US agricultural subsidies With retention of non-tariff barriers
Which were used when Mexico made inroads into 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
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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 agenda and may make development more difficult
CML (Chile: ironic, especially given role it played in protecting Chile from global financial crisis) Bubble gum (Singapore) Environmental regulations (Chapter 11)

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Bilateral agreements bad for global efficiency

Principle of single price at core of efficiency of market economy Underlays MFN principle (most favored nation) Which underlay global trade system for past fifty years Bilateral agreements undermine this
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Bilateral agreements undermine global efficiency

Much of gain based on trade diversion, rather than trade creation
Should be enforcement of WTO regulations, assessing overall impact

And in long run may increase costs of adjustment

Especially important for developing countries Movement into advantaged area, only to lead to a movement out, when advantage is eliminated

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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 any multilateral 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 administration And subject to administrative abuse
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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 out Aid 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 equals
Meaning developing countries are more likely to gain Even though economics of such agreements might 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 would look 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
Clinton attempts to launch Millennium Round, but the meeting fails amid street riots

Doha 01
Cancun 03 July mini 04

Launches the Development Round with the goal of completion in Jan 05

Supposed to evaluate progress but no progress was made in key areas, so the developing countries walked out Attempt to put the round back on track by reducing the ambition of the agreements

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Development Round: Is it only rhetoric?

The Doha declaration made bold but vague promises to developing countries
But did the agenda reflect the real concerns and interests of developing countries?
Or was the agenda hijacked, with the proposed agreements actually making the developing countries worse off

What would a development agenda really look like?

Conclusion: The agenda as it evolved was not pro-development
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Development Round: Is it only rhetoric?

The agenda of the Development Round as it evolved did little for the developing countries
It did little to address concerns in agriculture It did little to address problems posed by non-tariff barriers It went only a little way in addressing concerns about intellectual property It did little to advance a developing country service sector agenda There were no reforms in basic procedures

The proposed agendas new issues were not those of central concern to the developing world
Procurementdeveloping countries unlikely to be successful in procurement (e.g. defense) in advanced industrial countries, but US wanted capital market liberalization Competition policy which restricted development and socially oriented preferences

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Principles of a Development Round

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

2. An agreement should be fair

- it should have fair outcomes

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Principles of a Development Round

3. An agreement should be fairly arrived at
Current procedures put developing countries at a disadvantage Developed countries have resisted more fundamental reforms Increase openness and transparency of negotiations Symmetric enforcement system

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Principles of a Development Round

4. It should be limited in scope
Expansive negotiations put developing countries at a disadvantage Principle of conservatism. Only issues that 1) are relevant to trade flows, 2) are developmentfriendly, 3) involve a rationale for collective action Since decision process not democratic, and there is some loss of sovereignty, there should be positive benefits for developing countries: should focus on areas that are of essential concern e.g. where cooperative action is necessary
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11 Priorities of a Development Round

1. Liberalization and protection of labor flows and labor intensive services
More important for global efficiency than capital market liberalization Without imposition of adverse risk effects Improves living standards through remittances
$32 Billion in remittances in 2002 in Caribbean and Latin America far greater than total ODI and only slightly less than FDI
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11 Priorities of a Development Round

2. Liberalization of agricultural market,
- especially of those goods for which there will be limited adverse consumption effects

3. Liberalization of industrial goods

- elimination of tariff peaks, and tariff escalation

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11 Priorities of a Development Round

4. National treatment of anti-competitive practices

Eliminating discriminatory treatment against foreign producers through dumping duties Single regime for anti-competitive practices for both foreign and domestic firms

5. Explicit recognition of rights to use industrial and other development policies

Including governments right to provide to capital at reasonable interest rates Including use of CRA requirements to ensure access 33 to finance

11 Priorities of a Development Round

6. Restrictions on tax competition to attract investments
7. TRIPS minusrebalance intellectual property rights
Foster the transfer and dissemination of technology Protection of traditional knowledge
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11 Priorities of a Development Round

8. Fairer mechanism for enforcement
Threat of small, LDCs imposing trade sanctions against US not very effective Trade losses compensated with financial payments or from international auction of retaliatory rights

9. Expanding agenda to concerns of developing countries: Anti-corruption policies and arms sales restrictions

International non-bribery legislation

i.e. Everything But Arms agreement, but make it meaningful rules of originand broader

10. Extend unilateral disarmament

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11 Priorities of a Development Round

11. Institutional reforms
More transparency in negotiating process Principle of representativeness

Independent office for the assessment of the impact of proposed trade provisions on development and developing countries
and assessment of trade diversion vs. trade creation affects of bilateral and regional agreements

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Adjustment costs
Much larger for many developing countries than for advanced industrial countries
Developing countries are vulnerable to policy shocks because their export industries are least diversified Developing countries need to make the largest changes to comply with regulations The trade structure is most distorted in the industries of importance for developing countries

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Adjustment costs
Loss of preferences:
Small countries with less diversified industries may face large adjustment costs

Tariff reduction has serious fiscal consequences for 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 and divert resources from other development priorities Provision of compensation wins political support for reform Technical assistance is needed to improve trade performance through policy and institutional strengthening
Technical assistance commitments were non-binding for developed countries And many countries did not live up to the commitments

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Conclusion
The round of trade negotiations that began in Doha does not deserve epithet of a Development Round
In present set-up, for developing countries, no agreement may be better than a bad agreement

International community should resolve to have a true development round

International community needs to provide the assistance both to help developing countries to adjust and to take advantage of new opportunities

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Conclusion
International community should reform procedures of negotiations
Such reforms are likely to lead to a reform in outcomesto outcomes that are fairer to developing countries and more likely to promote rather than hinder their development

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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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