Fair Trade for All:
How Trade Can Promote Development
February 1st, 2006
Joseph E. Stiglitz
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Outline
• The need for a development round
• Trade liberalization has not lived up to its promise
– The failures in practice
– Theory
• The Development Round is not a True
Development Round
– The Dangers of a “false” development Round
– The Dangers of a failed development round
• The growth of bilateral and regional trade agreements
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Outline (II)
•
•
•
•
•
•
Overview of major results 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
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The need for a development round
(II) The trading system is unbalanced
• The system is stacked against poor countries
– The average OECD tariff on goods from poor countries is 4 times higher
than on goods from other OECD countries
– Rich countries cost poor countries three times more in trade restrictions
than their total development assistance to them.
• There has been little progress on agricultural issues
– OECD countries continue to subsidise agriculture by 48% of total farm
production, just 3% lower than 1986; and maintain high tariffs
• Intellectual property rights disadvantage poor
countries
– Exacerbate north-south knowledge gap; and restrict technology transfer
– Do not protect indigenous knowledge
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Trade liberalization has not …
… produced the expected benefits in
practice, even when specifically
directed at helping developing
countries
• EU’s 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
after restrictions (e.g. use of US cotton) come into forc6e
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 disaster—but 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 strategy—moving 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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NAFTA—if 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 America’s 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 isn’t everything
• Trade liberalization is important, but it isn’t 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 Millenium
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 fair—agreements
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 ’9
9
• Clinton attempts to launch
‘Millennium Round’, but the
meeting fails amid street riots
• Doha ’0
1
• Launches the ‘Development
Round’
with the goal of completion in Jan 05
• Cancun ’0
3
• 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
• July mini
‘04
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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 agenda’s new issues were not those of
central concern to the developing world
– Procurement—developing 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 government’s right to provide to capital at
“reasonable” interest rates
Including use of “CRA” requirements to ensure access
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to finance
11 Priorities of a Development Round
6. Restrictions on tax competition to
attract investments
7. TRIPS minus—rebalance 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
10. Extend “unilateral disarmament”
–
i.e. Everything But Arms agreement, but make it
meaningful — rules of origin—and broader
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11 Priorities of a Development Round
11. Institutional reforms
–
More transparency in negotiating process
–
Principle of representativeness
–
Independent office for the assessment of the
impact of proposed trade provisions 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
outcomes—to 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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