TWN Info Service on WTO and Trade Issues (Oct07/09)

11 October 2007

UNCTAD Board debates regional cooperation and development
Published by SUNS #6337 dated 4 October 2007
By Kanaga Raja, Geneva, 3 Oct 2007

The Trade and Development Board of the UN Conference on Trade and Development (UNCTAD) on Wednesday held a discussion on the agenda item of interdependence and global economic issues from a trade and development perspective, focussing on regional cooperation and development.

The focal point for these discussions was UNCTAD's flagship publication, the Trade and Development Report 2007 (TDR), whose theme this year was on regional cooperation and development (See SUNS #6319 dated 10 September 2007).

The Trade and Development Board of UNCTAD is currently holding its fifty-fourth session from 1-11 October.

In introducing the TDR at the session, UNCTAD Secretary-General Dr Supachai Panitchpakdi said that UNCTAD had published a highly illuminating report that emphasized an analysis of the proliferation of regional integration worldwide.

Supachai also noted that regional integration does not have to encompass trade alone. After the Asian financial crisis, there was financial cooperation in the region to pool reserves, he said, pointing, for example, to the "Chiang Mai" initiative.

Heiner Flassbeck, Director of UNCTAD's Division on Globalization and Development Strategies, presented the main findings of the report as well as an overall outlook of the global economic situation.

He noted that surplus countries are seeing their currencies depreciate while deficit countries are seeing an appreciation of their currencies. This could be a dangerous development, he said, and asked whether the international adjustment mechanism is working.

Flassbeck also pointed to the issue of destabilizing speculation, in that floating exchange rates, induced by interest rate differentials, frequently move in the wrong direction - leading to "false pricing" in the international product markets. Carry trade is also a source of imbalance for some economies.

He stressed that regional cooperation in the financial field is one way of getting out of these problems. "We need to look in a coherent way to reap the benefits of globalization, and regional cooperation is one extremely important ingredient."

Honduras, on behalf of the Group of 77 and China, said that the TDR this year is focussed on a key development strategy called regional cooperation. The report provides rich analysis and comparative experiences that are useful and needed by academics and trade negotiators to study and take decisions on regionalism and regionalization.

Cooperation and regional integration is not a new phenomenon, it said. It is a core element of the development strategies for developing countries. The report says that South-South regionalism includes substantially the provision of regional public goods and the re-configuration and merger of political space in one economical regional space to benefit all members of the group, the G77 added.

The nature and implementation of regionalism is one thing and the impact on developing countries is another. What is required is permanent monitoring and assessment.

The analysis of regional South-South trade agreements shows the importance of placing more attention on the way to manage and solve potential imbalances in trade distribution and the economic benefits among members with different levels of development.

The G77 highlighted that a single instrument for South-South regionalism is the GSTP among developing countries.

As to North-South FTAs, the G77 said that the analysis in the report on this issue is especially interesting. The report said that it is necessary for careful assessment of the costs and benefits by developing countries before signing these agreements. The challenge is to maximize the potential benefits of the agreements and minimize the possible costs.

The G77 also highlighted what it considered key parts in the North-South FTAs that could help guarantee benefits to developing countries. It said that Special and Differential Treatment has to be explicit and correctly provided in terms of long periods of transition and product coverage.

Less-than-full-reciprocity in tariff cuts has to be slow and gradual. The treatment has to be also incorporated under the WTO rules in the regional FTAs, so that the North-South agreements with due flexibility for developing countries could be WTO-compatible.

Honduras also said that the Doha Round provides the opportunity to rewrite special and differential treatment in Article XXIV of the GATT. It added that the rules of origin have to be flexible. There has to be a strong development dimension in every effort towards more deep integration. Deeper integration should be gradually pursued and only when developing countries are ready, said Honduras.

The Philippines, on behalf of the Asian Group, aligned itself with the statement of the G77. The Asian Group believed that this year's TDR is timely, as it offers a clear picture of the world economy and contains pragmatic policy options which we in the international community should give full consideration. This is especially relevant as we embark on our formal preparatory process for UNCTAD XII.

The Asian Group noted that the TDR points to some encouraging economic trends in Asia. Accelerated economic growth allowed East and South Asia to more than double their per capita GDP in only 14 years. The performance of East and South Asia was almost exclusively responsible for the overall reduction in global inequality and progress towards the achievements of the MDG goals.

The Group said that the TDR points out that although the overall world economic situation is more favourable for developing countries than at any time since the early 1970s, large external shocks originating in developed countries could have serious effects on Asia. The TDR therefore points to the importance of fostering a more stable global environment as well as the need to further advance initiatives that will lead to greater global economic stability.

As the TDR points out, said the Philippines, these imperatives are being addressed in Asia through several regional initiatives including through regional integration. It should be noted, however, that regional integration itself is not a guarantee for successful development.

Thus, there is a need to focus on regional integration efforts which are part of a broader development strategy aimed at faster domestic capital accumulation and technological progress in the most promising industrial and service sectors of each country.

Regionalism can then be a viable development path, even if at times, it might require a transfer of national policy space towards a regional policy space, allowing sufficient flexibility and greater coherence at the regional level.

A clear example of this transfer of policy space is when regional coordination preserves the policy space needed to effectively manage FDI, especially when un-coordinated national policies aimed at attracting FDI lead to a race to the bottom as governments cut regulations and offer generous tax incentives.

The Asian Group said that regional cooperation should therefore also include coordinated and joint action in policy areas that strengthen the potential for growth and structural change in developing countries, including macroeconomic, financial, infrastructure and industrial policies.

In this regard, economic cooperation among developing countries, including at the regional level, to improve transport facilities, provide commercial information, and which pool efforts in areas such as energy, water supply, research and development, and knowledge generation, can be crucial for the success of development strategies.

The Asian Group said that given that developing countries today have less options for public policies in support of development and structural change than the more advanced economies at similar stages of development, it may indeed be useful to explore how regional cooperation can widen national policy space by enabling individual countries to undertake bolder projects for development.

Like the previous year's TDR, this year's report is a very useful exercise in presenting options of operationalizing policy space, thus responding to UNCTAD's mandate on policy space stemming from the Sao Paulo Consensus and the world summit.

In this regard, said the Philippines, the Asian experience of pursuing development through an eclectic mix of policy instruments, rather than a focussed approach based on prevailing orthodoxy, has delivered positive results.

Indeed, those countries which best weathered the Asian financial crisis were those which pursued pragmatic and effective policies based on their own unique needs and circumstances, rather than those which adhered more closely with the orthodox policy prescriptions.

The Philippines said that Asia's broader experience in applying diverse policy instruments in response to unique situations and circumstances is reflective of the region's pragmatism and its willingness to address challenges with the most effective tools available.

A specific example is in the area of addressing the need for greater systemic stability in order to prevent a recurrence of the Asian financial crisis. In the absence of an effective international mechanism to address global imbalances, some Asian countries have recognized that regional cooperation can be effective in providing some security against abrupt corrections of exchange rates and volatility in financial markets.

In particular, said the Asian Group, regional cooperation may help developing countries deal with shortcomings in the international financial system in three areas: provision of regional payment facilities and short-term balance-of-payments financing; provision of long-term development finance; and protection against exchange rate volatility and currency misalignments that can distort trade flows and undermine fruitful trade relations.

Of particular interest in this regard are regional initiatives which seek to promote greater financial and monetary stability especially in the aftermath of the Asian financial crisis, the Asian Group said, pointing to initiatives such as the Chiang Mai initiative, which is geared towards both crisis management and prevention.

This initiative involves not only ASEAN countries but also China, Japan and Korea, underling that there are often interests common to developed and developing countries and that effective cooperation is possible in filling important gaps in the global economic architecture.

Brazil, on behalf of GRULAC, supported the statement of the G77 and considered that the TDR is an important contribution to the discussion of regional cooperation and development.

Portugal, speaking on behalf of the EU, welcomed the TDR as a strategic element to the debate on regional cooperation and development. Wide in scope, said the EU, the report represents a positive contribution to the discussion on this issue, even if the EU did not fully share its analysis.

The purpose is to evaluate, from a trade and development perspective, regionalism as a political option for developing countries and economies in transition. It addresses, also, the relations between globalization, regionalism and development and the implications, for those countries, of North-South free trade agreements or regional trade agreements.

The EU said that it remains committed to the multilateral trading system as a priority to guarantee benefits for all economies, in particular the LDCs. However, in parallel to the multilateral approach, said the EU, we believe that we cannot disregard the regional context and therefore disagree with the report's judgment that North-South bilateral or regional trade agreements "threaten the coherence of multilateral trading system".

We cannot accept either that "new regionalism denotes a departure from multilateralism," said the EU. The multilateral system provides common rules allowing all countries to participate in international trade according to the same principles and using their natural competitive advantages to generate economic growth.

The multilateral system, while being a powerful tool to fight poverty and promote cooperation between all main international actors and the developing and least developed economies, also constitutes a privileged forum to debate ideas and to find common approaches, thus providing a wider understanding of the world's economic problems and goals.

Nevertheless, said the EU, strengthening regional trade agreements (RTAs) is a complementary approach that must not be neglected and that represents a new trend amongst the main trade partners. One does not contradict the other, the EU said, adding that we need to pursue new opportunities, sharpening our efforts to open markets and tackle trade distortions both within the multilateral system and through bilateral and regional initiatives.

The EU said that RTAs also provide the basis for much more far-reaching trade liberalization (regulatory initiatives and elimination of non-tariff barriers to trade) than have so far been possible within the WTO. In this context, we must ensure that regulatory aspects of regionalism are based on clear and fair rules boosting sustainable development for all countries.

The EU supported the findings of the report that regional cooperation among developing countries has the potential to support national development strategies and that there appears to be an untapped potential for closer regional integration among developing countries. The EU also believed that North-South agreements do not threaten multilateral rules, but complement them.

Iran said that this year's TDR provides a good analysis of the outcome of regional agreements. This analysis indicates that the so-called neo-regionalism, in the form of South-North agreements which are primarily bilateral free trade agreements based on the principle of "reciprocity", mostly place the developing countries in situations that compared to the limitations imposed on them as to the implementation of national development policies, creation of opportunities necessary for the adjustment of their industrial production structure, the benefits accruing to them from deep liberalization and expanded trade, are generally not so much effective or useful.

Iran said that developing countries are increasingly participating in RTAs with developed countries for better market access and higher FDI flows and transfer of technology. But the main problem they have in North-South agreements is the insufficient attention to development needs, development level, and limited capacities in these countries. Ignoring these facts, developed countries keep raising their expectations.

Iran noted that RTAs may provide the partners from developing countries with considerable new trading opportunities or may also attract more FDI.

But there can also be disadvantages for them, because RTAs usually demand deeper liberalization of trade in goods and services, liberalization of foreign investment and government procurement, new rules on certain aspects of competition policy, stricter rules on intellectual property rights, and the incorporation of labour and environmental standards, while measures that can most benefit developing countries such as removing agricultural subsidies by developed countries are left out.

North-South RTAs could have positive effects on developing countries depending on the structure of these arrangements, the level of existing protection, and the formulation of rules. Improved market entry conditions including simplified rules of origin, mutual recognition of standards and trade facilitation measures would also be particularly beneficial to developing countries, said Iran.

Also there is a need for these arrangements to take into account the interest of developing countries in the form of special and differential treatment in commitments and disciplines, said Iran, adding that UNCTAD has an important role to play in assisting developing countries to deal with the interface between multilateralism and regionalism.

A representative of Third World Network congratulated UNCTAD for the TDR on regional cooperation and development, which it said is a very pertinent issue. The theme of regional cooperation should be a building block towards international cooperation. The best way towards this building block is to have South-South cooperation. This is important because countries at similar stages of development can help each other by expanding their markets.

Two very interesting and comprehensive sections in the report are that which relate to North-South trade agreements and South-South agreements, said TWN, adding that it was disappointed by the criticisms made to the report in relation to North-South FTAs and was surprised at statements that say that such FTAs are coherent with the WTO agreements.

The section on North-South agreements accurately portrays the dilemmas that developing countries face. Most North-South FTAs on balance give rise to more costs than benefits. The apparent aim of developing countries is to expand their trade and employment through these agreements.

However, said TWN, in reality, we face more problems. In the area of trade, because of the reciprocal nature of the FTAs, developing countries have to bring down their tariffs mostly to zero for agriculture and industrial products. This has caused very significant dislocation of farms, local firms and jobs.

At the same time, increase in exports for most developing countries is limited due to continued agriculture subsidies in the North, which are not addressed in the FTAs, and due to limited supply capacity.

Whilst gains are limited in trade and in most cases are negative, said TWN, developing countries lose out in their loss of policy space. In particular, they have to agree to take on obligations in relation to the Singapore issues which have been rejected in the WTO, as for example, the investment chapter with its pre-establishment rights and in some cases, investor-to-state dispute settlement and free transfer of funds. This has a tendency to crowd out local industry as well as set conditions for financial instability.

TWN said that the procurement chapter erodes the policy space of developing countries to use government expenditure as a tool for boosting economic and social development. The interpretation of competition inhibits the role of government to assist local companies. On IPRs, many of the flexibilities permitted by the TRIPS agreement are severely eroded. All these are erosion to policy space and poses a serious development threat.

TWN thanked UNCTAD for highlighting these problems in the report which it said is useful for raising awareness of civil society in the South. It was also of the view that the chapters on regional cooperation in the South and financial cooperation provide excellent material to foster South-South cooperation in trade and finance areas.

It called for UNCTAD to develop its role in advancing these discussions through seminars and further studies.