Majority of UN High-Level panel supports new trade round

by Chakravarthi Raghavan

Geneva, 29 June 2001 - A majority of the 11-member High-Level UN Panel on Financing for Development has recommended the launch of a new round of multilateral trade negotiations at the Doha ministerial meeting of the WTO, while a minority has says that such a round should not commence until the developed countries have fully delivered on their promises under the Uruguay Round.

The panel was chaired by former Mexican President, Mr. Ernesto Zedillo, and the report, commissioned by the UN Secretary-General, Mr. Kofi Annan, was issued Thursday in New York. It would be an input to the UN Conference and Summit on Financing for Development to be held in March 2002.

The panel said: “Members of the Panel endorse the thrust and principal recommendations of the (Technical) Report, but they do not all subscribe to every detail of the argument in the text.”

This stipulation, and some variations between the text of the report, the executive summary, and the proposals and recommendations at the end, appear to have been crafted to get the support of all the members, and get several issues and subjects on to the international agenda for discussion.

In the preparatory committee process, the US and the EC, for example resisted some of the ideas flagged for consideration and discussion at the UN Summit on Financing for Development.

The executive summary, issued by the UN secretariat in New York and Geneva said that the panel as a whole endorsed the launching of a new round of trade negotiations at Qatar.

However, the text of the report says this is a majority view, while the minority believes no such negotiations should begin until the developed countries have “fully delivered” on their promises in the Uruguay Round.

Says the report, “most members of the Panel believe that the best approach to doing so is to initiate a new round of multilateral trade negotiations at the ministerial meeting of the World Trade Organization (WTO) planned for Qatar in November 2001, although a minority believes that such negotiations should not commence until the developed countries have fully delivered on their promises under the Uruguay Round.”

The report does not identify the majority and the minority.

The panel in a sense has thus identified, made respectable and brought up for attention several issues - ranging from international taxation to infant industry protection in developing countries - whose formal inclusion in terms of the Conference and its agenda have been resisted by the US and the EC. The panel has thus brought up for international discussion some of the questions.

The report, under the title “Technical Report of the High-Level Panel on Financing for Development”, says that it was commissioned by the Secretary-General of the United Nations in December 2000, and that “the members of the Panel endorse the thrust and principal recommendations of the Report, but they do not all subscribe to every detail of the argument in the text.”

Besides, Zedillo, the panel consisted of. Mr. Abdulatif Y. Al-Hamad (director-general of the Arab Fund for Economic and Social Development), Mr.  David Bryer (former director of Oxfam), Ms Mary Chinery-Hesse (former Dy.  Director-General of the ILO), Mr. Jacques Delors (former EC Commission President), Ms. Rebecca Grynspan (former vice-president of Costa Rica), Mr.  Alexander Y. Livshits (Chairman of the Russian Credit bank), Mr. Abdul Magid Osman (former Finance Minister of Mozambique), Mr. Robert Rubin (former US Treasury Secretary under President Clinton), Mr. Manmohan Singh (former Indian Finance Minister) and Mr. Masayoshi Son (President and Chief Executive of Japan’s Softbank Corporation).

The new round, the report says, should be “truly a Development Round”, and the industrial world should accept that the negotiations are centred on questions of concern to the developing countries, and must enter the negotiations prepared to make substantive concessions on those issues.

“Many developing countries,” the report adds, “might find it difficult to start negotiations without some assurance of such willingness. The Qatar ministerial meeting should set an objective of making trade as free between industrial and developing countries as it already is among the industrial countries.”

While listing the agenda of items that must be on a development round, and while not limiting the Round to these topics alone, the report does not make any reference in its trade part to the new subjects that the EC and Japan, and more recently under President Bush, the US seems to advocate, namely the investment and competition policy issues and WTO trade rules on these.

The report refers to private capital flows, FDI and portfolio flows, and talks of FDI being more likely to flow if there is commitment of host countries to provide ‘national treatment’ to foreign capital; transparency in government policy; provisions for free transfer of capital, profits and dividends; willingness to allow temporary residence for key personnel; and absence of performance requirements.

The panel also stresses the importance of countries being able to make exceptions to protect national security, safeguard the integrity and stability of the financial system or respond to balance-of-payments crises.

And national treatment does not mean special treatment: “foreign investors should not be exempted from domestic laws governing corporate and individual behaviour, nor should the authority of domestic courts, tribunals, and regulatory authorities over foreign investors and their enterprises be curtailed.”

The report also speaks of developing countries having to continue to improve their attractiveness to FDI, including by upgrading their accounting and auditing standards and improving transparency, corporate governance, efficiency and impartiality of their administration, as well as physical infrastructure.

While such actions would be the right way to attract FDI, giving tax concessions or eroding domestic social or environmental standards in a race to the bottom would be a wrong way.

One of the ways that an International Tax Organization (advocated by the panel) could play is in disciplining competitive tax concessions that end up mostly benefiting foreign investors rather than host countries. And such disciplines would need to be applied to industrial as well as developing countries.

In a part of the report, dealing with systemic issues, and proposals for modernising international economic governance, the panel says that despite its youth, the WTO is in urgent need of reform and support in certain critical aspects. The necessary changes are unlikely to be achieved from within. What might be needed is a bigger political impulse, stemming from the construction of global economic governance.

The panel identifies for reform in the WTO its decision-making system, its capacity to provide technical assistance and its evident under-funding and under-staffing.

In setting an agenda for the new round, the report says that a Development Round would need to deal with:

·        Finishing the business of the Uruguay Round. This means securing full implementation of the spirit as well as the letter of the commitments that industrial countries made in those negotiations. There is also a need to review regulations that developing countries have found either hard to implement or unexpectedly onerous.

·        Strengthening the rules of the WTO system. This is of critical importance for developing countries, because it is the least powerful countries that most need strong rules. Anti-dumping rules, for example, are being increasingly abused and need to be disciplined by the international system.

·        Liberalising trade in agricultural products. All analyses indicate that this would benefit developing countries. Of course, the implications of full liberalisation would be enormously greater for some products, like sugar, than for others. The real cost of producing sugar in developing countries is as little as a third what it is in some EU countries, but developing-country exports are kept out by an EU tariff of 213 per cent. Agricultural subsidies in the member countries of the Organisation for Economic Co-operation and Development (OECD) amounted to $361 billion in 1999, more than the entire GDP of Sub-Saharan Africa. The aim should be complete liberalisation of agricultural trade, with at most two qualifications. First, in the industrial countries, any concern to sustain the real income of the rural sector should be addressed by subsidies focussed on environmental protection rather than agricultural output.  Second, in developing countries, a continuing concern with food security may justify variable import tariffs when world prices are low, given that these countries cannot afford extensive farm subsidies.

·        Reducing tariff peaks and tariff escalation. Even after the Multi-Fibre Arrangement has been phased out under the Uruguay Round agreement, the average tariff on textiles and clothing in OECD countries will be 8 per cent, compared with 3 per cent on other manufactures. For many other developing-country exports, market access is limited by particularly high tariffs or by tariffs that escalate with the degree of processing. This prevents developing countries from producing higher-value products and moving up the development ladder.

·        Reforming trade-related intellectual property rights. This was a topic covered for the first time by the multilateral trade regime in the Uruguay Round. But many developing countries have found it impractical to impose and enforce state-of-the-art intellectual property laws on the model prescribed in the WTO agreement. Furthermore, some of the results, such as the high cost of HIV/AIDS medicines and other patented pharmaceutical products in poor countries, have aroused much anxiety. This whole question needs to be re-examined, with a view, among other things, to seeking ways to increase the availability of low-cost medicines without unduly affecting the incentive to innovate and introduce new products.

·        Legitimizing limited, time-bound protection of certain industries by countries in the early stages of industrialisation. However misguided the old model of blanket protection intended to nurture import substitute industries, it would be a mistake to go to the other extreme and deny developing countries the opportunity of actively nurturing the development of an industrial sector. A requirement for international approval of such protection could be a help to the governments of developing countries in resisting excessive demands from their domestic lobbies (and from multinationals considering local investment).

·        Taking a new look at liberalising migration. The time may also be ripe to start seeking some measure of international agreement on ‘the movement of natural persons’, meaning rules governing short-term overseas employment, which could provide an even larger source of foreign exchange for developing countries than in the past.

This list is not intended to suggest that a new trade round should be limited to these topics. Rather, it seeks to identify those topics that must not be omitted if developing countries are to be fully included in the world trading system on an equitable basis.

Earlier, the report says that while eight rounds of multilateral trade negotiations have done much to dismantle tariff and non-tariff barriers to trade, by far the main beneficiaries of the trade liberalization have been the industrial countries, while the exports of developing countries continued to face significant impediments in the markets of rich countries, with the highly competitive basic products exported by the developing countries - including not only agricultural products facing ‘pernicious protection’, but also industrial products subject to tariff and non-tariff barriers - carrying “the highest protection in most advanced countries.”

In terms of systemic issues and institutional reforms, the panel says that some of the biggest problems are to be found in the WTO.

Part of the problem is the inadequate funding. One service that the WTO ought to provide to members, but presently does not, is legal aid to smaller and poorer members, aid that is needed when a country has to mount a legal defence against, say, an unwarranted anti-dumping action by a much larger country.

On need to address and change the WTO’s decision-making, the panel notes that the WTO, like the old GATT, works by consensus. But the informal negotiations in the ‘Green Room’ that normally precede the achievement of a consensus, conducted among a limited group of essentially self-selected countries, “is now close to collapse, partly as a result of increased numbers of countries involved, but mainly because the developing country members have a greater stake in the world trading system than they used to.”

Under the Uruguay Round accords, members can no longer pick and choose which of the agreements they would subscribe to, but are obliged to abide by all of them.

“Hence, they cannot stand aside from the process of negotiations in any important area without endangering their interests. Many countries after the Uruguay Round that they had accepted a series of obligations that had been developed without their participation, and which they would have great difficulty in implementing.”

The panel suggests that a small steering group can be established and could be delegated responsibility for negotiating consensus on future trade accords among WTO members. But such a group should not undercut countries’ rights and obligations in the WTO, nor should it supercede the rule of decision-making by consensus. The steering committee need not involve proportional or weighted voting, and “each member should retain the ultimate decision to accept or decline participation in trade pacts.”

And ideally the composition of the steering group should be representative of the total WTO membership, and participation should be based on clear, simple and objective criteria.

The panel also said that issues of both labour and environmental standards need a stronger focus in the international arena than they presently have.

In the case of labour standards, the most natural solution would be to strengthen the ILO which “should be quicker than it has been to condemn governments that violate its conventions.. and be able to impose economic sanctions, perhaps in the form of fines, on persistent offenders.” In the environmental domain, the sundry organizations that now shape policy responsibility should be consolidated into a single Global Environment Organisation with standing equivalent to that of the WTO, the IMF and the World Bank.

The report also deals with the IMF, their voting structures and governance, and the “fact of life that creditors expect to control organizations in which they place money,” and says that acceptance of this reality should not however preclude the continuation of attempts to correct anomalies in their governance.

The report deals with competition among countries, not by tariff policy or devaluation, but offering low tax rates and other tax incentives, and the tax evasion and capital flights caused by the territorial taxing systems, and the lack of any international organization dealing with these, and calls for an International Tax Organization (ITO) - which could at the least compile statics, identify trends, present reports and provide a forum for exchange of ideas and development of norms for tax policy.

One of the tasks of such an organization could international arrangements for taxation of emigrants, perhaps using the US system of taxing nationals on world-wide income, as an important way of turning brain drain to benefit the source countries.

The report also tries to revive the recommendation of the Global Governance Commission for an international apex body, a Global Council at the highest political level to provide leadership on issues of global governance. It has proposed a Globalization Summit to discuss the issue. The Summit should convene a group of heads of state, large enough to be representative, small enough to be efficient, to address the key governance challenges of globalization through a structured but informed discussion.

On trade, the panel said that trade is an engine of growth. Both the competitive pressures needed to produce successfully for the export market and access to the imports necessary to build a modern economy are essential for any sort of rapid growth, equitable or otherwise, environment-friendly or environment-destroying.  Making growth equitable and sustainable is the task of other policies; there is in general little reason to regard trade as inherently biassed one way or the other on those dimensions.

But since poverty in a poor country cannot be overcome without sustained rapid growth, the willingness and opportunity to trade liberally are critical to long-run poverty reduction. It is notable that, at least since the 1960s, every country that has pulled its people out of poverty has made a significant opening to trade a central feature of its economic strategy.

The past decade has seen a notable liberalisation of trade by developing countries, analogous to that earlier undertaken by today’s industrial countries, at least as regards trade among themselves. Unfortunately, the liberal trade regime that now prevails among the industrial countries (except in agriculture) is not matched by free market access extended to the products of interest to developing countries. In part this is doubtless due to simple protectionism - jobs were perceived to be at stake. But in part it is also due to the earlier attempts of developing countries to stand outside the process of making bargains about trade, and to expect to benefit from concessions without making concessions in return.

That finally changed in the most recent round of multilateral trade negotiations, the Uruguay Round, where developing countries did participate actively in the bargaining. Their involvement won them some notable gains, such as the tariffication of quantitative restrictions in agriculture and the phasing out of the Multi-Fibre Arrangement-albeit gains with a long time fuse. One important task of the coming years will be to make sure that the industrial countries fully implement their commitments under the Uruguay Round accords to liberalise trade in areas of great significance to developing countries.

Even after the Uruguay Round commitments are completely implemented, however, substantial barriers to developing-country exports will remain. One recent (post-Uruguay Round) attempt to quantify the benefits of removing all such trade barriers estimated the potential welfare gain to developing countries at about $130 billion a year (at current prices, and covering only the gains on visible trade). Another study concluded that even a 50 per cent tariff cut could give developing countries a gain in the region of $90 billion to $155 billion a year.  It is extremely important that developing countries be given the opportunity to realise these gains.

“Most members of the Panel believe that the best approach to doing so is to initiate a new round of multilateral trade negotiations at the ministerial meeting of the World Trade Organization (WTO) planned for Qatar in November 2001, although a minority believes that such negotiations should not commence until the developed countries have fully delivered on their promises under the Uruguay Round.

“The new round should be truly a Development Round, and indeed that title has been widely suggested. The industrial countries, whose leadership will be indispensable in making a new round successful, will need to accept that the negotiations are centred on questions of concern to developing countries. They must enter the negotiations prepared to make substantive concessions on those issues; many developing countries might find it difficult to start negotiations without some assurance of such willingness. The Qatar ministerial meeting should set an objective of making trade as free between industrial and developing countries as it already is among the industrial countries.”

One issue that has impeded agreement on the launch of a new round is the use of trade sanctions to promote labour or environmental standards. These topics are best dealt with by developing the international institutions specifically focussed on labour and the environment.

In recent years trade liberalisation has often occurred on a regional rather than a global basis. Regional agreements can be a constructive way of advancing more liberal trade and are often of special importance for small countries, but it is important to make them building blocks of, and not stumbling blocks to, a global free trade system. Such agreements should be fully WTO-consistent, and their pursuit should not become an excuse for delaying multilateral liberalisation.

On the trade problems of the least developed countries, the panel says: “Trade rounds take a long time to reach fruition. The problems of the least developed countries cannot wait that long. Some initiatives have already been taken to strengthen their trading position. The WTO, the World Bank, the International Monetary Fund (IMF), UNCTAD, the United Nations Development Programme, and the UNCTAD-WTO-sponsored International Trade Centre have jointly launched an ‘Integrated Framework’ designed to build up the capacity of the least developed countries for trade negotiation and to assist their export diversification. The extent to which countries are able to take advantage of improvements in market access obviously depends on a range of supply-side factors, many of which are covered by the discussion of domestic policies in the previous section. In the case of many least developed countries, these problems are so acute that it is right for the international community to give some immediate help in capacity building. The Trust Fund that has been established to support the Integrated Framework will do just that. It deserves generous financing.

The WTO has also tried to shame the industrial countries into improving market access for the least developed countries. New Zealand and Norway have already opened their markets completely. The United States has responded with its special programmes for Africa and the Caribbean, which have received congressional approval and are now being implemented, although unfortunately with limitations that are liable to curtail their value. The European Commission proposed that the European Union phase out all quota and tariff restrictions on imports of everything but arms from the least developed countries over 2002 to 2004. That proposal was approved in the Council of Ministers in February 2001, although with regrettable delay in giving unrestricted market access in bananas, rice, and sugar. It is important to secure faithful and prompt implementation of this commitment and to obtain actions at least as good from all other industrial countries. An immediate and useful step would be to implement without further delay all Uruguay Round concessions affecting the least developed countries, provided, of course, that such concessions not be allowed to substitute for overall liberalisation.

Many of the poorest countries still remain overwhelmingly dependent on primary commodities for their export revenue. In fact, more than 50 developing countries, including about two-thirds of the HIPCs, depend on three or fewer commodities for more than half their export earnings. This exposes them to two problems. One is that over the long run the prices of these goods have tended to fall in real terms, making it increasingly difficult for producers in these countries to earn a decent living and for the countries to buy the imports they need to grow. The other is that both the producers and their countries are buffeted by strong cyclical pressures, because commodity prices often vary sharply with the state of global demand.

It is difficult to imagine how the first problem could be resolved by direct intervention to support prices. International commodity agreements have occasionally managed to hold up prices for a few years. But such success has invariably attracted additional producers and dampened demand until the agreement finally collapsed, leading to adjustments even sharper and more painful than would have been experienced in a free market. At the root of the problem is that, under current circumstances, any rise in commodity prices spurs a rush of new entrants hoping to scratch out a living by supplying the world market, even if at a starvation wage. The problem will be overcome only when development has proceeded far enough to make such desperate behaviour unnecessary.

There is also a long history of attempts to reduce the cyclical variability of commodity prices, or at least to reduce its impact. Although some modest initiatives, such as the IMF’s Compensatory Financing Facility, have been useful at the margin, none of the grand proposals floated, from Keynes onward, has ever secured agreement. Even commodity agreements that did not aim to hold prices permanently above their market-clearing levels have eventually collapsed. It is regrettable that the Compensatory Financing Facility was scaled back in the 1980s. It deserves to be restored and improved.

One interesting new approach for making a limited assault on the problem is a scheme for commodity risk management in developing countries. This new initiative differs from its predecessors in two key respects. First, it makes no attempt to stabilise market prices, but rather focuses on the price received by the individual producer. Second, although it envisages the creation of a new intermediary within some international organisation to operate the scheme, this intermediary would reinsure its contracts with private sector insurers, so that the terms it offered would be essentially those being quoted by the private sector. The job of the intermediary would be to make these terms widely available to poor farmers and other producers in developing countries who now lack access to private insurance.

The proposed intermediary would sell insurance to producers on the prices of at least the 12 principal commodities exported by developing countries. Aid resources could be used to pay a part of the premium costs of poor producers, provided the eligibility criteria are unambiguous; producers with incomes above that threshold would be required to cover the costs. Since the intermediary would quote premium rates based on going rates in the commercial markets with which it would reinsure most of its risk, it would be largely risk-free.

How useful would such a mechanism be? It is important to be clear that it would not claim to stabilise prices received by producers, but rather to give them advance assurance of the minimum price that they will receive. This would be of special value to farmers with a choice of annual crops. They would be better able to decide which crop to sow if they knew, at planting time, the minimum price they would eventually receive for each alternative crop. The scheme would only stabilise the incomes of other producers (such as those harvesting coffee and other tree crops) to the extent that they would make claims on their insurance when times are bad and not when they are good. As world market prices fluctuate, so would the guaranteed minimum price that could be bought for a given insurance premium. Although the potential benefits of such a scheme are fairly modest, it would be worth initiating one promptly, at least on a trial basis.

In contrast to the many initiatives over the years to liberalise trade, and more recently to free capital movements, there has never been any comparable initiative to free the movement of persons between countries. In the light of demographic developments in the industrial countries (in particular, the ageing of their populations) and the potential benefits of migration in generating remittances to developing countries, the time has come to put this issue on the international agenda.

The increased trading opportunities called for in this section would create the chance for many more developing countries to enter the virtuous circle of export-led growth. These better market opportunities would need to be supplemented by strong support for capacity building and efforts to limit the havoc wrought by weak commodity prices. Only then will trade fulfil its potential in helping the poorest countries achieve the International Development Goals. – SUNS4926

The above article first appeared in the South-North Development Monitor (SUNS) of which Chakravarthi Raghavan is the Chief Editor.

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