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Can multilateral trade work for the poor?

By Robin Koshy

Protectionism, self-reliance and village republics are not enough to lift 1.3 billion of the world’s poor out of absolute poverty. There is sufficient empirical evidence to demonstrate that trade can be a powerful catalyst for poverty reduction, that free trade with fairer policies will benefit the world's poor more than aid or charity. The problem is that World Trade Organisation negotiations and global trade are far from free and fair, with the balance skewed in favour of powerful trading blocs like the US and EU and against poorer nations

The recent collapse of the Doha Round of trade talks presents a dilemma to both champions of free trade and opponents of free trade. For supporters of free trade and multilateralism, the World Trade Organisation (WTO) provides the ideal framework for relatively unrestricted movement of goods and services, which will free markets, strengthen competition, spur innovation, and trigger growth and development around the world. Its apparent failure represents the undoing of years of progressive global integration and the success of protectionist governments and far-left outfits. To them, any doubts cast over the efficacy of multilateralism in reducing poverty are misplaced -- free trade will cure all! They fear that repairing faith in multilateralism will take years, and alternatives such as Free Trade Agreements (FTAs), also known as Preferential Trading Agreements (PTAs), are a poor second choice.

For opponents of economic globalisation, the WTO is the epitome of the West’s neo-colonial agenda, the greed of transnational corporations, and the perpetration of the developing world’s economic dependence. To them, the WTO is the rich world’s negotiating range where developing countries are enmeshed in unfair trade agreements that diminish the policy space for national governments, open up domestic markets to the dumping of subsidised foreign goods and limit the access of producers from developing countries to rich-country markets. The WTO represents a growing web of binding agreements that threaten to stretch beyond regulating goods and services, to controlling basic services and traditional knowledge.

Opposing the WTO has served both as a rallying point and a profession for thousands of campaigners and advocacy outfits in the North and South. Now that the talks have actually stalled, most anti-WTO campaigners find themselves without a popular battle cry or answers about the immediate future of world trade.

Understanding the WTO

This crisis of purpose and surplus spare time that is beleaguering both ends of the ideological spectrum raises interesting questions. Firstly, what would the fence-sitter’s view on the WTO be? To understand whether the WTO is mostly good or evil, one needs to take a closer look at its structure and founding principles.

The WTO can be seen, simplistically, as the successor to the General Agreement on Tariffs and Trade (GATT), a trading system in existence since 1948 that provided rules primarily for trade in goods. The Uruguay Round (UR) of GATT negotiations (1986-1994) led to the creation of the WTO and saw its mandate expand beyond goods to cover trade-related aspects of intellectual property and trade in services. With the stated goal of helping producers of goods and services, exporters and importers to conduct their business, the WTO provides a forum for its member governments (149 at present) to negotiate trade agreements. While WTO agreements have enabled the liberalisation of trade in agricultural and manufactured goods, they also have rules to impose barriers where national and public interests are threatened.

The WTO provides a rule-based framework based on agreements negotiated by governments that are binding in nature. Whether there is equity of negotiating capacity amongst member countries is a frequently debated topic, but it can be accepted that the WTO agreements provide a transparent and predictable set of rules for individuals, firms and governments. The WTO follows the ‘one country, one vote’ principle, where the weight of each country’s vote is the same, unlike many other multilateral organisations. It does not, for instance, have a Security Council with veto powers! It also has a dispute settlement process that facilitates the settlement of differences on trade issues between countries, with retaliatory powers under a neutral process and established legal framework. This new dispute settlement mechanism that was agreed upon during the UR was a significant advancement over the dispute mechanism enshrined in GATT. In fact, the dispute settlement mechanism in the WTO is considered the most advanced dispute resolution mechanism in international law.

The legal framework of the WTO is a lawyer’s dreamland. The legal text, which has nearly 60 agreements, annexes, decisions and understandings running into thousands of pages, falls into several categories. At the highest level, it has ‘broad principles’ such as GATT (goods), General Agreement in Trade and Services (GATS) and Trade-Related Aspects of Intellectual Property Rights (TRIPS). Further, it has extra agreements and annexes for specific sectors and issues, and detailed ‘schedules’ of commitments made by individual countries on products and services allowed into their markets. At the narrow end, it has ‘plurilateral agreements’ -- like the ones on civil aircraft and government procurement -- that are agreements that do not have the approval of all WTO member countries. These are further underpinned by the dispute settlement and trade policy review mechanisms that settle conflicts and ensure transparency, respectively.

This legislative framework of the WTO, which the voluminous legal text embodies, has some fundamental principles underlying it. The WTO seeks to promote trade without discrimination, whereby countries cannot discriminate between trading partners (all partners get Most Favoured Nation (MFN) status) and treat foreign and national products, services or persons equally (national treatment). It seeks to promote progressive liberalisation through negotiations that will contribute to the lowering of tariff and non-tariff barriers, and provide longer periods to developing countries to fulfil their obligations. It seeks to make trade more predictable by encouraging countries to ‘bind’ their customs tariffs for goods and market access commitments for services, removing quantitative quotas for imports and making trade policies transparent. Finally, the legal texts are also meant to create a set of rules that enable open and fair competition.

Truly a picture of fairness, equity and transparency?

Sadly, in reality, WTO negotiations and functioning have been very different. At least part of the fear about it in the South is justified. The distribution of power at the negotiating table is skewed in favour of powerful trading blocs such as the United States and the European Union, while developing countries have struggled to influence the agenda. Till the Doha Round that began in 2001, developing countries were largely ineffective in altering agreements or commitments to protect national interests. Actual negotiating processes have been far from democratic, with Least Developed Countries (LDCs) and small nations often pressurised into accepting deals through a combination of sanction threats, aid, and closed room (‘Green Room’) meetings. This gunboat diplomacy of the trading powers has, in recent years, been challenged by the bigger emerging economies -- namely Brazil and India. Cartels of developing countries, such as the G20 and G33, have rallied support on key issues to significantly influence the outcome of WTO negotiations. 

The glass ceiling in trade

What have been the points of difference between the rich and the poor world, at the WTO? The numerous differences can be seen in simple terms. Poor countries have wanted greater market access for products in which they enjoyed comparative advantages, such as farm goods, textiles and leather. However, poor countries face tariff barriers on average four times higher than those applied when developed countries trade with each other.

For example, textile quotas in developed countries were meant to have been progressively dismantled over a 10-year period up to the end of 2005. But significant liberalisation measures of benefit to poor countries like Bangladesh and Cambodia were not taken till the very last moment. This slow back-loaded rollback of quotas in a labour-intensive sector such as textiles that offers immediate economic benefits to developing countries was seen as a testament of the developed world’s lack of commitment in offering better market access.

Developing countries had further demanded reductions in generous domestic support for farmers in rich countries that have made it impossible for them to compete on fair terms in the open market. For instance, US farm subsidies covered 72% of the total cost of production of rice in the country in 2003; today it is the third largest exporter of rice by virtue of these subsidies and the low tariff boundaries it has secured in many developing countries. Similarly, in 2002, Oxfam estimated that US cotton farmers (around 25,000 of them) get an estimated $ 230 per acre, which was more than three times the USAID budget to sub-Saharan Africa’s 500 million people! 

Developed countries were also expected to make deep concessions in the markets for agricultural and industrial goods and services. In industrial goods, the US wanted India, Brazil and other developing countries to cut bound tariff levels even below their applied levels. For tariff reduction, the US favoured the application of a tariff reduction formula that would require developing countries, which generally had higher tariff levels, to make deeper cuts. The Doha Round buckled, as developing countries found these concessions indefensible domestically.

The TRIPS Agreement has been another major flashpoint. The inclusion of the TRIPS Agreement was opposed by most developing countries as it was seen as a way for the WTO to bring intellectual property rights into a trade regime. The inclusion of the TRIPS Agreement was viewed as a major victory for US pharmaceutical firms, at a time when there were serious reservations about its suitability for the US itself. Innovation and research are largely led by developed countries, while developing countries are primarily end-users. Under the circumstances, strengthening the patent rights of technology-holders would, in effect, work as a resource transfer mechanism from South to North.

However, more important than the financial aspect has been concern about how the stringent application of patent rights in the pharmaceuticals sector favours large transnational pharma companies and restricts competition from the manufacturers of cheaper, generic medicines. The affordability of medicines and the public health disaster that could arise from non-affordability in sub-Saharan and Asian countries has, in part, been assuaged by the Doha Declaration on TRIPS and Public Health. However, concerns remain about the possibility of pharma companies manipulating regulations in developing countries. Moreover, many countries, under pressure from pharma and business lobbies, have not made adequate use of the leeway that the TRIPS Agreement provides. There is also no delusion that TRIPS-compliant patent regimes are going to spur research in tropical, infectious and parasitic diseases that abound in the poor world -- only $ 400 million of the $ 70 billion spent on health research in 1998 was spent on HIV/AIDS and malaria research (Sudip Chaudari, 2003). Ironically, 84% of the expenditure on research and development incurred by Indian companies in 1999 was on diseases prevalent in rich countries!

Perhaps it has been the experience with the TRIPS Agreement that has made most developing countries vociferously oppose the inclusion of ‘the Singapore issues’ (named after four working groups set up during the WTO Ministerial Conference in Singapore in 1996) -- investment, competition policy, transparency in government procurement, and trade facilitation. Although some progress has been made in trade facilitation, most developing countries prefer to make progress on these issues unilaterally rather than as a binding multilateral commitment. The remit of the GATS Agreement, especially where it expands to the liberalisation of financial services and utilities such as water and power, also faces obstacles in the developing world.

Even where market access concessions were offered, it was typically in sectors where poor countries had no comparative advantage. The ‘Everything but Arms’ initiative of the EU has been derided as the ‘Everything But What You Produce’ initiative. The US too offered 97% duty-free access to LDCs, which was great so long as LDCs produced robots, advanced computers and jet turbines. The goods that they actually produced, such as farm products and textiles, were carefully packaged in the remaining 3%. To the surprise of the US, the developing countries denounced such offers. Instead, the offers bred the collective belief in the South that the North was negotiating in bad faith.

Indisputably, there have been huge leaps in the negotiating capacity of countries of the South at the WTO negotiations. Many Western trade experts rummaging through the rubble of the collapsed Doha Round of talks have been apportioning large helpings of blame on Brazil and India. Some analysts worry that developing countries, including India, have displayed inadequate interest in a Doha deal, and that this could affect the resumption of talks. However, there is no denying that many of the high ambitions with which the Doha Development Round was launched, in the aftermath of the 9/11 terrorist strikes in the US, as an opportunity to build solidarity across rich and poor nations and share the benefits of globalisation, have been buried. The Doha Round and the WTO have largely failed to improve access to rich-country markets for goods and services from poor countries, or to reduce the handicap of poor-world farmers competing with rich-world farmers pampered by generous government subsidies. The failure of the multilateral talks has been seen by many as the failure of multilateralism itself.

Which brings us to the third question -- is the multilateral trade regime good for development?

Making sense of multilateralism

There is enough empirical evidence to demonstrate that trade can be a powerful catalyst for poverty reduction. The success of East Asia in lifting nearly half-a-billion people out of poverty since the mid-1970s can be attributed to export-led growth that generated employment, created investment opportunities, enabled the production of goods with a higher technology component, and created linkages that filtered benefits to the rural economy. Oxfam’s 2002 trade report, ‘Rigged Rules and Double Standards’, had suggested that 128 million people could be lifted out of poverty if Africa, South Asia, East Asia and Latin America increased their share of world exports by 1%. Contrary to what many detractors of global trade might believe, autarchy, protectionism, self-reliance and village republics are not enough to lift 1.3 billion of the world’s poor out of absolute poverty.

If the alternative to trade as a catalyst is aid, then there is no doubt that most LDCs would opt for trade. In his book, Trade Policy and Global Poverty, William Cline of the Centre for Global Development established on the basis of empirical analysis that liberalisation in agricultural trade would be the most powerful way to reduce global poverty, as three-fourths of the world’s poor live in rural areas. The poor in villages are more likely to be dependent on farming, and any increase in export opportunities would leave them better-off. He estimated that global free trade could increase agricultural prices by 10%, hike real wages of unskilled labour in developing countries by 5%, and boost the global economic welfare of developing countries by US$ 90 billion annually. This could pull an estimated 200 million people out of poverty, or even 650 million people, if one factors in capital investment and a period of 10-20 years. Poverty reduction gains are highest from liberalisation of agriculture and textiles. The US$ 90 billion that developing countries could gain would tower over the US$ 50 billion that developing countries receive in aid. Free trade with fairer policies and trade relations that are not skewed in favour of rich countries would benefit the world’s poor more than aid, charity and preferences.

Those who are dismissive of the WTO should also remember that the alternatives are not attractive. FTAs/PTAs -- regional and bilateral -- will take over where multilateralism ends and, unlike at the WTO, poor countries cannot fire from the shoulders of bigger countries like India or Brazil with better negotiating capital. Each country will be pitted against the trading and negotiating clout of the US or the EU. FTAs have been growing rapidly since the 1990s, and there could be as many as 300 by 2008. In the last six years, the US has concluded 14 FTAs and it is currently negotiating 11 more. The EU is following a similar approach, and the underlying logic is clear. Developed countries have been effectively using the regional and bilateral route to extract commitments that developing countries collectively refuse at the WTO. In fact, the regional route has been used either to make existing commitments at the multilateral level more stringent, or to facilitate the entry of non-trade issues. During the Tokyo, Uruguay and Doha Rounds, the US used bilateral and regional agreements with developing countries to extract commitments on agricultural subsidies and intellectual property rights that these countries collectively refused to give in to at the multilateral talks. Indeed, US FTAs that are being concluded with developing countries are replete with clauses more stringent than those in the WTO Agreements. 

FTAs between developing countries have become rampant too. Many hope that the web of FTAs and associated trade discrimination will ultimately push nations back to the multilateral trade regime. The optimists among them hope that this will lead to a WTO system with fairer governance and operation. The rule-based framework that the WTO provides is indeed the best forum for poor countries to ensure that the global trading system is not an exchange where each country protects its own special interests. Genuine free and fair trade will see countries specialising according to their comparative advantages.

Finally, it needs to be noted that not all the ills of trade can be blamed on the WTO and developed countries. Developing countries and their institutions are equally culpable. The social and economic shocks that are frequently blamed on trade liberalisation are accentuated by weak institutions and policies, at the national and regional levels. Few developing country governments integrate trade policies or, for that matter, agricultural and industrial policies within their overall poverty reduction strategies. Economist Dani Rodrik has highlighted the importance of property rights, regulatory institutions that correct the operation of markets (such as SEBI and TRAI), institutions for macroeconomic stabilisation (the RBI), social insurance (for example, job security and welfare) and institutions that manage social conflict (for instance, effective police, free media and independent judiciary) in boosting economic growth. One could argue that this is commonsense, but not many developing countries can claim to be following these maxims. Inequalities in access to education, health, assets, markets and finance keep the poor from reaping the benefits of trade and growth.

In a review of evidence linking trade liberalisation to economic growth in the Economic Journal (2004), Alan Winters cites the work of economists like Ann Krueger and Arnold Harberger that demonstrated that trade liberalisation reduces avenues for corruption and improves competition. Corruption (or ‘rent-seeking’, as the euphemism of the economists goes) is higher in countries with strict industrial polices such as licensing, and simple, non-discretionary policies reduce the scope for it. Further, openness improves access to the intermediate goods and heavy machinery that are needed to increase production. Reduced corruption, a skimpier bureaucracy, improved competition and better access to intermediate goods contribute to economic growth. This is another dose of commonsense that suggests that good governance at the national level can contribute to shared prosperity and poverty reduction.

There is no doubt that trade is poorly managed at all levels, and that reforms are indeed necessary. The current hiatus in the trade talks is an opportunity to correct some of the imbalances at the WTO and at national levels. The champions and opponents of free trade need to find a middle ground where sloganeering is replaced by consensus on a new order for making world trade work for the poor as well.

(Robin Koshy is a trade economist based in London. The views expressed in this article are his personal views.)

InfoChange News & Features, February 2007