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Pablo Furche, Ricardo A. Lagos – Defining Progressive Principles for International Trade

International trade is an activity mainly conducted by firms or persons led by the principle of maximising their utility function. Nevertheless, there is room for public policy; we can try to define principles that should apply to the rules or the policy-making related to international trade, and particularly to trade negotiations. In trade negotiations, every country pursues its own interests. It cannot be otherwise because there are always different sensitivities, interests and constituencies to answer to. However, a ‘progressive approach’ or ‘progressive principles’ for trade negotiations have to be more sophisticated than just pure and simple individual profit maximisation. As a starting point, this would require a vision and a clear political direction to address imbalances effectively,

Defining Progressive Principles for International Trade Pablo Furche Ricardo A. Lagos and hence, to achieve a better and fairer environment to negotiate trade rules and to compete. The following are some ideas on principles that should be taken into account if a progressive approach to trade negotiations is to be followed.

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The WTO is Best For a small economy, highly dependent on trade, such as Chile, it is very important to have clear rules in order to provide some degree of certainty to our exporters. They face a rough world and fierce competition. This is true for Chile, and also for most small or developing countries. While Chile has managed to negotiate bilateral trade agreements with most of its major trade partners, this is not the case for most developing countries. Whether because they have not conducted domestic reforms to enable them to open up their markets, or simply because other partners have been busy negotiating with someone else, the important thing is that up to now, the GATT/WTO has played the role of setting up the trade rules, and settling the disputes. For some people, the role of dispute settlement is enough to justify the existence of the WTO. For others, the WTO has an additional value which is to level the playing field, and allow for more balanced results because small countries create alliances that increase their leverage, with the G20 as a remarkable example of this, becoming one of the key players in the agricultural negotiations by playing a constructive role and shifting the decision-making process from the Quad to the FIPs (Five Interested Parties: Australia, Brazil, EU, India, USA). Whether WTO should focus ‘simply’ on ensuring that trade rules are respected, or if it should also pursue trade liberalisation, needs to be discussed. However, in both cases, the WTO has to have legitimacy and credibility. And so far, it has both.

The WTO is one of the few institutions which show that multilateralism can still work. This is the reason why it should be supported and protected.

Defend your interests, but don’t overdo it There are currently 148 WTO Members with huge differences among them in size, level of development, and specific interests. Hence, achieving consensus is a task that is becoming more difficult in each successive Round of negotiations. What should be done? Acknowledge this fact, be realistic and try to not push the line too far.

The WTO is one of the few institutions which show that multilateralism can still work. This is the reason why it should be supported and protected. In other words, while we understand that what some developed members will have to do in agriculture will require compensation somewhere else in order to make the Round attractive to them, they should bear in mind that the very same arguments they put forth to protect their agricultural sensitivities are valid for most developing countries when it comes to industrial products. Some developed countries argue that, for instance, rice production is sensitive because some farmers depend on it for a living. Fair enough. However, those countries insist that they need to attain ‘real market access’ – actual cuts in the

applied tariffs – on industrial markets in countries such as Brazil and India. Needless to say, Brazil and India do not have safety nets to absorb the negative impacts of trade liberalisation, as could be the case with, for example, Japan or Norway. The differences on ‘social endowment’ should be considered when ‘efforts’ towards liberalisation are discussed in trade negotiations. Similarly, some developing countries apparently believe that as a result of this Round, developed countries will have to pay an ‘historic debt’ and therefore they will get export subsidies elimination, cuts in applied levels of domestic support, and reduction of tariffs for free. That is not going to happen. Also, some developing countries face this negotiation as a North-South confrontation, disregarding the fact that, for some developing countries, market access to developing countries is as important as market access to developed countries. Job creation in a developing country as a consequence of export growth to other developing countries is as export-led job creation through trade with developed countries. An additional element lies in the conditionality or the linkages with non-trade related issues that some countries make. It is arguable whether or not legitimate concerns on human rights or labour and environmental standards should be linked with tariff concessions, but certainly making the link does not make negotiations any easier.

‘Effective’ Special and Differential Treatment An additional element of complexity is that in this Round there are more ‘least

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Pablo Furche, Ricardo A. Lagos – Defining Progressive Principles for International Trade

developed countries’ and others not quite ‘least developed’, but similarly poorly developed countries than in any other previous Round. We should seriously think why we were asking these countries to have Competition Policy laws or disciplines on Trade and Investment while they barely have sewerage. Furthermore, people tend to forget that these countries have very little – if anything – to win from this Round, since: • they have GSP preferences that provide them with market access to most developed countries. These preferences will be eroded as a result of this Round; • some of these countries actually benefit from agricultural export subsidies because they buy cheaper products that they cannot produce domestically. Once this Round is concluded, this will no longer be the case; • in addition, this Round may affect their fiscal revenue because tariffs are the easiest – and sometimes the only – way for them to collect taxes; • and, on top of that, it is not obvious that they will be able to reap the benefits of liberalisation in other markets because they face severe supply-side constraints. The issue here is that these countries have problems that cannot be solved with trade. Pretending that the DDA will seriously help them to develop is overestimating the importance of trade. Nevertheless, they have to be engaged in the negotiation process. Maybe this is a good case for differentiation between developing

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countries. While the WTO only recognises three categories of countries, nobody argues that in some areas the commitments of Chile should not necessarily be the same as those of the EU. But should, for instance, a $2,000 per capita income country have to make the same commitments as a $5,500 per capita income country?

Some developing countries face this negotiation as a North-South confrontation, disregarding the fact that, for some developing countries, market access to developing countries is as important as market access to developed countries. WTO purists will certainly answer: yes, all similar countries will have to make the same level of commitment. And they have a very good point in arguing that the Most Favored Nation (MFN) treatment is the core principle of the WTO, and to exempt some country from a provision may have an undesired spiraling effect. Fair enough, but then some new forms of effective Special and Differential treatment must be designed, such as: • A fourth category of countries; • Commitments that apply to everybody, but are only claimable once certain conditions are fulfilled.

If Trade is the answer, then what is the question? In trade negotiations, too often, arguments in favour of trade liberalisation are used arguing that this is something good for everybody and therefore, every country should open their markets, regardless of their specific conditions. This argument is not only patronising; it is also flawed. Chile has had a very successful policy of trade liberalisation, combining unilateral, bilateral, and multilateral trade liberalisation. However, there is

Chile has had a very successful policy of trade liberalisation, combining unilateral, bilateral, and multilateral trade liberalisation. no ‘one size fits all’ model. Trade policy does not operate in a vacuum. Its success will depend crucially on how it interacts with other economic and social policies, and on the soundness of the institutions of the country in question. The latter is a very important point that tends to be neglected in trade talks. In the case of the negotiation of bilateral agreements – where tariffs with the partner are eliminated – it is crucial to have previously undertaken some sort of unilateral or multilateral liberalisation, simply because the prospect of moving from an environment in which protection is 30 per cent to one in which it does not exist is likely to create social unrest. There are several examples of

countries with a successful story of gradual opening up: China, India, Korea, or Taiwan are all good examples. From this viewpoint, a progressive approach to trade liberalisation should encourage a gradual and persistent process of opening within a long time frame.

WTO rulings must be respected As mentioned above, for some people the WTO should focus mostly on defining rules, enforcing current commitments, and on solving the disputes that inevitably will arise. There may be different views on whether or not the Dispute Settlement Understanding (DSU) is the most efficient mechanism to solve disputes, but the most important thing is that their decisions should be respected. When a country simply decides that it will not amend its legislation in accordance to a DSU ruling, the whole multilateral trading system (MTS) is being undermined. If a country can get away with a WTO violation, what are the incentives for others to comply?

Negotiate FTAs or RTAs that support the MTS Trade liberalisation is currently being conducted mostly through bilateral or regional trade agreements (RTAs/FTAs). From a ‘systemic’ perspective, RTAs/FTAs are exceptions to the WTO MFN principle. As RTAs/FTAs increase, the MFN principle is undermined, and also the relevance of the WTO as a trade-ruling and trade liberalisation forum. This is particularly the case in areas such as investment, intellectual property, financial services, labour, environment, etc. Moreover, should RTAs/FTAs be negotiated in such a way

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as to preserve domestic sensitivities, incentives to negotiate in the WTO are reduced. In order for RTAs/FTAs to be ‘building blocks’ for the MTS, they need to have some desirable characteristics, such as consistency with the WTO, transparency, and flexible rules of origin. However, comprehensiveness is the key element because RTAs/FTAs that include all sectors, with due consideration of sensitivities, facilitate multilateral liberalisation and hence can support the WTO.

Trade policy does not operate in a vacuum. Its success will depend crucially on how it interacts with other economic and social policies, and on the soundness of the institutions of the country in question. The latter is a very important point that tends to be neglected in trade talks. Another important element on RTAs/FTAs is asymmetry. It seems to be that there is a trade off between the level of asymmetry among the partners and the level of ‘progressiveness’ of the agreement. It is not unusual to come across trade agreements in which a developing country had to adopt very stringent commitments not only in terms of tariff concessions, but also in Services, Investment and Intellectual Property. In addition, there is pressure to make commitments on

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labour and the environment that are not commensurate with their level of development.

Labour and Environmental Standards Labour and the environment (L&E) will be part of the international agenda for the time to come. L&E standards are issues of increasing importance, particularly in the developed world. Some of the concerns arising in relation to L&E are legitimate and, thus, the international community (including developing nations) should be prepared to address them. However, for a significant number of developing countries, labour and environmental standards have the potential to become disguised protectionist measures. If one listens and reads carefully the argumentation by politicians and opinion makers, particularly in developed countries, about why L&E should be part of the trade agenda, understand why: most of the time, the rationale is about job protection and certainly not about a genuine concern for improving standards in developing countries. Making a link between these measures and trade sanctions can actually be counterproductive. Stopping exports on behalf of so-called social dumping is rarely an efficient way to raise labour standards in the country of origin. There are more effective ways to obtain the same goals, expanding exports being one of them. Therefore, the problem here is how to balance this equation. Setting international norms and standards can work for electric appliances (albeit not without difficulty). Unfortunately, this is not the case for

labour and the environment. Who is going to develop those standards? How can consensus be achieved among members with such a vast disparity of income levels (and hence, labour and environmental protection levels)?

For a significant number of developing countries, labour and environmental standards have the potential to become disguised protectionist measures. Some countries have attained a creative way to incorporate these issues in the FTAs while at the same time not increasing barriers to our trade. Under this approach, parties make a commitment to enforce their own domestic regulations, and if one of the parties fails to do so, a monetary contribution is requested from the infringing party which is deposited in a jointly managed fund with the sole purpose of using those resources to improve the enforcement of domestic legislation on the infringing party. Thus, there is no homogenisation of standards, no trade sanction, no disruption of trade, and an approach that places emphasis on cooperation based on a system that will provide resources geared towards improving enforcement. This is a progressive approach that could be explored further. Recent agreements undertaken by Chile with some major trading partners capture some of these elements.

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