Guest bloggers Kevin P. Gallagher and Timothy A. Wise present their views on the links between the financial crisis, trade, and development, and set out their proposals for WTO reforms that would benefit developing countries.
Development should be the centerpiece of reforming the global economic architecture. Pressing to conclude a World Trade Organization (WTO) deal to close the Doha Round based on the current proposals circulating in Geneva would be counter productive. Instead, we offer five policies for reforming global trade that will enable economic development and stimulate the global demand needed for a global recovery.
Many developing countries have spent scarce resources to build human capital and technological capabilities in the manufacturing, services, and agricultural sectors. In the current economic crisis, massive devaluations in currencies and the loss of access to credit can wipe out local firms in developing countries and put the real economy into a tailspin. Without care, these losses can be irreversible because domestic firms are often replaced or taken over by foreign firms or undermined by import shocks. Losing such firms not only throws people out of work, it represents a long-term setback to dynamic development.
Ensuring that years of development policy are not swallowed up by foreign capital during tough times is among the highest priorities in the developing world as the global economic crisis unfolds. Some developing countries are equipped with reserves and stabilization funds that can be used to ensure that the domestic economy does not become hollowed out. Many more developing countries face dangerously high budget and current account deficits that make the preservation of their industries and recovery near impossible.
The WTO, as it currently stands, provides some levers that can help countries facilitate and sustain their development process even in the context of economic crisis and uncertainty. Under current WTO rules, nations can, for instance, put in place capital controls, use safeguard mechanisms when faced by unjustified floods in imports or investment, subsidize credit to domestic firms, and stimulate the domestic economy through government procurement programs.
Rushing to conclude a new WTO deal along the lines currently on the table in Geneva could strip many developing countries of these tools while giving them little in return. Many of the proposals under discussion in Geneva would end up giving private capital greater freedom from the very government regulation needed to weather the current financial storm.
In July 2008, rich countries were pressing poorer countries to drastically reduce applied tariff rates in manufacturing and agriculture, and to virtually eliminate the use of safeguard mechanisms in ways that would suspend the potential for such cuts during crises. According to the United Nations, such cuts would cost the developing world approximately USD 63 billion in lost government revenue on an annual basis. For many developing countries, tariff revenue comprises over 20 percent of budgets that are already straining to counteract the crisis.
Alongside such costs, the projected gains of the July deal were limited. According to studies by the World Bank and leading research institutions, the benefits for the developing world were paltry. Under the World Bank’s “likely Doha” modeling projections, global gains for 2015 are just USD 96 billion, with only USD 16 billion going to the developing world. The developing country benefits are 0.16 percent of their collective GDP. In per capita terms, that amounts to USD 3.13 per year, or less than a penny per day per person for those living in developing countries.[1]
The elements of a WTO deal have now been in place for several years: modest cuts in agricultural tariffs and subsidies by developed countries in return for modest cuts in manufacturing and services barriers in the developing world.[2] The negotiations have, however, been doomed by the developed world’s refusal to grant poorer nations the exceptions they need to demands for cuts in the area of services and manufacture in order to support competitive national industries and defend their economies from unfair or unequal competitions.
One of the deal breakers when the talks collapsed in July was a developing country demand for a “special safeguard mechanism” – that would enable them to raise tariffs in the event of sudden or large increases in imports that threaten to undermine domestic producers. The proposed mechanism exemplifies the kind of policy space that the poorest countries have sought from this so-called development round. The US refused, and India, backed by a large number of developing countries, walked away.[3]
THE WAY FORWARD
The organizing principle for revived global trade negotiations needs to be a recognition that the world economy consists of nations at widely differing levels of development. Any negotiation that claims to take development seriously must recognize these fundamental asymmetries and address them. Developing countries need policy space to retain, adapt, and evolve the kinds of government measures that have been proven to work for development in the West and in other developing countries.
To restart negotiations on a pro-development foundation, we need to be specific about what policy means and to guarantee it in five core areas:
First, nations should preserve the space under current WTO law to place controls on capital outflows, use safeguard mechanisms when faced by unjustified floods in imports or investment, subsidize credit to domestic firms, and stimulate the domestic economy through government procurement programs.
Second, developing nations need to be part of a coordinated global response to the crisis. At least USD 1 trillion in new capital needs to be infused into the developing world to preserve currencies, support coordinated stimulus packages, and cover the costs of adjustment, such as tariff revenue losses and job retraining in ailing sectors. The International Monetary Fund’s (IMF) Trade Integration Mechanism and Short-term Liquidity Facility can help. However, the IMF will need to double its budget by issuing more Special Drawing Rights.
Third, in agriculture, the US and Europe should honour WTO rulings that have found their subsidies for cotton and sugar to be in violation of trade rules that forbid the exporting products at subsidized prices. This would give a tangible boost to farmers in West Africa and Latin America and send a strong signal to developing countries that developed nations are willing to honour existing WTO rules.
In addition, the WTO should take seriously the proposals by many African nations to tame highly concentrated global commodities markets, dominated by agribusinesses that suck most of the revenue out of these value chains. Rich nations should also grant poorer countries extensive rights to exempt local staple foods such as corn, rice, and wheat – so-called “special products” – from tariff cuts, and allow them to raise duties when imports surge (as called for in the “special safeguard mechanism” that the United States rejected in July).
Fourth, in the manufacturing sector, the longstanding WTO principle of “special and differentiated treatment” should be re-enshrined for poorer nations and made more meaningful in practice. Developed nations should, for instance, agree to rolling back patent laws that impede poorer nations from manufacturing cheaper generic drugs and allow selective industrial policy so governments can diversify their economies. What worked for development in the United States, China, and South Korea must not be prohibited by the WTO.
Finally, there should be a moratorium on North-South preferential trade agreements. These deals exploit the asymmetric nature of bargaining power between developed and developing nations, divert trade away from nations with true comparative advantages, and curtail the ability of developing countries to deploy effective policies for development.
We now live in an interdependent world and it will take a global response to recover from the crisis. According to UN trade statistics, almost 60 percent of all trade from the European Union, Japan, and the United States was with the developing world. Ensuring developing countries have the policy space needed for equitable growth is thus key for stimulating global demand and getting all countries out of the crisis.
Kevin P. Gallagher is a professor of international relations at Boston University and senior researcher at the Global Development and Environment Institute, Tufts University. His recent books are The Enclave Economy: Foreign Investment and Sustainable Development in Mexico’s Silicon Valley, and Putting Development First: The Importance of Policy Space in the WTO and IFIs. He writes a monthly column on globalization and development for The Guardian.
Timothy A. Wise is Director of Research at the Global Development and Environment Institute, Tufts University. He is the author of Confronting Globalization: Economic. Integration and Popular Resistance in Mexico.
This article is part of a forthcoming compilation on a trade agenda for G20 leaders edited jointly by Dr. Carolyn Deere Birkbeck (Global Economic Governance Programme) and Ricardo Meléndez-Ortiz (International Centre on Trade and Sustainable Development (ICTSD)). The compilation will be published in mid-March 2009.
[1] New research by the Carnegie Endowment for International Peace using similar modeling exercises puts the potential gains to developing countries at USD 21.5 billion. See Polaski, Sandra (2006), Winners and Losers: Impact of the Doha Round on Developing Countries (Washington, DC: Carnegie Endowment for International Peace), Figures 3.1-3.8.
[2] Specifically, the US and other developed nations would have cut applied agricultural tariffs from 15percent on average to 11percent. On agriculture, the US offered to cut its trade-distorting subsidies to USD 14.5 billion (well above current levels). Regarding manufacturing tariff reductions, developed country members agreed to apply an across-the-board “Swiss formula” coefficient (the lower the coefficient the deeper the cut) of 7 to 9 and developing countries agreed to three different ranges between 19 and 26 (the lower the coefficient the more exceptions each country can enjoy). Finally, many developing countries agreed in principle to liberalize their financial service sectors.
[3] India proposed that if imports rise above 115percent over a base period, developing nations should be allowed to impose safeguards that are 25-30 percent over its bound duties on products taking zero cut. The Bush Administration, however, refused to come down below a 140 percent trigger, a level India and other countries argued would make the mechanism virtually useless in most circumstances.
As an institution, the WTO has functioned very differently from theGATT. The old power centers within the multilateral trade regime have been joined by new powercenters, especially the emerging economies. Developing and the least-developed members, actingin coalitions, have become more effective players in the Doha Round with significant success inensuring that WTO agreements are in their favour. However, they have not had similar success insetting the negotiating agendas that meet their expectations and development concerns.
Two related developments appear to be at the root of the recent chaos in the global governance system, with direct implications for the trade governance
regime. First, in terms of hegemonic cycles, the United States (US) was a rising contender for hegemony as of 1873, achieved full hegemonic dominance in 1945,and the fruits were reflected in the leadership position it assumed to create the
world trading governance regime in 1947 in the form of GATT and in ensuring that the progressive trade integration and tariff liberalisation continued despite the economic turbulence of the 1960s and 1970s. Second, the US dominance on global economy has been slowly declining since the 1970s, and in this new
century we are past any semblance of US hegemony.2 We seem to have entered a multipolar world where the emerging developing countries are beginning to play
increasingly definitive roles because of their economic strength, but the global leadership issues still remain unaddressed.
A solution to the above conundrum will not be easily obtained or obtained in the near future. But in resolving it, to begin with, the world and the multilateral trading system needs to realign itself with changing realities of our times where developing countries are emerging as important players in the negotiations and governance systems of both international trade and finance.