Few would question that opportunities offered by the international trading system have been an important vehicle for development, or that GATT/WTO negotiations have played a critical role in creating that system. Euphoric perhaps from past successes with trade restrictions, at the Uruguay Round the negotiating community reached too far. It extended coverage of GATT/WTO regulations to ‘behind-the-border’ issues, particularly services, standards and intellectual property. These policy areas do affect trade and their ‘trade-related aspects’ were the rationalisation for the WTO taking them in. More fundamentally however, the regulations and institutions in these areas establish the structure of the domestic economy. They are traditionally forged in the interplay of the domestic interests that will be affected. Uruguay Round implementation has demonstrated that WTO negotiations in these areas provide a troubled approach to development.
That Old GATT Magic, How It Works
In order to get the economics correct, trade politics must take into account buyer/user interests as well as producer interests. But in domestic politics buyer interests are overwhelmed by import-competing producer interests. Country by country, the domestic politics of trade produces more import restrictions than the domestic economics of trade would say is optimum.
The secret behind the old GATT magic is that in trade negotiations the interests of buyers/users happen to correspond with those of foreign exporters: both want buyers/users to have the opportunity to pay less. This ‘institutional accident,’ is the basis for the old GATT magic.
International negotiations pit domestic protection seekers against exporters, as exporters advance their own interests they simultaneously advance those of import users. The result, by happy coincidence of buyer/user interests with exporter interests, is trade policy that makes domestic economic sense.
The magic does not carry over to the behind-the-border areas. There, buyer/user and foreign exporter interests do not coincide. An obvious example is intellectual property; in these negotiations exporters want buyers/users to pay more, not less. The old GATT magic does not work. On behind-the-border regulations and institutions, the Uruguay Round negotiations did little to identify, much less to advance, the development dimensions of the issues.
Challenges and Approaches
The first challenge for the international community is to learn this lesson--to recognise where the old GATT magic of trade negotiations works and where it does not. The second challenge is to keep that magic working where it does work. The third is to remember that there is a lot of magic in the world--trade negotiations are not the only tool the international community has crafted to advance development.
Where the Old GATT Magic Works
Reduction of restrictions on agriculture and on manufactures trade offers a positive outcome for all WTO Members. Here the old GATT magic works. In economics the concessions are twice blessed. On the export side, a concession extends the comparative advantage of the country who ‘receives’ the concession. On the import side, the economics are likewise positive. Lifting the burden of import restrictions from buyers/users advances their interests more than it takes from the interests of domestic producers. (The classical economics of the gains from trade never said that every domestic interest would benefit. It does, however, assure that the domestic benefits will exceed the domestic costs.)
Where Other Magic Works Better
There is such a thing as comparative advantage among institutions. It is ironic that the people most resistant to accepting that idea are members of the international community who represent their governments at trade institutions such as the WTO. They recommend a redoubling of WTO efforts in the behind-the-border areas, they insist that with a sufficient budget they can create absolute advantage for the WTO. Their plea awakens echoes from David Ricardo’s explanation of comparative advantage, his example being wine from Portugal, cloth from England: With sufficient application of labour, e.g., to build greenhouses and heating systems, wine can be produced in England, and good wine, too, Ricardo accepts. Oranges, maybe pineapples, on the grounds of the WTO building in Switzerland, this logic would continue; with trade-related technical assistance to provide the greenhouses and the heating. Ricardo’s argument, of course, is not that it cannot be done, but that it does not make sense to do it.
To understand which institutions have comparative advantage in trade reform versus in construction of behind-the-border institutions, a key distinction should be kept in mind. Where trade negotiations have demonstrated their comparative advantage there is no difference between legal obligation and project design. Legal obligation from tariff negotiations is the schedule of reduced tariff rates, the project design is to put these rates into the national tariff code. Hence the GATT Secretariat did not evolve project design capacities.
The development banks, in their work to build up behind-the-border structures of economies, have evolved such capacities. Their documents at the level of generality of WTO agreements contain no legal obligations. They are intelligent conversation--e.g., the World Bank’s World Development Reports, the Asian Development Bank’s monograph series, The Doha Round and Development. Project design people in development banks bring these intelligent generalisations to bear on the specifics of country situations. The resulting projects, agreed with the host country, are specific to that country’s needs and capacities.
In the development banks, legal obligation comes in specific project lending documents. The World Bank’s portfolio with Senegal may include an education component for which the relevant lending documents provide specific, legally-obligated, performance requirements. The Bank’s portfolio with a neighboring country, say Mali, may not include an education component; or if it does, the education component may address the need for teacher training, while in Senegal the Bank may be helping the government to provide textbooks. To build behind-the-border institutions, such country-specific and project-specific legalities are better suited to the one-off problems and the trial-error rhythm of what is needed than is WTO’s generic approach to legal obligation.
Proposals have been put forward for the WTO to find ways to make its statements of legal obligation specific to particular levels of development, to sub-categories of countries otherwise drawn. If we apply to these proposals what we have learned from development bank experience, we would have to go to the detail of specific projects in specific countries for the legal obligation to be useful. The WTO would become another development bank--one without money.
My response to these well-meaning suggestions is not to insist that such cannot be done, it is simply to ask: “Why bother? Portugal already produces good wine. Yes, wine can be grown in England, and good wine, too. But Portugal is better suited to the task.”
Special and Differential Treatment in the WTO?
The answer in four words: special, yes; differential, no. To be helpful, agriculture and non-agriculture market access negotiations must be an effort to achieve multilateral liberalisation on products of particular interest to developing Members. Developing country trade restrictions impose an unnecessary burden on their own buyers/users; they display a bias against developing country exports even worse than do industrial country restrictions. In short, the restrictions of special relevance to the prospects of developing countries include those imposed by developing countries themselves. And unless they lead here, addressing their restrictions as all others on the multilateral table, there is nothing to spark the GATT magic to life.
As to differential treatment, the areas where it makes sense for development are not those appropriately managed through trade negotiations.
A WTO agenda from which all Members would benefit would centre on agriculture and non-agriculture trade reform, but it is difficult to see who will provide leadership. The US is not serious about agricultural liberalisation. Farmers in the US will not readily give up their subsidies as demonstrated by the recently-concluded free trade agreement with Australia. The US cannot however openly oppose agricultural liberalisation because several Latin American countries are seriously interested. Regional and bilateral deals on non-agriculture market access provide an opportunity to placate these countries demands on agriculture--at Asia’s economic expense.
Moving the Trade Agenda
Asian leadership is the only way. Asian developing countries are strong exporters, they need a strategy to diminish the spread of anti-Asian regional agreements in the West. They will have to face up to Latin America and Africa’s attractions to anti-Asia regional deals with the US and the EU. They will have to work a deal with Latin America and Africa over how agriculture is treated, the US and the EU will not do so. Without leadership from Asian developing country Members, with Latin America and Africa as their major leadership partners, the WTO will achieve little in the near future.
Moving the Behind-the-Border Agenda
On the development dimensions of behind-the-border issues, trade negotiations have already demonstrated their lack of comparative advantage. It is hardly a surprise that growing pineapples on the shores of Lake Leman has proven difficult.
There is however no need to worry. The world is full of magic, moving these issues forward through the development banks is already under way. The thrust of the work is to identify people in poor countries whose livelihood is affected by standards, intellectual property, environmental degradation, etc. It is to find ways to build the capacity of these people to manage such dimensions of property ownership as copyrights, standards and environmental regulations to their own benefit. It is to find ways to empower these people so that the institutions and regulations in their own countries are sensitive to their own interests.
To members of WTO delegations who want to help developing countries with standards, intellectual property, other institutions that provide the behind-the-border structure of the economy: you might consider getting yourself reassigned to your government’s World Bank or regional development bank delegation. There, you may find more satisfaction in your work. Remember, to abandon growing wine in England is not to abandon growing wine.
J. Michael Finger is a resident scholar at the American Enterprise Institute.