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HomeDOCUMENTSCommittee Reports2003 Annual Session151 ECTER 03 E - FROM DOHA TO CANCUN: ECONOMIC DEVELOPMENT AND THE TRANSATLANTIC TRADE RELATIONSHIP
151 ECTER 03 E - FROM DOHA TO CANCUN: ECONOMIC DEVELOPMENT AND THE TRANSATLANTIC TRADE RELATIONSHIP
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Co-Rapporteurs - corapporteurs : John TANNER (United States – Etats-Unis) Michael GAPES (United Kingdom – Royaume-Uni) |
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TABLE OF CONTENTS I. INTRODUCTION II. TRADE AND DEVELOPMENT - THE THEORETICAL UNDERPINNINGS AND THE CURRENT DEBATE III. THE BENEFITS OF TRADE 1. By changing the price and availability of goods and services 2. By changing factor prices, income and employment 3. By encouraging investment and innovation IV. POTENTIAL BARRIERS TO REAPING THE BENEFITS OF FREE TRADE V. THE PROBLEMS OF THE URUGUAY ROUND VI. TRIPS AND GATS VII. AMERICAN AND EUROPEAN APPROACHES TO THE AGRICULTURE TRADE - DEVELOPMENT LINK VIII. GENETICALLY MODIFIED CROPS AND FOOD PRODUCTS-THE DEVELOPMENT ANGLE IX. REGIONAL TRADE AGREEMENTS (RTAS) X. TEXTILES AND CLOTHING XI. OTHER INDUSTRIAL GOODS TRADE XII. THE DOHA ROUND: AN UPDATE XIII. THE CANCUN MINISTERIAL XIV. CONCLUSIONS BIBLIOGRAPHY I. INTRODUCTION 1. The derailed attempt to launch a round of multilateral trade negotiations in Seattle in 1999 provoked a shock among many long-term observers of the trade negotiating process. Large and violent street demonstrations marked an unprecedented and surprising degree of mobilisation and hostility to the notion of trade liberalization. One of the ironies of those demonstrations was that many of those in the streets purported to represent the interests of developing countries when, in fact, most developing countries had come to Seattle recognising their real interests in the global economy and their desire to gain access to developed country markets. When it became apparent that concessions from the West would not be forthcoming, they essentially torpedoed the negotiations. Seattle thus proved an abject failure, and nothing Western statesmen said in the aftermath altered that impression. 2. The collapse of those talks definitively demonstrated that WTO negotiations would henceforth have to take on board the interests of the developing world to reach any new multilateral trade agreement. The new partnership with the developing world on trade matters has thus added yet another complicating factor to the transatlantic trade relationship. The old GATT system was essentially a means of regulating trade relations within a club of developed countries. Only in the Uruguay Round, did the developing world begin to play a more vibrant role in global trade talks. Yet it did not negotiate very effectively during that round and confronted strong pressures to accept a set of agreements that were one-sided in several respects. 3. Some critics of globalisation have pointed to the growing gap between the developed and developing world as evidence that free trade and openness to the global economy has been disastrous for the world's poor countries. This is a highly contentious claim and one that most economists would challenge. At the recent failed WTO review conference in Cancun, developing countries took more liberal positions than their US and EU counterparts, at least on the most critical issue: agricultural trade. However, they rejected a range of liberalization measures in other areas which were steps seen as benefiting only the developed countries. Nevertheless many developing country governments certainly seem prepared to embrace more open trading structures. The problem for many developing countries is not a philosophical rejection of the global economy as such, but rather the myriad structural, political, and commercial barriers to their exploiting opportunities in world markets. These include high tariff and non-tariff barriers to developing country exports, poor infrastructure needed to sell internationally, developing country dependence on tariff revenues to underwrite stretched national budgets, capital scarcity or simply lack of experience. 4. A related debate has unfolded about the emphasis developing countries should place on the kind of trade liberalization the WTO fosters. There are concerns, for example, that it is now too expensive to comply with current international trade law. Some developing countries believe that they are squandering resources and personnel in efforts to comply with rules that are, at best, very remote from their own economic reality. Some argue that they might better employ these resources for other developmental ends. It should be pointed out, however, that the Uruguay Round had already recognized special and differential treatment by committing developing countries to smaller reductions and longer implementation-periods than the developed countries. Many economists now contend that free trade should not be treated as an end in itself, but rather as one of many tools for achieving development. This argument has been directed against those who have pushed hard for access to developing country markets without focusing on other elements of development, including the vital role development assistance, good governance, and transparency can play, as well as the great importance of reciprocally opening up developed country markets to all developing country goods - a critical deficiency that negotiators at Cancun were not able to address to the satisfaction of the developing world. 5. A more liberal trading relationship between the developing and developed world would, on balance, help address a number of fundamental development challenges. It would grant consumers and producers access to a wider range of goods and production inputs. It would stimulate entrepreneurial activities and create new learning opportunities. Openness to world markets invariably attracts capital inflows, increases foreign exchange earnings and generates resources for sustainable development and poverty alleviation (OECD). These all contribute to development and can hardly be described as incidental. 6. While this year's General Report focuses on the broad question of economic development and its security implications, this Sub-Committee Report will explore the trade-development link by briefly surveying the economic literature on the topic and providing an update on the key issues shaping the Doha development round of multilateral trade negotiations. II. TRADE AND DEVELOPMENT - THE THEORETICAL UNDERPINNINGS AND THE CURRENT DEBATE 7. Classical economic theory asserts that trade benefits all those countries exporting goods that they produce relatively cheaply, while importing those goods that they produce at a relatively higher cost. Any party to trade has a comparative (as opposed to absolute) advantage in a particular good or service that it produces relatively cheaply. Countries, however poor, will experience overall welfare gains by exporting goods or services in which they hold such a comparative advantage, and by importing those goods that can be produced at lower relative costs abroad. In the simplified two production factor, two good, two country micro-economic model of trade, comparative advantage driven commercial exchange helps both countries to achieve a higher degree of wealth and to consume more than if they did not trade. Liberal economic theorists since David Riccardo have thus argued for the dismantling of trade barriers in order to realise the potential gains from trade. 8. That elegant model, of course, has been subject to countless criticisms, not least because it fails to incorporate a range of other economic and non-economic factors; liberal trade theory has substantially accounted for many of these exceptions, without undermining Riccardo's fundamental intuitions. Yet certain schools of development economics have launched particularly strong attacks on classical trade theory. In the post-war period, the theory of Import Substitution Industrialisation (ISI) rejected open market solutions to problems of underdevelopment. Leading development economists in the 1950s recommended that less developed countries erect trade barriers in order to build indigenous domestic industrial foundations. The theory suggested that structural change induced by protectionism would spur economic development and trigger industrialisation. Import substitution, however, required a high degree of central planning, an elaborate array of tariff and non-tariff barriers and strict exchange controls - tasks that developing countries were generally ill suited to manage efficiently. 9. Not surprisingly, by the 1980s severe problems had arisen in countries that had adopted ISI strategies, especially in Latin America where they had first been introduced. ISI had certainly sparked a degree of industrialisation in certain countries; yet the costs proved enormous. In a country like India, for example, resources were allocated in a highly inefficient manner, and virtually none of the country's industry was competitive internationally. Input prices were simply too high as firms were legally prevented from going to international markets to find lowest cost suppliers. This led to a serious squeeze on investment, budgetary shortfalls and low wages. Frequently ISI contributed to overvalued exchange rates, which, in turn, further discouraged manufacturing and agriculture exports. As a result, developing countries employing such strategies were denied the opportunity to reap normal gains from trade. Many developing countries excluded themselves from the GATT process, through which the most developed countries were lowering tariff and non-tariff barriers and thus building foundations for a massive expansion of trade and prosperity in the post-war era. 10. The ultimate failure of import substitution as a catalyst to development helped spark a resurgence in neo-classical approaches to trade, which partly ascribed the persistence of underdevelopment to distorted goods and factor markets in developing countries (Williamson, World Bank Observer). New approaches to development economics in the 1980s would place trade liberalization at the centre of prescribed economic policy objectives for developing countries. 11. A number of recent influential empirical studies have indeed demonstrated a positive correlation between trade openness and economic growth. This academic work, in turn, has informed IMF, World Bank, OECD and WTO support for trade liberalization in the developing as well as the developed world. In 1995 Jeffrey Sachs and Andrew Warner demonstrated that open economies grew at an average annual rate of 4.5% during the 1970s and 1980s, while closed economies expanded at a rate of only 0.7%. They suggested not only that open economies grow more rapidly than closed economies, but also that poor open economies grow faster than the rich open ones (Sachs and Warner). David Dollar and Art Kraay also unearthed a "strong positive effect of trade on growth" and argued that rising trade "leads to proportionate increases in incomes of the poor" (Dollar and Kraay). 12. Dani Rodrik and Francisco Rodríguez launched a much-discussed counter-attack on these pro-trade findings. Basing their critique on methodological grounds, they claimed that techniques used to measure openness invariably explain more than just trade policy. This leads economists to overstate the value of free trade regimes to developing countries, and thus "the priority afforded to trade policy has generated expectations that are unlikely to be met, and it may have crowded out other institutional reforms with potential greater payoffs" (Rodríguez and Rodrik). Rodrik has gone a step further in his criticism, asserting that openness is also likely to widen income and wealth disparities within countries (Rodrik, The Development Council). 13. Jagdish Bhagwati, considered one of the staunchest proponents of free trade strategies for development, demonstrated in 1958 that if market failures are present, "growth under free trade" can, in fact, be immiserising. According to Bhagwati and Srinivasan, Rodrik's error is to suggest that proponents of free trade are ignoring such "nuances and theoretical qualifications" to the neo-classical model (Bhagwati and Srinivasan). Even Rodrik and Rodríguez are unwilling to embrace a potential implication of their research - that trade protection promotes economic growth. Indeed, they claim to "know of no credible evidence - at least for the post-1945 period - that suggests that trade restrictions are systematically associated with higher growth rates". Rather, their concern is that free trade policies should not predominate over other reforms, a view echoed by many other economists. 14. Although much of this discussion is methodological, there are nonetheless clear policy implications at stake. Certainly, many economists with practical experience in development policy-making appreciate that free trade is not an end in itself but rather a means to achieving development - a notion that gives great latitude to the role of foreign aid and positive state intervention (http://www.fortune.com). John Williamson, who coined the term "Washington Consensus," recently expressed his bemusement that the phrase has come to be associated with a "dogmatic commitment to the belief that free markets can handle everything". Williamson has stated that the Washington Consensus, when misinterpreted as "laissez-faire market fundamentalism", cannot provide an effective means of poverty reduction. Williamson argues that while most of the reforms embodied in the neo-liberal Washington Consensus "are at least potentially pro-poor", the concept has never constituted a "policy manifesto adequate for addressing poverty"; in other words, a comprehensive development strategy must go beyond simple free market and free trade prescriptions (Williamson, World Bank Observer). 15. A new consensus among economists is thus coalescing around the notion that even if free trade is generally a good thing for developing countries, there are a number of qualifications that must be considered when formulating the place of trade policy in overarching national development strategies. These include a country's de facto capacity to engage in trade, and existing market distortions that free trade would only exacerbate. It is also increasingly understood that there are no simple trade driven formulae for triggering broader development. At the end of the day, the effects of trade reform on growth and development are highly dependent on the macroeconomic, structural, institutional and social-cultural setting, not to mention world market conditions (Bannister and Thugge). III. THE BENEFITS OF TRADE 16. There are at least three identifiable channels through which trade liberalization can improve welfare in developing countries: 1. By changing the price and availability of goods and services 17. According to classical trade theory, trade will benefit developing countries and developed countries in much the same way. The market mechanisms associated with a reduction of barriers to imports should lower the price of imported goods, and thereby keep the prices of substitutes for imported goods low. This benefits consumers who will experience increases in their purchasing power, as well as producers seeking low cost production inputs like capital goods. Producers will also benefit from the removal of barriers to exports, which will expand their potential markets, and stimulate production and employment. 18. Theoretically, at least, the poor also stand to benefit from the greater potential availability and lower cost of basic foods and medical supplies. Through trade, developing country firms can enjoy enhanced access to new technologies like chemicals for sterilising water, or improved seeds and fertilisers that help foster conditions more conducive to economic take-off. 2. By changing factor prices, income and employment 19. Standard trade theory (Stopler-Samuelson) suggests that trade liberalization will trigger a rise in the relative price of the commodities that trading countries produce relatively cheaply. Mounting sales of those goods on international markets will, in turn, increase the real return to the most important factor of production used in making that commodity. This theory suggests that in a so-called labour-rich developing country, which competitively produces goods that use labour relatively more intensively, real wages for those working in that sector will rise as trade increases. There have also been numerous studies demonstrating that workers in export-oriented firms in poor and developed countries tend to be better paid than those not working in the sector. 20. Yet for developing countries achieving such gains from trade liberalization can be problematic in practice. In some LDCs (Least Developed Countries), the supply of unskilled labour can be highly "elastic". This means that the formal sector experiencing export increases can draw almost infinite amounts of labour from the informal sector, or subsistence agriculture, without significantly raising wages. But this presumes that only unskilled workers are needed to man the means of production when in fact, skilled labourers who are in shorter (less elastic) supply are also needed. At the very least, however, trade liberalization will likely result in increased employment in the formal sector. But if the formal wage is no more than subsistence earnings, the transfer of labour to the exporting sector will have little effect on poverty (Winters). 3. By encouraging investment and innovation 21. Trade liberalization tends to stimulate investment and innovation as entrepreneurs confront new incentives to produce a greater variety and quantity of goods for international markets. Trade also tends to expose societies to new technology, managerial methods and general knowledge flows and thus provides a boost to innovation (Bhagwati). New technologies and innovative business strategies aimed at increasing overall productivity obviously nourish broader economic, social and even political development. IV. POTENTIAL BARRIERS TO REAPING THE BENEFITS OF FREE TRADE 22. Yet many of the potential benefits of free trade fail to materialise even when societies have dismantled their barriers to trade. There are numerous possible reasons for this. Most importantly, a country may simply lack the capacity to exploit new trade opportunities. Frequently tariffs are the least daunting barrier to trade in a country. Other factors may be at work: hidden bureaucratic barriers to trade at home, and persistent protectionism abroad, expressed not only in tariffs but also non-tariff barriers, geographical isolation, the absence of a transportation infrastructure that would make it possible to move goods to world markets; and a dearth of knowledge about the way international markets function. 23. Finally, there is the fact that the international trading system itself has become so complex that the "start up" costs of operating in global markets have become prohibitively expensive for many of the least developed countries. Uruguay Round obligations imposed significant implementation costs on developing countries. Simply assessing the potential gains and losses to be had from a particular agreement was itself an enormous burden for these countries. In fact, developing countries entered talks without the means to ascertain their precise interest in the outcome of a particular negotiation. Not surprisingly, during the Uruguay Round the expectations of increased availability of goods and services, as a result of trade agreement, were shattered when it became apparent that certain agreements ultimately resulted in restricting developing country access to technology and medicine. 24. While few economists refute the contention that trade liberalization can result in overall welfare gains and long-term benefits, many point out that the vulnerable sectors of society suffer the most from trade-driven adjustments. For the poorest members of society, who tend to operate in informal urban and rural markets, trade-induced adjustment can be catastrophic. Micro-enterprises or small farm households operating on razor thin small profit margins, for example, may have to exit the market in the face of increased competition from abroad after liberalization. The poor have very few assets to draw upon in periods of transition, when the looming spectre of unemployment becomes a reality (Winters). In countries lacking social safety nets, such "short-term" transitions can lead to permanent consequences related to the loss of housing, foregone educational opportunities, or lost access to healthcare. In this sense, the rules of the game for poor countries can differ from those of developed ones. V. THE PROBLEMS OF THE URUGUAY ROUND 25. A number of economists have charged that the Uruguay Round's outcome largely favoured the developed economies and in a number of cases imposed serious burdens on the developing countries. Yet while developing countries did take on a wide range of complex new obligations, they also incurred commitments to open up their own economies. This represented a genuine advance. 26. Developing countries also stood to gain from the North's reduction of its import barriers. Yet Western commitments made during the Uruguay Round proved insufficient in several critical areas. The careful wording of the Agreement on Textiles and Clothing, for example, granted industrial countries sufficient "wiggle room" to delay liberalising that sensitive market until the very end of the transition period (2005). Countries with large textile manufacturing or agricultural sectors, however, have not benefited as they had expected to from the Uruguay Round agreement (Finger and Nogués). This provoked anger in the developing world and is a root cause of the developing countries' recent refusal to embrace US and EU positions on agricultural trade at the recent Cancun review conference. 27. While developing countries have failed to gain full access to markets in which they are most competitive, many of the regulations they have adopted - as a result of international trade law - have proven costly (although it is difficult to measure welfare losses and gains with precision). While the reduction of a tariff or the removal of a quantitative restriction costs little to implement, new trade agreements like TRIPS (Trade Related Aspects of Intellectual Property Rights) and GATS (General Agreement on Trade in Services), impose considerable implementation costs on both developed and developing countries, although the former are better prepared to cope with these costs. Frequently poor countries have been compelled to adopt standards prevailing in OECD countries and have had to dedicate scarce resources and personnel to upholding standards that, in fact, are of little relevance to their economic life. An asymmetrical pattern has emerged in which developing countries confront significant implementation costs, while most developed countries face virtually none. 28. Why did developing countries experience unfavourable outcomes in the wake of the Uruguay Round? The transition from GATT to the WTO system put developing countries under enormous pressure to accept the conditions of membership of the new organisation. To have rejected those standards would have led to exclusion from the club. Developing country negotiators were anxious to avoid conflict with the US and the EU and thus accepted conditions that many believe were imposed on them simply to satisfy the West's export agenda (Finger and Nogués). VI. TRIPS AND GATS 29. The Uruguay Round significantly broadened the multilateral trade negotiating agenda beyond tariffs and quotas to address non-tariff barriers including domestic regulations. The TRIPS and GATS agreements were two of the most important accords made during the Uruguay Round negotiations and have had different implications for economic development. 30. During the Uruguay Round negotiations, the US, EU and Japan called upon all GATT members to reinforce Intellectual Property Right (IPR) protections. Developed countries felt that failure to do so would result in "free-riding" -- unauthorised or uncompensated use of intellectual property. This, in turn, would allegedly reduce the economic incentives to invest in the development of intellectual property. The TRIPS agreement thus created minimum universal standards of protection, which, in effect, globalised US and European laws governing intellectual property protection. (Capling) It stipulated that countries should normally not exclude any area of technology, including pharmaceutical goods, from patent coverage. It also required all WTO members to establish mechanisms for the domestic enforcement of IPRs, including provisions both to award damages to rights holders and obligations to file criminal charges against those wilfully violating these laws (Makus). 31. It is particularly difficult to measure the economic costs to developing countries of applying new regulatory standards, even those that are designed to reinforce a free market. The costs of introducing new intellectual property laws are thus not clear. Advocates of intellectual property protection claim that higher standards will, over time, encourage growth in developing countries by reassuring foreign investors and by raising incentives for innovation. Sceptics claim that the benefits simply accrue to the holders of existing intellectual property rights (often multinational corporations headquartered in the West), who are positioned to use their profits from old patents to develop new ones (Capling). Patent infringing firms in developing countries are either compelled to abandon protected business or to pay the patent holder to acquire licences for technologies and trademarks. Patent protection can also grant companies that hold the patent a temporary monopoly that can, in the absence of competing patents, generate monopoly rents as a reward for developing that technology. According to some critics, the TRIPS agreement has exacerbated the already formidable technological gulf between haves and have-nots: stronger IPRs have raised the costs to developing country consumers and manufacturers of critical technologies and intermediate inputs. Of course, it is hard to generalise about these trends, as relatively advanced developing countries like India and Brazil clearly stand to benefit from more stringent intellectual property regimes than poorer, less industrialised countries. 32. Among the greatest recent concerns of developing countries has been the potential impact of pharmaceutical patents on access to essential medicines, such as drugs to combat HIV/AIDS. TRIPS has come to be seen in much of the developing world as a system that drives drug prices higher, while diminishing health and failing to produce any of the predicted beneficial effects on local pharmaceutical innovation (Makus). 33. Most observers acknowledge that the TRIPS agreement represented one of the least balanced aspects of the Uruguay Round; critics point to it to illustrate how the interests of powerful companies in the developed world ultimately shaped WTO policy. The Uruguay Round effectively ended the once accepted notion that each nation has the sovereign right to set for itself the balance between the interests of the producers and users of intellectual property. The term "piracy" was henceforward applied to situations in which countries extended less than full protection to intellectual property rights (Finger and Nogués ). 34. Developing countries agreed to TRIPS partly in exchange for US and EU promises to reduce barriers to trade in textiles and agriculture. But as suggested above, they were disappointed with the outcome. The liberal trade economist Jagdish Bhagwati has suggested that "the majority of developing countries [are] losing and the majority of developed countries [are] gaining from the post-Uruguay trade structure" (Capling). 35. According to some critics, the TRIPS agreement has probably done more to hinder than to encourage economic development. It has placed onerous compliance obligations on developing countries, while the patent protections it extends are largely illusory to a broad range of countries lacking the scientific foundation and the capital to exploit that protection. Of course, creating a legal climate that includes intellectual property protection might help change this condition; yet for that to happen, a country requires a critical mass of skilled technicians, an inflow of foreign investments, and an array of other changes and reforms. Strengthening IPRs alone is obviously of limited utility in promoting FDI, innovation and technological change. Developing countries will stand to benefit from their commitments under the TRIPS agreement only in the context of further market liberalization, efficient competition laws, investments in human capital, and the promotion of adequate technological infrastructures (Makus). In the eyes of many development economists, however, dealing with the AIDS pandemics represents a far greater development priority than protecting patents. 36. Subsequent efforts to draft new rules governing developing countries' access to essential medicines have been fraught with difficulties. The Doha declaration states that a (poor) country has the right to use generic versions of patent protected drugs in an emergency case; yet it also stipulates that a country must produce the generic medicine itself, and should not import cheaper generic versions of it from abroad. Brazil reduced by half the number of people dying from AIDS, by providing patented anti-retroviral drugs to 150,000 people free of charge. Brazil was able to do this because it could produce cheap, generic versions of the medicines needed, or acquire drugs at much reduced prices from patent-holders by threatening to manufacture these drugs itself (The Economist, September 1, 2003). This strategy, however, was not an option for the least developed countries. 37. Although WTO members have accepted the principle that developing countries should be able to license local producers to copy essential drugs, negotiators were unable to agree for some time on rules for countries that do not have the industrial capacities to manufacture the drugs themselves. US negotiators long advanced the case made by Western drug companies and patent holders. Their concern was that generic drug producers in countries like India and Brazil would slice into the market share of US patent-holding firms, by selling cheap generic medicines for a wide range of ailments to those developing countries with manufacturing capacities. US negotiators had demanded that any agreement be limited to a list of 20 major infectious diseases, including HIV/AIDS, malaria and tuberculosis. Negotiators from developing countries rejected this position and insisted that developing countries have the freedom to decide for themselves which drugs to import (The Guardian, February 19, 2003). 38. It was therefore welcome news when the United States and a small group of key countries agreed on a system that will provide low-cost medicines to poor countries as long as stringent measures are taken to protect patents in wealthier countries. The agreement would relax patent regulations on certain drugs and permit producers of generic versions of these drugs to export to poor countries. Pharmaceutical companies have been assured that the arrangement will not allow for the re-export of these drugs back to wealthy western countries. The agreement marks a significant concession on the part of the US government, which, in turn, was made possible by the drug industry's agreement to permit poor countries' importation of compulsorily licensed drugs for all diseases - not just those for HIV, tuberculosis and malaria (Miller, Newman and Hensley). 39. It is expected that the rest of the WTO membership will sign on to the deal shortly, and it was hoped that this might ease expected tension at the Cancun meeting, although that did not happen. The question of whether the ruling will markedly change the conditions of the millions of impoverished people suffering from AIDS in the developing world cannot yet be answered. The agreement will not in itself lead to improvements in medical infrastructure, distribution and information that are all essential to winning the battle against AIDS. 40. The agreement solves this problem for those countries that were unable to manufacture their own generic medicine. It seeks to balance the interests of the poor, potential exporters of generics (like India and Brazil) and patent holders (principally American pharmaceutical companies). It lists those rich countries that will refrain from importing generic medicines as well as the less rich countries (so-called middle-income developing countries) that will import them only in case of a national emergency, or "circumstances of extreme urgency". In addition, OECD members have agreed to opt out of the system, as have the countries that will join the European Union next year. 41. There are lingering doubts about the agreement's capacity to balance developing country and multinational pharmaceutical manufacturing interests. Some question whether the generic drug industry will not end up producing for developed markets where consumers, taxpayers and state and local governments are increasingly up in arms about skyrocketing drug prices. On the other hand, Indian companies have suggested that the safeguards are too stringent and will make the agreement unworkable (Oxfam, August 30, 2003). 42. The General Agreement on Trade in Services (GATS) was one of the major achievements of the Uruguay Round. It obliged signatories to provide for legally enforceable rights to trade in a large number of services. GATS set in motion the progressive liberalization of such trade through negotiations, transparency and the increased participation of developing countries. Although the agreement itself did not directly result in service sector liberalization, it laid a foundation for future negotiations. 43. Some economists suggest that while the TRIPS agreement required a "big bang" conversion to the standards of most advanced countries, GATS is significantly more flexible. It allows members to control the pace of services sector liberalization and thus to schedule market access commitments in a manner consistent with their level of economic development. In other words, members can choose whether or not to open particular sectors to foreign competition. By enabling step-by-step negotiations for market access, GATS represents a potentially more development friendly structure for liberalization than does TRIPS (Finger and Nogués). 44. Taking the case of Argentina, Finger and Nogués demonstrate that service liberalization has both generated increased business opportunities for outsiders, while granting Argentinean consumers a greater range of services at lower costs - in this sense it is a classic case of free trade resulting in a win-win situation. This particular study, however, also demonstrated that the generally positive outcome was due less to the terms of the GATS, than it was to the fact that Argentina had already embarked on the liberalization of its services sector before signing the agreement. International negotiations provided the opportunity to lock in some of those reforms against second thoughts or opposing political pressures. A similar case has been made for India, which has also become an important exporter of software and other services (Chadha). 45. Not surprisingly, some economists characterise the GATS model as more of a catalyst for development than that of TRIPS. Certainly developing countries hold a strong interest in the further liberalization of trade in services. Not only will this provide a means to broaden their own service base, but also through the relaxation of OECD member visa quotas, it can open new export opportunities (Hoekman, http://www.wtowatch.org). This, in turn, might well reinforce the will of certain developing countries to embark upon further domestic deregulation, in order to remedy market failures and advance a range of social goals. Recognising the rights of countries to lower barriers at a rate consistent with their broader development strategy has been key to the success of GATS. Sadly, efforts to deepen free service trade are currently stalled in the Doha Round, and developing countries do not seem willing to countenance agreements on this front without corresponding concessions on agriculture from the EU, the US and Japan. 46. Critics of recent trade negotiations have argued that the West must exercise care that the trade negotiation process does not become "tantamount to an OECD standards harmonisation agenda" that proves too burdensome for developing countries and particularly for LDCs (Sally). Indeed, the contrasting outcomes of the TRIPS and GATS agreements demonstrate the importance of tailoring such accords to developing country needs. When this is not possible, negotiators should consider "phase ins" to give developing countries ample time to adjust to new standards. Under the terms of the TRIPS agreement, some countries were pressured to run before they could walk; the agreement compelled them to divert precious resources for compliance purposes that might have been better spent on meeting other development needs. GATS, by contrast, has the potential to advance reforms conducive to long-term economic development by giving developing countries more leeway in setting their own priorities within a broadly liberalising framework. VII. AMERICAN AND EUROPEAN APPROACHES TO THE AGRICULTURE TRADE - DEVELOPMENT LINK 47. Through varying combinations of subsidised production, price supports and overt and hidden export subsidies, the US and EU have managed to undercut agriculture prices in poor countries. US and EU tariff and non-tariff barriers have only exacerbated the problem. It is estimated that the developed world as a whole pays out more than US$300 billion a year in farm subsidies, seven times what it gives in development aid. Nicholas Stern, the Chief Economist at the World Bank, recently wrote: "The average European cow receives around US$2.50 a day in subsidy. The average Japanese cow receives around US$7.00 a day in subsidy. In sub-Saharan Africa, 75% of the people live on less than US$2.00 a day. By anybody's standards these subsidies are huge and foster market conditions which can overwhelm developing world agriculture" (International Herald Tribune, December 3, 2002). For example, Europe grows subsidised sugar beets even though average production costs are more than double those of more efficient producers like Brazil and Zambia. Only subsidies and tariffs up to 140% make European sugar production possible, and this, in turn, dramatically reduces the market for more efficiently produced sugar. There are similar examples of commodity supports in the United States, which undoubtedly result in larger global market shares (The Guardian, August 18, 2003). 48. According to a 2002 World Bank report, one way to evaluate reform proposals is to compare their likely results with the potential gains to be had from full removal of all barriers, which would yield global welfare gains of $400 to $900 billion, more than half of which would go to developing countries. If all trade barriers were dismantled, agriculture and food would account for 10% of these gains. A major share--60%--would derive from reforms in developing countries. The largest gains are to be had from tariff reforms in agriculture, undertaken in a context of a global reform programme. For the WTO's poor member countries, a move toward a higher level of agriculture liberalization would bring more than sectoral economic benefits; it would demonstrate a commitment to make the Doha Round a "development round". In that sense, the issue has become a litmus test for both the developed and the developing countries. If progress is not made on this front, a deal at Geneva or at the next Ministerial Conference in Hong Kong is highly unlikely. 49. American and European negotiators have well understood that there can be no progress in the Doha Round without concessions on agriculture. Both sides have worked to deal with this politically sensitive challenge, and this past summer agreed to a joint framework calling for a range of reforms, import tariff cuts, domestic and export subsidy reductions and spending caps -that would be jointly presented at the Cancun review conference. This deal however suffered from an absence of sufficient detail. 50. The United States' position on agricultural trade is highly complex and strongly conditioned by the domestic political landscape. Powerful farm lobbies have managed to convince national leaders of the need to maintain and even enhance an array of farm supports that directly and indirectly distort trade in those commodities. US leaders have partly justified this as a response to the even higher levels of support extended to European farmers. In the months leading to Cancun, however, US leaders expressed a willingness to exercise "active, robust leadership" in a round of farm trade liberalization, implying that US farm supports could be put on the table (Sally). 51. Reconciling free trade principles with the interests of key domestic groups is never easy. President Bush won trade promotion authority - enabling the Doha Round negotiations to get underway - by making a series of side deals, several of which included protectionist clauses. As last year's report pointed out, the 2002 Farm Security and Rural Investment Act dramatically increased domestic farm subsidies, which would allow the US to spend up to US$19 billion a year over the next 10 years on commodity programmes. In expanding the extent and time frame of US farm support, the act has several potential trade-distorting effects, and is widely seen in the developing world as an egregious contradiction of America's purported support for trade liberalization among developing country trade negotiators. 52. The US Administration had proposed an international accord aiming to reduce farm support programmes in the developed world. In the run up to Cancun, Robert Zoellick, the US trade representative, called for the co-ordinated reduction of American and European export subsidies and domestic support programmes as part of the Doha process. The problem is that the Farm Security and Rural Investment Act weakened US credibility on this issue at the WTO Doha negotiations, thereby enabling certain strident agriculture protectionists in Europe and Japan to accuse the US of hypocrisy, while ignoring the substance of US and Cairns Group proposals for a more liberal agricultural trading system. Because of American electoral politics and the need to win the support of the powerful US agribusiness lobby, there is now great pessimism that the administration will be prepared to tinker with a farm support programme designed more to harvest votes than to make good policy sense. 53. Of course, there are very few economists who would argue that Europe's CAP makes good policy sense either, and it too stands as a testament to the sheer power of the farming lobby. A core group of key member states seems keen to preserve CAP spending at current levels, even if they are increasingly amenable to altering the most egregious trade-distorting elements. In October 2002, France and Germany agreed on a deal to slow the pace of CAP reform by locking in spending until 2013. This dashed any lingering hope of substantial spending reform. It was a deal not particularly welcomed in those European capitals like London where the CAP is seen both as a budget breaker and a system that undermines the Union's development and environmental goals. Although some groups supporting CAP reform had hoped that EU enlargement would weaken the position of those countries supporting the status quo, political leaders in Poland and Hungary now seem inclined to throw their weight behind the current system. 54. That said, a number of EU member governments continue to view CAP reform as inevitable. Not surprising, these EU countries are mainly net contributors to the EU budget and thus hold an important stake in altering the status quo. This group includes the UK, the Netherlands and Sweden. Their argument is bolstered by the fact that the current system will almost inevitably prove financially unsustainable once the transition phase of the next enlargement has concluded. In their view, the clock is ticking and the sooner change comes, the better. They also readily acknowledge the link between reducing EU farm supports and advancing development in primarily agricultural developing countries, but frankly this is only a secondary motivation for their position. More to the point, politically, is the fact that the current system is costing their treasuries and their consumers a great deal, and they want to avoid the prospect of enlargement driving these payouts to ever-higher levels. A Swedish household with two children would gain an estimated US$1,200 a year in discretionary income if all agricultural trade barriers were abolished. Such statistics, though, rarely inform the debate in Europe or in North America (Nordberg). Nor is it generally known that half of all EU agricultural funds go to only 5% of the farms - generally the largest and richest 5% (The Observer, November 3, 2002). The situation is similar in the United States, where, according to the Heritage Foundation, the largest and most profitable farms and large agribusiness conglomerates receive the great bulk of federal subsidies (Riedl). 55. In an effort to achieve a common EU position on farm trade reform in the WTO negotiations, the European Commission proposed a compromise CAP reform at the end of 2002. The proposed reform, while promising no substantial cuts in overall agricultural spending, would have "decoupled" subsidies from production and redirected funds into income support and rural development plans. According to Franz Fischler, the EU Agriculture Commissioner, the scheme would direct roughly 80% of EU farm spending to what would be non-trade distorting measures. The EU Council of Ministers, however, subsequently rejected the Commission plan while endorsing a Franco-German proposal to maintain the overall levels of CAP spending until 2013. 56. At a February 2003 summit of 52 African nations in Paris, however, President Chirac appeared to soften his position on CAP reform when he called for a temporary suspension of all subsidies on agricultural exports to Africa -including those export credits and food aid provisions that are used as export subsidies. In his remarks, he also acknowledged a certain merit to the notion that developed country export subsidies (including both the EU and US) were indeed destabilising developing country markets. 57. Critics have suggested that Chirac's proposal is at best piecemeal: the proposed elimination of subsidies on exports to Africa is politically viable only because food exports to Africa constitute such a small percentage of the EU's export market - roughly 3%. As world prices would remain unaffected, the step would do nothing to encourage export-oriented agricultural production in Africa. The real challenges include the paucity of market access enjoyed by all (and not just African) developing countries, and particularly the negative effects on world prices of European production subsidies and US price supports. 58. The problems are evident in Europe's own backyard. According to Oxfam, over the past thirteen years, hundreds of Albanian orange farmers have been forced out of business because of an influx of cheap Italian and Greek oranges on the Albanian market (orange producers in Greece and Italy receive an EU subsidy of 20%). As a consequence, many Albanian farmers have left their orange groves and emigrated to the EU in their search for work. In this case, EU farm policy seems to be directly contravening other critical EU development and immigration goals (Oxfam). 59. In June 2003, under pressure to come up with concessions for the Cancun Ministerial, EU negotiators struck a deal on CAP reform. This was the first genuine reform of the CAP since the McSharry reforms of the early 90s. The deal promises to move away from the old subsidy system, and break the long-standing link between production and subsidies - which encouraged European farmers to overproduce due to assured market access and a fixed price for farm output. Instead, farmers will receive flat annual payments based on past subsidies received. CAP funding will be increasingly channelled into programmes that do not distort trade, like rural development (protecting the landscape) and environmentally friendly farming (decoupling production and subsidies, limiting trade distortions, fostering rural development, and encouraging environmentally-friendly farming methods). 60. The initial proposals of Commissioner Fischler had gone much further than the current agreement, but were watered down by the opposition of some member states. The reform package will neither reduce the EU's inflated food prices, nor will it lower the US$50 billion (€43 billion) annual spending on agriculture until 2013 (a consequence of the deal struck between France and Germany in October 2002). Moreover, the announced reform will not affect the EU's huge barriers to many food imports, nor its highly protectionist and expensive sugar regime, which has disturbed international trade to the detriment of many potential developing country suppliers. Reform of the sugar regime was never intended to be covered by the reform to the system of domestic support to farmers. Reform of the EU sugar regime is long overdue. EU prices are currently 3 to 4 times world levels. The Commission has produced an options paper on reform of the sugar regime as part of the so-called second stage of CAP-reform. Legislative proposals, however, are unlikely to emerge until mid-2004. Finally, the agreement does not decouple subsidies from production totally, and some member states have gained opt-out provisions. For these reasons, Australia and Brazil, speaking on behalf of the Cairns Group and the block of developing countries respectively, announced that these reforms were insufficient to move the Doha Round forward. 61. The European Union's positions on trade and development are thus deeply contradictory. While the Union and its member states are important champions of development and far more generous in underwriting development assistance than the US, the CAP system continues to limit critical market access to many poor countries, while undercutting global prices. Its reform is increasingly seen as a diplomatic, economic and moral imperative (Financial Times, January 21, 2003). 62. American farm policy has traditionally been more trade-friendly, but recent policy changes have begun to move in the wrong direction. It would nevertheless be unwise to assume that US and EU reform of their distorting agricultural systems alone will prove a panacea for the developing world's agricultural prospects. Obviously, a whole range of national level reforms, and reciprocal openness on the part of developing countries, would also be essential. VIII. GENETICALLY MODIFIED CROPS AND FOOD PRODUCTS-THE DEVELOPMENT ANGLE 63. Ongoing US-EU tensions over trade in genetically modified (GM) foods also has significant implications for development. Underlying the debate are pronounced differences about the potential health and environmental effects of GM products. In Europe, public scepticism about the long-term effects of GM materials on health and the environment lies behind an extremely cautious approach, culminating in a de facto moratorium on any new approval of GM products. At the beginning of 2003, Robert Zoellick expressed the US administration view that the alleged dangers of GM foods were mere fabrications and that the EU ban was "immoral" (SAPA-AFP January 13, 2003). Although the European Commission concurred that the ban had to be lifted, various member states refused to do so, at least until stringent labelling regulations were put into place (Financial Times, February 6, 2003). 64. On 2 July, 2003, the European Parliament approved new and even more stringent regulations on genetically modified food: an initiative that tightened rules governing GMO-labelling and traceability through the food chain (The Economist, July 3, 2003). Interestingly enough, products that are made with genetically modified processing aids, like GM enzymes and yeast, do not need to be labelled in a similar way. This conveniently exempts critical European exports - like wine, cheese and beer - unaffected by the legislation. On 18 August 2003, the US called for a WTO panel to investigate the legality of the EU's five-year-old moratorium on new GM food products. 65. The current US-EU stalemate on GM products has directly affected trading partners in the developing world. Certain developing countries are hesitant to accept GM imports partly out of fear that this will prevent them from exporting to the EU. Zambia and Zimbabwe even refused emergency food aid from the US containing GM maize. The two governments were apparently concerned that GM maize received as aid would be planted thus potentially affecting their environment and their capacity to export agricultural products to the European Union. Yet, the ban was also applied to milled maize which cannot be planted-an astonishing position given the threat of mass starvation in both countries (www.cid.harvard.edu). The 1970 Nobel Peace Prize laureate Norman E. Borlaug recently wrote: "Privileged societies have the luxury of adopting a very low-risk position on the GM crops issue, even if this action later turns out to be unnecessary. But the vast majority of humankind does not have such a luxury, and certainly not the hungry victims of wars, natural disasters, and economic crises." (Wall Street Journal Europe, January 22, 2003). 66. The Cartagena Protocol on Bio-safety came into force in September 2003. It is the only international instrument controlling transboundary movement of Genetically Modified Organisms. It will provide a mechanism to enable developing countries to make informed decisions about whether or not to accept the import of GM products on justified environmental grounds by reference to a Bio-safety Clearing House. The EU strongly supported this protocol. Although the US does not think a multilateral agreement is necessary it does support the exchange of information through the clearinghouse. 67. Scientists and environmentalists are divided on the potential effects of GM products on economic growth and health in developing countries. The American government and a number of scientists maintain that GM crop varieties that help to control insects and weeds are lowering production costs and environmental damage, while increasing harvests. Some scientists contend that crops nutritionally enriched through genetic engineering, can play an essential role in reducing world hunger and malnutrition. One commonly cited example is "Golden rice", which, through genetic manipulation, produces additional Vitamin A and is thus thought to help prevent blindness. Sceptics point to a more complex picture, in which "genetic pollution" from such modified crops could be transferred to plants in the wild, potentially damaging ecosystems and threatening biodiversity, and fostering dependence in developing countries on patented seeds, the distribution of which is exclusively controlled by large Western corporations. In broad terms, however, even though there are at present few commercially available examples of beneficial GM technologies applied to crops, the debate over GM foods is distracting attention from the real causes of hunger and malnutrition, including fundamental distributional issues (www.cid.harvard.edu). IX. REGIONAL TRADE AGREEMENTS (RTAS) 68. Over half of the 168 Regional Trade Agreements (RTAs) currently in force were signed after 1995. If anything, agreeing these types of accords has accelerated after the failure of the WTO's Seattle Ministerial conference, and this has sparked a new debate on the effects of regional and bilateral trade agreements on multilateral trade negotiations, and the implications of these trends for developing countries. 69. Advocates of RTAs see them as steppingstones to full global free trade. Regional initiatives, they argue, allow countries to liberalise gradually by increasing the level of openness slowly, thereby granting domestic industries time to adjust. These arrangements, it is argued, inculcate developing and previously protected countries in the habits of trade that will then provide a foundation for future liberalization (www.cid.harvard.edu). 70. Theoretically, RTAs can advance economic policy reform and political stability while generating jobs and investment. The North American Free Trade Agreement (NAFTA) has had this effect on Mexico, while the countries of Central and Eastern Europe have certainly benefited from special trading relations with the European Free Trade Association (EFTA) and the EU. According to Robert Zoellick, NAFTA "enabled Mexico to bounce back quickly from its 1994 financial crisis, launched the country on the path of becoming a global economic competitor, and supported its transformation to an open democratic society". In addition to assuring developing countries' access to developed markets, Zoellick claims that RTAs provide "strong links in a global sourcing chain". (http://www.economist.com, December 5, 2002). America's chief negotiator has made it clear that his government is intent on signing a broad range of bilateral and regional trade liberalization measures with developing countries, partly as a hedge against failed multilateral talks. 71. Critics of regional trade agreements, and there are many in the development community, argue that once these arrangements are made, developing countries may have little interest in opening their markets further. There is also a danger that trading blocs will emerge that will have the effect of "diverting" rather than creating trade, particularly if countries need to raise tariffs or non-tariff barriers on some commodities as the price of joining (Bhagwati and Panagariya). RTAs are often riddled with "rules of origin" clauses: for instance under NAFTA, clothing imports into the US market are subject to the "triple transformation rule", requiring a garment's assembly to transpire in and its yarn to originate from NAFTA territories. The "triple transformation rule" is thought to have caused severe trade distortion, resulting in large losses for textile manufacturers in East Asia (James and Umemoto). From an economic perspective, therefore, RTAs are inferior to generalised trade liberalization. Finally, the volume of RTA activity has placed heavy demands on the negotiation capacities of developing countries. Given their limited resources, developing countries would be better off devoting their resources to negotiating in multilateral fora, where potential rewards are indeed greater. 72. Moreover, it is not evident that the proliferation of regional, as opposed to global, trade deals is in the long-term interests of the United States. B.K. Gordon has shown, for example, that the global distribution of US exports is extraordinarily balanced over the three main economic regions in the world: North America (Canada and Mexico), East Asia and the EU. No other major economic player enjoys such a balance. The US thus has a great deal more to gain from an open global trade order, as opposed to a segmented one in which trade diversion effects can be significant. In essence, this means that because of membership in a regional preference system, a country is prevented from importing from lowest cost suppliers. The problem today is that the United States government feels that it needs regional options both as a negotiating "stick" and as a back-up to failed global talks. If it moves in this direction, it will doubtless encourage other developed countries to do the same, and this will only burden the international economy with an ever more confusing set of rules (B.K. Gordon). 73. This is not to say that there is no place for special arrangements, particularly for LDCs. In October 2000, the US Congress passed the African Growth and Opportunity Act (AGOA). It was billed as a radical attempt to grant completely unrestricted access to US markets for all sub-Saharan African exports. The Act offers 34 sub-Saharan African countries duty-free and quota-free access to US markets, and lifts all existing quotas on textiles and apparel products. Since 2000, five countries have accounted for 95% of AGOA exports, most of which are petroleum-based. Yet there has also been a substantial increase in non-oil products imports as well. In the first seven months of 2002, US consumers purchased US$900 million-worth of non-fuel products, 50% more than two years before (The Economist, January 16, 2003). According to Oxfam, AGOA has stimulated exports of garments and apparel from a number of countries, generating an estimated 8-11% increase in overall non-oil exports from Africa. This is a truly positive development. 74. Yet AGOA is not without its critics, several of whom claim that AGOA is designed first and foremost to advance US interests. Rules of origin requirements, for example, stipulate that duty-free access for garments is contingent on exporters' using American yarn. This is sub-optimal trade diversion and leads to concomitant losses for African fabric producers. Under AGOA, governments seeking eligibility for duty-free access are required to provide protection for the intellectual property rights of American firms, and an open door, non-discriminatory policy on foreign investment. Moreover, duty-free access under AGOA will do nothing to help sales of agricultural produce that are so adversely affected by US and EU farm subsidies. 75. In October 2000, the European Commission put forward a proposal to enhance market access for the world's 49 Least Developed Countries (LDCs). The proposal advocated duty- and quota-free access on all products exported from the LDCs, except armaments. 76. Oxfam applauded the EBA (Everything but Arms) initiative and suggested that, if adopted, it would send a strong signal to other industrialised countries. But the benefits have been less than striking, as most LDCs already receive duty-free access to the EU through the Cotonou Convention. According to Oxfam, the benefits from increased export revenues "would have been concentrated in a handful of products, with sugar accounting for over 60% of the total, and rice, bananas and beef the bulk of the remainder". 77. Unfortunately the EBA proposal was subject to intensive lobbying by powerful representatives of the European food and agricultural sector, and several EU countries succeeded in blocking key aspects of the initiative. According to Oxfam, the claims of lobby groups were wildly exaggerated: for instance, the sugar beet lobby warned that sugar exports to the EU would rise by almost three million tons over five years, a figure that Oxfam suggests is well beyond the supply capacity of LDCs. In any event, the Council of Ministers delayed the inclusion of sugar and rice in the EBA proposal until 2009, prompting critics to rename it the `Everything but Farms' initiative (Oxfam, May 2001). X. TEXTILES AND CLOTHING 78. The labour intensive textiles sector is critical to the weak industrial base of many of the world's poorer countries. China and India, among many others, hold a clear comparative advantage over producers based, , , in the West, particularly at the lower end of the market. Current barriers to exporting fabric to developed countries are therefore a source of deep contention between poorer and richer nations. 79. Developed countries are party to the Uruguay Round Agreement on Textiles and Clothing (ATC), which committed them to phasing out bilateral quotas on textiles and clothing by the beginning of 2005. So far, little progress has been made to honour these commitments and the developing countries, particularly members of the International Textiles and Clothing Bureau, have criticised the US and European Union for "back loading" liberalization until the very end of the implementation period. Developing countries are also concerned that only the minimum requirements of the ATC are being met, while protectionism will rear its ugly head through other measures, such as anti-dumping actions (www.cid.harvard.edu). 80. Developing countries' confidence in a new round of liberalization also hinges on Western progress in implementing commitments, made during the Uruguay Round, on dismantling barriers to textiles and clothing production. These commitments, though, are highly unpopular with Western trade unions. A textile trade union leader told members of this Sub-Committee in New York last year, for example, that developing countries will eventually be nostalgic for the old quota system once they understand the damage that Chinese clothing production will do to their own firms in a more open trading environment (NATO PA Secretariat Report-New York and San Francisco [AV 73 EC/TER (02) 3]). Thus a final agreement may prove very difficult to achieve in Geneva if developed countries fail to live up to their ATC commitments by 2005 (Sally). XI. OTHER INDUSTRIAL GOODS TRADE 81. The Doha Ministerial Declaration called for the reduction, or, as appropriate, elimination, of tariffs and non-tariff barriers, "in particular on products of interest to developing countries". 82. Currently, developed country tariffs schedules hinder developing country exports in steel, energy products, leather goods and footwear, as well as textiles and clothing. Of particular concern are tariff peaks (defined as duty rates of more than 15%), which frequently apply to developing country production. Indeed, close analysis of developed country tariff structures betrays significant tariff escalation (whereby the greater the level of processing involved in production, the higher the tariff - a tariff structure which essentially discourages real economic development). In the EU and Japan, fully processed manufacturing products face tariffs twice as large as products in the initial stage of processing (Hoekman, World Bank Policy Research Working Paper). By making processed goods prohibitively expensive, tariff escalation brutally hinders the development of an industrial infrastructure in less developed countries. In this particular area, Western trade policy appears to be working in direct contravention of most developed countries' development goals. This is the height of hypocrisy. 83. America's overall weighted average tariff rate of only 2% on worldwide imports is low by global standards. Yet rather than apply this rate evenly among nations, the US applies tariffs according to the type of product imported. The goods that face the highest US tariffs are those that the poorest countries produce: agricultural goods, textiles and apparel. Combined with the impact of quotas, US tariffs present a significant obstacle to any country entering the global economy. US weighed average tariff rates end up varying widely depending upon the exporting countries' economic wealth. Those that have an income of US$25,000 a year face an average US tariff rate of 2%. However, 25 countries with a per capita GDP of less than US$1,000 confront tariff rates significantly greater than the US average (Froning). 84. Even more depressing is the fact that trade among developing countries is inhibited by their own high and differentiated tariffs, as well as an array of non-tariff barriers. Tariff peaks are particularly common in developing countries' tariff schedules and this has an utterly adverse impact upon South-South trade. 85. There are few signs of consensus among WTO members regarding the modalities for tariff-cutting negotiations. The most radical proposal to date, coming first from New Zealand, and then from the United States, is for the worldwide abolition of all tariffs by 2015. According to Robert Zoellick: "With zero tariffs, the manufacturing sectors of developing countries could compete fairly. The proposal would eliminate the barriers between developing countries, which include 70% of tariffs on manufactured goods. By eliminating barriers to the farm and manufactured-goods trade, the income of the developing world could be boosted by over $500 billion." (Zoellick). 86. One analyst characterised this proposal as "the most visible sign of resurgent US activism in international trade policy" (Sally). But, Europe and Japan barely paid it lip service and it ultimately failed to win broad support. In Zoellick's estimation, while the US "is pressing to 'deepen' the WTO by freeing trade across the core agenda of market access", the EU hopes "to 'widen' the WTO mandate by developing new rules to cover more topics" (Zoellick). Some analysts see the US proposal as a posture that it would not politically be in a position to implement. The debate illustrated ongoing trans-Atlantic divisions over farm trade. 87. It should also be pointed out that many developing countries firmly oppose the US proposal. Since they maintain higher average tariffs and a greater incidence of peak tariffs and tariff escalation, they would bear the brunt of adjustment. Liberal trade economists, however, would argue that they would benefit even if they unilaterally tore down those barriers, and all the more so if developed countries were to reciprocate. Their position also points to the real and psychological barriers that exist to advancing South-South trade - a potential engine of development that is hamstrung by countless barriers to free trade. XII. THE DOHA ROUND: AN UPDATE 88. The Doha Round of multilateral trade negotiations was launched at the Fourth Ministerial Conference in Qatar in November 2001. In light of the unforeseen burdens placed on developing countries by the Uruguay Round, ministers agreed to longer transition periods and improved technical assistance to help with the implementation of previous agreements. Negotiators also recognised the need for special and differential treatment of developing countries in almost every aspect of the new round. 89. Western governments have acknowledged the need for greater flexibility in implementing the TRIPS agreement in the crucial area of public health. Both the US and EU pledged to reduce tariffs and subsidies, particularly in agriculture. 90. While the Doha Ministerial Declaration laid out the broad parameters for a negotiating agenda, most of the hard bargaining remains to be done. At one level, this is perfectly normal. Looming deadlines have a way of concentrating the minds of diplomats and their leaders, and in past trade talks, the outlines of the final deal were only apparent in the waning days of negotiations. The current negotiations started in January 2002 and must be completed no later than 1 January 2005. 91. Yet today there is a clear standoff between the developing and developed countries over very fundamental matters of market access and subsidies - a gulf that in the current political and economic climate seems almost unbridgeable. It has been argued by some that while the Doha agreement "provided a short-term boost to a demoralised and weakened post-Seattle WTO, very little progress has been made in Geneva since the round started" (Sally). However, others would point to the August 2003 WTO agreement on TRIPS and access to medicines as a positive development and the CAP reform agreement of June 2003 which was in part at least helped by pressure from the WTO negotiations. The September 11 attacks certainly helped concentrate the minds of negotiators at Doha, when world leaders were intent on issuing a message of solidarity and economic optimism. But since then, member states have found themselves hung up on the crucial issues that must be settled if an agreement is to be forged. Two key deadlines for arriving at "clear recommendations" on special and differential treatment (in July 2002 and December 2002) passed without any agreement. Undoubtedly, without strong and active engagement from national capitals, moving the talks forward has proven very difficult indeed. Thus much of the momentum registered at the Fourth Ministerial Conference had already been squandered in the run-up to the Cancun Ministerial. XIII. THE CANCUN MINISTERIAL 92. In the months preceding the Cancun review conference, it became evident that EU and US concessions on agriculture were going to be needed to keep the Doha round alive. Other WTO members were urging both sides to work together to find common ground and to be prepared to make important compromises on agricultural trade. After a last late night session on 13 August, the US and the EU claimed that they had buried some of their main differences regarding agricultural policy. Nevertheless, key players including the Cairns Group, India, and influential NGOs (like Oxfam), felt the proposal, which The Economist characterised as fraught with fuzzy language and fudged commitments, was fundamentally flawed (The Economist, August 14, 2003). 93. The agreement calls for a range of reforms, subsidy cuts and spending caps, but was indeed lacking in details. The final text, for instance, proposed to cap some trade-distorting payments, as a share of total agricultural production at 5%. This is less significant than it seems since it ignores many other distorting payments. Most European and American farm subsidy programmes - which cost, respectively, US$88 billion and US$52 billion a year - are not characterised as trade distorting; whereas most economists and developing country trade negotiators would argue that they are. As a result, several developing countries - led by Brazil, India and China - challenged the US-EU deal with a far more radical set of proposals to eradicate all agricultural export subsidies, and an array of product specific support reductions in areas not traditionally called trade-distorting. They also sought a more balanced agreement on market access and lower tariff peaks that developed countries have used to protect sensitive sectors. Small Central and West African countries, among the most efficient producers of cotton in the world, added their voice to the mix in calling for the elimination of cotton subsidies in three years. The wide gulf between these two texts ultimately overwhelmed the best intentions of negotiators in Cancun. 94. Brazil, India and China also played an instrumental role in setting up the Group of 21 negotiating bloc. It has engaged the important middle-income developing countries in a concerted effort to defend their collective interests. South Africa, Argentina, Egypt, Bolivia, Chile, Colombia, Costa Rica, Cuba, Ecuador, El Salvador, Guatemala, Mexico, Pakistan, Paraguay, Peru, the Philippines, Thailand and Venezuela joined this group, which represents nearly half of the world's population and two-thirds of its farmers. 95. At Cancun, the G-21 insisted on product-specific support reductions, the total elimination of agricultural export subsidies, and reductions in agricultural tariffs. It also blocked European efforts to negotiate on the so-called Singapore Issues: new rules to promote global investment, greater transparency in government procurement, anti-trust policies, and efforts to facilitate global trade by revising other domestic policies that implicitly lead to protectionism. 96. At the very least, the G-21 did manage to highlight some of the true inequalities in the current international trading system. Yet it is not a particularly homogeneous grouping. Several of its members are important agricultural exporters, while others are net food importers. Brazil, to take one example, is a very important food exporter and stands to benefit from more liberal trading rules in agricultural products, while India wants to maintain tariffs on farm produce at home while eliminating agricultural subsidies abroad. Moreover, this group is not engaging the Least Developed Countries, which, in many instances, may have a different set of priorities. Some have argued that the lack of negotiating flexibility displayed by the G-21 stems from these internal contradictions, which are thus a source weakness. At the end of the day, both sides lost, perhaps because the developing countries had overplayed a weak hand, and the rich countries had unskilfully played a strong one. 97. Undoubtedly US and European insistence on protecting certain critical commodities played a part in the collapse. US officials have already let it be known that they are now perfectly prepared to secure commercial arrangements outside the WTO, on either a bilateral or regional basis. When the breakdown became apparent, Robert Zoellick suggested that the Group of 21 had simply "missed an opportunity to cut our subsidies", and this could well be the case. He added that "We'll always be there to engage [in the WTO], but I'm also not waiting forever." (King and Scott Miller). Those who were sipping champagne to celebrate the collapse of the talks had probably not considered how difficult it will be for developing countries to defend their collective interests in such bilateral talks. Nor had they likely read a recent World Bank study that suggested the losses in foregone trade, as a result of a failed round, could total as much as US$500 billion a year to the global economy. 98. The failure at Cancun does not mean that the Doha Round is over. Yet it has suffered a debilitating setback, and the way forward is not at all clear. Protectionist sentiment is clearly on the rise in the US. Its mounting fiscal and military burdens are casting a large shadow over a modest and jobless recovery. Another economic downturn in the US would likely reinforce the position of trade protectionists. Moreover, the run-up to presidential elections is never the moment to embark upon bold new trade initiatives, and America's trading partners are perfectly cognisant of this. 99. For its part, the EU has locked itself into a very inflexible position on agriculture despite the recent effort to de-link production and subsidies. EU member states also confront grave fiscal and structural difficulties that are likely to persist over the next several years; agricultural reform is only one of a panoply of reforms that most observers recognise Europe needs to undertake. At the same time, the Union is girding itself for its most ambitious and difficult enlargement yet. All of this will tend to result in a certain degree of European "navel gazing" and make it more difficult to engage the Union in substantial trade negotiations. 100. The problem is that if the EU and the US decide simply to circumnavigate the WTO, the least developed countries will have no other powerful means of addressing the structural inequities in their trading relations. Asia seems prepared to follow the US lead and now seem inclined to move toward the "bilateralisation" of trade agreements. This threatens to push aside the Doha trade round as developed countries focus on their own domestic economic and political tribulations, while the developing countries linger on the sidelines. In this respect, Cancun was clearly a lost opportunity. XIV. CONCLUSIONS 101. In order for the gains from trade to materialise, proper frameworks are needed both at the national and international level to ensure that trade opportunities can be both created and exploited. This is a fundamental rationale for developed country partnerships with developing countries. Western governments need to provide more assistance to developing countries, which still lack the institutional foundations, personnel and know-how to link their trade relations to broader development ambitions. Trade-related development assistance should engage not only recipient states but also the private sector and civil society. All three are needed to ensure that trade policy and reciprocal market access support broader development strategies. The dissemination and analysis of trade-related information should be as broadly based as possible in order to build a much-needed consensus on trade policy. Donor countries can play a critical role in fostering this dialogue designed to reinforce the institutions, and in building the know-how needed to make trade openness work. But if developing country interests are not respected, they are well positioned to block advances. This was made evident in Seattle and at Cancun. 102. Indeed, progress will prove elusive if the West refuses to engage developing country interests in a meaningful way in the current Doha Round. Failure to do so will not only make a mockery of the West's ostensible commitment to engaging the developing world in the global trading system, it also threatens that system itself. At this extremely tense moment, failure to move forward on global trade could prove disastrous for North America, Europe and the developing world. There are legitimate concerns today that the foundations of post-war stability are being uprooted. The spectre of Europe and America retreating behind the high walls of the fortress in security and economic terms, heralds a disastrous turn of events. Those walls bring only the illusion of security. Engagement is essential, and, in trade terms, this means that hammering out a deal in Geneva is the only alternative to a setback and the rise of protectionism fuelled by animosity, economic provincialism, resentment, and fear. This cannot be allowed to happen. But it will if the developed world does not go some way to meeting the concerns and needs of the developing world. For its part, the leaders of the developing countries must learn to distinguish better between what is possible to achieve in a perfect economic universe, and what is feasible when one factors in the politics of trade. Of course, meeting the concerns of both can and must be a win-win situation, particularly if this means parallel reductions in costly trade barriers. 103. Undoubtedly, there will be no improvement until the West takes the courageous step of granting greater market access to developing country producers in sensitive products. Current tariff schedules in the West are terribly biased against developing country production, and offer few realistic prospects of galvanising development, through international markets, to many of the world's poorest countries. This is unacceptable, and steps must be made to open Western agricultural markets and industrial markets, both of which have been subject to the highest levels of discriminatory tariffs. But developing countries have also erected high tariff barriers both to developed and developing country goods and services. These too must come down for trade to become an engine of growth and development. 104. Accordingly, those NGOs purporting to be operating in the interest of developing countries should focus their efforts on encouraging greater trade liberalization, and promoting more and better capacity building projects. Rather than railing against the international economy as such, their advocacy might better be directed to calling for the reduction of developed country tariff structures that grossly discriminate against developing country products, while prodding developing countries to embrace, rather than fear, the global market. The anti-global hysteria surrounding many trade discussions, actually masks an agenda designed to help specific interest groups in developed countries. Leaders need to help their constituents separate the legitimate concerns from those trade policies proposed in the name of developing countries that, if implemented, would only impede growth and development. 105. At the same time, though, extending preferential treatment will still be essential in matters such as medicines, where broad development concerns clearly override immediate trade obligations. Such treatment is invariably sensitive, and it is important that these be applied only in clear-cut cases. Otherwise, the trading order will be even further burdened with an array of exceptions and loopholes that will do more to stimulate rent seeking, than real growth and development. 106. Much has been made in recent years of the need to support "capacity building" in the developing world. There is a reason for this. Many developing countries, and particularly the least developed countries, lack the capacity both to negotiate in ever more complex multilateral trade negotiations and to exploit opportunities in global markets. More Western assistance is needed in this area. Another problem is that developing country treasuries continue to derive a fairly significant share of tax revenue from tariff collection, and are often ill prepared to collect revenue through other means. Helping these countries solve this fiscal dilemma should also be a goal of capacity-building assistance. 107. Multilateral trade negotiations are not the only game in town. Indeed, there has been a proliferation of bilateral arrangements, and these could emerge as the primary engine of liberalization in the future, if the WTO process breaks down. This is clearly a second-best option and could even leave the global economy worse off because regional trade agreements often divert a significant amount of trade. 108. Developing countries should be accorded adequate leeway to fit their trade policy into a broader development strategy. Premature capital market opening can have disastrous economic and developmental implications, if fully articulated institutional structures are not in place. The sudden flight of short-term capital, linked to a relatively under-developed financial structure, was a root cause of the Asian financial crisis. The West must better account for these vulnerabilities, and not make trade openness hostage to policy demands that may be entirely inappropriate for certain developing countries. Those countries ultimately must make the final judgements about the best path to development (Bhagwati and Tarullo). 109. Finally, although Cancun has set back multilateral trade talks, the leaders of North America and Europe must not lose sight of the need to conclude a Doha Round that delivers improved market access and more equitable trading rules. 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