GLOBAL ECONOMICS

Patrick Grady and Kathleen Macmillan
The Stakes in Seattle
from Seattle and Beyond: the WTO Millenium Round (1999), Chapter 1.

Trade Negotiators Meet Protestors

The Third WTO Ministerial Meeting, which is scheduled to be held in Seattle, Washington from November 30 to December 3, 1999, certainly won't be a quiet, dignified affair as in the early GATT rounds. In those good old days, small chummy groups of trade negotiators used to meet in a stately chateau in Geneva to drink tea and cut deals. This time when trade ministers and officials gather behind the closed doors of the Washington State Trade and Convention Center to go about the important, but unexciting, business of setting the agenda for a new Millennium Round of multilateral trade negotiations, a rainbow coalition of protestors will be massing outside to demonstrate against globalization. And among them will be a core of elite activists, shock troops trained at a nearby boot camp in the latest guerilla protest manoeuvres like scaling buildings and blocking traffic. Outnumbered as well as outyelled, the 5,000 official delegates from 150 countries in attendance may experience some sleeplessness in Seattle.

The anti-trade protestors will make for much more colorful TV than what is going on inside. And as usual they will probably get most of the air time to express their specious arguments and gut opposition to freer trade. That's too bad because the public deserves to hear more about the benefits of trade and the key role the WTO plays in the world trading system. It also needs to hear some concrete ideas about what can be done to improve the system. Nihilism is not very constructive.

The demonstrations in Seattle will be far from spontaneous. Planning has been underway for months. The Seattle City Council helped set the stage by voting unanimously to make the city an "MAI-Free Zone." Mike Dolan, the field director of Global Trade Watch, an offshoot of Ralph Nader's Public Citizen group, has spent much time in Seattle and elsewhere mobilizing opposition to the WTO. Environmental groups like Greenpeace, the Friends of the Earth and the Sierra Club are planning to be in Seattle to make sure their views about the environmental havoc wreaked by trade gets plenty of press. Labour groups, such as the U.S. steelworkers and longshoremen, will also be there to demonstrate against the harm that trade does to the workers of the world regardless of whether they come from developed or developing countries. Who knows? Canada's own Maude Barlow may even put in an appearance in Seattle.

And if it wasn't already hard enough to stand up to the opponents of the WTO who claimed that it was in the pocket of big corporations, the Seattle host committee chaired by Bill Gates of Microsoft and Phil Condit of Boeing had to embark on a campaign of creative financing for the conference, the first WTO meeting ever to be paid for by the private sector. In its letters to corporate donors seeking money to pay for the Conference, the committee offered what looked very much like access to participating trade ministers and officials. Even though the committee modified its letters when the US Government complained, the spot of influence peddling will not be so easy to get out.

Trade and globalization has become very hot of late. And the opponents of trade have tasted blood with their success in getting the industrialized countries to scrap the proposed Multilateral Agreement on Investment (MAI), which they claimed put corporations ahead of people. Perceiving the vulnerability of the fledgling WTO, the anti-traders are anxious to push their advantage and to take on the WTO now when public support appears weak.

Governments, particularly in North America and Europe, were badly stung by the apparent success of non-governmental organizations in stirring up opposition to the MAI. A new euphemism "civil society" is used to refer to these groups. "Managing the relationship with civil society" has become a preoccupation of governments in the industrialized world. Some would say an obsession to the exclusion of providing leadership for the new trade round.

As the Millennium Round, gets underway, there will be many complicated and sensitive issues on the table just as there were in the failed MAI negotiations. Unfortunately, unless economists take a much larger role in the public debate than they have, the public's understanding of the issues will be distorted by the simplistic and illogical views voiced by the outspoken opponents of freer trade. Practitioners of the dismal science may not agree on many things, but, since Adam Smith and David Ricardo, the one thing they do agree on is that free trade improves economic welfare. Comparative advantage and the potential gains from trade is as close to a scientific theory as one gets in the social sciences.

Much is at stake in Seattle and particularly its aftermath. The Millennium Round will be an important symbol of the direction that world trade is going to take in the 21st century. Either there will be continued progress towards an integrated global economy or a back-slide into growing protectionism and uncertainty. Trade dynamics is peculiar that way. It can't stand still. It either moves forward or it falls back like pushing a car up a hill.

Because there is so much at stake and so little understanding of the issues, we have felt compelled to write this book. It's intended to provide a straightforward presentation of the key issues likely to arise in the Millennium Round from an economic perspective. Hopefully, this will be useful in clearing up some of the misconceptions that are likely to arise when the main source of information on difficult economic issues is those who know diddlysquat about economics.

We provide in this chapter an overview of the stakes and issues of the Millennium Round. In subsequent chapters we deal with particular issues in more depth. A final chapter offers our concluding views on where the trade round is headed.

The Gains from Expanded Trade

Expanding trade is very important for the continued prosperity of the global economy. It enables countries with a small internal market, like Canada, the opportunity to take advantage of the economies of scale and scope that only the larger international market offers. This generates increases in productivity and rises in living standards.

Rapidly growing world trade, spurred by tariff cuts and the removal of quantitative barriers over the course of eight rounds of multilateral trade negotiations since the Second World War, has been the main engine driving the global economy in the post-war period. Tariffs of industrialized countries were slashed from high-double-digit rates right after the war, to less than 10 per cent in the 1960s, and to less than 4 per cent today. Over the last three rounds, reductions have averaged a hefty 35 per cent.

Trade has outpaced output growth by a substantial margin since the war, accounting for a growing share of output and employment. From 1948 to 1997, trade grew 6 per cent per year, while output only rose 3.7 per cent per year. Over this period, trade mushroomed a spectacular seventeen-fold, while output only increased a more modest, but still hefty, six-fold. By 1997 world exports had reached whopping US$5.3 trillion.

The WTO estimated that the Uruguay Round results alone would boost world trade volumes by 6 to 20 per cent and raised world income by US$200-500 billion per year. The Canadian Department of Finance estimated that the Canadian share of the gains to be CAN$3 billion annually. No small potatoes.

A widely cited study by Jeffrey Sachs and Andrew Warner of Harvard University found that countries that were open to trade tended to grow much more rapidly than those that weren't. Over the 1970s and 1980s, developed open economies grew 2.3 per cent per year and closed ones 0.7 per cent; developing open economies grew 4.5 per cent per year and closed only 0.7 per cent.

Trade creates jobs as well as growth in output. Canada is a good example of the beneficial effects of trade expansion on job creation. While the Canadian Government was relatively modest, only claiming that 120 thousand new jobs would result from the Canada-U.S Free Trade Agreement, employment increased 1.5 million or 11.8 per cent in the ten years following its 1989 implementation. Much of this can be attributed to the doubling in real exports, which took place over this period. Without the spectacular export growth, the Canadian economy would have experienced very high unemployment because domestic demand growth was weak.

Trade also lowers the prices that consumers pay for good and services and widens their choices. Most recently, the Uruguay Round liberalized the trade restrictions on textiles and clothing imposed under the Multi-Fibre Arrangement. This has already resulted in significant reductions in clothing prices. The prices of other goods have also been reduced or increased less as a result of the Uruguay Round tariff cuts, but because the impact was small this has been less evident. However, over the whole period since the Second World War, the price reductions have been much more substantial reflecting the magnitude of the overall tariff decreases.

The WTO

The World Trade Organization, which is the focus of all of the controversy and consequently this book, is the member-directed institution administering the rules governing world trade. It was created in 1995 as the result of a Canadian Uruguay Round initiative . The General Agreement on Tariffs and Trade (GATT) had finally been given an institutional home, completing the Bretton Woods troika of international institutions. The original American proposal made after the Second World War to create an International Trade Organization to go along with the International Monetary Fund and World Bank had been dropped in the face Congressional opposition. The world trading system had had to limp along without proper institutional support for almost fifty years because of this political retreat.

Over a series of eight rounds of trade negotiations under the GATT, a complex web of some 60 agreements governing world trade grew up, which now have been integrated as part of the Uruguay Round outcome and placed under the WTO. An updated GATT with annexes covering specific sectors such as agriculture and textiles, and specific issues such as state trading, product standards, subsidies and anti-dumping, has become the umbrella agreement mandating non-discrimination for trade in goods. A General Agreement on Trade in Services (GATS), which contains both a framework and specific commitments for opening up service sectors to foreign competition, does the same for services. An Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) provides protection to "intellectual property" such as patents, copyrights, trademarks, and trade secrets when trade is involved.. Finally, a strengthened Dispute Settlement Understanding establishes procedures for resolving trade disputes without resort to unilateral actions. There are now 134 countries that are members of the WTO and bound by these agreements. The number is growing all the time with important countries like China, Russia, Saudi Arabia, and Taiwan negotiating to get in and Estonia and Georgia completing the final formalities required for admittance.

The importance of the WTO to the world economy is all out of proportion to its relatively modest budget of only 124.8 million Swiss Francs in 1999 (a Swiss Franc equal about 96 cents Canadian). While this may seem like a lot of money, it's not much for an international institutions. The IMF spends this much on travel alone.

Canada is a middle-sized country that is heavily dependent on international trade. Exports account for more than 40 per cent of GDP and one job in three is export related. While it's true that the lion's share of this trade is with the United States and is governed by the North American Free Trade Agreement (NAFTA), the WTO Agreements also apply and in some cases cover areas not covered by NAFTA. Canada has much to gain from a Millennium Round that will extend and strengthen the WTO and its rules-based trading system. By the same token, Canada has much to lose from any weakening of the WTO which would jeopardize our future economic security. The larger entities like the United States and the European Union are more secure in their large internal markets and have less at stake. A strengthened world trading system would enable Canada to take advantage of growth opportunities in other parts of the world and thereby diversify its exports, almost 85 per cent of which currently go to the United States under NAFTA.

The Agenda

Some may ask, "Why another round of multilateral trade negotiations right now? Didn't we just get through the Uruguay Round?" While it may feel like the Uruguay Round just finished, given that it involved so many difficult negotiations and took eight years, it was actually formally concluded in Marrakesh, Morocco on April 15, 1994, and has now been over for more than five years. A trade regime like any other mechanism, even with regular maintenance and tuning, can still use a major overhaul every five years or so. There have been major changes in computers and telecommunications that have fundamentally altered business practices and government administration since the agenda was set for the Uruguay Round. The participation of developing countries, which are coming under the full disciplines of the WTO system according to the timetable set in the Uruguay Round, needs to be enhanced. Moreover, the WTO itself is a new institution and its experience has provided many valuable lessons for institutional reform.

In addition, there was already an agreed built-in agenda for trade negotiations left over from the Uruguay Round in agriculture (AA Article 20) , services (negotiations of more specific commitments under GATS Articles XIX and of disciplines for subsidies under GATS Article XV), intellectual property (TRIPS Articles 65 and 71), government procurement (GPA Article XXVII:7), and other matters. This means that even without a new overall round, negotiations will have to get underway soon in some of the most controversial sectors. These negotiations would be rendered much more difficult by the inability to make the broader trade-offs required to make sure that every country comes out a winner on something of particular interest to it.

In a speech before the WTO in Geneva in May 1998, President Clinton called for a new round of global trade talks to be launched in a ministerial meeting to be held in the United States. His speech was so successful that it almost ended up getting the round named after him, but the name suggested by Sir Leon Brittain the former EU Trade Commissioner appears to be the one that will stick, although it could still be christened the Seattle Round by ministers. Since President Clinton's speech, a consensus has developed on the need for a Millennium Round amongst the membership of the WTO. In early May 1999, the Quad trade group consisting of the US, EU, Japan and Canada agreed to support, at a minimum in addition to agriculture and services, negotiations on tariff cuts for industrial goods in the next round of WTO talks. In May late 1999, OECD trade and finance ministers said that the new round of trade talks should have "an ambitious, broad-based and balanced agenda." At the close of their June meeting, the trade ministers of the Asia Pacific Economic Cooperation forum, which has 21 Pacific Rim countries as members including the United States, Japan, China, and Canada, also endorsed a broad round of trade talks. While leaving open the issue of its precise scope of the negoatiations, the developing country opposition to a comprehensive new round seems to have been transformed into resignation, even though some developing countries such as Malaysia claim they're not yet ready to start another round.

There are many issues possible to be included in the Millennium Round that are summarized here and that will be treated in more detail in the following chapters:

The Process

Economic purists think the whole process of trade negotiations smacks of mercantilism. This is an outdated economic theory, much berated by Adam Smith and David Ricardo, that encouraged export and discouraged imports so as to accumulate gold bullion, which they regarded to be the source of a country's wealth. Similarly, the basic premise behind the eight rounds of multilateral trade negotiations since the war is that a country should try to get its trading partners to reduce their tariffs and non-tariff barriers (NTBs) on its exports as much as possible, while at the same time reducing its own as little as it can get away with. This flies in the face of the economic objective of maximizing consumer welfare, which would be furthered not only by reductions in foreign tariffs and NTBs but even by a unilateral reduction in tariffs and NTBs. A pragmatic justification of the real-world process of trade negotiations is that reductions in foreign tariffs and NTBs can only be secured by bargaining away domestic tariffs and NTBs. The end result is not only that a country gets foreign tariffs and NTBs down but its own as well. The validity of this justification has been demonstrated by the success of successive rounds of multilateral trade negotiations in bringing down tariffs and eliminating NTBs. It's hard to argue against success.

Concerning the exact nature of the process, there are different views on how best to structure the negotiations -- single-undertaking versus sector-by-sector or sector clusters. Single-undertaking is the most comprehensive approach. Under it, nothing is settled until everything is settled. Previously agreed issues can be reopened at any time until all the issues are resolved. This is the way the Uruguay Round worked. It enables the parties to the negotiation to have the maximum flexibility in terms of trade-offs amongst issues. The downside is that a single-undertaking negotiation can be difficult to bring to a conclusion and can take a long time to complete. That's why US Trade Representative Charlene Barshefsky said, "We absolutely will not sign on the notion of a single-undertaking if that means every issue and the kitchen sink has to be decided before the core issues of market access are decided for the round to conclude."

In contrast, sector-by-sector is a piecemeal approach. Under it, the parties reach binding agreements on each individual sector (or issue) and the whole round is complete when all the sectors are settled. There is no going back to reopen settled sectors if the parties are dissatisfied with the offers on subsequent sectors. It may be easier to bring a sector-by-sector negotiation to completion if it is possible to segment all the issues into nice compartmentalized sectors on which agreement can be easily reached. At the September APEC meeting in Auckland, the United States was pushing a sectoral approach, but ran into heavy resistance from Japan which is defensive about its agriculture, forestry and fisheries sectors.

Intermediate in comprehensiveness between single-undertaking and sector-by-sector is the cluster approach, which was proposed by former Canadian Trade Minister Sergio Marchi. It would group the sectors together into broad enough clusters to allow meaningful trade-offs. It may make it easier to reach agreement, but only if the right clusters are created. This may be harder than it sounds.

Originally, the EU and Japan favoured single-undertaking and the United States a sector-by-sector approach. But a consensus seems to be emerging in favour of a single-undertaking approach as long as the package is kept "manageable," to use the term employed by US Trade Representative. But since what is "manageable" tends to grow, this probably means another Uruguay-like round is probably in store.

There is the possibility of an "early harvest" of agreements on some issues at Seattle before a new round is launched. These issues include electronic commerce and transparency in government procurement.

The Timetable

The Uruguay Round was launched in Punta del Esta, Uruguay in September 1986 and didn't finally conclude until April 15, 1994 in Marrakesh, Morocco, almost eight years later. There is almost universal agreement among WTO members that this is an unacceptably long period for a trade negotiation to take even on the basis of a single-undertaking approach. As one wag put it, "They call it the Millennium Round because of when it starts, not because of how long it is supposed to take."

The APEC trade ministers and OECD trade and finance ministers have agreed to a three-year target for the negotiations. This will probably be accepted at the Seattle Ministerial as the time frame for the Millennium Round. But it is always possible that an agreement won't be reached before the deadline. The Uruguay Round had several such deadlines that were passed unmet. Nevertheless, if three years is accepted as the target, it is unlikely that the negotiations will be allowed to drag on as long as the Uruguay Round negotiations. In addition, this time the WTO provides an institutional setting that is more conducive to "rolling," continuous negotiations. If some issues weren't resolved by the end of the three years or shortly thereafter, it would always be possible to mandate an ongoing work program in particular areas and to call an end to the round.

Obstacles

There are many obstacles that will have to be overcome to complete a successful Millennium Round. In the first place, it will not be easy to get the process smoothly underway. The difficulty in choosing a new Director General of the WTO does not augur well for the ability of member countries to come up with common agenda. Decisions in the WTO are made by consensus. This worked all right in narrowing down the number of candidates from four to two, but then a deadlock developed that left the WTO headless for six months. The United States backed Michael Moore, the former New Zealand Prime Minister and Trade Minister, and an Asian block led by Japan stood firmly behind Supachai Panitchpakdi, the Thai Deputy Prime Minister. Both sides refused to budge. The only way that a compromise could finally be reached was to split a six year term making Moore the Director General for a three year term beginning in September to be followed by Supachai for the next three years. This unorthodox arrangement, with Moore finishing his term before the completion of the Millennium Round, will make it more difficult to bring the negotiations to a timely and satisfactory conclusion. It also underlines the great difficulty of making hard decisions by consensus in the WTO. On the other hand, it underscores the importance of the WTO as a body whose headship is worth fighting over.

Decision-making at the WTO will also be hampered by an emerging conflict between the Quad group (the United States, Europe, Japan, and Canada) that support further trade liberalization and developing countries that are much less enthusiastic. In past rounds, this was not a problem as the Quad always dominated multilateral negotiations.

The forces of protectionism, which are on the rise particularly in the United States, are another major obstacle. Large increases in US steel imports from Japan, South Korea, Russia and Brazil set off alarm bells last year. Consequently, steel quota bills are currently before the United States Congress, although none has passed, and an accord limiting steel exports was reached between the United States and Russia in July. The United States has also been aggressive in extending the coverage of products under the Canada-US softwood lumber agreement, which voluntarily restricts exports. Trade disputes between the US and Europe over bananas and hormone-treated beef could also lead to further protectionist or retaliatory measures.

The US Government also lacks fast-track authority which is necessary for the US Administration to conclude a trade negotiation. Without fast-track, the trade legislation enacting the Millennium Round agreement would be subject to amendment in the US Congress. This could put the Administration in the impossible position of having to try to reopen the Millennium Round agreement to incorporate any changes enacted by the Congress. Other countries are unlikely to come to agreement on these terms. The 1998 bill providing fast-track authority was blocked by anti-trade Democrats, giving the President a slap in the face from his own party. While fast track authority may not be necessary to begin a trade negotiation, it is certainly necessary to conclude it. In other trade rounds, the Congressional authorization has lagged the start of negotiations. For the Tokyo Round, it was fifteen months after the round started before the fast-track legislation was passed; for the Uruguay Round, it was two years. In both these cases, the negotiators didn't really get down to brass tacks until the Administration finally got its mandate.