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blogging the big picture

December 3rd, 2007

The Warwick Commission report on world trade

The Warwick Commission report on the world trade system …

Experts Say Consensus Should No Longer Be Deal Breaker in World Trade

The Warwick Commission, a panel of leading specialists on world trade is this week publishing the results of its 10 month study of the state of the world trade system. They are concerned about what they see as a dwindling commitment to multilateralism in global commerce and critical of national political leaders’ reliance on “the politics of blame and responsibility avoidance” in trade talks.  They call for an end to the reliance on consensus decision-making in future negotiations; a bigger role for the World Trade Organization in the delivery of Aid for Trade to developing countries; escalating financial compensation as a means to resolve some trade disputes and a high level ‘reflection exercise’ on the future of the trade system by the members of the WTO.

The Warwick Commission is chaired by the Honourable Pierre S. Pettigrew, PC who has held office in Canada as both Minister for Trade and Foreign Affairs, and is now Executive Advisor, International, at Deloitte.  The Director of the Commission is Professor Richard Higgott of Warwick’s Centre for the Study of Globalisation and Regionalisation.  The Commission’s report is entitled The Multilateral Trade Regime: Which Way Forward?  It will be launched at the WTO headquarters in Geneva at 11am on Thursday 6th December 2007.

One of the key recommendations of the Warwick Commission relates to the WTO’s long tradition of relying on consensus in decision-making.  The Commission notes that “consensus-based decision-making can be cumbersome if the need for a consensus enables a single player or a few players to block outcomes and stifle progress.”

“Preventing a decision from being taken may be entirely legitimate where vital interests are at stake, the more so if there is a shared perception among a significant group of countries that a particular outcome is undesirable.  But equally, blocking may lack legitimacy where its aim is more to prevent others from moving an agenda forward than it is about avoiding a policy outcome perceived as harmful by those exercising a veto.  In the history of GATT/WTO, there have undoubtedly been occasions where some parties have seen the action of others as less than fully legitimate in this regard.”

The Warwick Commission therefore recommends that serious consideration be given to what has come to be known as ‘critical mass’ decision-making.  This ‘variable geometry’ solution would bring together a critical mass of countries with clear direct interests in the particular trade issue to be discussed.  Again, there would be no vote but consensus on the issue would be reached by that critical mass of countries avoiding tactical vetoes from nations with little or no real interest in the issue at hand.
However the Warwick Commission also recommends that in these circumstances all nations that did not form part of the initial critical mass agreement must have the unchallengeable and unqualified right to join the accord at any time in the future on terms no more excessive than those accepted by signatories to the original critical mass accord.  The Commission notes that there are precedents for critical mass arrangements in the basic telecommunications, financial services and Information Technology Agreements of the second half of the 1990s.

The second significant recommendation of the Warwick Commission is that the option of financial compensation should be added to the list of possible remedies available to the WTO as a means of penalising non-complying states. From the perspective of a system one of the goals of which is to liberalise trade, the imposition of trade sanctions, or restrictions, is both counter intuitive and counterproductive.  In most cases, sanctions increase the cost of imports and harm weaker nations that have won their case.  Thus, the Commission proposes that WTO Members consider introducing an obligation to provide cash compensation to aggrieved parties where compliance or trade-related compensation is not forthcoming.

This approach is not only less trade-distorting, it would also offer developing countries the possibility of neutralising what is otherwise a major asymmetry in the WTO’s dispute settlement system.  Indeed, in certain circumstances the Commission argues it would be appropriate to provide for an escalating amount of compensation until an offending party complies or compensates through trade measures.

The Commission argues that the WTO must deliver more for its weaker members and identifies as a “key challenge” the reconciliation of trade and development under conditions of globalisation.  The Commission’s Report makes it clear that the multilateral trading system must offer meaningful support to developing countries so that they can take advantage of the trade opportunities open to them in an increasingly global world.  The Commission concentrates on the importance of the Aid for Trade initiative and the Special and Differential Treatment arrangements available to WTO Members and recommends that the WTO should have a clearly defined role in the implementation of the Aid for Trade initiative.  It also recommends that Special and Differential Treatment arrangements should, in future, recognise the different development needs of individual Members rather than the perceptions of developed countries donors of what is best for weaker Members.

The Commission is also critical of national political leaders’ failures to defend the multilateral trading system.  Leaders, the Commission says, “have often failed to explain adequately to the public what is at stake.  Instead they have preferred silence, or worse, the politics of blame and responsibility avoidance.  Governments must look beyond the electoral cycle and confront more directly the vested interests that benefit from protection and the inefficiency it breeds.”  The Commission calls for the membership of the WTO to engage in a reflection exercise that will consider the challenges and opportunities facing the multilateral trading system and draw up a plan of action to address them.

Notes for editors:

  1. A full list of the commissioners with some background on each can be found here: http://www2.warwick.ac.uk/research/warwickcommission/about/commissioners
  1. In establishing the Warwick Commissions, of which this is the first, the University of Warwick aims to draw on its scholars, their expertise and their networks of professional contacts to address issues of global importance.
  1. The Warwick Commission is an initiative of the University of Warwick and is a major programme of independent annual inquiries into issues of global importance.  The University of Warwick is one of the UK’s most dynamic and progressive universities and is ranked in the top ten in the UK for the quality of both its research and teaching. Warwick has been a pioneer since its creation forty years ago.  It was one of the first UK universities to forge partnerships with commerce and industry to underpin its academic research; and it has been proactive in diversifying its income base by developing commercial businesses and services.  Warwick’s vision is to become a world leader in research and teaching and to emerge as one of a small group of global brands in higher education.
November 23rd, 2007

Emperor Qian Long to King George III

This link came across my desk and I share it because of my ties to Hong Kong and fondness for China.  It is the text of a famous letter from Emperor Qian Long sent to King George III at the height of Chinese civilisation in the 18th century.  China entered into a 200-year period of decline shortly afterwards. It’s a great reminder of the benefits of openness, and an entertaining read!

October 29th, 2007

China’s focus on quality gets results

Following the appointment of Vice Premier Wu Yi to a special task force to raise standards, results continue to be reported. On one hand it is a little bit worrying to see the lack of standards compliance (though they are not accompanied by stories of swathes people getting ill), but it is refreshing to see the speed and effectiveness of inspections. During September and October 774 arrests were made! One can hardly imagine action taking place so quickly in more developed economies or more democratic states, where we know standards abuse takes place at the highest level. (And we’re not immune to failures in food standards as the Topps beef affair or this story of Stand ‘n’ Seal show.)

No wonder Chinese exports continue to rise.

October 18th, 2007

Trade, inequality and education

Observations that inequality is rising as wealth rises have circulated recently with the publication of the International Monetary Fund’s latest World Economic Outlook which shows that while global income inequality has fallen, within countries, both rich and poor, inequality has been rising almost everywhere. As the IMF put it: “This recent experience seems to be a clear change in course from the general decline in inequality in the first half of the 20th century”.

While the antagonists tend to parrot the orthodoxy of capitalism vs anti-globalisation, all voices seem to end up with the same conclusion: education is the key. This quote from the FT makes the point:

They say the answer is to raise educational standards, and to mitigate the pain for the losers with social protection programmes to compensate their lost income and education to help them find another job.

Professor Paul Krugman of Princeton University wrote on VoxEU.org that the problem of inequality “doesn’t mean I’m endorsing protectionism”.

“It does mean that free-traders need better answers to the anxieties of those who are likely to end up on the losing side from globalisation.”

The IMF agrees, arguing: “The appropriate policy response is not to suppress FDI or technological change but to make increased access to education a priority.”

Education is the holy grail as it reduces the benefits the already-rich derive from new technology and FDI. But as Jim O’Neil and Erik Neilsen of Goldman Sachs observe: “This, of course, is easier said than done.”

October 16th, 2007

WTO rules US cotton subsidies illegal, again

The World Trade Organisation upheld the findings of its interim report released in July saying that subsidies paid to US cotton farmers are illegal. The US is expected to appeal, but if it is upheld, the US could face billions of dollars in trade sanctions for failing to scrap illegal subsidies.  The ruling is a victory for Brazil’s cotton industry, which spearheaded the complaint, and for West African states.  Brazil and others complain that the payments harm their producers and depress world prices.

There is increasing legal opinion that US subsidies are illegal, and significant economic opinion that the subsidies are harmful.  They are a key complaint of developing countries in the current Doha trade round.  Elimination of the subsidies would liberate trade discussions, help developing economies, which are more reliant on agriculture and help US and other rich subsidisers allocate resources more effectively.  Subsidies should go.

October 12th, 2007

Soften the China lobby (and others)

Beijing recently announced an anti-monopoly law which some observers say could work with rules on technology standards, procurement, taxes and patent transfer requirements to give Chinese firms an unfair boost over foreign competitors.  It is part of the call by US and other lobbyists for China to open up but at the same time enforce “international” standards.  Unfortunately, while improvement is good, the tactic of villifying China does not help.  Most obviously it is difficult to call for improvements without being guilty of failures oneself (whether it be competition, trade, nuclear proliferation, energy abuse, …).  And it also can make the job of internal advocates of improvement more difficult, as this insightful observation on a global trade forum shows.  Commenting on the US criticism of the anti-monopoly law:

While the final draft is significantly less ambitious than previous drafts in introducing competition into the economy, it is only so because the draftsmen have realized that there is really no way any currently existing government entity has the means to tackle the powerful vested interests in the state-run sectors. Thus it reflects a realistic domestic political outlook, something that most western governments do not have in China. Most of the draftsmen are actually just as frustrated as the US is. The thing is that every time the US chides China on domestic reforms, it only makes it more difficult for pro-reform leaders to argue their case since they are branded as some sort of traitors.

It is long overdue that a softer, more conciliatory approach is taken by western nations and organisations in supporting economic and social evolution in China and elsewhere, whether in the field of competition, IP, energy policy, defence policy, agrucultural policy or trade.

October 9th, 2007

US protectionism for a while

As Doha dies and economic pressures rise, there has been more commentary of trade and investment protectionism, particularly among US presidential candidates. The outlook is not good as this insightful comment from a global trade forum indicates:

Bottom line: there are really only two things you can expect, on the whole, from the US on trade, and they are:

1) Consolidation period of gains made thru bilateral/regional deals

2) Retrenchment on any forward-leaning policies, unless (and this is an “if and only if” conditionality) a mega deal like US-EU or US-Japan gets brokered principally on its foreign policy merits rather than sold as a commercial deal

I imagine that this kind of analysis will stimulate much meaty criticism of the US and how it can’t abandon free trade. Well, bitching about the real impact of the politics of globalization won’t change the playing field. USTR can’t point to a single WTO partner (maybe Canberra) and say to Congress, with credibility, that “they’re really with us on clinching a Doha deal”. Brussels, Tokyo, Delhi, Brasilia, et al, can look forward to reaping what they’ve sown. There are many politicos in those capitals who’ve reaped the short-term benefits of beating up Washington on trade, but they made that decision at a price – that they’ve now missed the window on Doha for the next couple of years. It is simply going to take a political cycle for Washington to come back to the point where liberal trade is embraced, by the majority, as a lynchpin of long-term security, and that is certainly not entirely due to internal, domestic developments.

More from US: Yale Global – Globalization Was Good Then, Not Now

More from Europe: The Economist – The China Trade Syndrome

The irony is that the US and Europe are benefiting tremendously from trade with China.  US companies might try to keep a lower profile, than European ones,  as they are more fearful of  a backlash from labour rights, anti-globalisation, or simply anti-China groups – it is politically incorrect to say that China is good for the US economy.

October 3rd, 2007

Africa growing with China or the west

This Jamestown Institute article African Perspectives on China offers a summary of the growing relationship of Africa with the rest of the world, especially China.  Two main conclusions are apparent: China deals with Africa in a straightforward way (eg access to oil for a railway or factory) which is difficult for western businesses, particularly American ones, which are governed by more stringent laws on collusion and conflict of interest.  China is a very attractive partner and African nations should diversify their relationships with other Asian nations to reduce reliance on China.  For western businesses, the challenge is to offer Africa more or what they need, less charity, more investment.

September 29th, 2007

Quality enforcement Chinese style

As previously reported, the head of China’s Food and Agriculture minister was executed for corruption and dereliction of duty earlier this year. That sets the tone for measures that will be taken in in China to maintain standards. But it is more extreme than one would like. So, with the spate of product quality issues in the summer, Vice Premier Wu Yi has been appointed head of a task force to raise standards in China. As BusinessWeek reports she has a good chance of making a positive change quickly.

Wu is off to a fast start. In the three weeks since she took over the job, Chinese authorities have banned the use of lead paint in toys, shuttered 953 unlicensed food processing plants, closed more than 2,000 factories making fake goods, and suspended the licenses of 1,200 drug and medical equipment companies. As she did when she oversaw the fight against SARS four years ago, Wu will likely create a nationwide campaign to motivate the public, boost coordination among various ministries and agencies, and fire officials who resist change.

We must remember though, that most stakeholders are happy with the rough playing field, including western brands outsourcing manufacturing to China. It is western markets that push Chinese factories to produce more product, more cheaply and turn a blind-eye to standards that would not be accepted at home. It is the “child-labour” story with different actors, but the same directors. Businesses operating in China know its standards are more permissive – that’s why they’re there:

… more than one-fifth of China’s food products failed government safety-tests last year. Corruption, blackmail and counterfeiting are rampant. Eight buyers at Carrefour, a French supermarket chain, are under investigation for accepting kickbacks from suppliers. Zheng Xiaoyu, a former boss of the SFDA, was executed earlier this year for taking bribes to approve fake drugs and certificates claiming that the paint used by Mattel’s suppliers was lead-free. Yet many foreign managers working locally say bosses in Europe or America do not understand these problems, or do not want to hear about them.

Higher standards in China will mean higher prices globally which will mean some short term pain and an incentive to recreate opportunities at home.

September 25th, 2007

Cost of food rising fast, driving inflation and hurting the poor

rural commodity pricesThe cost of food is rising fast. We had been expecting this because of variations in weather patterns which we feared would upset cultivation. However, the sudden interest in corn for ethanol, since the warnings last year by the Stern Review, An Inconvenient Truth and IPCC, has also contributed to an increase. The chart here shows the Reserve Bank of Australia’s index for food commodities since 1982. (Includes Wheat, Beef and veal, Wool, Cotton, Sugar, Barley, Canola, Rice.) It is now at its highest level ever, having bounced up in the past couple of months.

While we will start to feel the pinch at the basic end of our consumption spectrum and this relative scarcity of food commodities will push up inflation, it is the poor of the world that will suffer most, particularly the poor in developing countries. The first sign of this pain was the hike in corn prices in the middle of the year as agro-industrial giants and investors rushed to invest in US corn for ethanol, which meant Mexican’s staple tortilla doubled in price. Now signs of a wider pain are showing as we learn that US food aid has halved because of increasing prices: The amount of food bought for American food aid programs has fallen to 2.4 million metric tons this year from 4 million metric tons in 2005 and 5.3 million metric tons in 2000.

It is perhaps time to think more seriously of ending the food subsidies that rich countries pay their farmers. That would have the multiple benefits of moderating prices of commodities, helping feed people in poor countries and realigning resource use to a more natural and economical profile in rich countries.

(Further browsing: the UN Food and Agriculture Organisation (many divisions, lots of news and data) USDA Food sector site and an interesting site on food history.