Nitin Desai: Should trade rule?

Trade policy must listen far more to the people as consumers and small producers

George Bush's reelection has been welcomed by most economic commentators. The expectation is that the BPO boom can continue and that protectionist pressures in the US will be contained.

That may well be the case, but judging by what the first Bush administration did with safeguard action on steel and agriculture subsidies, some caution is necessary.

A more balanced view must also take account of the policies of his administration towards global institutions and the broader consequences for India if the drift away from multilateralism continues.

In the field of trade this drift away has already started. The Doha Round of trade negotiations does not seem to be making much progress. In the meantime, bilateral and regional trade agreements have become the principal instrument of trade policy for the industrial countries.

The US, in particular, seems to be following a systematic agenda and is using bilateral trade concessions as a key foreign policy instrument.

The provisions of these agreements go much beyond the WTO rules. For instance, the North Atlantic Free Trade Agreement (NAFTA) includes a chapter that provides safeguards against "expropriation", which sounds unexceptionable, except that the interpretation of the term covers almost anything that would be deemed to be a loss of business opportunity.

There was a case in which an American company, Metalclad, was proposing to put up a hazardous waste disposal site in Mexico. The local government put the land they were going to use in a protected category and thereby prevented them from going ahead.

Metalclad appealed, as is allowed under NAFTA, and won substantial compensation from the Mexican authorities. Nor is this an isolated case. There are several others that testify to the broad interpretation of what constitutes "expropriation".

Another example of creeping conditionality is the recent announcement by the European Commission that some new trade concessions that they have offered will only be available to developing countries that comply with certain global labour and environmental standards.

Since the concessions will not be offered to India, we are not directly affected by this exercise. However, if other developing countries, tempted by the concessions, do accept the conditions, negotiating positions in the trade talks will surely be affected.

This is the essence of the problem. The piecemeal erosion of developing country positions will create "facts on the ground" that will make it easier for the industrial countries to argue for the universalisation of these norms.

There is in fact a more general problem that started with the Uruguay Round""mandate creep in the world trade rules. Investment, intellectual property protection, non-tradeable services (in some respects) have all been brought within the framework of trade rules.

Principles like national treatment, non-discrimination between suppliers, and the irreversibility of liberalisation are being applied to areas beyond the exchange of tradeable goods and services.

In fact, the meaning of the term "tradeable" is being extended to cover for instance the right of establishment to provide a service. Essentially, GATT had negative rules about things governments could not do.

The agreements covered by the WTO include provisions on what governments have to do, like, for instance, pass laws to protect intellectual property on the lines specified in the TRIPs agreement. The so-called Singapore issues would have meant yet a further mandate creep. But these fortunately are off the table.

Trade rules are becoming the constitutional framework for economic globalisation. But should trade rule? Whose interests does the present trade regime serve?

A word first on the benefits of trade per se. There are some anti-globalisation activists who question the case for trade liberalisation.

Their case rests on their concerns about the impact of widening global trade networks on local culture and specificity, the social and environmental consequences of these, and the resulting inequalities. One can respect this argument, particularly in India, where Gandhiji propounded something similar.

But it is hardly possible to design a trade policy on these premises when all other areas of public policy are working towards integrating local markets into national ones.

One should also recognise that, however imperfect the trade liberalisation process, it has helped to reduce poverty in many areas. An Oxfam report that is very critical of the process accepts that in East Asia trade expansion has lifted around 400 million people out of poverty.

Trade does this by allowing people to move to higher productivity work. In the longer run, there can be further dynamic gains. There is of course a downside""the possibility of structural unemployment and greater vulnerability to external shocks. But, on balance widening trade opportunities is good for poor countries and poor people.

We do not have to reject trade liberalisation. What we have to do is to ensure that it serves the interests of people rather than of special interest groups. That is not the case at present.

To take the most egregious example""it is estimated that the TRIPs agreement will increase royalty payments from developing to industrial countries by $40 billion, about half of the gain accruing to US companies.

It will increase the cost of medicines, with virtually no countervailing benefits. Was this even considered when the TRIPs agreement was being finalised?

The development of trade rules is dominated by special interests, particularly those of large corporations. The roles of the US Coalition of Service Industries (mainly banks and other financial institutions) in the Uruguay Round service negotiations and of the Pharmaceutical Research and Manufacturers of America on the TRIPs negotiations are well-known.

The power of special interest extends to the domestic application of trade rules. The safeguard provisions are being applied in a manner that would often not be countenanced in domestic policy.

For instance, it has been argued that if the concept of "predatory pricing" used in some US safeguard decisions were to be applied domestically in competition matters, a large proportion of US companies would be in violation.

The answer does not lie in breaking the multilateral system. The only consequence of that will be to make the unbalanced bilateral agreements the constitutional framework for globalisation. It will simply strengthen powerful corporations and countries.

What we need is a reform of the multilateral system and the domestic application of trade regimes that is less subject to special interests, more mindful of diffuse but substantial consumer benefits, and more balanced in its coverage.

Textiles, agriculture, and the movement of natural persons to provide a service across borders should be subject to the same liberalisation impulses as manufactures, services, and the cross-border movement of capital.

Above all, we must resist mandate creep, the pressure to include within trade rules matters which rightfully should be negotiated and dealt with in a different context.

Trade negotiations have been driven by a procedural agenda. The goal is liberalisation in itself. At Doha we argued that the goals must be substantive""not just liberalisation but the improvement of opportunities for poor people and poor countries.

We must hold the multilateral system to this substantive end and we must reflect this in the way in which we handle trade policy at home, listening far more to the voices of people as consumers and small producers rather than just the large corporations.

(The author is a former UN under-secretary general, and before that chief economic adviser in the finance ministry. He writes for this paper once a month)