Free trade shackle to poor states

By ROBERT HUNTER WADE

For the first time a New Zealand Prime Minister has chaired the annual meeting of ministers of countries of the Organisation for Economic Co-operation and Development (OECD).

In her forum speech Helen Clark fleshed out two themes she wishes OECD ministers to focus on - speeding growth in the developing world, and establishing fair rules for trade in agriculture.

To meet both objectives it is important, she said, to speed up the negotiations on a comprehensive round of world trade and investment liberalisation initiated at the WTO ministerial meeting in Doha in November 2001.

It sounds perfectly reasonable. New Zealand has long supported the cause of liberalisation in world trade. And in terms of immediate realpolitik, New Zealand's use of its chairmanship to champion a free-trade and investment agenda for the world may help retrieve credibility in the eyes of the Bush Administration.

But things are not so simple. The Prime Minister stressed the importance of speeding up the Doha round because it has stalled, and it has stalled largely because the great majority of developing countries do not want it with its present agenda.

The present agenda calls for even further liberalisation of foreign investment, Government procurement, and competition. The majority of developing countries consider they have not yet had time to work through the implications of the 23 existing WTO agreements, including trade-related investment measures (TRIMS), intellectual property rights (TRIPS), and trade in services (GATS).

They deeply resent the way these agreements, as well as the agenda for the Doha round, were steamrollered through with little account taken of their views, using every hardball trick in the negotiator's arsenal and often in flagrant violation of the WTO's own rules for decision-making.

Developing countries are increasingly realising that the TRIMS, TRIPS, and GATS agreements are heavily weighted towards the interests of the US and the EU, and are more likely to hold back than to accelerate their own development.

The agreements prevent their Governments from adopting many of the measures used by the US, Western Europe, Japan, South Korea and Taiwan to nurture their own firms and industries.

The United States, for example, from the time of Alexander Hamilton in the late eighteenth century to World War II, used forms of trade protection to encourage firms and industries based in the US, and became a champion of free trade only once its firms and industries could be sure to win.

After the war, Japan, Korea and Taiwan used an array of industrial policy measures to expand their own manufacturing capabilities, first by replacing some imports with domestic products, then by exporting the products to third markets, all the while continuing to expand imports of products that could not be produced domestically within range of international prices.

Certainly they drew on foreign firms and sources of technology, but they also used measures such as local content requirements, joint-venturing requirements and technology transfer requirements to accelerate supply linkages between foreign firms and domestic firms.

Most of the industrial policies used by these most successful of "catch-up" countries are either prohibited or planned to be prohibited under the Doha round.

Among the countries that have come close to catching up with living standards in the North American/Western European core since World War II, colonial-city-state Hong Kong is just about the only case which behaved in a way consistent with present-day WTO rules.

Of course, the OECD countries claim that the WTO agreements are balanced. They have made important concessions to improve market access for developing country exports and greater technology transfer to developing countries.

This is largely untrue. The OECD countries have "backloaded" the improved market access until the end of a transition period and incorporated lots of wiggle room, and their agreements on technology transfer are worded in a way that makes them unenforceable.

If developing countries do not meet their obligations under TRIPS to expand the range of what they allow to be patented (even to include community knowledge and naturally occurring chemical processes) they can be taken to the WTO's court, and sanctioned.

If developed countries do not meet obligations to transfer technology nothing happens to them.

No wonder the developing countries are resisting a raft of new obligations on them to liberalise yet more of their economies, and want instead to build up their capacity to understand and implement what they have already got themselves into.

Helen Clark has the opportunity to walk a difficult tightrope between pushing the agenda of the US and the EU and bringing the quite legitimate concerns of developing countries into discussion within the OECD.

New Zealand's civil society groups should rouse themselves to support the latter. They should advance the argument that when bargains are struck between strong and weak players the balance of advantage depends on which of two moralities prevails.

One is the a-bit-better-than-the-jungle morality, which sanctions that the strong do best. The other is the all-men-are-brothers morality, which says that the strong have a duty to help the weaker.

This is the morality behind the decision of early 20th century British judges to give trade unions legal privileges in order to force a degree of restraint by employers.

But their decision to prefer the second morality over the first was itself based on enlightened class interest - to prevent the social instability caused by the unrestrained power of employers over employees.

Developed world participants in OECD and WTO deliberations would do well to bear this precedent in mind.

The developed world will not be able to escape the consequences of tipping the playing field even more against developing countries than it has to date. Consequences may include distress migrations, collapsing states, anti-Western social movements, and even terrorism.

Civil society groups should also be paying critical attention to the negotiations for a free-trade agreement between the US and New Zealand.

The US in its other free-trade agreements has taken the WTO agreements as the starting point and required its bilateral partners to meet even tougher conditions - to ban joint-venturing requirements on foreign subsidiaries, for example, further reduce exceptions to patentability, further curb the Government's ability to revoke patents, and commit to never imposing restrictions on the inflow and outflow of hot money.

This amounts to a dramatic shrinking of "development space", to say nothing of democratic space. In free-trade agreements with the United States, buyer beware!

Wade's view

Trade liberalisation moves - promoted by Helen Clark in Paris last week - are unfair on Third World countries.

Agreements being pushed by the World Trade Organisation are biased against developing countries.

Countries like the US, which advocate free trade, were strongly protectionist until their economies were strong enough to dominate the rest of the world.

* Robert Hunter Wade is professor of political economy at the London School of Economics, and a graduate of Otago and Victoria.