Fair Trade Nafta

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    Fair Trade for All:How Trade Can Promote Development

    May 2006

    Joseph E. Stiglitz

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    Outline

    The need for a development round

    Trade liberalization has not lived up to its promise

    The failures in practice

    Theory

    The Development Round is not a True

    Development Round

    The Dangers of a false development Round

    The Dangers of a failed development round

    The growth of bilateral and regional trade agreements

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    Outline (II)

    Overview of major results ofFair Trade for All

    Road to the Hong Kong WTO meeting:

    Development Round: Is it only rhetoric?

    Principles of a Development Round

    11 Priorities of a Development Round

    Adjustment costs Adjustment assistance

    Conclusion

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    The need for a development round

    (I) Past rounds have been unfair

    The Uruguay Round agenda focussed on the interests ofrich countries; it included

    Services - but not unskilled labor intensive services;

    Subsidies - but not agricultural subsidies;

    Intellectual property rights;

    Most of its projected benefits accrued to the rich countries

    70% of gains to developed countries The 48 Least Developed Countries were actually left worse off

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    The need for a development round

    (II) The trading system is unbalanced

    The system is stacked against poor countries

    The average OECD tariff on goods from poor countries is 4 times higher

    than on goods from other OECD countries Rich countries cost poor countries three times more in trade restrictions

    than their total development assistance to them.

    There has been little progress on agricultural issues OECD countries continue to subsidise agriculture by 48% of total farm

    production, just 3% lower than 1986; and maintain high tariffs

    Intellectual property rights disadvantage poor countries Exacerbate north-south knowledge gap; and restrict technology transfer

    Do not protect indigenous knowledge

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    Trade liberalization has not

    produced the expected benefits inpractice, even when specificallydirected at helping developingcountries

    EUs Everything But Arms (EBA) initiative Did not lead to significant increases in exports from poor

    countries, partly because of low export capacity/weakinfrastructure and complex rules of origin

    US AGOA initiative Only benefitted a few countries and those will diminish

    after restrictions (e.g. use of US cotton) come into force

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    Explaining the Failures

    Trade liberalization has not been asymmetric

    But even theory is qualified in its support of tradeliberalization With imperfect risk markets, trade liberalization may be

    Pareto Inferior (Newbery-Stiglitz, 1982)

    With growth, argument for trade liberalization evenweaker

    Most of growth is related to technological progress (Solow,

    1957) Market failures are pervasive (Arrow, Stiglitz)

    Historically, most successful countries developed behind someprotectionist barriers

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    The Infant Economy Argument for

    Protection

    Often trade-offs between static and dynamicefficiency (patent system)

    Model postulates (uncompensated) spillovers from industrial

    sector to agricultural sector within a country

    both in technology and in institutional development

    Innovations concentrated in industrial sector

    Among the important determinants of pace ofinnovation in industrial sector is its size

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    Two sector two country model; large efficientdeveloped country; small developing country withcomparative advantage in agriculture

    Without protection, it specializes in agriculture,remains stagnant, falling increasing behinddeveloped country

    Protection results in short run losses, but long run

    gains Model robust

    Results strengthened if there are interindustry crossborder technology flows in the industrial sector

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    Argues for broad based protection

    Generates revenue to finance education, research

    Avoids special interest protectionism

    Consistent with south-south regional tradeagreements

    From Bruce Greenwald and Joseph E. Stiglitz,Helping Infant Economies Grow: TheFoundations of Trade Policies for DevelopingCountriesAmerican Economic Review, May,2006 (forthcoming)

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    Development Round as it has evolved

    is not true development round

    Central message of our bookFair Trade for All HowTrade Can Promote Development

    Lays out a comprehensive agenda of trade liberalization

    that would promote development That agenda is very different from that set out in Doha

    And even more different from what has evolved since With the current agenda, the Development Round does not deserve

    that name

    Hong Kong avoided a disasterbut only by lowering expectations And even then exposed the advanced industrial countries to charges

    of hypocrisy

    And of reneging on the promises of Doha

    But showed new and diverging interests of developing countries

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    The Dangers

    An agreement that would make many developing

    countries worse off

    An agreement that would be treated as a truedevelopment round, so that efforts at redressing

    imbalances of past would be diminished

    The U.S. bilateral strategymoving away from

    multilateralism and the multilateral trade system

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    The dangers of bilateral and regional

    trade agreements

    Not just undermining multilateral system

    And making progress towards a more

    liberal global trade regime more difficult

    But a move towards a trade regime which is

    even more unfair to developing countries

    And which undermines principles of the

    market economy

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    Bilateral trade agreements have been

    based on a dream

    That signing an agreement with the U.S.a

    good housekeeping seal of approval

    would bring untold investment and growth

    But the reality has been far different

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    NAFTAif there was ever an

    agreement that should have worked

    --it was NAFTA, with Mexico so close tohuge U.S. market

    NAFTA ten years later Mexico has lower growth than ten years before

    High inequality, low innovation, low wagesgrowth and some of the poorest worse off as a

    consequence of US agricultural subsidies

    Shows at the very least dream has not beenrealized

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    Problems

    NAFTA was not really a free and fair trade agreement With massive US agricultural subsidies

    With retention of non-tariff barriers Which were used when Mexico made inroads into Americas market

    NAFTA intruded into basic areas of national sovereignty Chapter 11 made environmental regulations more difficult

    Not really intended for basic investor protection

    Trade is important, but trade isnt everything

    Trade liberalization is important, but it isnt everything Difficulties in competing with China

    Making Mexico more dependent on US

    Significant loss of revenue from loss of tariffs

    Revenue needed for public investments in infrastructure and education

    Major impediment to economic success

    Bil l d lik l

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    Bilateral trade agreements likely to

    be more unfair

    Need for TRIPs minus, instead TRIPs plus

    Morocco

    Going into areas which should not be on agendaand may make development more difficult

    CML (Chile: ironic, especially given role it played in

    protecting Chile from global financial crisis)

    Bubble gum (Singapore)

    Environmental regulations (Chapter 11)

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    Bilateral agreements bad for global

    efficiency

    Principle of single price at core of

    efficiency of market economy

    Underlays MFN principle (most favorednation)

    Which underlay global trade system for past

    fifty years

    Bilateral agreements undermine this

    Bil l d i

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    Bilateral agreements undermine

    global efficiency

    Much of gain based on trade diversion, rather than

    trade creation

    Should be enforcement of WTO regulations, assessingoverall impact

    And in long run may increase costs of adjustment

    Especially important for developing countries

    Movement into advantaged area, only to lead to amovement out, when advantage is eliminated

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    Bilateral agreements make progress towards

    global trading system more difficult

    In spite of fact that they are sometimes sold

    to the contrary

    Those with preferences will see anymultilateral agreement as hurting them

    Putting up obstacles for global liberalization