Council on Foreign Relations
New York, NY
JAMES F. HOGE: Thank you, whoever did the tinkling. Good morning, everybody. I’m Jim Hoge, editor of Foreign Affairs magazine here at the council and the moderator this morning. This session is on the record, so the logistical rigamarole will be shorter than usual. I do have to tell you to turnoff your cell phones and anything approximate to that for the next hour and a half or so.
We will be having a discussion up here for 20 minutes or so and then turning to you all, so think of some questions. And if you have something to say, put your hand up. We’ll get a mike up to you. Tell us who you are and try and keep your questions or comments on the concise side. And I’m sure our panelists up here will keep their responses the same.
Now, the title today is, “The Doha Round: Where Are We Headed?” And we’ve got a storm coming here in New York this evening; we’ll see what kind of a storm we’ve got coming on the trade front. But our two panelists — and we’re very lucky to have them — know a great deal on this subject.
On my right is Jagdish Bhagwati. He’s a senior fellow here at the council on international economics. He’s also a university professor in economics and law at Columbia University, and as you know, a prolific author of books and articles, some of which we’re lucky to have in Foreign Affairs. And speaking of that, we do have a special report — not one of our regular issues — coming out just in a matter of days, which is going to go to everybody who is going to Hong Kong for the WTO meeting. And it’s devoted exclusively to the issue of free trade, where are we, where are we going, what are some of the obstacles.
Also with this morning is Lael Brainard, vice president and direct of Global Economy and Development Center, and is chair in international economics at the Brookings Institution.
With that, let’s get started. And Jagdish, in a sort of capsule form, what is the outlook for Davos — I’m sorry; Davos we know the outlook. (Laughter.) It’s a lot of fog and very murky. But what’s the outlook for the Doha Round at Hong Kong?
JAGDISH BHAGWATI: Well, we’re almost there, and I think we know it’s not going to close over there. I think most people are pessimistic about anything substantial happening there, and in fact, correctly so.
But there’s a different question as to whether Doha itself is in deep trouble. There I’m more optimistic. And sort of —
HOGE: In other words, Hong Kong is not necessarily the end of the game?
BHAGWATI: No, and Hong Kong — when you think about it — is only four years down the road. The last round was almost eight. The one before that — the Tokyo Round — was five. There’s no reason why this should finish, particularly, when the worst weeds like agriculture — no pun intended — are being pulled out. For that to finish earlier than, you know, right now — first they stayed in Cancun in two years, now in four years — well, if you work on trade like I do —
HOGE: Maybe the more practical question would be, I mean, Cancun — after Cancun there was really a total collapse for a while. Is there a way to avoid that happening at Hong Kong?
BHAGWATI: There was a total collapse only in the sense that everybody thought — everybody who was important wanted it closed in two years’ time. Pascal Lamy was going to retire from his job, and now he’s got another better one, but he didn’t know it at that time. Zoellick was going to go and has moved upstairs. Supachai was going to go and has moved to Hong Kong.
BHAGWATI: But they all wanted a success on their TV, but finishing in two years because you want success on your TV is not really a sufficient reason for it to succeed on time. Cancun actually cleared a whole lot of difficultie issues out of the way. The (drugs ?) agreement the president managed to get, the pharmaceutical firms agreed to work with them — demanded, more or less — they’s very little light with that cleared off. Lamy had been wanting the so-called Singapore issues. They were abandoned. The two contentious issues were buried. So we made progress.
And finally, I think we also managed to get the G20, which is the group of the major developing countries, to take an active part, which I think politically is extremely important for the success, both of the negotiations of the WTO. I mean, until that point, with all this USTR and the EU Trade Commission, all this — this is what I used to call the duopoly of admiration or adulation. It was always these two guys in the news, and nobody else got a play. And finally we got — (inaudible) — et cetera, really playing a role.
And all they did was basically say, go back. Your agricultural offer is no good — and it wasn’t very good, and many objective views showed you that. So that was all they virtually did. So I think this was a very major step forward, and I think we’re beginning to move in and then to step into some kind of outline of an agreement now.
HOGE: Lael, what’s your outlook for the Doha Round? And what are the — if we cleared up a lot of issues in Cancun, what are the big stumbling blocks — both economic and political — as we go to Hong Kong?
LAEL BRAINARD: Well, I wish I could be more divergent from Jagdish, but unfortunately, I think I agree with him. I’m quite pessimistic that Hong Kong is going to achieve a really big milestone forward, but I don’t think that in anyway endangers the round. It just changes the momentum for the round. And the experience on trade negotiations, historically, has been that they sort of don’t happen till they happen. That you sort of know what the outcome is going to look like more or less. It always takes long than you anticipate and it has to do with the alignment of increasing numbers of political stars. And those moments, unfortunately, happen at long intervals.
It is a little astonishing that one country consistently can kind of hold up the entire world on agriculture. I mean, I think France’s position is unbelievably powerful. And you really do have to ask the question whether the EU has been a good or bad thing for liberalization if it gives France that amount of power.
But that really, I think, is what happened this time. We actually lost a lot of time, as you were suggesting, following Cancun. I think that was very unfortunate. And it is, I think, in terms of the U.S.’s role, it’s really to Ambassador Portman’s credit that the offer he put on the table is a nice one. He showed some lag. But why did it take 14 months between the July framework agreement, which was the beginnings of getting agriculture back on track and when the U.S. actually put something on the table?
So that, I think, was in a way a fatal delay. And then the other thing that’s very interesting is Pascal Lamy’s tactical decision to essentially take the pressure off several weeks in the past. That hasn’t happened before.
BRAINARD: It suggests that he is more worried about a kind of devastating public relations debacle in Hong Kong than he is about using that extra leverage to maybe push Europe, because it’s the odd man out at the moment.
HOGE: Before I ask another question, let me just make a little bit of input, because I got back last night from Great Britain. I was at a Ditchley Conference, and while I was there, Blair was coming under incredible heat from the British press for having signaled that they’re willing to give back some of the funds that they get to the EU if the French will show some flexibility on the agricultural front.
And the line taken against him by both Labour and Tory press was, since when do you give your card up before you know whether the other fellow’s going to play? Because the French have already announced that they could care less whether Britain’s going to give back some of the rebate money or not. So the French are really intransigent on this issue.
But Jagdish and Lael, let me ask you this — you’ve had this in your FT piece and we have it in the piece coming up in our WTO issue, which is a proper understanding of the agricultural issue says that the figures that are being bantered around about how much has to be given, are really not accurate. And that a win-win situation, so to speak, could be designed at much less consequence to the parties — both the developing countries and the developed.
Is that a proper assessment? And is that going to be any help in Hong Kong, or is it still too intransigent?
BHAGWATI: I think it’s beginning to kind of get through. I mean, I was in London, too, at something else, you know, giving a lecture there just this week. And I was at the Department of International Development, and they were all corralled with the fact that you had to distinguish between subsidies which actually distorted production and trade and the subsidies which did not.
And under Pascal Lamy and Fischler (ph), as part of the cap reforms in 2003, if I remember correctly, a lot of subsidies were moved from the distorting side to the non-distorting side. Now the Brits — so the $365 billion or $1 billion a day is a gross exaggeration because, frankly, for us, we’re not British — except in spirit; we’re all former colonies, all anglicized deep down — (laughter). I think the Brits have a problem because they pay the French, basically.
So they are interested in the entire subsidies, right? Including the ones which don’t effect trade. So their lens is completely distorted, as is that of the British — of the Oxfam, which is also a British charity. So they completely have been going around saying this repeatedly, not distinguishing.
Now the reason why it matters is simply because when you look at the subsidies that really distort trade, which really affect the rest of us, they are less than $100 billion according to the best estimates right now. If so — if you say look, if we have $20 billion worth of these subsidies removed as part of the negotiation, that’s about a fifth. And so, you know, it’s sizeable. But if you divide $20 billion by 365, that looks like a tiny step forward.
So when the paying group countries say, look, we want a significant step forward, I think it would be helpful to get the numbers right. And I think increasingly people are beginning to appreciate that, and this is one reason to be optimistic. And the other, of course, is that the — I mean, this has always happened close to the wire, as Lael was saying — yesterday the Brazilians and the Indians did come up with an offer on manufacturing, and we can discuss that in a little time.
HOGE: Well, and agriculture is — it’s not the only, but it’s the big stumbling block at the moment, hmm?
BRAINARD: It is. I mean, I think it’s interesting that there are a variety of kind of persistent self delusions on the part of the developing countries. And they are aided and abetted by a group of well meaning, but often confused or confusing advocates. And you know, I’ll put myself in that camp every once in a while, because you want to see some new constituencies developing for trade liberalization.
But if you look at most of the credible estimates of what you get from liberalization, first of all, within the agricultural round, agriculture gives the biggest gains for the developing countries. Over half of those gains come not from the rich countries moves, but actually from developing countries moves. And in some cases, for many large countries with very high care, it’s actually because they are — if they were to do so, they would make food available at much cheaper cost.
And so when you look at the actual pattern of welfare gains, first of all, subsidies, as Jagdish was suggesting, are not as important as liberalization, which is where we are now — at loggerheads — very serious loggerheads with the Europeans. And secondly, a lot of the gains to the developing countries actually come from liberalization by the developing countries.
We should and do care a lot about continued manufacturing liberalization, especially among the developing countries. And there there’s a fair amount of south-south gains as well. But for the Europes and the Japans, they’d actually gain a lot from their own agricultural liberalization, full stop.
HOGE: I don’t want to stay just with agriculture, but before we leave it, kind of a quick answer that came from both of you. On this proposition, the French are still saying no. And the head of the House Agriculture Committee has written our trade rep, Rob Portman, essentially saying, you can’t give any more either.
Now are these just postures? Is it possible that on both the EU front and the American front there is a little bit more give that we might see in Hong Kong to try and get an agricultural agreement? Or should we take them at face value?
BRAINARD: You know, it’s hard for me to read the French politics right now. They’re very complicated for reasons that have nothing to do with agriculture. And you know, if I were sitting Chirac’s position, I would certainly not put any priority on giving something internationally on agriculture. He has enough problems at home, and it is such an explosive issue.
So I don’t know about that, but the commission is out ahead of France and trying to pull them along. And so there is a question mark whether they can do some more and surprise everybody pleasantly in Hong Kong.
U.S. politics are very interesting. We have a whole series of things that are kind of coming together as we run into 2007 that, you know, economists always like to think, well, gee, wouldn’t it be wonderful if all these forces pushed in the same direction? That would be towards very significant reduction in subsidies and towards us getting something in return for liberalization here at home.
We’ve got the farm bill that will be rewritten next year. We’ve got an awful situation on the budget and we’re looking for savings wherever we can find them. And if we have meaningful liberalization on the part of some of the developing countries, on the part of the EU, the administration could make a serious argument that this is a good deal and take it.
Now the things that weigh against that is that if you look at the electoral map, the Republican base is very, very heavily concentrated in rural areas. And so it’s very, very difficult for the Republican party to take on a really big liberalization move. And the other things that will be difficult is if you get outside of that summer of ‘07 window, you have both the expiration of fast track authority, which is not fatal —
HOGE: That’s the real deadline, or not?
BRAINARD: The real deadline for fast track expires July 1, ‘07.
HOGE: I know that, but I’m talking about for the Doha Round.
BRAINARD: No, that’s not — that’s really the U.S.. That’s what everybody thinks of as the U.S., you know, when everything sort of — midnight. You know, when the —
BRAINARD: — the pumpkin — the coach turns back into a pumpkin. April, then, you know, working back from that, because you need 90 days, is sort of the deadline.
In reality, you could get an extension — we have in the past — of fast track if you had a pending trade bill. So I think — but the other thing is you have to remember, we go into primaries not too long after that. And that’s pretty fatal for a big agricultural round.
BHAGWATI: No, I think Lael has covered most of the ground on that.
But there’s one point that I’d like to add, which is that the fast track expiration is something that bothers a lot of people. And normally they would say, look, we’ll go on. But the U.S. trade scene — and I think Lael is a better authority on that, living in Washington — is actually very worrisome for — you know, much more worrisome than ever before because the Democratic support for trade bills has been steadily falling. The fast track renewal, the Trade Promotion Authority Act, have been passed by — (inaudible) — in a majority of one.
In the past, I worked with a majority of two. If I was trying to teach my students how to lie with statistics, I would say that the support for trade has gone up by 100 percent. (Laughs, laughter.) Actually, that’s very misleading. (Laughs.) It just (reigns ?) us — actually (reigns ?) us in. And the number of Democrats who have been supporting trade bills has been steadily following. So that’s one problem.
Now the second problem, I think, is the Republican leadership, which is, I am afraid, not nuanced enough on trade because to go — at a time when everybody is skeptical or hostile in most constituencies, to come with these (stifling ?) little things — these free trade agreements with the Chile and Singapore and Morocco and Jordan and Costa — and asking Congress — you know, either party — to go back to these constituents and risk their political capital again and again and again, it seems to me to be a — you know, an idiotic move.
And you know, you have to understand, you know, in this current climate, there is just so many times you could go. And think this cuts across both parties. I mean, if I was a congressman, you know, know matter how I loved free trade, I’d worry doing it. And I think they should have concentrated just on Doha. And in a way, I was happy to see President Lula plant a, you know, (nightstick ?) on President Bush’s behind on FTAA and say, look, let’s concentrate on Doha, you know, not on FTAA. I mean, it took Brazil to say that when, in fact, the U.S. being the — who likes to fancy itself as a leader on trade and so on, actually was behaving quite irresponsibly, in my view.
HOGE: Bringing up FTAA, which brings me to sort of my last opening question, and then we’re going to go to the floor.
We’ve had eight trade rounds before this one. And several of them have been logjammed right up until the end and then broke and there were agreements. Let’s for a moment say this time that’s not going to happen; that the Doha Round fails. What are some of the major consequences of that?
BHAGWATI: Do you want to go first, Lael?
HOGE: Go ahead, Lael.
BRAINARD: Well, first, you know, I just want to pick up on this issue. We’ve had — in the last few months we’ve had a failure, essentially, of the Free Trade Area of the Americas.
BRAINARD: We had a pretty unimpressive meeting at APEC. I mean, lots of nice stuff on non-trade issues, but really nothing on trade. And here we go into Hong Kong and everybody’s betting that, you know, we’re not going to be able to move the ball forward very substantially.
I think one thing it does do — and it should put a nail in the coffin of the quote-quote “theory” of competitive liberalization. And what has happened is the U.S. has gotten very distracted by a series of what are politically, perhaps, important, but economically to us completely inconsequential trade deals. And we have also given the go signal to every country in the world that they should do the same.
These aren’t regionals. These are individual countries —
HOGE: Give us just one example of an inconsequential trade deal.
BRAINARD: Well, I hate to make enemies of any of my many foreign friends. So I can’t give you examples. (Laughter.) But if you take the list of our free trade area partners that have already been concluded and that are scheduled to be concluded, all of them together account for less than 7 percent of our total exports — all of them tougher. And as you can imagine, Australia is actually a pretty big chunk of that.
And so all of the others individually are very, very small. Now they give good things for individual disciplines for where we have very intense interests. So for instance, they do move the ball forward on intellectual property. They create some new templates there, but — and we can actually debate whether that’s a good thing. But the reality, there is no big economic bang.
And the theory was that these were all going to put the regionals. The regionals were going to push the multilateral system. And instead what we’re finding is, as Jagdish was saying, we spend a lot of time up on the Hill fighting for these rather inconsequential agreements. And USTR is a wonderful organization, but it’s small, and the reality is you only have so much political capital to expend on trade. And there is zero-sum to some degree on trade.
HOGE: On consequences, Jagdish, there are several worries that have been raised. One Lael has dealt with, which is a plethora of (FTVs ?). Others are that we’re going to end up with big trading blocs clashing with each other. That’s going to be an aversion to protectionism not only in the U.S., but elsewhere; that there will be a clash between China and the United States on a number of trade issues and currency issues. What concerns you most if this doesn’t work out?
BHAGWATI: Well, none of these really bother me very much in the sense that —
HOGE: I —
BHAGWATI: I don’t think anybody could — (inaudible) — free trade agreements, the bilaterals, any more faster than they already are.
BHAGWATI: I mean, people are just crazy about them. I mean, and politics — (inaudible). And now Asia has joined forces also, and they’re multiplying. Actually, the only worrisome thing is that China will now be off the hook on this one. And I mean, China, when it does meet a developing country, the bilaterals, it comes not on the Article 24, with what is called enabling clause for developing countries, but anything goes. I can cut my tariffs by 5 percent on this and 10 percent on something else for my friends with whom I have an agreement. There is no discipline. And you can imagine all the congressmen coming down the steps and, you know, carrying off the Chinese-made T-shirts and so on, you know, like the green Hulk or something, the way we did — (laughter) — four of them came down the Capitol Hill steps and smashed a Toshiba radio during the years of Japan bashing.
So I think those are sort of worries, you know, as to what will happen. But basically, (FTAA ?) is growing very rapidly, and this is not going to make any difference. Gains in trade, of course, we’ll lose some.
BHAGWATI: I don’t know. I should — I mean, being accused of being the worst form of free trade, I should say, rah, rah. But having looked at those models, I don’t know what to believe, actually. But certainly substantial gains in trade will be lost.
But, basically, I don’t think we’re going to step backwards. I mean, it would be like a — to use an analogy from my part of my world, where I come from in India, with the monsoon. You know, the — (inaudible) — cart gets stuck in the mud during the monsoon. It neither moves forward, but nor does it roll back. We’ve got enough things in place — protections — not to break that. So I don’t think —
HOGE: But who’s going to lose the most if it doesn’t work out? One thing that’s been said about the Doha Round is that the way to judge whether it’s successful or not is how much does it do for the developing countries — for the poor, so speak?
BHAGWATI: Do you want to take that, Lael, and I’ll follow after?
BRAINARD: Yeah, I think, oddly enough, a Doha Round would be somewhat uncomfortable for some of these developing countries would do a fair amount. And what do I mean by a fair amount? You know, in some cases, maybe as high as over a percentage of GDP. And you know, let’s keep this in perspective.
This was important in terms of, there aren’t that many packs of money that governments can find out there by simply changing some policies that you actually raise income on a permanent basis. So it’s very important, but we’re talking maybe one percent rise in income for some developing countries. That would probably be about the average and East Asian countries would have actually more to gain from it.
Brazil, from agriculture liberalization, will be a huge gainer. India will, if it actually is forced into doing some dismantling, will go through a very painful transition period. And Jagdish can speak much more knowledgeably about this. But in the end, the estimates are positive there, too. Some of the poorest countries will not gain as much. And I think that’s also very important to recognize.
There are about 50 countries that are net food importers. Many countries actually benefit from the subsidies that are out there. And so it’s a more complicated distributive pattern than, you know, the advocacy groups would like us to believe. But the reality is that, again, there aren’t that many places you can look to do an international agreement where you can boost incomes on a permanent basis by close to one percent of GDP.
BHAGWATI: I think Lael is right, basically, on that.
MR. HOGE: Okay. Yes, ma’am?
QUESTIONER: Emily Auburn (sp) from Morgan Stanley.
We’ve gotten through 25 minutes without talking about services at all. It’s being held hostage, to some degree, by agriculture. And services itself is not uncomplicated. It’s got what are really immigration issues and those are complicated by the Hill.
Do you want to comment on whether or not even if the other issues are solved, whether or you think services has a chance of meaningful liberalization? And in particular, about financial services, which is a driver of all of the other sectors?
BHAGWATI: I’m personally very optimistic about being able to get something in the financial sector like insurance and banking, for the simple reason these are basically producer services as far as most — to support your export drivers market access expands, you really need it.
But I think it’s again, part of the problem of negotiating these things is that, you know, we want a rules-oriented expansion. And you’re not going to get that in these sectors because you’re going to get quantitative expansion like 10 more banks or five more insurance companies. One of the reasons, of course, is that we don’t have what we call a safeguard to the market disruption clause yet on these things. We don’t.
And therefore, which means like 10 more banks come in and cause disruption. Do you close down 10 of these banks? I mean, we haven’t really arrived at anything like that. So unless you have that safety net, it’s not going to work out under — (inaudible). But what you can get is quantitative commitments under Article 19 — 17 or 19 of GATT. So I’m optimistic about that.
But I think you mentioned immigration, and I’m glad you mentioned it, because part of the argument is that there’s a category of provisional services that is called movement of natural persons. And I’ve never seen an unnatural person move, actually. (Laughter.) Maybe because I was too traumatized if I ever encountered one. But I think that is something where it’s very temporary workers coming in. You know, I work on immigration law, so — (chuckles).
And this is really — temporary migration has a trade side, but that is the least important, you know, side of the coin. The other one is the immigration side. And most of us know the temporary turns into permanent anyway. It is best dealt with — in immigration, you know, we’ve got a bill coming up. And most of the countries are — the European countries are going to have to open the window. More immigrants are going to be coming in because of the demographics.
So I would let that be handled through the immigration window, rather than clutter it up with this. You know, I mean, so I am favor of just the first part, which is — (inaudible).
BRAINARD: Yeah, I’m glad you raised it, because it’s terrifically important for the U.S. — enormously important. And if you look at sort of future productivity growth and future opportunities, if you look at our trade balance at the moment, services is one of our great strengths and will continue to be despite this most recent debate over services off shoring and about India.
The reason I think we don’t lump it together with manufacturing and agriculture is because it is a little suigenerous. The way the disciplines are going to work is just very different. I don’t think we can get around that given the history there. And my guess is that on things like services, we actually do have a better shot of doing lots of — working with a select group of countries to really deepen and letting a bunch of other countries free ride.
The other interesting thing I think about services is unique in that we did two really important sectoral trade agreements in services, both of which were extremely positive, I think. Telecoms and financial services outside of the parameters of a round. They were kind of leftovers from the Uruguay round and we were able to conclude them each on their own. And my guess is that that suggests that they are within services sectors trades that you can do so that if it doesn’t get rolled up in a really nice way into the Doha Round because of the complexity associated with agriculture, we can still move forward.
The only other thing I would say on that is there was this moment, this sort of very, very brief moment where the U.S. and India thought they might actually define a common agenda on services. And then Cancun happened and the Indians turned out to be extremely successful on services off shoring. And that moment collapsed. But I actually think that we do have common interests on services. And it would be nice at some juncture if India and the U.S. could move forward together in a constructive manner on what aspect of trade.
HOGE: Emily (sp), I noticed the body language. Was there a concern we didn’t touch that you had?
QUESTIONER: (Off mike) — nobody ever mentioned the security sector.
HOGE: The security sector.
QUESTIONER: (Off mike.)
HOGE: Yes, ma’am. In the back. Mike coming your way.
QUESTIONER: Thank you. Carole Brookins.
Very interesting discussion. I remember Heysel during the Uruguay Round, and there was a big debate at that time as to whether we should even go, since the French weren’t prepared to negotiate. I was one of the believers who said we shouldn’t go and might have moved it along faster.
So I think there is a question here as to whether we set these timetables — Cancun or Hong Kong — and whether everyone should agree that if there isn’t progress, we don’t play at that time? But that’s one question.
My real issue is really focused on trade facilitation, which is the one new issue that everyone agreed could be negotiated. And it relates to the developing countries and the fact that if the developing countries get Ag liberalization, but they have no reasonable trade supply chain, they have no decent regulatory standards, they have no anything else that’s necessary for trade to take place, where will the welfare benefit come from and will they be competitive? What do you all think about the trade facilitation agenda? Is it important, and is going to make progress?
BHAGWATI: I mean, I think it is important. But I think, however, you are probably understating, you know, what you can do with that consolidation. I mean, just way before administer procedures or devise and simply it and so on. And the people are used to trade and people — I mean, when there are incentives, people really work that much to make money.
So I think facilitation, yes. But I think the agenda needs to be broadened beyond that, actually. And I think, you know, a lot of people are now talking about it. It’s aid-for-trade initiative, which I think the Brits actually started and Mandelsohn has picked up, Lamy has picked up. I think Wolfowitz has, I think, is more — (inaudible) — into it also — which is to, you know, to provide monies and technical assistance for devising adjustment assistance programs like the ones we have, you know, when import competition becomes tough and you’ve got to support people who have been thrown out of work and so on. That is something they don’t have. So developing countries are very hesitant about liberalizing, simply because they don’t have the institutional mechanisms to do that. This is something we can provide and so on.
So that’s another agenda which, certainly, is now very much there, which would help us bring in the developing countries on board, I think, a little, because they — I mean, that’s part of development agenda, that you can’t just say we’ll open markets and leave it to you. You have to try to hack it.
HOGE: You know, Wolfowitz, in his recent FT piece, probably it’s self evident, said, look, it’s — Europe and the United States are very worried about the immigration problem. One of the solutions is to get a lot more for the developing countries in terms of being able to keep their populations at home by having greater economic opportunities.
HOGE: Do you have any comments on —
BRAINARD: I think I basically think it’s extraordinarily important. We’ve learned that over time. We should be paying for it. I think we’ve also learned that over time. We would be putting our money where our mouth is. I agree with Jagdish. It’s not just on the customers and, you know, the regulations. These things are actually very difficult for smaller countries, for poorer countries to put in place.
I mean, they have a lot of other things that are competing for their enforcement dollars, like just basic crime on the streets. And so it is a little disingenuous for us to ask them to put these very complicated mechanisms in place and not to be willing to put up some money.
And I think objective of the world — diversification agenda. Those are other places where aid needs to accompany trade. And what’s been interesting is we had an exercise on this, that I think USTR undertook with a lot of sincerity and vigor with regards to one of the recent trade agreements we did. But when I looked closely at the budget, it actually came out of the existing USAID budget that would have gone to other things.
I don’t think we can do that as a country. I think we have to be really serious when we say we believe in economic freedom, we want to help it work. But we know trade is a very difficult and adjustment intensive set of policy changes put in place. We know from our own experience there needs to be a safety net. And so we need to actually put some money up against that.
In terms of the issue of deadlines, you know, it’s not very elegant. It’s embarrassing when you’re actually in the position of being in the position of being at a trade ministerial that’s failing. But it seems to be the only mechanism out there right now that works is to have high level meetings which put a lot of public pressure on officials to actually get past their domestic politics.
HOGE: Richard Gardner.
QUESTIONER: Reform of — Dirk Gardner, Columbia University. Reform of U.S. trade remedy laws — anti-dumping, countervailing duty, escape clause is a long standing demand of developing countries. Yes, Congress has an acute allergy to even considering any change. There’s great political opposition.
Is this a stumbling block in the negotiation? How do we get around that?
BHAGWATI: Well, my judgment is that the U.S. is simply not going to play on this. I mean, look the Byrd amendment. I mean, there are so many senators saying we should not accept a WTO judgment. I mean, this is a clearly protectionist move. So I think most people are realistic about it, I think, and they wouldn’t let that turn into a make-or-break issue of any kind at all.
Secondly, I think what’s happened, of course, is everybody has their own anti-dumping legislation. It’s spread everywhere. Now you could say that this role reversal might make us a little more, you know, skeptical and a little more — (inaudible) — to change. But I think what’s happened is that everybody has joined in, and they’ve all become now an enormous coalition in favor of anti-dumping laws.
And large numbers of bureaucrats, politicians and businessmen, you know, who are afraid of import competition, will form an incredible coalition around the world. They’ve become very much like the spread of the MSA at that height.
I’ve become a pessimist. I used to believe that the spread would actually result in our learning, you know, to be more sensible, but nothing of that has happened. And other people have become less sensible.
QUESTIONER: Hi, I’m Maurice Templesman from Maurice Templesman & Son.
Let me come back to your thesis is that these regional FTAA’s are a distraction rather than a step forward. I could postulate that in a sense, while a broader solution is being sought, that these are indeed forward steps, because the world is changing.
If you take a look at our economy, what’s happened in the last 10 years — the shift from manufacturing to services, reduction of the importance of agriculture, the arrival on the scene of China with it’s trying to secure raw materials. And my last conversation with one of the G-20 presidents was, my God, these people are dumping in our market. They’re destroying our textile industry.
You’ve had a series of changes taking place where — on the objective side — which could support the case that while we were waiting for this global all-encompassing — take the agricultural sector. The very fact that you’d have an agricultural bill passing in the United States, and where the last trip to Latin America, Brazil and the U.S. were much more concerned about the French position and other things. (Chuckles.)
So you’ve had dramatic changes. I could say, well, make the case that these things are step forwards while we’re looking for that magic wave of the magic wand. And I’d like to hear what you think of that.
HOGE: Let’s go with Lael, and then we’ll come back to Jagdish.
BRAINARD: Well, first of all, I’m not a purist on this issue at all. I think, you know, you judge case by case based on the actual facts.
And I would make a very important distinction between a large regional grouping, like the Free Trade Area of the Americas, where what you’re doing is you are pushing down barriers among a large group of countries who will be natural trade partners because of their proximity anyway, and doing one-off deals with countries that are — you know, sort of far reaches of the world, with which you don’t have particularly deep trade ties to begin with, for reasons that have often little to do with economics.
If you look, for instance, at the U.S.-Chile FTA, we have a separate trade agreement that does not connect up with NAFTA with Chile. Mexico has one, and Canada has one. Now trade is all about reducing bureaucratic intervention. It’s all about creating one set of prices, one set of rules. And so here, instead of doing that, you now have four different sets of rules depending on which set of traders are and because of the way that rules of origin work. And if you look at each of our individual bilateral trade agreements, none of them, you know, sort of include other bilateral free trade partners in those rules of origin.
So instead of building a larger and larger marketplace, which I think might be a good way of achieving this ideal that you’re talking about, through a more pragmatic approach, instead what we’re doing is we’re essentially establishing different sets of rules, different sets of prices, more forms, more bureaucracy, with each individual country. And that’s, I think, where the difficulty is.
BHAGWATI: Yeah. I think this is a very wide subject. But I think what Lael was talking about was what I call the spaghetti bowl problem. Just, I mean, imagine one country or one area like EU negotiating not for the (Chinese side ?), which is the inner core, but for the spokes in the wheel — and you know, there are all kinds of free trade agreements. They are not coordinated, and — you know. The same products — you’ve got 12 FTAs like that. You’ve got the same product on 12 different trajectories.
Then you have to identify also, you know, how do you say a product belongs to that particular origin? You’ve got the rules of origin. Now typically, if we take the NAFTA agreement, for example, they vary by sectors, by industries and so on. These are negotiated. And so that, plus all the WTO-plus obligations and so on, everything amounts to a gigantic document. I mean, I debate with someone like Laurie Wallace (sp) as I used to. She would always arrive with her lawyer — (laughter) — 10 minutes after the event was supposed to start — (inaudible) — and impress the jury somehow.
She always carried this big, fat book, which she always said was a NAFTA document. And I was hoping it wasn’t just a, you know, hollow thing, but it actually was a NAFTA trade document, and that she would get a hernia in due course — (laughter) — carrying this giant, big thing around.
But that’s what this all — you know, it’s a variety of things down there. And I think this is what worries a lot of us. We can pick this up later.
QUESTIONER: Isn’t your adversary protectionism?
HOGE: Mike —
BHAGWATI: Yes. We’ll carry it forward. You know —
QUESTIONER: Isn’t your real adversary protectionism? And doesn’t this interim step-by-step address that major issue rather than looking for the perfect — (inaudible)?
BHAGWATI: No, but that’s actually been another thing, like is this a stumbling block or a building block towards the multilateral free trade? Now it turns out that — (inaudible) — a whole lot of interest, which have market access; sort of, you know, preferential market access under these. So they’ve become enemies of expanding it elsewhere.
Like one of the major problems we have with Doha right now, there are a whole lot of countries which have one-way preferential access like, you know, the ACP countries and so on. Then there are lots of bilaterals under which they have preferential access. They don’t want the (MSN ?) rate to go down because they lose the value of their preferences, which they’ve negotiated against some quid pro quo, which they’ve given in that big, fat document of Laurie Wallace (sp).
And so I think this is — it just complicates life enormously. So it’s not a slam-dunk on your side. I mean, a lot of people used to think that, well, if you can’t get down the turnpike with multilateral trade negotiations, let’s take the dirt road. You know, I mean, and, you know, do all these crazy things.
HOGE: Before we move on, Richard Gardner raised traded impediments as one area in which actions should be taken, but the Congress is shy to do so. Two others that are mentioned very often as being necessary to create more tolerance rather than less, which is where we’re headed for free trade — you mentioned one, which is holes in our safety net. For example, there’s going to be a generation of folks that have to be taken care of. And another one is increasing our competitiveness, primarily through a better and more relevant education.
Any further comments on can we expect anything in these areas, or are we so under siege in this country between tax cuts and war expenditures and whatnot else that there’s not much likely to come?
BRAINARD: What’s interesting in the way we do business in this country is we do trade agreements sort of over here, and then we’ve got the whole set of domestic policies that actually have profound impacts on our ability to compete, and we do them in a completely different sphere.
If you look — and we’ve just gone through this rather bruising debate on services offshoring. What’s interesting about that is there was no trade agreement, no trade law change, and suddenly the whole trade landscape had changed. It was a technological change.
The answer to that didn’t really have to do with trade regulation. The answer has to do with well, what are we doing on science and technology, and why do so many more foreign students get BAs in science and engineering than Americans? Why are we do reliant on masters and Ph.D. students from abroad rather than being able to grow our own? Why have our R&D — our basic R&D — our federal R&D for basic purposes, which a lot of economists think is a public good and should be subsidized — why have those fallen in all areas except for the life sciences? Why aren’t we renewing our physical infrastructure?
I mean, it looked very interesting. We now have this rather stark example of Delphi going into bankruptcy, GM teetering on the brink. We went through the whole steel episode. In all of those cases, the big competitive disadvantage is healthcare costs and our pension system. Our healthcare costs are larger and growing faster than any other OECD country, and we have much greater employer incidence.
So if you look at the relative competitive positions of the U.S. and Canada, for instance, we’re actually less competitive on average in manufacturing now. Why? Because of healthcare.
So that’s — that whole debate, that whole set of issues, is really the set of issues that we as a nation should be engaging as we think about our long-term competitiveness. The trade rules are a piece of that, but we have this weird way of completely segregating the two when, in fact, they’re very deeply interlinked.
HOGE: Yes, ma’am?
Mike is coming over here.
QUESTIONER: I’m Eleanor Fox, New York University.
I’d like to go back to your statements about the poorest countries. This is, to me, a very big problem and seems to get dropped out of the debate. As you said, the poorest countries would lose by withdrawal of agricultural subsidies.
I wonder, first of all, is there another story? Another way to look at that that is a short-term problem and maybe a direct payment problem that in the long-term even the poorer countries will gain? And second — and if not, how do you deal with the illiberal imperative?
And then secondly, what should be done in terms of a trade imperative that would really help the poorest countries?
BHAGWATI: I think the trade liberalization can create losers. Like if I and Lael and Jim form an (unliberalized ?) state among ourselves, your terms of trade as an outsider could decline. So there’s nothing which we teach in trade liberalization which says that you can’t be harmed, and we say that the — (inaudible) — compensate you, and then we’ll all be better off in some way. You know, competitive —
QUESTIONER: (Off mike.)
BHAGWATI: No, no, no, but I’m just telling you what the theory is, all right? So we understand the issue that third countries can be harmed.
And in the Uruguay Round, many models have shown that, in fact, Africa was going to be marginally a net — slight loser. We sort of lost sight of that because of this Oxfam and Keynes Group propaganda, as it were; you know, sort of the old subsidies should be removed. Actually, if you really wanted to help the developing countries at that point, you would have said take these — take the lower-term — you know, lower prices due to European subsidies. You get, in terms of trade gained and in technical terms, you know, you’re buying cheaper imports. You get consumer gain because consumers get cheap. And if you want to protect your farmers, which is — you know, because that’s what people focus on, just give a production countervailing subsidy. And so you’ve shut off the production gain, but you get the terms of trade gain and the consumption gain.
Sorry it was a little technical, but just to say that they’d be better off. So what we should be recommending to the African countries and most of the poorest is, you know, encourage subsidies because when you get things cheaper, and close off the impact on your production if you’re worried about that. Instead, you know — people have just gone in the other direction.
Now what do we do about it, okay? I mean, this is what you’re asking.
First, their (need ?) to export remains, right? I mean, this is (reliberalizing ?) a variety of things. They’re going to be able to find markets in a variety of things, not just — not necessarily in agriculture.
Two, the way — if you’re an importer of agricultural goods, and as prices rise, you could, in fact, become an exporter because maybe because of the traditional subsidies by other people, you were a natural exporter, but were, in fact, forced into being an importer, all right? So maybe over time you may be able to become an exporter and become, therefore, someone who gains from this.
So the answer is, you know, you have to do the trade for aid kind of thing. Put up microcredit, make it possible for them to move from, you know, from non-agriculture to agricultural items, become exporters. There’s a variety of things which can follow, but I think that’s the way I would approach the problem.
HOGE: Lael, anything to add?
BRAINARD: I just want to clarify that some of the poorest countries will actually gain. It’s really a case by case, and I agree with Jagdish.
But what it suggests is that we — first of all, we shouldn’t oversell trade, which I personally have experienced several times, have lived with the aftermath. And you know, trade is redistributed. And it’s — we should be very, very clear about that, and the public discourse should reflect that.
And for those countries which actually are net food importers, which are unlikely to gain, we should make sure we have a policy that will cushion the impact for them. We can debate whether it should be food aid or not or whether it should be state subsidies — straight — sorry, straight aid — but we should proactively have plans for those countries. We’ve never done that in the past.
HOGE: Yes, sir?
QUESTIONER: Yes, I’m Guy Erb from LECG.
A brief comment, having many years ago slogged through the details of the Kennedy Round. At that point, there were no developing countries at all in the picture, none. Having then let a few years passed and worked on the Tokyo Round, how different it was then, and how many countries had pushed into the sector.
At the moment, we’re talking about a hard-core, very hard to develop group of countries that for a variety of reasons — historical, current, government, et cetera — cannot really act as quickly as they should. And it is a serious problem and it’s must be addressed, but I wouldn’t like this conversation, as important as it is, to lose sight of the fact that over the last 40 years an enormous amount of entry into the world trading system has been achieved by countries that were nowhere at a certain point.
HOGE: Thank you.
BHAGWATI: Actually, Guy’s actually right on that.
I mean, it first gives a sense of participation for a whole lot of countries. At the same time, you know, the more the players, the more difficult it is to get consensus, but it’s not impossible.
I mean, this is why also you need a round actually because people often say look, you know, this is the last round. Every time we were — (inaudible) — it’s the last round.
But the point is, you have to have trade-offs, you know, because that’s the way negotiations are set up. And it’s very difficult to just remain within sectors. It’s very difficult to find balances within sectors. You have to go across sectors.
But I think, you know, all kinds of an agreement I think are possible, and that’s what Pascal Lamy kind of put down last week, much like the — (inaudible) — draft in ‘91. And so I think we should be getting somewhere, I think.
HOGE: Let me give you some thinking of another economist to swing at. I know sometimes you enjoy doing that.
Fred Burkston has a thesis he’s working on right now, which is that —
BHAGWATI: In our issue?
HOGE: No, not in our issue.
BHAGWATI: Another one, okay.
HOGE: Some of this is in there, but he’s refined it further. But it goes like this.
At several of our previous rounds, took some preconditions breakthroughs before it was possible to get them to the finish line, and that that might be the case now. And he raises two issues in particular.
One is currency valuation, that the U.S. currency is overvalued both in Europe and in Asia, and the euro is overvalued versus Asian currencies, and something ought to be done about that.
The second thing he raised was the U.S. trade deficit, and that something has to be done about that.
Now is it realistic to expect that much can be done on either of these fronts in time to have an affect on the Doha Round? And is it necessary?
BRAINARD: Well, unlike trade negotiations, financial markets move extremely fast and trade balances actually move extremely fast. And you know, we know that because we saw it back in the sort of ‘85 to ‘88 period. We saw it at the very beginning of the ‘90s.
So yes, those things could happen. But are they a necessary precondition? I don’t think so. I mean, I don’t actually — my reading of the current politics on Doha within the U.S. really have very little to do with the deficit.
Manufacturing sector is very little engaged, in fact, because they don’t see a lot of gains there. And it’s really the real energy and locus of sort of political constraints is now in the agricultural sector, which is not a big piece of our overall trade balance.
So I — you know, I think that the currency situation and our overall borrowings from China in particular, are an enormous challenge for the country, and we should be getting our hands around it. And you could imagine, as Fred has experienced in the past, a deal that involved, you know, some of the major countries doing different things — and you could trade mobilization into that, which has happened in the past, but I don’t think it’s a necessary condition at all.
BHAGWATI: No, I agree with Lael. And I’d just add one point very quickly, that we have enough problems on the trade front, I mean, you know, trying to arrive at agreements and so on. To pad currency and balance of payments, I mean, questions to that, is to invite a whole lot of trouble. And there’s so much intransivity among people on these issues compared to the trade issues that it’s kind of inviting a lot of trouble.
I mean, just look at the spread of opinions about where the Chinese exchange rates should be. They go from do nothing all the way — you know, just read the international economy and you’ve go, what, 25 top people in the field all over the place. Do you want to that a part of your, you know, international trade negotiation? (Chuckles.)
I mean, you know, let the IMF handle it. I mean, let your people have — leave us alone, please, to manage the trade issue. (Laughter.)
HOGE: Yes? Mike coming.
QUESTIONER: Abe Katz, U.S. Council for International Business.
In the past, trade adjustment assistance raised its ugly head towards the end. I haven’t heard about it recently. What are the politics today? And how does this split in the labor movement affect the politics of trade, accepting the results of the round, and private parties especially?
HOGE: Good question. Lael?
BRAINARD: Well, we also haven’t touched on labor and environmental standards, so I guess we might as well thrown those on the table and do it all at once.
On the trade adjustment assistance front, it is one of those policy areas that the labor movement is very reluctant to — I think as I’m sure you’re very aware — they’re very reluctant to make this a big piece of their platform because they generally see it as giving members of Congress a free pass to vote positively for trade.
It is often derided as burial insurance within the labor movement, and essentially they want the jobs they have. They want to provide their membership with the jobs they have rather than, you know, sort of buying them off.
That said, trade adjustment assistance is actually seen as a very, very, very important part of the safety net for manufacturing workers among the labor movement. And so they actually behind the scenes, I think, care deeply about it and work hard on it.
We just went through a major reform in ‘02, and it was, you know, in many respects a missed opportunity. There were some expansions of coverage.
I should say first of all that I think compensation of some form, a safety net of some form, is a really important part of the social contract, should be in this country. So I should put my cards on the table and say I’m for some kind of insurance. I’m actually — I’m a big proponent of wage insurance, which is quite a different concept, but you know, trade adjustment assistance is what we’ve got.
And the reality, as, you know, I learned from Jagdish Bhagwati and all the other, you know, eminences in the trade field, trade is a big gainer on average, but there are losers. It is redistributive, and we don’t compensate the losers in this country sufficiently enough by the political opposition as is deep, and our general safety net is very good.
The trade reform in ‘02 I think did not cover services, did not cover a number of connected industries, and so the reality is that there’s been huge disappointment with it. And I would think that if we had a big trade agreement pending, people would come back with demands for more.
Labor and environmental standards, I will simply say quickly because I think it’s somewhat related, that is actually a much bigger item — agenda item — for the labor movement. They would really like to see labor in trade agreements. They have what they think is sort of half a loaf in some of the bilaterals. And in fact, the bilaterals are able to move this agenda in a way that the multilateral system hasn’t moved it at all. And I think that’s where the energy is.
HOGE: Anything to add?
BHAGWATI: Let Lael —
HOGE: (Off mike.)
Let me close this out with a question that goes beyond Doha. The contexts can be all important when you’re trying to solve a problem. And what I read as a non-economist is that indicators in the short term are pretty good for a strong American economy and not a bad international economy. But I also read lots of warnings about how fragile the situation is internationally in the medium to longer term. What are your outlooks on kind of what’s the economic environment for these very difficult trade negotiations?
Let’s start with you, Jagdish.
BHAGWATI: Oh, I mean, it’s sort of middling. I mean, I’m not too worried about the American economy. I’m more worried about the European one. I mean, one thing which we haven’t really mentioned, of course, is France and Germany.
BHAGWATI: There are very high rates of unemployment. I don’t think they’ve anything to do with globalization. If anything, globalization is good for them.
But that’s not the way the cookie crumbles in the political sphere, and we know people just don’t move forward on trade liberalization when there’s heavy unemployment. That’s what worries me. I think we are a much better managed economy despite all the weaknesses we have on the budget and so on.
So I think there are problems in certain parts of the world which are important players. I don’t know which way it’s going to work out.
HOGE: Closing comments?
BRAINARD: Just briefly.
I’m always struck that trade negotiations don’t really ripple through the stock markets at all; that if this were a G-7 finance ministers meeting and there was a big agreement pending on the table, we might actually see it in currencies or stock markets. And trade agreements, the expectations are essentially that they are glacial. They’ll happen when they happen. And so it’s very interesting that there’s that disconnect between the sort of immediate financial health of an economy and these trade agreements, which everybody believes will have a very significant long-term impact.
HOGE: Join me in thanking our very good panelists. (Applause.)
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