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The Future of Global Trade

Speakers: Jagdish N. Bhagwati, senior fellow for international economics, Maurice R. Greenberg Center for Geoeconomic Studies, Council on Foreign Relations, and Pascal Lamy, president, Association Notre Europe; former commissioner for trade, European Commission
Presider: Paul Blustein, reporter, The Washington Post
March 10, 2005
Council on Foreign Relations

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Corporate Conference
New York, N.Y.

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PAUL BLUSTEIN: Good afternoon. My name is Paul Blustein. I’m a reporter with the Washington Post, and I am your champion. I’m your presider. The description of my job title says I’m supposed to be your champion, so I’m supposed to help keep things moving and keep it lively and keep people from talking too long or something. And I’ll try not to be too dictatorial about it, since both of the people who are going to be addressing you this afternoon have some very interesting things to say, based on my experience of, in Mr. Lamy’s case, covering him, and in Professor Baghwati’s case, in calling him up and asking him what I ought to think about things.

Pascal Lamy, who I’ll introduce first, for those of you—I assume most of you are here because you’re interested in the issue of trade, so you, I’m sure, as—most of you know that he spent most of the last five years as the European commissioner for trade and is now one of four people who are being considered for director general of the World Trade Organization. You have his bio, and we presiders are not supposed to go at great length, I guess, into all the honors. And they’re so lengthy here, we’d spend the whole afternoon if I did that for these two gentlemen.

Anyway, but one of the things I must say about covering Mr. Lamy is, I always found at press conferences and in interviews that I was occasionally privileged to have with him, one of the things I—you know, when you’re a reporter covering this stuff in Washington for a long enough time, you find that you can sort of divide politicians and public servants into two categories. There are the guys who are extremely careful and give you the party line and who are just predictable. And you know, you get to get that party line from them because they represent some powerful force. And then there are the people who, when you go to—when you talk to them or even when you just ask them a perfectly routine question at a press conference, they always answer with this—with a—even if they’re giving you the party line, which they—which Mr. Lamy has been known to do on occasion, they will—they’ll say it with a certain—with, how shall I say, is it “je ne sais quoi” or—how’s my accent? [Laughter]

And that’s—and anyway, Mr. Lamy was very much in the latter category, as far as I was concerned. He always had something interesting to say, even when he was just telling me what I might have known was the European position, if I’d bothered to check their website. [Laughter] We journalists are—you know, the nice thing about being a journalist is you don’t have to do stuff like that.

And Professor Bhagwati—again, the list of credentials, I suppose, you have in your folder—all the—educated at Cambridge, but we won’t hold that against him, and professor at Columbia and a fellow here at the—I’m sorry—it’s a particular kind of fellow here at the Council on Foreign Relations. But you’ll forgive me. Being a journalist, I’m not supposed to—

UNKNOWN: Forget [inaudible].

BLUSTEIN: Yeah, OK. [Laughter] And the thing I really like about Professor Bhagwati is that he’s—he really is unpredictable on the things that I—that people like me call to interview him about. It sometimes makes me smile to think of young people starting out in my field who might think, “Well, I’ll call this professor at Columbia who I once saw give a very vigorous defense of the free-trade system and ask him some—or maybe I’ll ask him what does he think of CAFTA [Central America Free Trade Agreement], or what does he think of NAFTA [North America Free Trade Agreement]? Or he’ll—you know, he’ll give some—I need a quote from someone defending NAFTA. You know, I’ll call that professor at Columbia who I once saw give this vigorous defense of the free-trade system.” And of course they would be very surprised by his answer, because he has a rather, shall we say, nuanced view of the value of those sorts of things. And—or if they’d called and said, “Well, you know, I’ll ask him what does he think about what—you know, what caused the financial crisis in such-and-such a country. It must have been just that they—that—you know, the country didn’t have the right policies. And surely he’s not one of those professors who blames anything on financial markets or the IMF [International Monetary Fund], because, after all, I’ve seen him give this vigorous defense of global free markets. So therefore, I know what—I have a pretty good idea what to say. I better—I need to get a professor giving a quote like that. I’ll call him and ask him.” But again, he would give an answer that would have such a fellow scratching his head and realizing that in fact the world is a lot more complex than just simple shades of black and white.

So with that I’d just say, to set the expectations bar high, and I’ll just sort of start off by asking the two of you to talk about perhaps the most—I think the most interesting policy challenge facing the global trading system, which is the Doha Round [of negotiations at the World Trade Organization], and ask the two of you to comment on some specific issues that pose challenges to the successful completion of the round. Of course, I mean, we’ll ask Mr. Lamy to be as unconstrained as he possibly can be, given the natural constraints of someone who’s being considered for the director generalship. And although this is on the record, we’re sure he’ll let fly.

And there are some very specific challenges that could derail the whole thing, you know, whether the rich countries really are prepared to give up their agricultural subsidies; the whole new sort of mindset that has sort of begun to take over, particularly in the United States, about the issue of outsourcing and whether that somehow changes the whole calculation about whether free trade is beneficial to the world system. And, I don’t know, why don’t we, to keep the conversation focused, perhaps we could start with those two challenges. You could pick one or both that you might want to address on how you—what your concerns are about whether those two challenges are likely to have some serious impact on the outcome. Pascal, do you want to, please?

PASCAL LAMY: Shall I start? Thanks. In terms of where are the main sort of challenges for succeeding in the round, let’s say in 2006, let’s assume Hong Kong is—which is the ministerial [meeting] which will take place at the end of this year—is the sort of pre-final ministerial. So if we set the horizons that it should be done by the end of 2006, it can be done, what are the sort of main issues globally, and then of course, it translates into various areas in the negotiation.

I think there are basically two big conditions. The first one has to do with the developed countries; the second one with developing countries. Not that it is a round that pitches developed countries on one side and developing countries on the other side. I mean, this landscape and this grade of analysis is not the right one. It’s not North versus South. You’ve got now several Norths and several Souths. I mean, the South of the G-20 [group of 20]—Brazil, South Africa, India, China—is not the South of the G-90 [group of 90]—Senegal, Cambodia and Bangladesh. But there nevertheless are I think two big preconditions, which is, one, developing countries must buy the results of the round; and it’s the first time in the history of trade rounds that everybody knows that developing countries are the crucial constituency, and they have a big leverage on the results. That’s one.

Now, what are the conditions under which developing countries will buy the round? Obviously, serious efforts from EU [European Union] and U.S. on agriculture: a sort of down payment for that was done in July last year in Geneva—remains to be fine-printed, but it’s gone in the direction, which is why the sort of expectations after [the WTO meeting in] Cancun [September 2003], which were very negative, has switched rather positive because of this down payment by EU and U.S. But it’s not the only issue. I mean, there are areas like anti-dumpings, which the press doesn’t report as sort of nicely as about agriculture—or tricky things about special and preferential treatment for some developing countries, which by the way pitches developing countries against themselves, which are not lucky. So that’s the big first condition. Agriculture is one sort of visible thing there, but there are others.

And the second, on the developed-country side, is sort of domestic politics of trade, whether the sort of 60 percent [inaudible] trade opening favorable domestic political constituency, which you need to have in U.S., EU, Japan, Canada, Australia, whether it is there or not, and there are, which has been the case for the last 10 years, basically. Of course, there have been problems with Congress here and there, and there have been problems with some European nations about trade here and there, but globally speaking, there is this sort of 50 percent trade-prone constituency, which is crucial in terms of energizing politicians, because as we all know, I mean, the politics of trade are quite difficult. I mean, the people who benefit from trade opening are many times ignorant of these benefits and hence are silent. The people who suffer from trade opening—and there are people who suffer from trade opening—usually are much more visible and much more vocal.

Now, will this trade-positive constituency be there? At the moment, as sort of the crunch of the negotiation takes place, basically in U.S. and Europe, it depends on domestic politics, and hence the sort of importance of debates about outsourcing, for instance, which are not exactly in the same terms in U.S. and EU, but which will raise the question of delocalization, re-localization, outsourcing, competition on compensation, competition on social standards, competition on environmental standards, will feed into these domestic processes, I have no doubt about that. And I think the key to whether we can reach this horizon is in these two areas, which, of course, we can translate later into the discussion into more precise things in various compartments of the negotiations.

BHAGWATI: Well, I think Pascal is on the right track. Let me first put my bias in front of you, because I work on policy because I think I can change it. If I was a pessimist, I would go back to theory, right? [Laughter] So I’m going to give you an optimistic point of view, and basically fleshing out what Pascal said.

I think on agriculture, which I think, despite what [WTO Director General] Supachai Panitchpakdi was saying during his luncheon speech—of course there are many issues on the table, we’ve got to make progress in services and industry—but agriculture does remain the linchpin, and particularly in terms of us versus them; you know, EU, U.S. versus the developing countries. And the big developing countries, all the Cairns Group [of 17 agricultural-exporting countries] people, who are pure exporters, net exporters, I mean they finally want something done. And they’re, of course, using Africa to work the moral levers.

Actually if you look at Africa, I mean, the least-developed countries—there are 49, according to the U.N. definition—of them, 45 are net importers of food. You may not believe that, but they are. And if the food prices go up as a result of the removal of the subsidies, you would have to have your head examined to think that’s really good for them. But that’s part of the politics. But basically the big countries, including G-20, which overlap with Cairns Group, are pushing for it. And I think, finally, they’re beginning to make a dent. For 40 years, economists tried without success to get this done. A lot of forces have now mobilized, and I think we’re making a move. I mean, I was at [the WTO meeting in] Seattle [November 1999] with my friend [Argentina’s Guido] Di Tella from my MIT days—who, unfortunately, died. He was the minister for foreign affairs, international trade, and worship. So we were both talking, at the time of the Seattle, to the Cairns Group people about agriculture liberalization. I said, “This is the correct portfolio. Only God can save Seattle.” [Laughter] Of course, he was asleep at the watch, as usual. [Laughter]

BLUSTEIN: A show of hands for all the people in this room who actually knew such a position existed?

BHAGWATI: Maybe it was illogical, I don’t know. You know, it’s a Catholic nation, so it could be. But whatever it was, there is a [inaudible]. So I think the main reason—actually the world is focused on agricultural liberalization, because that’s the last surviving sort of major problem, but a lot of it is subsidies, not tariffs. Now, if it’s tariffs, you can remove them bilaterally. This issue came up: bilaterals, regionals and so on. But if it’s production subsidies, you can’t just cut them for, say, Brazil or Chile. Once you’ve cut them, it’s for everybody. It cannot be done in a bilateral context. When it comes to export subsidies, you’d get your throat cut from your constituents if you say, “I’m going to reduce my subsidy for the Brazilian market”—as part of a bilateral agreement—and the Europeans don’t. Then the Europeans get an advantage in the Brazilian market vis-a-vis meat.

So the whole logic which we’ve learned at school and which we teach, namely that diverting trade from outsiders to insiders in a preferential trade agreement turns upside down with subsidies. So when I wrote that article in Foreign Affairs saying “Don’t cry for Cancun,” basically I was saying that developing countries are big players. Once subsidies are removed they have to come back to the multilateral system, no matter what. And then it’s simply a matter of negotiating to see how much EU and U.S. will be able to deliver. At the Cancun, enough wasn’t delivered clearly for a variety of reasons, and so they went back literally two years down the road, and no—I mean, except for the early rounds, the three rounds in six months after each other after the war, I mean, almost no round has taken just two years. I mean, it would be fantastic if it’d been done while [deputy secretary of state-designate and former U.S. Trade Representative Robert] Zoellick and Pascal were there. But it couldn’t be done. And I think it was a little too optimistic to think.

So the developing countries finally were players in a big way through G-22, and through Cairns Group in particular, said, “Go back and come back with a better offer.” I took that as a simple—I mean, you know, a sensible thing to do. It also increases the motive for especially Lamy to go improve the EU offer, for us to go back and try and improve it, which actually the president is trying to do now, as we all know from the new farm bill initiative. Whether it works is another thing. But I think it has to work in the end.

And one reason I’m optimistic is that the U.S. in the end will play a major role, whether we like it or not. Pascal can speak to the EU politics, but certainly the president was always accused, and quite appropriately in my view, of being a unilateralist. This is a multilateral triumph that he can get, and so very little actually—you know, if he can somehow manage the farm assistance, or really manage to remove the TRIPS [trade-related aspects of intellectual property rights] as an obstacle, because all he had to do is get five or six people like [Pfizer Chief Executive Henry] McKinnell and [inaudible] together on the pharmaceutical firms and tell them, “You’ve got to do it,” and they did it, right? Before Cancun actually, and we made the final concessions, got that out of the way.

So I feel that the U.S. has sufficient motivation, and it will move and otherwise the developing countries also have a motive, as long as we can improve the offer. And I think if we do that in the next two years we’ll be getting somewhere.

I think as far as the United States and outsourcing, et cetera, are concerned, I think that speaks to a very different issue. First, although I’m a Democrat, on the trade dimension, if I was just voting on one dimension, or a single-issue person, I would have voted Republican. But, you know, I’m not a single-issue voter. But I was in India recently with Pascal Lamy, and everybody was rooting for the Republicans, because they thought it would be a disaster if the Democrats had come in with worries about outsourcing. They appear to be hypocritical. They said they were for trade, but as soon as they had competition from particular poor countries they started screaming “protection.” It just doesn’t sound good. And one of the major problems for the Democrats is how they thought this out. If they’re going to have any credibility in the rest of the world, fortunately the president doesn’t face that. He believes in trade. When he walks with that swagger, you know [inaudible]—you know. I mean, he knows in his heart of hearts we’re going to win in this Darwinian competition. So he has no doubt—which is not a fair price to ask. [Laughter] Over here it’s helpful—it’s very helpful on trade.

So I think what we need though is institutional changes, which is what Pascal was hinting at. The developing countries, two problems—obviously the rest of the developing countries were non-agricultural. One is, of course, they’re going to lose preferences, and so they’re going to be hurt. Now, I think this is something where we can go and tell them, “Look, we told you so, that this is a wasting asset”—because if the MFN [most-favored nation] tariff declines, the preferences relative to the MFN will also decline, because preferences are relative to that. So if preferences lower to zero, are zero, right? So if you understand ratios—I mean, everybody doesn’t. I’m told Beryl Sprinkel, when he was chief economic adviser to the president—Reagan I think—he’s supposed to have said, “Let the Europeans look after their exchange rates, and we’ll look after ours.” [Laughter] I’m glad he went back to his Boston consulting firm very quickly. [Laughter]

LAMY: Which is basically what has happened since. [Laughter]

BHAGWATI: But, you see, now, because we’ve—

BLUSTEIN: Was there something wrong with that? [Laughter]

BHAGWATI: Now we’ve become more sensitive. I mean, we see the anguish and so on. And Africa is properly on our minds and so on. So I think we need to worry about helping them out. And the fact that we told them 20 years ago, 30 years ago, 10 years ago, it should be just put aside, and we should say, “Look, they have all these problems including, you know, excessive debt and all kinds of problems which you know we read about every day. We should not collect a pound of flesh from them, as it were, or deny them some compensation.”

And then you really add it up. It doesn’t amount to all that much. So I think we need first to address that very clearly. I think Zoellick I will forgive, because when he went to Cancun—I mean, he hadn’t realized the seriousness of those four African cotton exporters. But now I think—and how critical it would be to the negotiation. But I think—you know, I think we’ve got to move in that direction. And that means coordinating what the World Bank, and the USAID [U.S. Agency for International Development] does direct aid to these countries additionally to help them out.

And the second thing, of course, is we have adjustment assistance programs here. They don’t. So when we liberalized, since 1962 from President Kennedy’s time, at the time of the Kennedy Round negotiation, we started our adjustment assistance program. We have them. We can finance them. They’re still not at—we have to extend them to the outsourcing sector services.

But the poor countries don’t. They’ve finally read our textbooks, listened to our speeches and so on and so forth—they want to do it now. But they’re scared. They’re petrified, and you know because they don’t have any ways to help the import competing. So we have to pay attention to that.

And at our end I think the thing that worries me most, which was absent from the elections, is we also have to worry about it, because we have an aging society. And if you get thrown out of work, it’s a lot more—I mean, even if there are other skilled jobs available, it’s not easy to find them. Like if I get thrown out as a professor of economics at the age of 60—I’m subtracting a lot actually to make the example really credible [laughter]—so at 60, I lose my job as an economist, but if somebody comes and says, “But there’s now a job available for a professor of theoretical physics,” that is only going to increase my anguish, right? [Laughter] So I say, you know, don’t tell me about it.

So we have to work out how to handle it. It’s not just a matter of making more money available and so on. And I think we need to really handle that at our end. But unless we have the institutional support, I think people are really going to be worried about going into this very open economy, whether the fear is justified or not. The fact that there is a fear is something we have to work with. And I think there I support Pascal.

Along with the negotiations, we have to really somehow call in the Bank and the Fund and the USAID and everybody to handle all these kinds of things, and this is where the Republicans have—and both the parties, and particularly Democrats, have to sort of figure out how to do it, because it’s not easy in an aging society. Thank you.

BLUSTEIN: Well, picking up on your last point about what you’re worried about—I mean, I appreciate how both of you have sort of taken an optimistic view about the overall prospects, and I really—I don’t want to send you back to peer theory because then when I call you up and when I ask you questions and we’re commenting on what’s happening in Washington that day, you’ll tell me you’re too lost in your equations and you won’t be able to help me, tell me what I ought to think.

But just to raise somewhat gloomier scenarios, you know the World Trade Organization had several near-death experiences—or maybe not “near-death,” but near something pretty bad experiences—first at Seattle, then at Cancun. And things always seemed to get patched up eventually. In Doha it was things—you know, we—things got patched up after Seattle because member countries had the tremendous impetus stemming from the desire to show the world we’re working together after September 11th.

And in Geneva, when the WTO was patching together after the disaster at Cancun, I remember talking to some of the people from member countries afterwards and trying to figure out how—you know, what was really behind this. And there was a—particularly among the—interesting enough, among the poor countries that had caused the blow-up at Cancun, there was this real desire not to deal the system a second body blow. I mean, it’s like they could whack it once, but they knew that if they whacked it again that it might go down for a—you know, all the way to the count of 10, and then they wouldn’t have this multilateral system anymore, which they realized that sort of outcome would be particularly against their interests, not only against the interests of the rich countries.

But even with all these forces that you’ve so clearly laid out that are—you know, that make it likely that we’ll be able to overcome some of these challenges, what are some of the real nightmare scenarios that worry you? Are there one or two that you can think of that could clearly cause things to go really seriously off track?

LAMY: Yes, there are. I very much agree with the impression you got after Cancun and after Geneva that when the problem of WTO as a system is at stake, then sort of behaviors rationalize as a proportion of how much people care about the system and what would be the situation if they were not in the system.

And this is true first and foremost with developing countries who know that they can get from the system a more balanced view than if it was on a bilateral basis with U.S., EU, and in the future China—because China is playing vis-a-vis these developing countries in terms of bilateral—the potential of bilateralism, the same sort of threat now that the U.S. and EU have been representing in recent years. So I agree with that.

Where are the risks? Let me mention a few very concrete things: bananas, sugar, cotton, textiles. These are four issues—and I can’t think of any other sort of commodity or business which—where there would be this level of risk between interaction with the round. Bananas, because we are once more in a sort of fight. As a consequence of a previous WTO litigation, EU has to switch over to a tariff-only system, remove its quantitative restrictions, quotas, and move to a tariff-only system by the 1st of January 2006, which is a very complex game. Not so much because of the EU itself—I’m not speaking any more for the EU, as you know—I’m speaking 360 degrees now—but because a number of Latin American producers and a number of African producers have different interests given their different competitiveness. So that’s one. And it’s terribly important for some of the countries—terribly important question.

Sugar is a difficult one, also because of changes in the European system, and changes which will have to take place in the U.S. system either as a consequence of WTO litigations or as a consequence of reforms in the farming system. Here again it’s complex because developing countries do not have the same interests. Some developing countries like Brazil, who basically sort of can produce and sell sugar for $250 a ton on the world market, are pushing for liberalization. Other countries like Mauritius or Jamaica or Fiji, who can only sort of make a bit of money, around $300, $400, and who get a good price on the open market, are resisting it. And this is—the same is going up. That’s what textiles—you know, the consequences at the end of the quotas are not yet very clear. There’s been formidably sort of bleak predictions that China’s invasion would sort of push out of the market many developing countries. Numbers through the first years of this year do not show that, but I mean the jury clearly is still out. And by the end of this year, which is precisely the moment where, you know, things should [inaudible] so there’s a risk there.

And of course cotton, which for a number of African countries is now sort of life and death in terms of coping medium- and long-term with the problem of subsidies and market access through trade, but there is a very short-term problem—is that the level of prices has totally strangled the economies of countries like Benin, Burkina Faso, Mali. And that’s a short-term problem which—part of which is totally beyond WTO reach. I mean, WTO is not going into sort of provide for, you know, the money, which, as Supachai was saying during lunch, will provide farmers with what they can reimburse their loans.

So these four issues, which are very short-term issues, can very well sort of bump into the sort of more global agenda and derail it, because whichever care and affection people have for the system as a whole, if they have a national issue like this which reverberates formidably in domestic politics—and banana is one; textile is one; sugar can be one, in many countries; cotton can be one—then there is a big risk.

BHAGWATI: And Pascal is absolutely right, I think, in the sense that the atmospherics can also change as a result of these specific issues. But I think it ties into what I was saying, which is, you do have to pay attention to how the expansion of international trade actually can affect you institutionally. Do you have any responses to that?

Some of these are manageable, like, I mean, bananas. I mean, it’s really—if you look at the impact on the Caribbean nations, for example, it’s very large in relation to their own GNP [gross national product]. It can go up to 15 percent. And to have a sense of perspective on that, we lost 3 percent of our GNP when the oil prices went up sevenfold at the beginning of the ’70s, and look: we had a decade of difficulty, with all our resources, all our brilliant people and so on and so forth. Here you’ve got this almost going up to 15 percent.

But when—look—when you look at it in relation to our aid funds and so on from the World Bank and USAID and so on, it’s minuscule. So it seems to me that, you know, you really can take hold of some problems and really respond to them.

On textiles, again, in my country of origin, India—I get—could move back and forth [laughter]—schizophrenic about my nationality—so I mean, going back to the Indian one, everybody was afraid of China, like here. The Bangladeshi were. But there is a—but the reaction isn’t very much like Detroit, once it recovered its sanity, vis-a-vis Japanese competition, which is to stand up and fight and—you know, and change your ways. So in India, now, you have a very different attitude, saying, “You know, if we just change a few policies which are really inhibiting our industry, we can get back to getting a substantial share.” I find that in Bangladesh also.

So it is possible that the problem may not be all that acute once people get used to the—and so I think, again, it doesn’t mean complacency. I mean, we still have to worry about it. So I would simply say that those—you know, the four things—on the sugar—it’s Florida and EU—and you know, it’s going to be, you know, an internal problem, again, of politics, just like your general agricultural support and so on. So I think it’s had to be folded into that.

But it seems to me that the main problem still remains, I think, for a whole lot of people, including in this country, China; that China is just seen as a gigantic dragon which is, you know, coming up and spewing out flames and so on, and you’re all going to be, you know, simply traumatized, paralyzed, incinerated, whatever, as a result of this. [Laughter] And I think this is a real fear, and I think this is why—I mean, one thing I see is that many people in our country are now trying to say somehow the Chinese exchange rate should be part of trade negotiations and so on. One reason why I avoid macroeconomics is because it’s a mug’s game; nobody knows the answers. [Laughter] It’s a tough business, right? I mean, you have to do it, but it’s very tough.

If you start putting things like exchange rates into the WTO, you’re finished. I mean, the WTO finished, because there will be continuous hassles on: is your exchange rate correct, or are you overvalued, are you undervalued, and so on and so forth. It doesn’t mean we don’t have to take a view, but don’t put this—we have enough problems, as Pascal is pointing out, already in the WTO, which are trade-generated.

And the other thing, of course, is that I think—again, it gets back to the institutional side—because what is China’s main problem vis-a-vis us or vis-a-vis the rest of—I think it is what Japan was in the ’30s and then in the ’80s; that with a very rapid growth rate, two digits, and very high ratio of trade to GNP, trade grows fantastically.

Now when you export, unless you’re building up surpluses, which becomes a macro problem, which wasn’t the case really—so you’re exporting and taking away markets from other people. But you’re importing at the same time, right? And then you’re creating your market. [Laughter] But the new markets you create are not the same as the markets that you are taking away. So it’s like a tsunami coming at you, like a—let’s call it a sort of, you know, Gulliver in a Lilliputian world economy. They’re just too big to accommodate without waves with specific sectors.

And so I think it gets back to strengthening our safety net, adjustment assistance, and for poor countries, who are more petrified than we are. And I think it speaks to the fact that, you know, now that we have more open economies and we’re now in the final throes of further expansion, bringing in services, agriculture, into it, I think we really now have to sit down and say what institutional structures we really need to support this economy, before people get so petrified and terrified that they just throw the whole—you know, just set up roadblocks to this. I mean, this is—I think this is the greatest danger. If we neglect paying attention to the infrastructure—I think, as a social issue, Pascal cannot but agree with me [laughter], if he gives you [inaudible]—your objection—

LAMY: I read terrible things about [inaudible] [laughter] in this campaign.

BLUSTEIN: Before we turn to questions from the audience, I’d slip in one more question, which gets to some of the introductory remarks I was making about Professor Bhagwati, because he is an interesting—he presents a fascinating agglomeration of views about globalization and trade that on the surface, to people who aren’t very schooled in these matters, seem contradictory, but once you really listen to him spell it all out, the totality of it makes a great deal of sense. And my question is about all these bilateral and regional and sub-regional agreements that have really proliferated in recent years. As I said, a reporter calling Professor Bhagwati and asking for an opinion, say, on whether CAFTA is a swell thing or not would be quite surprised by his answer. And on the other hand, Mr. Lamy is—like, I think it’s fair to say, most people in the trade community, is not nearly as concerned about these issues. But obviously, even for someone who’s—who accepts the idea that regional trade agreements aren’t necessarily bad, one has to acknowledge that, well, they can go too far. So I’m wondering what the two of you think ought to be done about this proliferation of all these bilateral free trade, trilateral free trade, regional sub-groupings, and what their—what would you prescribe?

LAMY: Well, first, I’m more concerned, as a candidate to WTO DG [director generalship], about bilateral, free-trade agreements than when I was EU trade commissioner. [Laughter] I mean, it’s obvious.

BLUSTEIN: [Laughter] Totally.

LAMY: When you aspire to priestdom, there are a number of things you just can’t talk the same way as you did if you don’t. [Laughter] So it’s obvious. And Jagdish is one of the sort of holders of the holy doctrine on free trade and bilateral agreements. So I have concerns about bilateral free trade agreements. [Laughter] And please note down that I have concerns about free trade agreements. [Laughter]

BLUSTEIN: [Laughter] Sir, has the camera gotten that—

LAMY: Because, you know, it’s on the record. So it has to be advantages that there are things on the record.

BLUSTEIN: Yes.

LAMY: Second, I think Supachai gave two very good answers in the question he had at lunchtime about this. A, there is a systemic interrogation, because of spaghetti bowl, because of MFN, and so on. And second, there is a problem of not trade diversion, but resource diversion, trade negotiator diversion, which, I can testify, is a real problem, because even with the sort of big machinery as the one we have in the EU, I have this problem. I had to make decisions whether we would put how many resources on multilateral issues and how many resources on bilateral deeds, and sometimes, you know, the non-availability of resources was a problem. Now I won’t expand on that.

Third, I will insist on one thing, which Supachai did not, whether on purpose or not—and which Jagdish knows—there are provisions in WTO rules about the compatibility of regional trade agreements.

This problem has been there from the very beginning. And there is a code of rules according to which regional trade agreements, bilateral trade agreements, have to be notified to the WTO and that WTO has to clear these regional and bilateral trade agreements, which, in theory, cannot enter into force before they’ve been cleared by WTO, which is, I think, a rather good architecture, because there is a sort of primacy of multilateral trade rules over what is done bilaterally. And the WTO secretariat has to check whether the conditions which are in WTO rules for having valid bilateral trade agreements are there.

Now, everybody has forgotten this. It just doesn’t happen. And if you look at the sort of records of WTO, how many of these bilateral trade agreements have been notified recently, has there been a discussion and have they been cleared? The answer is no. And when I ask the question, the answer is, “No resources.” And the answer to, “Why no resources?” is, “Because resources are given by member states,” and the member states of WTO don’t want to pay for resources to sort of kick them in the legs if it does not.

So there is a problem there, which I think is a very practical, pragmatic problem, which, should we sort of, you know, solve this bottleneck there, I think the whole problem would be much easier to be looked at. So maybe Stuart [Harbinson, WTO director general’s chief of staff] has views on that. Am I correct, Stuart, when I’m saying there are not resources enough and that the member states are not that keen in pushing on this? [Laughter]

STUART HARBINSON: Well, it’s not quite as [inaudible]. The examination of regional trade agreements is actually—

BLUSTEIN: Sir, could you identify yourself?

LAMY: Stuart Harbinson—

HARBINSON: Stuart Harbinson. I’m the chief of staff for Dr. Supachai. The examination of regional trade agreements is actually supposed to be done by a committee of the WTO, and the committee—I was actually the vice chairman of this committee once—the committee’s tried valiantly to do that. But of course, there’s never a consensus, because members of the committee include the parties to the regional trade agreement. So this is a serious problem.

But during the Doha negotiations, there have been steps forward, and there is now more of an idea that the secretariat should be able to examine a regional trade agreement and make a report to members; not that this would make any decision on its compatibility with the multilateral trading system, but at least there would be a process of more objective examination.

BHAGWATI: It might, Stuart, just lead to more paper being consumed, and environmental damage from that. [Laughter] But seriously, I agree that the discipline has not been there from Article 24. If you look at the enabling clause, which permits developing countries to simply do any kind of bilateral, regional—you know, 5 percent preference on one commodity, 10 percent preference on things. So you don’t even have a commitment to go to zero, like under Article 24, whether properly enforced or not.

I mean, that’s far worse than actually, I think—I think the developing countries have a much bigger problem because they proliferate these things. I had a debate with a very eminent person on the committee which produced the report, and he said, “Oh, but developing countries need more policy space.” So I said, “You know, if I want to shoot myself in the foot, I guess I need more policy space.” You know? I mean, it doesn’t really—I mean, discipline is good for everybody.

But I think the problem in the end is that the systemic impact is really what the report focuses on. I think for individual countries you can certainly say it might be good. Like when I was giving a talk in Singapore many years ago, before it started all these proliferations, I said to go ahead and lie in every bed you can, because they have practically no tariffs, zero tariffs, so there’s no problem of trade diversion, Pascal. Right? And they get preferential access to other people’s markets. I said, go and do a massive amount.

And besides—I didn’t tell them that, but I said, I mean, who cares about what Singapore does, in terms of a systemic impact. It’s a small country. It’s a great country, but it’s not—but when United States starts doing that, we’re a hegemonic power, we set an example. And this is where I take issue with the U.S. policy, in the sense that we started doing that after EU did a little bit of that, too. I didn’t mean the core. The core is a very different argument—including the 25 core. It’s a big core of it now. But still, that’s a very different set of arguments. But if you start doing it with all and sundry, you know, all over the place, then we sort of followed suit, and we never—in fact, my view is that we should—at that time very few, of course, anticipated that this thing would just break wide open and there would be 300 now, maybe 500, 700 by next year, complete erosion of the MFN system.

I mean, I call it the spaghetti bowl because I can’t eat spaghetti, you know, it’s all messy, but one of our—Koichi Hamada, who has a nice sense of humor on the committee, a Japanese professor at Yale, he said, “Oh, but maybe it would turn into lasagna.” [Laughter] And I said, “You know, I don’t cook, but I know that to make lasagna, you need a different kind of flat pasta; you can’t do it from spaghetti.” [Laughter] And so that’s another problem. But all of this will congeal at some stage into the kind of desired end. But those are the questions. But I think in terms of the—

BLUSTEIN: [Inaudible] bananas and sugar.

BHAGWATI: But in terms of the recommendations which we have, it’s simply that, look, again getting back to the real issue, there’s nothing we can do, because politicians just want to do this. So maybe it’s Gresham’s Law, monkey see, monkey do, and some politicians don’t even understand the difference between a preferential liberalization and a multilateral liberalization.

I often say that, you know, we should never use the phrase “FTA,” free trade agreement, because politicians cannot go beyond a sound bite, which means they can’t read more than two words one time. So if they read “free trade agreement,” they’ll read only “free trade,” and so they’ll think it’s the same thing. And this was just a joke [laughter], but unfortunately, there was a politician in the audience and I regretted having said it. But basically, this is now we call it preferential trade agreements to remind us that it’s straight liberalization within the group and it increases the handicap of outsiders inside your group, so it is two faced—free trade and protection—both increasing. This is why we get into a problem.

But the systemic problem, I think, can be taken care of, but there is a problem which EU and U.S. also have, which I think—I mean, I hope you become Supachai’s successor. I’m a great admirer of Mr. Lamy and I can say things like that; he can’t, because he is running. But it seems to me that the thing which we’ll have to face up to is that many of these bilaterals are used by lobbies in the West, to some extent your country, all the time in our country, to establish [inaudible]. You get a little country by itself in a bilateral negotiation, then you can ram anything down its throat. Those guys will sell both their grandmothers to be able to sign on to such an agreement because this is a big market, preferential, we also can give goodies on other dimensions or we can give punishments on other dimensions. We are the [inaudible] which can really procure that consensus very quickly with little doubt.

Now, our job intentionally is to say, “Look, you agree to this”—maybe labor standards, maybe intellectual property standards—which are way in excess of what can be negotiated in Geneva, when there are too many players and so on, who will fight a little bit anyway; then use of capital controls, which you ran through a little bit, with Singapore and Chile. The game goes on. But you see, that you can do one by one. It’s a sort of Leninist policy of divide and conquer all opposition.

Now, if you believe that our lobbies are always doing the right thing, that’s fine. Right? I mean, you can argue that. I don’t—I mean, there are good lobbies, bad lobbies, you can go in excess, but the rest of the world now sees that the bilateral is really an instrument of imposition of non-trade or weakly trade-related issues, and they’re beginning to see the game for what it is. And it’s not really a trade game, it’s a non-trade game.

So all our lobbies are totally aware of it, and the foreigners—you know, other countries are not fighting, so when you see [inaudible] with [Brazilian] President [Luiz Inacio] Lula [da Silva], I mean, he, as far as I know, and I’ve checked it with a few people there, he’s continuing the objection of the Brazilians to having—like Indians do, to having labor standards and other things. It’s not that they’re opposed to labor standards in their own country, but they don’t want them in the trade treaty, and they’re continuing their opposition. And I suppose President Lula’s—I mean, he’s certainly no mean trade union leader. I mean, he can easily out-compete [American Federation of Labor-Congress of Industrial Organizations President] John Sweeney at our end in terms of his credentials. But he won’t have this in a trade treaty.

So then what do we say? We say we’ll go with the Andean people, and what Lula wants is [inaudible] lite. Now, that’s again the Orwellian use of words. You say it’s “lite,” which means, you know, it’s no good, right? But in fact, he’s probably taking a principled stand, saying that we’re ruining the world trading system by using this. But, I mean, these are different perspectives, and you can make up your own mind.

But this is where I think the things are coming up, and whoever becomes the next director general will have to face up to very deep divisions on this. And, you know, just saying that bilateralism is simply a road to multilateralism is, I think, a very naive thing to say. It’s only a big power that can say that and get away with it.

BLUSTEIN: Well, thanks. I’m sorry, we’re going to have a slightly—a bit of a Q&A session lite, but only slightly. I did let—I wasn’t quite as fierce as I should have been, perhaps. But anyway, if you could please identify yourself and state your question.

QUESTIONER: Sure. I’m Julie Grimes Waldorf, and I’m an attorney for Ford Models, and my question is for Commissioner Lamy. In a letter that you wrote to the other WTO commissioners, you had advocated differentiating among developing countries, and that had drawn some criticism from some groups claiming that it was an attempt to divide and conquer. But on the other hand there are substantial differences between countries like Brazil and countries like Senegal that may call for some differentiation. So I wondered what you think the prospects are for differentiating among the developing countries other than just the least developed countries for special and preferential treatment.

LAMY: Well, that’s another area where a candidate to the DG job doesn’t have the same language as an EU commissioner. [Laughter] You’re right, I basically proposed last year, when I was EU trade commissioner, what I suggested was to give the G-90 the round for free, which was, basically, everybody will make efforts, but given that these are the poorer countries, the idea was that they would have nothing to pay, but what looks like a technical detail, which is binding the tariffs which is the next step before reducing them. Of course it’s a very taboo topic which I understand the DG of the WTO has no authority to sort of cope with in public.

Now, it’s the sort of thing which everybody thinks about, but you’re not allowed to talk about. And the code name, the dirty word, is “differentiation.” Now, there is no sort of rational solution to that. Obviously, the point you made is obvious—there are developing countries with some provisos, and there are developing countries with other provisos. And the only characterization which exists in WTO, which basically is indices on a sort of World Bank criteria, is not enough to sort of describe the diversity of members who have developed.

So I don’t think there is a big sort of hope in the sort of rational negotiation of criteria and what special and deferential treatment, what sort of geometry should it have according to the topography of developments. But I believe that, of course, developing countries cannot cope with the same sort of constraints as developed countries in terms of rules, in terms of tariff stabilization. They need transition. Some of them need waivers, whether these are permanent waivers or whether these are time-weighted waivers remains to be seen. I think the solution to that in a WTO context is transparency. It’s periodic review. It’s peer examination.

If Developing Country A has a problem with Developing Country B having a sort of advantage which A does not have, which because A fears that B is going to take something out of A which A should have. Now, if the case can be made through opening the problem around the table that it’s not the case, that like Jagdish said a moment ago for instance, let’s not discuss about the principles; let’s speak about the numbers, if it’s a really smallish number and if it appears around the table to everybody that it’s a very smallish number, why should we care, I mean de minimis? And I think the solution to that—I mean, WTO has recently invented a new sort of concept which journalists immediately are laughing at, which they call “situational flexibility.” [Laughter] Well, I’m not saying it’s a very solid concept [laughter] but it means, you know, everything doesn’t have to be sort of—

BLUSTEIN: Not just me, but people who are laughing at it, you see?

LAMY: Yes, but when I say immediately people laugh at it, I mean, it encourages others to do it. You know the sort of leading role you have in this sort of thing.

So that’s my answer. My answer is let’s be pragmatic. There has to be flexibility. There has to be waivers. There has to be transitions. And let’s review them. Let’s discuss them. After all, trade people are rather reasonable people when they are sort of grounded in reality. It’s not numbers. And I think if we do that the sort of big heat about this concept, which raises so many concerns, will decrease and we can work.

BLUSTEIN: More questions?

QUESTIONER: [Inaudible] I’m from Merrill Lynch. I have a question for both panelists on the role of FTAs in locking in deeper institutional reform within countries. For example, my understanding is through the NAFTA, Mexico reformed its bankruptcy laws which has resulted in much higher foreign direct investment into Mexico. Or if you take a country like India, for example, its actual tariffs are much lower than the tariffs they’ve agreed to under the WTO. So one could argue that the extent of reform possible internally within a country like India in the WTO could be limited. But is there a role for FTAs in locking in greater institutional reform within countries?

LAMY: What you call FTAs, bilateral treaties—

BLUSTEIN: Free trade agreements, yes, FTAs.

BHAGWATI: No, this is a standard argument recently Mexico in particular, right? I mean, I just don’t know whether—you cannot get the same degree of commitment through a multilateral commitment, right? So I think the—Mexico had a choice of going purely multilateral or walking on two legs, right?—which it decided to do. So I think it’s hard to decide which one really—if it had gone multilateral it would not have been able to use that set of disciplines you have there, also to do things.

On NAFTA, I think I see Ambassador [Carla] Hills—hi—and I think we had a big discussion on that when—my ministerial with you, remember? And I think one of the things which was coming up, which just made me wonder a little bit, which was that virtually everywhere, once you have big trade expansion after trade liberalization, like with NAFTA, you would normally get a high rate of growth of income as well. I mean, this is normally a good association, but we were having big problems with the critics of NAFTA. I wasn’t one of them—I was just in the audience [laughter]. But the critics of NAFTA were quite strong-minded actually, and they were saying, “Oh, no, no, this is really—the income has gone down.”

And it occurred to me that maybe there was a lot of trade diversion which had happened, because they were not really into multilateral commitments in the same degree in the sense that in multilateral commitments you’re binding, which are like the ceiling and the actual applied tariff can be low. So when the petro crisis happened in ’94—was it November ’94?—the 503 tariffs were raised externally. But they couldn’t really maneuver reducing their trade barrier reductions within the NAFTA process.

So it’s a hypothesis which I put to [inaudible] and to us, saying that the reason why, because all trade expansion is not good. That’s the first thing we teach, that trade is—you know, trade expansion can be bad rather than good. It depends on the kind of trade, right? So if you’re diverting trade and expanding trade on a trade-diverting basis, then you will not get the effect on growth. But anyway, I have written to [inaudible] and I’ve never got an answer on that. I told [inaudible] he’s not—and nobody has ever looked into it. But I—you know, it’s often said that familiarity breeds contempt, but contempt does not breed familiarity, and I don’t study it bilateral, so I don’t know. [Laughter] I just leave it at that hypothesis.

BLUSTEIN: That was one of most entertaining dodging of a—

LAMY: My own answer that, very shortly, is I wouldn’t rely on bilateral trade agreements to sort of address serious regulatory changes. Not really, because in terms of domestic politics, these quote/unquote “serious” regulatory changes are often painful, and the fact that it’s gone because of a bilateral agreement doesn’t make the setting domestically very easy. On the contrary, it’s the sort of thing which you set domestically more easily if it comes from a multilateral horizon than a bilateral horizon.

And, second, it’s much more difficult and in terms of profitability in a trade negotiation. Let’s assume my domestic market for reinsurance is closed, and I’m going to open it under the pressure of a bilateral agreement. So the case for this is, well, he has started and he did this because of the pressure of the bilateral agreement, whereas there was no pressure multilaterally. True. But for the price of what I get in opening bilaterally my reinsurance market, I know fairly well that next time I’ll discuss with anybody, or next time the thing goes multilateral, I’ll have to give it for free, because people will say, “Well, he’s given it to this country, then it’s no cost,” and then it goes multilateral immediately. So even in terms of profitability of the deal, I wouldn’t advise a country to do that.

QUESTIONER: [Inaudible] This is a question both for Commissioner Lamy and for Professor Bhagwati. All economics is predicated on politics. And as you both agreed or said earlier on earlier occasions, and Mr. Supachai said as well that political consensus is obviously important in any agreement, trade or other. In this country particularly, there’s been some skepticism over international institutions. Now that Mr. Lamy is running for a new position and Mr. Bhagwati is endorsing him, do you feel that there is a danger of the WTO in particular being perceived as this behemoth in Geneva, essentially running our lives? And is that likely to have political consequences, adverse consequences, in this country and your other constituents? And does that worry you, and what might be done to essentially counter the perception that there are these—the moral equivalent of these U.N. black helicopters basically running our lives as far as trade is concerned, which is at the heart of our economic system?

BLUSTEIN: Let me just say, given the time constraint, you might consider making this your—making this your closing comment because, I’m sorry, I realize we’re getting close to the period where we’re supposed to—[is there] some way you can combine, that’s a pretty broad question—black helicopters wrapped in—

LAMY: Maybe we can take one or two more questions—

BLUSTEIN: Would that be alright?

LAMY: I could answer—

BLUSTEIN: I didn’t see too many more hands, but—

QUESTIONER: [Inaudible]

BLUSTEIN: That’s one heck of a challenge to address those, but I know you’re up to it.

LAMY: Well, on the first question, whether we should be worried about the perception in some countries that the WTO’s legitimacy is shaky, I think it’s—we have to care about that, especially here where, you know, trade policy lies with Congress under the terms of the U.S. Constitution, which is a fairly different tradition than what it is in many other countries, where it is a much more of an executive branch responsibility, because the U.S. started as a republic, whereas most of the other systems were kingdoms, which explains the differences in tradition.

So, and by the way, the U.S. legislation is [inaudible]. And the more WTO gets public attention, the more spotlights it gets, and it got a lot of that, thanks to anti-trade constituencies. I mean, the WTO’s notoriety in the world, and in domestic audiences, has been formidably increased by anti-trade activities, or anti-WTO activities, during the recent years. So, yes it’s a problem, yes, we should care about this, and yes, we should be able to make the case that it’s something which has a big advantage.

Now, I can do that. I can go—as I did, by the way, when I was EU trade commissioner—I can go before the Congress committee and give the list of 10 reasons why having the WTO is good for the U.S., and giving five examples of what would happen, let’s just say, with the trade relationship between the U.S. and China. Try to think of a system of a trade relationship whether it would be U.S. and China, where there would be no WTO rules.

So yes, it’s a problem we should care about, and it’s a case which consistently has to be made because it is about politics, and in politics you have to be able to make your case permanently, otherwise, people are entitled to have a different view and vote differently.

On whether or not EU and U.S. should use more, or less, of [inaudible]. I agree with you, basically, after 10 years of existence, the dispute settlement is a big success, and by the way, it has also contributed, sort of, as profiling the WTO as a different international trade organization. There’s a label of efficiency in WTO which stems from the dispute-settlement machinery, because it’s one thing having rules; it’s another thing having rules which you know can be enforced. And this is also what has given to WTO the sort of size in public opinion which it has, compared to other organizations like WHO or ILO [International Labor Organization] or whatever. So it’s a success.

But—but the judiciary cannot substitute for sort of the legislature, I don’t think. I mean, I think in whichever political system, there is always a danger that is the legislature does not address tensions in the quote/unquote “society.” [Inaudible] Then it goes to the judiciary, and the judiciary takes the decision for the legislature. You all know about political history. It can sometimes happen that the discrepancy has limits, and we have to be careful in WTO that on things which are pretty touchy—like let’s say trade in environmental [inaudible], which are things that go beyond vested interest. It’s clearly about what people feel, about values, about things which they can gauge politically very severely about. So that’s one thing. And I think the balance has to be watched. And it’s like another power system.

But if the legislature does not address—if for instance a round which is there to create a new layer of rules to address, trade opening—what we have to do—if it’s not successful, then one should not think that the dispute settlement machinery be cause for the problems we have. I don’t think anybody should bet on that.

Transcript ends.