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Global Economic Trends: The Trading System

Speaker: Jagdish N. Bhagwati, Senior Fellow For International Economics, Council On Foreign Relations
Presider: Ernesto Zedillo Ponce de León, Director, Center For The Study Of Globalization, Yale University, Former President, United Mexican States
September 23, 2008
Council on Foreign Relations


ERNESTO ZEDILLO PONCE DE LEON: Okay. Good afternoon, ladies and gentlemen. I am Ernesto Zedillo, director of the Yale Center for the Study of Globalization, and also a member of the International Advisory Board of the Council.

And before I introduce Professor Bhagwati formally, I have been mandated to tell you that you should turn off your cell phones and all of those exotic devices, and also to remind the audience that this meeting is on the record. And so having said that, let me tell you that I am very happy, pleased and honored to introduce Professor Jagdish Bhagwati, and I would like to make full disclosure about it.

Professor Bhagwati is my grand-professor -- (laughter) -- in the sense that I was trained in international economics by one of his students. But of course more than half of the reading list were articles in my international trade theory course by Professor Bhagwati. So I must confess upfront that if I were going to single out a few names of enormous intellectual influence on my thinking -- not only as an analyst of international economic events but also as a policymaker, then I would have to do some finger-pointing towards Jagdish Bhagwati.

And this is the case not only about me, but I would say about many economists and policymakers in the world. So here we have, I would say -- I'm not exaggerating in any sense -- one of the towering figures in my profession.

And the work that Jagdish started to do right after leaving graduate school has been incredibly influential, not only in academia but I would say even more important -- important, I mean for the better -- in the policy world. He has always been ahead of the curve. He has seen things that others were able to see only many years later.

And that brings me to the topic of today. He just wrote a book on preferential trade agreement. It's a very nice book that you can acquire. I hope you support Jagdish. It's a good price.

JAGDISH BHAGWATI: It is. (Laughs.)

ZEDILLO: And some of you might say, well, you know, today we are in the middle of this terrible financial crisis. Why are we worrying about this particular topic of the international economy, the PTAs. And I would say, well, this is the time to discuss it because many years ago we had a terrible financial crisis that started in 1929, for example, and the reaction was to go for protectionism. And then people forgot what we had learned before, and we went for preferential trade agreements. And it took us many years to repeat again the (law ?) of the global trading system -- took many decades with dramatic consequences for humanity's progress and prosperity.

Well, I really hope that this is not going to happen this time around. I really hope that the decisions that have been taken in recent days will help the system to address the very difficult problems that we are facing. But above all I think -- I hope that this is not to give rise to a new wave of protectionism. There is always a risk, and I think Jagdish brilliantly is addressing a very sophisticated form of protectionism in this book.

So that's what we are going to do today. And I -- this is not going to be a lecture but rather first a conversation and then we will open the floor for discussion.

So I would start by asking you, Jagdish, why -- do you really feel that this is a very serious problem? Why do you feel compelled to write this book at this time? What is the kind of threat you are looking in the horizon -- you're always looking far away -- but why did you write this book? I mean, you can write books on so many other things; why did you write this book?

BHAGWATI: (Laughs.) Right, right. Well, this book is about free trade agreements, which I call preferential trade agreements because when you say "free trade agreements" in the political space, people must think it's another form of free trade. And I think we economists understand that when you have preferential discriminatory free trade -- so in a free trade agreement we do it for -- this would liberalize trade for the members, and in the same breath if we leave our external status unchanged, which is what Article 24 requires, and which most people do -- the handicap of those other guys -- not members in your market -- (inaudible).

So this is a two-faced animal, right? One part is free trade with the full members; the other part is increased handicap and therefore increased protectionism vis-a-vis the outsiders. And so the analysis cannot be the same. And the reason why the scheme call them PTAs was because that draws attention. I mean, once I was on -- (inaudible) -- you're no longer a politician, but I said, politicians are used to sound bites and they can't read more than two words at one time.

ZEDILLO: Thank you very much. (Laughter.)

BHAGWATI: Now you're on our side.

ZEDILLO: (Laughs.)

BHAGWATI: And I didn't think there was any politician there. It's really just being funny.

And so I said, you know, they start reading free trade agreement and they stop at free trade and think it's the same thing. The fact that we should call it PTAs -- I never thought I would ever succeed in changing, you know, what we call them, but we've gotten that far.

So I think the -- what worried me was that when Article 24 in the post-war trading arrangements were made in the GATT, we had, you know, we -- the architects -- we know from history and archival history that nobody expected that it would go beyond one or two, maybe. And we Americans, when we were designing it, you know, in the State Department, we had -- as I point it out in the book because it since had come out -- we were going to confine it only to customs unions, which was deep integration of the European core -- (inaudible) -- at least in intention, but not in reality I'm told.

So it really remained rather small because it's very difficult to actually have deep integration going on for a variety of reasons which all of you would understand.

But free trade agreements are very easy to make, and they were introduced into Article 24. So as a result, we've got now a systemic problem. The European -- we used to call it the European disease because the European core is not what we are talking about, you know, but it was the spokes and -- with the hub. The hub was okay because that was deep integration, but every commission would go out and get an FTA.

So they started doing them in a massive way, and then unfortunately we (fought a few ?) in America and, you know, with -- it's a more complicated story than what I'm saying -- and ultimately now the Asians have gotten and joined it, too. So it's now become a kind of systemic problem. And I think it was last week somebody said they were about 390 and their -- (inaudible) -- were up. I mean, I haven't taken a bet because that would be an unfair one because I know it's going to happen -- but many people say it's going to be 7,000 maybe by the end of next year and so on because every trade minister, unless he or she is on holiday, is negotiating one. (Laughter.)

And I had, you know, once I read a funny article -- I thought I would use irony and sarcasm, and you know, and mischief to try and pour water on this one. And I said, you know, I call it watering the trade and, you know, how people were going by oceans and then they were going by, you know, bays, then they were going by rivers, you know, to make these agreements. And I just made up two, and by the time my article came out, both of them were on. (Laughs.) And everybody's doing it.

So now we have a systemic problem. That's what worries me, one fact, because it has meant that everything is now subject to some kind of discrimination. Rules of origin have to be worked out. If I want to give you, (Marsha ?) one -- you know, a better term -- you know, terms because I have a FTA with you, than to your friend on your left, I have to say that that is your product, not a general product -- certainly assign products to specific sources if I'm going to be able to work with an FTA. Now, as soon as you start doing that, just think about -- you don't even have to be a CEO or anything -- I mean, today the world economy is so integrated. I mean, it's like the, what -- $6 million man or whatever that movie -- you know, that program was? I mean, everything except your brain is coming from somewhere else other than what you were born with. You cannot really define it except arbitrarily. And so you've got a chaotic system of preferences, which I call spaghetti bowl, and it is really screwing up, gumming up the works.

So, unless you've got an overriding reason to do these things, you have to be really crazy to prefer FTAs. I mean, there can be overriding reasons but I don't see anything, particularly if you can go and start doing the Doha, et cetera, et cetera.

The other thing of course which I think where people like Steve Charnovitz and I will probably disagree is this whole question which I think is going to divide the two presidential candidates because McCain doesn't understand the nuances. I mean, he's a good free trader -- maybe a bad one, I don't know -- (laughter) -- because you have to put into an institutional context. I like him because he likes trade, you know, but if I were a single-issue voter I would work for him, but I'm not. (Laughter.)

So I think the -- he's just a -- (inaudible) -- a free trader. He believes this is a good thing, and I think it's rare to find such people now these days. So I like him for that reason.

But Obama is now into essentially saying free trade agreements are not good -- and I should like that in light of my book -- but I don't because of the reason that he -- he wants them, but he wants them making them worse by saying we must have more labor and a domestic and environmental and whatever conditions, which any lobby which is going to work for the Democratic party want. Of course it's all masked in this story of -- in the language of altruism, including "we're doing it for your workers" -- you know, it's what we call export protections and turning Tom Friedman on his head, saying, "You must have the same standards as we do" -- actually we are asking them to have even better ones than we have because we're not very good on labor standards, as all of you know. If there is anybody from a labor movement, they'll agree with it because we've got less than 10 percent of our labor force in unions; we break strikes; we have, you know, Taft-Hartley provisions.

So -- in other words, we're a model for labor standards. (Laughs.) I'm not saying I would like better labor standards -- actually I'm a pro-labor person on that. But it is a lobby and it is -- the reason why they want all of this is because they're scared like hell of competition from the developing countries. I've talked with labor union leaders -- and I know John Sweeney well, and so on -- and they say, "Look, Jagdish, you're wrong. We're altruistic. We have no -- you know, we are not really -- how dare you suggest" -- sometimes they get passionate -- "that we are doing it to just protect our -- (inaudible) -- from competition.

So I say okay. Well, after five minutes they start talking about how it's unfair to have to compete with people who have lower standards. And I say, "That's what I mean. That's exactly what I mean."

There's nothing wrong with self-interest, but I think what is wrong is that there's this really exaggerated fear and it's the wrong diagnosis. If it was a correct diagnosis that trade or globalization was causing you to have to worry about your -- you know, about your wages and standards, then I would -- you know, I'm not wedded to free trade, per se. I would be glad to throw it out of the window if -- it's an instrument; it's not an objective.

And so I just don't think -- the diagnosis is wrong and unfortunately Obama has just bought into it because nobody has the ability to -- I mean, if you want to win with Democratic support, you just have to go with the flow. I think he's better -- I think I'm not worried about his reopening NAFTA because if I could throw something at the AFL-CIO -- now I'm talking cynically but realistically -- I have to give them something, okay? Which is the most innocuous thing? To reopen NAFTA. Well, anyone who knows about trade -- multilateral trade negotiations like we do knows that every -- in every round we reopen everything -- (inaudible) -- there is nothing sacrosanct about what we've put down at one point in time in NAFTA, or anything for that matter. I mean, it makes sense.

My sense -- and you know this very well about NAFTA -- is that they will -- all three of them will go down. We don't -- still don't know whether (Harper ?) is going to come back, but Calderon will be there and -- if Obama is there -- and they'll go down to Yucatan, have margaritas, you know, chat, and then Obama will hear all the complaints from these other two partners about what we are doing wrong, naturally -- and so he'll come back and tell the AFL-CIO and the Congress and so on, you know, "I'm negotiating; I'm negotiating and we've reopened the issue," and nothing will happen. It's an innocuous thing in my judgment.

Colombia is more serious -- Colombia, I mean, Uribe is really -- and we've come very close to signing something, but there you have the same problem. I've met Uribe; I spent a week there and I promised my host I would never talk about FTAs. (Laughs.) Just some things you have to do for, you know -- they were being hospitable to me, so I said I won't. And I have -- I -- (inaudible) -- against Uribe doing one; I have -- (inaudible) -- against United States, which is a major power, doing it because what we do affects the system and affects the -- (inaudible.) I mean, poor Uribe is just looking at it from his own perspective.

He and Pastrana, whom I know well --

ZEDILLO: Yeah, but what do you expect? I mean, countries -- if you look at these PTAs --


ZEDILLO: Countries that have negotiated and are tied to them feel that by doing it they have got a better deal with their counterparties; otherwise they wouldn't do it. So that's a reality.

BHAGWATI: Yeah. Let me --

ZEDILLO: Yeah. I mean, they lock preferences; they get lower tariffs from their counterparties. I mean, this is a real issue.

I agree with you that the objective should be a system of universal, nondiscriminatory, reciprocal trade liberalization, but the reality of each individual country is that they want to have better market access.


ZEDILLO: So the market -- so --

BHAGWATI: It's a very good question, actually. And in fact, you know, hyper-powers like us are using the dangling the market access to receive it, but actually what is -- (inaudible)? Because we are a reasonably open country anyway, and in fact President Bush repeatedly keeps saying, "We're going to get something from Colombia, not Colombia from us." Right? I mean, that we need -- we're going to get the market there.

So, now, -- he's of course -- I don't know if he really understands what he is talking about, but the point is our market is reasonably open, so we're getting guaranteed market access but at the same time it erodes -- as soon as you open up another FTA, as you were saying. So right now Peru has one. And Peru and -- these are Andean countries so -- if Peru has one then Uribe is even more keen because he might get some trade diversion. So it's the (wasting ?) advantage to -- as you read (MFN ?) succeeding, the preference itself begins to erode because preference is relative to the (MFN ?). If (MFN ?) goes down, the value of the preference goes down which is becoming a problem as you know in the Doha round, as well.

So we are getting -- rather, if I was Uribe, I would say, "Look, I'm getting very little in terms of trade. I'm just losing something if Peru gets it and I don't." And we'll also use muscle because they have GSB, which is preferential entry in developing countries. And we've said, "We won't renew that if you don't sign the" -- meaning your tariffs will actually rise if you -- and the only way you can keep them low is by if you join.

So when you look at the hardball bargaining that goes on, this is -- we're playing a sort of tough game. But the real problem is that we are getting them to do a whole lot of trade unrelated things. Now, they may be good sometimes; they may be -- but they can be bad also. Like we're saying to them, "Look, you" -- I mean, I work also for Human Rights Watch on the Asian Advisory Committee, so I know Ken Roth, et cetera -- and they simply say that you're having -- you're targeting union people. And, you know -- and so it's a human rights thing, which is really where the augment is stuck. The Democrats are into this -- the Democratic politicians, and they say, we have to impose tough conditions on something which has to do with human rights. And both Pastrano and Uribe tell me, and a whole lot of people I met said that we're in the middle of a civil war, basically, brought about by the U.S. refusal to legalize drugs -- meaning, we've got the illegal demand being generated here, and they understand that legalization doesn't mean you go to a vending machine and get your shot out. I mean, they just mean that if you get hooked, you don't have to go and rape and murder and do all the crazy things which leads to the illegal market. You just go to a doctor -- a certified doctor -- who then gives you what you need so that you don't then have to -- so when we say legalization, it means something very different from you just buy it like in Amsterdam or somewhere, you know.

If we don't do that, we are actually creating the supply problem because nobody can -- neither your country, nor Afghanistan, nor Colombia -- once the profits are so high, can ever manage to really put it down. So in a sense, I told Ken Roth, we are the ones who are responsible for the problem there. And once you have a war like that, to fine tune it is like fine tuning finance or macro. It's just not possible. Things will get out of hand. So all you can ask is what could happen.

So Pastrano was telling me, everybody is been targeted; everybody -- you know, the Supreme Court (has been wiped out ?) at one stage; generalists are being wiped out; all kinds of people -- so union people are also being (wiped ?). So we do not really look at this, but Colombia is at the receiving end. It's a smaller, weaker power vis-a-vis us. And so we are saying, "Unless you do the following thing, regardless of the logic of it and the" -- just because we are the powerful guys, right?

Now, supposing -- it's just imagine if it's -- construct a reverse experiment and say Colombia was the hyper-power and we were here where the Colombians --

ZEDILLO: What's the interest of the United States in pushing for these PTAs? I mean, why --

BHAGWATI: You mean vis-a-vis Colombia?


BHAGWATI: Oh, it is because it's not the executive which is necessarily running it but it's the different lobbies which are doing it. So it is being -- I mean, this is a country where there were -- (inaudible) -- presidents and many more lobbyists and so on.

So why does AFL-CIO, for example -- why would it want a PTA rather than the (Uruguay ?) round -- or the Doha round? Because at Doha you cannot -- you have a -- you confront front big countries, like Brazil, India and China, which is off the charts --

ZEDILLO: But I never heard the AFL-CIO -- I hear Bob Zoellig saying we should --

BHAGWATI: He -- yeah. I mean, okay -- there are lots of reasons I'll state but I'm giving you one --

ZEDILLO: That's why I'm trying to not degrade you, to --

BHAGWATI: Yeah, so I think on one -- I think if you give a break from the, sort of, the more NGO type of lobbies or -- you know, not the business lobby -- the AFL-CIO is a labor lobby. They feel they can -- because I've talked with John Sweeney, et cetera, and -- (inaudible) -- and they really feel that you can on one-on-one get basically these kinds of issues introduced because the other country is the weak power. And it's a kind of Leninist policy which they -- they kind of understand.

I take you, (Marsha ?) first, then I take her, and say that, "Look, you agreed to this, so you have to agree to it." And then I take several other people, and then I've broken the coalition of the developing countries at Geneva because they then -- if many of them already agreed on this one-on-one, then you will be -- it will be easier to bring about the change at the -- you know, at the multilateral level. So I see a definite interest.

So what about business lobbies? I would say business lobbies are a bit mixed, but I would say they also have a free rider advantage. Supposing I'm putting a dollar worth of expense into opening a market -- say, Mexico. If I do that and if it is part of the multilateral negotiations on (MFN ?), then that -- when that market opens, the free riders like the Japanese and Europeans, who also get access to that market, if they've gone on (MFN ?) basis. If I spend it on just the bilateral opening, then I get the full return. So when I'm comparing these two alternatives, as a businessman -- unless I'm, you know -- and there are businessmen who are also more, you know, kind of cosmopolitan or who have wider interests -- but a lot of people are going to be saying, "Look, I'm going to focus on my main marker. I get that done bilaterally, and therefore I'm going to focus on that." Once I get my main one, then comes the other problem, which is that once I've gotten my thing, I'm going to be out of the trade game anyway. I've gotten what I wanted, right? Because that's my main market. So you also lose the soldiers for the multilateral trade negotiations.

And one of the problems about bilaterals and sectors -- like we had the IT sector and now -- as soon as these guys get their thing done, they're not going to be around wasting their time and energy and money to push for the multilateral trade negotiations. And that used -- this is not my point, but several political scientists have made the point that in the old days when we were going for sectoral things like the MFA -- which was on textiles -- we were doing sectoral agreements for these protections so that they would get out and let us liberalize trade. Now the sectoral ones are people who want free trade -- they get what they want and then get out of the game. And therefore we have colonels and generals like Zoellig and you and me and so on, but we have no infantry to send out. There's nobody supporting us. So this is a way in which the FTAs can, by being an option, can actually undermine. So there's a variety of reasons why it can be a -- it can be counterproductive if we open up this possibility, and it is just one of those things where we might be better off if we didn't have that option open. So this -- (inaudible) -- in the literature we call it "stumbling blocks" versus, you know, building blocks and getting to the (MFN ?) trade liberalization, which we all want actually, which is nondiscriminatory -- you know, you don't have this --

ZEDILLO: (Inaudible.) You and I want that, but I'm not so sure --

BHAGWATI: Ah, yeah. But I mean, when I say everybody, meaning people who are aware of the historical fragmentation of markets and so on. (Inaudible) -- actually one of my students, Doug Irvin (sp), brought up the other day. I mean, you won't believe it -- I mean, there's not the slightest chance that I will get the Nobel Peace Prize. But (Cornell Hub ?) got the Nobel Peace Prize for doing trade, which sounds incredible today -- (laughs) -- because the idea was -- I think you began with that you would be building peace. I mean, the basis for free trade was out of a much bigger social argument that if you fragment the world economy into blocks and so on -- and that was the result of protectionism in the 1930s -- that you will in fact be setting countries against one another. And so there's a lovely Herblock cartoon actually where somebody -- there are three acrobats at the bottom -- there is trade, believe it or not; above him is peace, and above that is, you know, justice. And protection is trying to topple the bottom one, so the whole thing would collapse. So I'm going to put it in my next book -- it's very interesting.

Today you would never think like that, but in a way ironically now it's not because of protectionism that we are fragmenting the world in -- trade-wise. Now we are doing it because we want free trade, but we are doing it through free trade agreements. Now, whether that will -- I'll just give you one reason why it will maybe lead to fragmentation and -- from the point of view of blocks and so on. We Americans went south to -- you know, beyond Mexico, and we still haven't got FTAA and so on. But that was our area of interest, or what the Japanese call goal prosperity sphere, or if you're a radical you would call it America's backyard. Take your pick; I don't really care. But this is America's sphere of influence, right? So that's where we went.

That time, many of us said, look, Latin America is a great continent -- particularly in literature; I don't know about everything else.

ZEDILLO: We have all the -- (inaudible).

BHAGWATI: (Laughs.) Well, but it goes up and down. I mean, you know, there's booms and busts. And you know, it's something you want to be involved in, obviously, and it's a fascinating continent. So we said, look, if you're going to do this and keep out the Asians, then it's not that the Asians will try and join you because you're keeping them out to begin with; they're going to do their own thing. So this is what I call "tit for tat." So when -- (inaudible) -- and all these people -- when they're doing ASEAN, they have ASEAN plus one, ASEAN plus three -- and where's the United States in all that? (Inaudible) -- Fred Burkes (sp) and my good friend -- (inaudible) -- all get agitated like we're being left out. Well, we didn't get agitated when we left them out at that time. And you know, they never listened to anybody saying, look, this is -- if you're going to play politics this way, in terms of your preferences, it's going to come home to roost.

So right now what we are doing is -- since we are a hyper-power -- you know, we can create a coalition of the willing through punishments and inducements and so on, but right now we are cultivating Australia and Japan, who can try and get us a seat at the table, and then hopefully we'll make it so that when we look at the Doha round, the four countries which are -- or four -- (inaudible) -- four -- whatever you call it -- U.S., E.U., Brazil and England. These were the final people who have to make the concessions to bring the Doha round to a close. And suddenly I see in the first London meeting, we have Japan and Australia. What's the reason? What I gave you. And then they said, "Oh, we need Australia because that's the -- (inaudible) -- group." Well, I thought Brazil was a member of the -- (inaudible) -- group.

So I think we can play that game, but in the end we'll wind up just playing those games, and we are actually splitting -- you know, I mean, creating -- not blocks in the sense in which we had during the '30s, but certainly --

ZEDILLO: But it could happen.

BHAGWATI: But it could happen.

ZEDILLO: It could happen.

We are now going to take questions --

MR. BHAGWAT: So anyway we've got --

ZEDILLO: -- questions from the floor. So let's go ladies first. Here.

QUESTIONER: Hanya Kim, member in New York. Professor, I know it's off topic: I'm really curious about your comments on the current bailout. I'm sorry, I know it's really off topic.

MR. BHAGWAT: Sebastian Mallaby has written a beautiful article in Washington Post today. But I think the really -- the interesting question which I think is being raised in relation to the trade topic is that now that we've had this currency -- you know, this enormous crisis, will we then become skeptical about trade as well? Because when the East Asian crisis happened -- you will remember -- (inaudible) -- everybody thought -- because of trade, they had economic miracle. I think nobody disputes it. The disputes are only about the details of it. But they were output oriented, and they really profited enormously and grew enormously well. And whenever a country grows enormously well, we call it a miracle because I think we are -- economists are a dismal -- belong to a dismal science. If you do well, it must be a miracle. (Laughter.) A -- (inaudible) -- economic miracle.

Then they crash because of the financial liberalization without, you know, going in for a strong reformed banking sector. So the growth was due to trade; the crash was due to the financial side.

I was really worried -- and I think we had a conversation about that, too -- that the common people will just throw both out because it is all a part of globalization. Well -- (inaudible) -- they didn't do that.

Now, are we smart enough to do that? I think we are in a way, except for a few people who've said, you know, this shows -- I mean, my good friend Joe Stiggis (sp), I was telling -- (inaudible) -- and he was saying, this is the -- the crisis is the -- is like the Berlin Wall. It's the end of market fundamentalism, and he said, "such as free trade." (Laughs.) He was -- I mean, he's like Casanova who saw sex everywhere. (Laughter.) And I mean, Joe sees the decline of globalization everywhere, whether it's true or not. (Laughs.) And so I forgive him for that.

But I don't think the two have any connection, but the average person -- forget about a Nobel Laureate -- might think so. But I haven't seen any evidence of that, so I'm not really -- but we have to make sure of that. But one thing we might not -- Doha is kind of in a limbo for various reasons now. Will we then be like -- like with Doha -- you remember, when Bob Zoellig cleverly used 9/11 to say, "We must reaffirm" -- right -- "our determination that we will not collapse on the international -- (inaudible) -- we will reinforce." They managed to get the round started despite all the problems of Seattle. Actually there's a movie on Seattle with Charlize Theron and her boyfriend, I think have done it. (Laughter.) And we don't have any part, not even as extras, I'm afraid. (Laughter.)

ZEDILLO: Steve, and then you, and then Bob.

QUESTIONER: Steve Charnovitz, GW Law School. You're the world champion in exposing all the pathologies of free trade agreements, and you do that really well. But let me try to operationalize your point -- (inaudible) -- that question. Next year, whoever is elected president is going to be seeking some kind of fast track trade promotion authority.

MR. : Sure.

QUESTIONER: McCain may be quicker than Obama, but they're going to be doing it. And there'll be a hearing at Ways and Means, Jim Moody's old committee, and he may be called to testify.

And if you're asked, do you think we should just provide fast track authority for multilaterals and totally rebuff the bilaterals? Would you say yes?

BHAGWATI: My own view would be that that's the thing we should do, but there's no way it's going to happen. I mean -- (laughs). I do think adjustments. I don't go shooting down what my economics tells me.

So I think -- like Paul Blustein (ph), who is next door, right? -- he was with The Washington Post. He really wants a complete moratorium. I want an exception for Colombia, not because I was treated well by Uribe -- (laughs) -- but --

There's too much water under the bridge, and -- (inaudible) -- negotiated something at that length and in that depth, if you then say no, that's very different from not getting started on something. Because this is asymmetrical, and it will convey, I think, the wrong kind of signal to a country which is really very keen to part of our relationship.

South Korea I haven't thought through, but it's a big boy, right? It's one-tenth of our trade. I think it can manage if the --

But we might just have a like grandfathering, just a -- we should say grandmothering now. We should just have -- if you negotiated these -- and you're practically close to the water's edge, let them through and then apply the -- (inaudible).

But I personally think -- I would definitely say this is not the way to go, and let's now focus on the big picture. Because we know too much about what's wrong with these things, and if we can avoid it, that'd be good.


QUESTIONER: Jim Moody, Merrill Lynch.

You gave the short shrift to the human rights argument a few moments ago. But as you know, in Congress often these kind of other considerations that have other goals in mind -- get attached; environmental standards, human rights, and so forth.

Please take a moment to provide the case for that in the grounds of there's a serious goal here in mind. It isn't a frivolous goal. It can be perverted. It is a serious goal --


QUESTIONER: -- whether it's environmental or whatever.

And then take a moment to knock it down, for -- I'm asking you to wear two hats. First, provide the case for attaching these provisions, and then what's the argument against them.

BHAGWATI: Well, I think the -- As I said, I work for Human Rights Watch, and I'm for human rights. And so -- actually, I know more about human rights than the human rights people because my brother is a former chief justice of India and he's -- he with Puhankin (ph). They're the two great icons of the human rights movement. So -- I just happen to know more about the whole -- human rights norms and international law and so on and so forth, more than I probably should know.

I think if you attach those conditions, you have to be very careful. Now, I think you want to go, in my view, not from having broad principles like that put into trade treaties the way we do with -- (inaudible) -- is where we say there must be gender equality, for example, and many constitutions have that -- because that can be defined in a dozen different ways.

When you have a national court, constitutional court -- (inaudible) -- and your own democratic system, you -- (inaudible) -- right? for your system. So my view is that it should come from below. It should come from below. We ought to work at it like on labor standards.

We ought to go to ILO and get that agreement, like on torture. We will be -- (inaudible) -- everybody -- (inaudible) -- a universal acceptance of the view. It's like our occasional departure, from time to time. But you're not going to get fingernails out or do unspeakable things to people for -- we've done that, but that's not us, in my (opinion ?). That's them.

And so I think the -- we can build up the universal values, which then will automatically come into any treaty at all, including trade treaties. Because we won't --

But if it goes from the top down, it's just -- is going to cause chaos. And then -- so that's my main argument against doing it through trade treaties.

Too, if we mix it up with trade, because people have altruistic reasons -- there are some union leaders I know who are altruistic. But there are a whole lot of people who are also concerned about their competition, right?

As soon as you have these two things going together, you're devaluing the altruistic parts. See, I go around the world and a lot of people say, oh, this is being done because they're worried about competition.

Well, when I want to do something on labor rights, I want to be able to (use insurance ?) where I don't get that kind of cynical response on refusal to go along. Because if we do that, then we will have been using, again, a stick. And what worries me -- I'm a Democrat -- and what worries me is that if the --

We have the same -- we are all Americans and we want to use the clout whenever we can. Nobody wants to -- (inaudible) --other people when they have power. And so the Democrats want to -- while they condemn Bush, et cetera, for unilateralism, this is like unilateralism as far as the other countries are concerned.

They object to our forcing things on them. Persuading them, financing their NGOs, getting it from the groundswell -- and getting their governments to also then move cooperatively with us. So there's a whole lot of -- I've written hundreds of pages on this, so I'll just refer to that.

But -- to give you the flavor that it is not really -- I think other -- (inaudible) -- nations, particularly after Jimmy Carter, when you -- human rights have become important. We do want to pay attention to that. And labor standards are part of -- labor rights and so on.

Too often you fear the phrase "labor and human rights," as if labor were some robot or something. You know, labor is also human, so human rights should include labor rights.

ZEDILLO: (Off mike.)

QUESTIONER: Bob (Hastert ?) from American University.

ZEDILLO: And then Marsha (sp).

QUESTIONER: Two questions, actually, for both of you. Jagdish, I want you to give a little time for Ernesto to answer as well, okay?

BHAGWATI: No, I'll let --

ZEDILLO: That's not my role.

(Cross talk.)

QUESTIONER: Because the questions really mesh with both of you.

The first question is how are these preferential trade agreements really implemented, not just for industrialized countries? Mexico has 35 PTAs. What happens at the developing-country level when you have 35 different agreements? What happens at the customs area?

One of the reasons for free trade is, as President Zedillo knows very well, was to eliminate a source of corruption at the border.

ZEDILLO: (Off mike.)

QUESTIONER: But if you have 35 different agreements that are just free trade, nevermind with those that are not, does that offer a new opportunity for corruption or, at least, inefficiency?

And the second question is all these preferential trade agreements are not equal. They are quite different.


QUESTIONER: And certainly North America stands out as something intermediate from most of the agreements and the European Union on the other hand.

And the question is aren't there whole sets of challenges, economic and social challenges, that are almost post-trade, that offer groups of countries a chance to address them more effectively than if they're acting on their own?

North America, in effect, stopped right now with just trade, but there is a wide range of challenges -- social challenges, infrastructure, transportation, regulatory -- that the European Union have been struggling with and that other smaller PTAs could deal with as well.

Which other -- what are those challenges? Are there not some good reasons for PTAs?

BHAGWATI: PTAs include the trade option, and -- (inaudible) -- come to mind -- (inaudible). Okay? That's what free trade agreements do.

Go back to President Kennedy's time. There was a Kennedy round of multilateral trade negotiations, and the -- (inaudible) -- candidates' -- position was that when it came to trade liberalization, we were going to be in Geneva. We were going to be MFN.

But at the same time -- (inaudible) -- for progress in the (OPA ?) -- and in South America was -- (inaudible) -- and lots of people there go for security, investment, democracy, what have you. They are our neighbors. And if you -- neighbors will, in fact, collaborate on a variety of things.

So then he had a kind of two-part policy, okay? So regionalism makes sense. If we go back to David Hume and his concentric circles -- we get nuclear family, extended family, then your borough or whatever, and then your city, then your state and then your country and then -- so on. So you have concentric circles of empathy.

And so clearly -- I mean, there's no question in my mind that you want to go with neighbors on a variety of things. But the only question was if that design should also include trade.

And I think that if you start muddling it up with trade, it's going to create many of the issues which I've been worried about and which I write about in the book.

So I think I would go back to the old Kennedy model and say, look. Regionalism certainly makes a lot of sense. There is absolutely every reason in the world for the U.S. historically and geographically to be interested in Latin America, just like the Japanese are interested in Asia. Though Asia may not be interested in Japan, because of what they did in the Second World War.

But the point is, it is part of its neighborhood, and it does make some sense. So I think my response would be you are right. That's the way we want to go.

As for having 35 FTAs and corruption, I agree with you. Having -- it's like -- somebody having 35 beds to lie on. It creates problems, as you know. (Chuckles.) I'm just thinking about it -- not personal experience.

And so in the same way, if you've got 35 countries to look after, that's going to cause diversion of energy. And certainly sometimes professors are asked -- Ernesto is also a professor -- where should I send my child to? Which occupation?

Well, the -- (inaudible) -- service might not be a bad one. (Laughter.) He or she will make tons of money by simply assigning the goods to an appropriate source -- (inaudible) --tariff.

ZEDILLO: Marsha.

QUESTIONER: (Off mike.)

ZEDILLO: I agree with on what?

(Response off mike.)

QUESTIONER: Marsha Eckles (sp) From Howard University Law School.

I have a question of whether -- I think from your answer you're saying all PTAs are contrary to the notions of open trade. There have been some discussions recently about encouraging some groups of developing countries to cooperate among themselves, including in the trade area. So in Africa, maybe small -- (inaudible) -- developing states.

So do you have the same feelings towards those types of groupings among countries that are smaller and not as developed as a Mexico or even a Colombia?

BHAGWATI: Well, just two very quick reactions. One is when it's all among developing countries, we don't go through Article 24, which has some disciplines, as you lawyers call it, and some rules. They're not effectively enforced, but at least there's an attempt at having some rules.

When it comes to developing countries, we can go under the enabling clause. The greatest (part ?) of the special dispensation we gave to developing countries. So there is no discipline at all there.

And second, cut something -- an import tariff on something you want to export to me by 5 percent. You can cut something else on my export by 10 percent. There's no obligation to go -- (inaudible) -- hundred; there's no obligation to include a lot of commodities -- it's just free-for-all.

Celso Amorim was a wonderful, brilliant foreign minister of Brazil and he was head of the G-77 and he's a professor of international law and -- a very, very smart man. And we were on the Sutherland Commission report -- and actually, I must say, most of the people didn't know there was something called the enabling clause. Everybody thought everybody had to be under Article 24. And finally (Amorim ?) brought it up.

And so I knew vaguely about that, but I'd not focused on it so much. And everybody was astonished that the developing countries could do anything to themselves without any constraint at all -- no discipline, free-for-all, like freestyle wrestling or something.

And so I asked -- how can you -- don't you want some discipline, even for the developing countries? And he said the usual phrases, we need policy space. And I was being mischievous and I said -- (inaudible) -- did you hear about the guy who shot himself in the foot and when he was asked why did you do it, he said I was exercising my policy space. (Laughs.)

So I think we have to be very careful what we do among the developing countries. One good thing about the thing -- (inaudible) -- is that it doesn't really go into all these trade-unrelated issues.

I mean, it's really about trade. But on the other hand, it does trade in a most incredible way, so you could really be doing crazy things.

I think there I would just say there have to be -- you have to look at each specific case. Don't just assume that because it is something where you're having a regional partnership or something it therefore is good for you.

And in fact, some of the studies I've seen of these developing countries' chaotic PTAs or FTAs -- in fact, they're not even FTAs, if free trade agreements mean you go (actively ?) to a zero. Here there is no such condition required, if it's just a trade liberalizing preferential agreement, all right? But it's not -- (inaudible).

(Cross talk.)

There are about 32 right now, I think.

QUESTIONER: Hi. I'm Steven Schrock (ph) and I think you did a brilliant job in talking about -- the troubles in the overlays in all the PTAs.

One question I had was that your solution talking about going through MFN, particularly as post-World War II because of the great of you and others, tariff rates have become much less of an important issue for a lot of business leaders.

And the FTAs have been an avenue for injecting things like intellectual property rights investments that you say are -- the results of lobbies. But also as tariffs were earlier in the interests of lobbies, they're very much in the interest of globalized corporate entities and others.

If you see the WTO, which has only tentatively gone on this -- in trade-related areas and kind of the demise of PTAs and regional players being blocked by --


QUESTIONER: -- Brazil and others, how do you see advancing other rules of the road for a globalized society in the event of this that are very related to trade but may not fit the current mandates of the WTO?

BHAGWATI: You raised intellectual property, when I -- I do believe that what (we've built in ?), it's too much. And lots of people feel that the lobbies that worry about raising it more and more are overdoing it. And in fact -- new works --

People have to stand on other people's shoulders, and if we don't allow them to do so, then they will not be able to develop new ideas and so on. There's some optimum here.

The real question is should we have put that into the WTO? Because we wanted it, and -- I believe in the positive -- some where -- (inaudible) -- them total freedom to steal, as it were.

We put it into the WTO because the IP lobby -- by lobby, in this town a lobby is not a bad word. So IP lobby basically wanted to shove it into the WTO because you have sanctions, right? If you violate an IP agreement, if you do it it's (dubbed ?) WIPO, which is the World Intellectual Property -- there are no teeth in it. That was the worry. So we shoved it in.

So now, today, the WTO is tripod. One is the original GATT; the others, a general agreement on trade and services, which is also trade; and then the third one is a strange thing called TRIPS. It sounds wonderful, like you're going to the Riviera or something. But it's Trade-Related Intellectual Property.

I have nothing about -- against intellectual property, but by shoving in the words "trade related," they made it a trade issue. Now, always we're interested with trade -- (inaudible).

Now everybody else wants to -- this is a tripod, and my fear is that it's turning into a centipede, because everybody wants to grow their own legs and try and get their issue into the --

I think their model's like Kyoto, with standalone treaties on global warming, climate change. We can do that. We could have -- if we didn't like the WIPO, we could have just gone for something like that with trade sanctions negotiated as exceptions to the WTO.

Well, I think rather than corrupt an institution just for one particular issue, which is really -- a matter of -- (inaudible) -- and turning WTO into a kind of a slum landlord or something who is collecting royalty payments.

We didn't need to do that. It was a hasty solution imposed -- ultimately everybody gave up because we wanted to bring the wretched round to a close. And we were just not able to do that. And the U.S. --

So we -- yes, we won IP, but this is the wrong place and it led to a precedent where everybody else wants to do their own thing and shove it in by just working on the USTR. And the USTR, we are living in a country where you have to be responsive to your constituencies. It's part of our democratic setup.

And somebody says that -- I don't know who invented this witticism, but it was in America if you're a congressman and if your constituents want -- are cannibals, you'll have to supply a missionary for breakfast. (Chuckles.) You have to respond, and therefore it was inevitable -- but in the end, people gave up.

But I think it was a wrong decision, in my opinion. People didn't understand the systemic impact on the WTO.

ZEDILLO: You -- (off mike).

QUESTIONER: (Off mike.)

(Cross talk.)

BHAGWATI: Yeah, hi. How are you?

QUESTIONER: Paula Stern.

BHAGWATI: Yeah, I know.

QUESTIONER: The Stern Group.

I wonder if you would, both of y'all, address the concerns that both have that if the WTO is dysfunctional and can't get the Doha Round closed, that it bodes ill for any efforts, in terms of global climate change and other global issues that really do require some institutional approach.

So I know you talked about the Herblock cartoon.

BHAGWATI: Cartoon, yeah.

QUESTIONER: That was kind of in the past.


QUESTIONER: Now I'm thinking of other global challenges, and what do we do? Is the WTO a good pattern that we should try to exercise for global climate change, or is it a doomed one?

BHAGWATI: I think there were two questions. The first one was whether the -- if WTO -- if the Doha Round, I guess, didn't succeed, would that undermine our efforts at doing a climate change treaty?

I think the public support for doing something on climate change is a much greater one for the moment, at least as far as one can make out, than there is for trade.

And then also many people have gone around saying -- and I think incorrectly, in my view -- there's very little in this to be gained. Actually, if you look at it in some depth, there's quite a lot has been accomplished and a lot of countries are actually keen. And many of the African countries and the LDCs, the least developed countries, were actually very upset that the last time -- you know, we went away without signing on. And India came under a lot of criticism for that.

And so there is more there, but we have kind of undercut ourselves -- and I won't name any specific people -- by going around saying, you know, there's just not -- nothing there, that there's very little there.

And I think that means even among the -- (inaudible) -- support might be less, people who read this kind of stuff, and at the general level there's so much anxiety and people blame it all the time on trade rather than on -- (inaudible) -- negative. So I would say really on things like climate change there's no peril or implication.

We -- now, climate change has its own problems which are very considerable, actually -- whether we'll be able to bring India and China on board and, you know, what are the conditions under which we do that. That's another ballgame, actually.

ZEDILLO: But you are overlooking a very evident connection. It is now the official position of Europe that they would like to see the multilateral trading system playing these games, in the sense that those countries that don't come on board should be subject to --

BHAGWATI: Sanctions.

ZEDILLO: -- to -- well, to tariffs as a function of the carbon content of the product.

BHAGWATI: Right. Right.

ZEDILLO: So there is another -- (inaudible) -- light there in the horizon, unfortunately.

BHAGWATI: And it's sort of ironic --

(Cross talk.)

ZEDILLO: But let us take the last question here. Unfortunately, we cannot take all the questions.

QUESTIONER: -- (off mike) -- the chart. Irving Williams from the U.S. International Trade Commission.

I was wondering, in thinking about your argument and also thinking about the importance of development and getting development, one of the things -- the benefits of joining the WTO for developing countries that can make itself more competitive, I guess, through economic reforms and customs reform and all those things.

If a country's already in the WTO and it still needs that incentive, doing an FTA with the U.S. does offer them -- I mean, in a number of our studies we've seen countries come in and say, well we -- it's economic leaderships that we want. You know, we signed the FTA with the U.S. and we negotiated because we need to do economic reforms.

And you seem like you sort of totally dismissed that. And so --

(Cross talk.)

QUESTIONER: -- you might think that about also with IFA agreements that the E.U. --

BHAGWATI: Maybe he should talk about it, because that argument, when it first came up in the NAFTA contracts, right? I mean, the ideal is -- I'm a bit skeptical of that, but let's let President Zedillo have a go.

ZEDILLO: I think that if our president at the time had gone to the Mexican people and say I'm doing NAFTA because we need to make reforms, I think it would have been a disaster, a political disaster.

I think his argument was very straightforward and economic. You know, we need to be -- we need to grow, we need to export, we are next to the biggest market in the world and I want to have better market access for Mexican exports.

All these political arguments that was an instrument to lock -- reforms. It's not -- I mean, it was never a subject, really. So I don't find it very persuasive. I think it was very, you know, mercantilist interests. We want market access, we have already taken the route of going for opening markets and said we want to have preferential access to the U.S. market. We believe we deserve that for many reasons, and let's go after that.

QUESTIONER: What are some of the reforms that Mexico made to join the -- to join the GATT at the time?

ZEDILLO: Well, that was the GATT, in '85 --

QUESTIONER: Yeah, but that laid the foundation, because you'd never have done NAFTA if you hadn't done that.

(Cross talk.)

ZEDILLO: Well -- I think we did, you know. And this is something that has not been really (written ?). And every time I see all these discussions about the Washington consensus and so on, I really laugh at it because it was only after I stopped being president that I heard for the first time this term. I was going to hire John Williamson for the financial -- for development, and he sent me his CD, you know. And he says I am the author of the term. (Laughter.)

(Cross talk.)

ZEDILLO: This was in 2001. And I had to call a fellow at the Bank of Mexico, and said, you know, one of the things that John is saying that he did is to invent this term of Washington consensus. And this was when, I think, Washington consensus, I think it was already passe. So this is ridiculous. I mean, we did the reforms because we were against the war.

BHAGWATI: Exactly.

ZEDILLO: Really against the war. We had such a macroeconomic mess.

(Cross talk.)

ZEDILLO: That's why the reformists were able, or we were able to win it, because we were aware -- against the war because the -- (inaudible) -- didn't have any other option but going -- serious about doing reforms.

BHAGWATI: (Inaudible) -- interlocutory reform which has made them successful.


BHAGWATI: And then you want -- then you'll have a whole -- it's like in India, the '91 -- post-'91 reforms that produced such enormous results that nobody will wonder what (chuckles) turned them back.

ZEDILLO: Well, with that, unfortunately, we have to finish this session. But I want to thank again Professor Bhagwati for enlightening us --

BHAGWATI: Thank you.

ZEDILLO: -- with a new -- (inaudible). (Applause.) Probably, there will be many more coming.

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