Trade and Global Public Goods:

> Dossier The breakdown of the World Trade Organization (WTO) ministerial conferences in Seattle and Cancun and the difficulties of the WTO members to agree on a Development Agenda in Doha highlighted the increasing NorthSouth cleavages among WTO members on how to ensure that international trade rules become a global public good (GPG) with a fair distribution of its benefits. Although multilateral trade negotiations have previously witnessed deadlock and periods of acrimony, the expanded WTO mandate and negotiating agenda has introduced an unprecedented level of complexity in the trade regime that rendered consensus decision-making in the WTO more intricate. On the other hand, however, such an expanded role to monitor and regulate a wide range of trade-related matters and increased country membership offer further grounds to consider the multilateral trading system a GPG. Lucian Cernat*

Trade and Global Public Goods: the unfinished agenda

According to various estimates, most of the expected gains from a new multilateral round of trade liberalisation accruing to African and Latin American countries would come from the elimination of tariff peaks and escalation on food and processed agriculture.

The main argument for trade as a GPG is that the benefits stemming from WTO membership are non-excludable and non-rival 1. Moreover, thanks to its basic principle of nondiscrimination, the same level of benefit is available to all members, even though not everybody derives the same utility from membership. This last point is a crucial element in the debate about the fairness of the global trading system. The purpose of this article is to suggest that the multilateral trading system has shown a limited capacity to create global public goods and that the expansion of such goods, including concerted approaches to addressing remaining trade-related global public “bads”, should become a major priority for the current WTO negotiations. The unfinished trade-related GPG agenda The relationship of developing countries with the WTO system has been at the centre of a serious debate since the failed WTO Third Ministerial Meeting in Seattle in 1999. Since the end of the Uruguay Round, developing countries have expressed considerable concern about the implementation of the WTO agreements. On the one hand, market access gains in developed countries’ markets did not materialize as expected. In agriculture, the process of tarification of nontariff measures aggravated to some extent the phenomena of tariff peaks and tariff escalation and the widespread use of tariffquotas and specific tariffs contributed to keep low the degree of transparency of agricultural protection 2. Moreover, some of the expected gains from the removal of protection in textiles and clothing were offset by the use of anti-dumping duties and spe-

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cial safeguards. On the other hand, while many developing countries extended tariff bindings and lowered bound MFN (Most-Favoured-Nation) tariffs on merchandise trade after the Uruguay Round, their applied rates remained in many cases lower than the new bound levels, generating few computable welfare gains3. Concerning the new issues of trade in services, investment and intellectual property rights, the commitments resulting from the Uruguay Round were often poorly understood by developing countries and their implementation made difficult by the lack of institutional and technical capacity 4. Overall, the significant economic gains that the Uruguay Round should have brought to the developing countries according to estimates by scholars and international organisations simply never showed up. This has led to an uneven distribution of trade gains, with many developing countries unable to avail themselves of the trade-related GPGs that the WTO rules were supposed to offer. As with all goods, private and public, the multilateral trade regime is valuable only to the extent that it generates utility for its providers and users. Growing concern about the welfare effects of multilateral negotiations on the different actors and stakeholders in trade was behind tensions expressed in Seattle, Doha and Cancun related to the WTO regime. One of the most challenging tasks for the Doha Ministerial Meeting was to ensure that the concerns of developing countries were reflected in the negotiating mandates, and in the area of market access, the texts agreed in Doha provided an opportunity to improve developing countries’ effective participation in international trade. In response to the demands of developing countries,

there was agreement in Doha on the need to reduce not only the average level of merchandise tariffs but also the distortions brought about by tariff peaks and tariff escalation. In spite of the now fairly low average levels of MFN protection in major developed markets, there are biases against exports of interest to developing countries that can be fully understood only by analysing the structure of tariffs at a very disaggregated level. MFN tariff peaks in some processed agriculture and food categories can be so high as to completely displace exports from developing countries in the absence of preferential market access 5. Likewise, in textiles and clothing and some low-medium technology manufactures, the share of MFN domestic tariff peaks in several OECD countries is remarkably high. Finally, the structure of tariffs tend to escalate with the level of processing in almost all major world markets, a feature that may hamper the transition of developing countries’ exports towards products with higher levels of value added.

Challenges ahead: complementary GPGs or global public bads? The above discussion highlighted that trade-related GPGs need to be based on principles, norms, rules, and procedures through which an international regime can be created and a level-playing field maintained between developed and developing countries. As the global trade regime gathers increasing institutional capacity, the trade-based governance system should be a collective construction in which developing countries make a substantial contribution. Nevertheless, despite an expanding WTO agenda, global governance is supplied in suboptimal quantities and solutions to many global problems continue to rely on constrained national policies. To illustrate this, take the case of the trade and competition nexus. Competition policy has the characteristics of a public good: the benefits that competition law enforcement provides to consumers and economic agents are often indivisible and nonexclusionary. As with other policies, these characteristics make the case for a multilateral framework on competition, as a GPG. As “traditional” barriers to global commerce and investment have been reduced or eliminated it has become increasingly clear that international anti-competitive private business practices can in fact be more damaging to consumers worldwide than traditional governmental barriers. A number of studies show that international cartels, abuses of dominance by multinational firms (including exclusive distribution channels of such firms) and mega-mergers are able to distort prices and hurt consumers and weaker firms in developing countries to the advantage of dominant firms or cartel members, which can then reap monopolistic rents. But national competition

laws (where they exist) often lack the necessary extraterritorial reach to counter such negative externalities stemming from increased globalisation. Hence, despite the stated objectives of competition policies in many developing countries to deliver various public goods (such as consumer protection, fair and equitable prices, raising living standards) there is a growing recognition that without some form of international cooperation in this area it may be particularly difficult for small, developing countries to benefit from such public goods. Among the wide set of policy “tools” with which to address such impediments, competition policy is therefore proposed as a “new” international issue. However, how to make sure that international cooperation on competition policy will effectively address such issues is far from clear. Moreover, abuse of dominance by large multinational companies affects developing countries disproportionately. Developing countries therefore have a stake in a global competition law framework. Yet in Cancun, rightly or wrongly, a large number of developing countries opposed negotiations on the Singapore issues, including competition policy, fearing that WTO rules on these areas could become TRIPS-like agreements with negative impacts on their development prospects. It remains to be seen whether some developing countries with a more developed competition law regime would consider it appropriate to articulate clearer proposals at multilateral level on trade and competition policy linkages that would take into account the concerns of developing countries. Trade and competition policy is a case where global governance is in short supply. In contrast, in other areas governance structures seem to be in excess supply. One such area is regionalism, where preferences of nation states in search of their commercial and economic interests have led to the proliferation of alternative institutional arrangements to GPGs provided at multilateral level. The “spaghetti bowl” regionalism is a reflection of the need to complement the multilateral trading rules and to move towards greater interdependence. In this sense, regionalism has maintained a certain amount of competition among various institutional arrangements for a more effective provision of international public goods. This fact downplays the potential negative effects of the “spaghetti bowl” on trade-related GPGs and the multilateral trading system and emphasises the potential complementarities between regional trade agreements (RTAs) and the multilateral trading system. Partly as a result of this process, in recent years, both multilateralism and regionalism evolved towards integration involving the provision of “beyond the border” public goods. Integration has now become much deeper, more multifaceted and multi-sectoral, encompassing a wide range of economic and other political objectives 6. New RTAs place considerable emphasis on liberalisation of services, investments and labour markets, government procurement, strengthening of technological and scientific cooperation, environment, common competition policies or monetary and financial integration. Yet, whether the formation of an ambitious RTA will

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> GPGs

complement the existing trade-related GPGs at multilateral level is still unclear. Both the multilateral trading rules and regional agreements still contain a number of loopholes that may lead to the re-emergence of protectionist actions and other “public bads” against RTA partners or third countries. Some empirical evidence, however, suggests that a number of RTAs, including South-South agreements, produced trade-related public goods that are non-exclusive 7 . What these findings suggest is that even though some of these regional arrangements faced implementation problems and delays, the formation of these RTAs succeeded in reducing certain non-negligible “public bads” such as high transport costs, time-consuming border formalities, heterogeneous technical or health standards. Eliminating such regional “public bads” implies no welfare loss for members since there are no tariff revenues forgone and in certain cases they may lead to positive externalities for non-members.

Conclusions The WTO meetings in Seattle and Cancun and the growing backlash against globalisation indicate that the future of the trade regime rests on a more equitable distribution of gains from trade between and within countries. For developing countries the development impact of trade is a primary concern. Hence the provision of this global public good depends crucially on striking a better balance

The multilateral trading system has shown a limited capacity to create global public goods, and many developing countries have been unable to avail of the trade-related GPGs that the WTO rules were supposed to offer. The expansion of trade-related GPGs – including addressing trade-related global public “bads” – should become a major priority for the current WTO negotiations.

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between the interests of developed and developing countries. Trade-related GPGs are best provided through more participatory decision-making to alleviate the criticism that the current trade rules are unfair to poorer countries. Developing countries need to strengthen their capacity to assess the impact of multilateral trade negotiations, as errors can have costs that they can ill afford. The ways in which the multilateral trading system could provide more fairly distributed GPGs and better contribute to economic development remains the subject of considerable debate, although today there is increased convergence on the longer-term aim of progressive liberalisation and the need for accompanying institutional reforms at national and multilateral level. While the long-term pursuit of freer trade as a GPG seems to have become widely accepted, concern has been expressed about the short-term effects of liberalisation and the costs of implementation of WTO commitments. The main areas of concern relate to the relative importance of different elements of national and multilateral governance structures and the timing and sequencing of their implementation. This has led to greater emphasis being devoted to institution and capacity building as well as to the removal of supply-side constraints. In a similar vein, the view has been expressed that developing countries need “policy space” to pursue industrialisation policies that are appropriate to their stage of development. This means establishing a realistic timetable, making estimates of the costs of implementation, and funding technical assistance efforts, structural adjustment programmes, and social safety nets in countries that could be negatively affected by the negotiated outcome. ■ * The author is an economist with the UNCTAD's Division on International Trade.The opinions expressed in this paper are those of the author and do not necessarily reflect the views of UNCTAD. 1. For a comprehensive discussion of this point see, for instance,Mendoza,R. U. 2003."The Multilateral Trade Regime:A Global Public Good for All?",in Inge Kaul, Pedro Conceição,Katell Le Goulven and Ronald U. Mendoza,eds., Providing Global Public Goods:Managing Globalization. New York:Oxford University Press. 2. Hathaway, D. and M.Ingco 1996.“Agricultural Liberalization and the Uruguay Round”, in W. Martin and L.A.Winters (eds),The Uruguay Round and the Developing Countries,Cambridge University Press,New York. 3. Safadi,R.and S.Laird 1996.“The Uruguay Round Agreements:Impact on Developing Countries”,World Development,24,No.7,1223-1242. 4. Stiglitz, J. E.2000.“Two Principles for the Next Round or, How to Bring De veloping Countries in from the Cold”,The World Economy, 23,No.4,437-453;Rodrik, D. 2001.The Global Governance of Trade as if De velopment Really Mattered,Ne w York:UNDP. 5. See UNCTAD 2003.Back to Basics:Market Access Issues in the Doha Agenda,New York and Geneva:UNCTAD. 6. Bora,B.and C. Findlay 1996.Regional integration and the Asia-Pacific,Oxford University Press,Melbourne. Cernat,L.and S.Laird 2003.“North,South,East,West:What’s best? Modern RTAs and their Implications for the Stability of Trade Policy”,Credit Research Paper No.3/11,Centre for Research in Economic De velopment and International Trade,University of Nottingham. 7. Cernat,L.2001.“Assessing Regional Trade Arrangements:Are South-South RTAs More Trade Diverting?”, Policy Issues in International Trade and Commodities Study Series no.16, New York and Geneva:UNCTAD.