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TUESDAY 4 FEBRUARY 2003 __________ Members present: Tony Baldry, in the Chair __________ Memorandum submitted by the Department for International Development, Department of Trade and Industry, Department for Environment and Rural Affairs and the Foreign and Commonwealth Office Examination of Witnesses PROFESSOR ADRIAN WOOD, Chief Economist, Department for International Development (DFID), DR ELAINE DRAGE, Director for Trade and Development, Europe and World Trade Directorate, Department of Trade and Industry (DTI) and MR IAN NEWTON, Head of Trade Policy Unit, European Union International Division, Department for Environment and Rural Affairs (DEFRA), examined. Chairman
(Professor Wood) We shall give it a try. (Dr Drage) May I ask my colleague from DFID just to do a very short introduction. I know you do not like long introductions. (Professor Wood) I should like to say that my Secretary of State very much welcomes this inquiry and she very much looks forward to appearing before the Committee at a later date, so indeed does Patricia Hewitt, her Cabinet colleague. I should perhaps explain that I am Chief Economist in DFID. Elaine is the Director for Trade and Development in the Europe and World Trade Directorate of the DTI. She works both on the Doha development agenda and on the EU's bilateral agreements with developing countries. Ian Newton from DEFRA is from their international trade team and his particular area of experience is in the WTO agreement on agriculture. (Dr Drage) May I set you a starter for ten? This is the government's globalisation White Paper from two years' ago. It is a very thorough survey, agreed by all the key departments involved in development, as to what this government wants to get out of trade and development. I would recommend that to you very strongly; you have probably all read it already. (Dr Drage) And for officials too. That remains the basis of the government's policy. Put briefly: what does the government want to get out of the development round? We are very conscious that to reduce poverty in many developing countries around the world it is important that they increase trade and that means increasing access to the developed countries of the world in particular. That is very true in the agriculture area, which no doubt my colleague from DEFRA will say more on. What we want to do there, in line with the commitments in the Doha development agenda, is to see that export subsidies are reduced with a view to phasing out - to quote the immortal wording - that domestic subsidies are reduced and that tariffs are reduced, in terms of the UK's use, as significantly as we possibly can get out of this round to increase access as much as possible for developing countries. That is clearly a most important target, because for many developing countries agricultural exports are the prime thing they are likely to benefit from first with any trade opening. We must not forget that there are still targets also in terms of manufactured goods and services. We want to see tariffs on those reduced, we want to see tariff peaks reduced and a lot of those tariff peaks are in areas where there is potentially comparative advantage for developing countries like textiles, clothing, footwear, steel on the manufactured goods side and a lot of agricultural products. We are very concerned to see that the issues of tariff escalation are dealt with which means that the more a primary product has added value to it the higher the tariff gets and that is a key factor in preventing diversification, which is also important for developing countries trying to grow their way out of poverty. That is the key basis of agriculture and tariffs. There is a whole range of other issues, to do with intellectual property. The government is very keen, like the rest of the EU, to see that the agenda is broadened, so that the so-called new issues of investment, competition, trade facilitation, government procurement, are negotiated on more actively after Cancun and that is because we believe that for all those four issues there are considerable potential gains for developing countries. It will mean they have more transparent and stable systems which will attract in investment, which will ensure the better that the benefits of trade liberalisation do trickle down within their economies and that is why the government will continue to argue, not always with a receptive audience, I have to say, that these four issues are worth taking forward in terms of the round. I am sure I have forgotten something but those are the main facts. (Professor Wood) Yes, I would. Perhaps for the benefit of those sitting behind me, let me just say that the question is: why does UK trade policy not include as an objective "To increase the ability of developing countries to make genuine and well-informed policy choices in the sphere of trade"? The answer is that I think it does. We do not actually use that particular form of words anywhere, but a very important plank of our policies and activities is what we call trade capacity building. In sheer financial terms we made a commitment in the White Paper to double the amount that we were going to put into this; in effect over the period 1998-2004 to put £45 million into trade capacity building initiatives of one kind or another. We have already committed about £38 million, so we have made quite a lot of headway in this direction. This money has gone partly into multilateral initiatives, of which probably the most significant one is the Integrated Framework, which I can tell you more about if you like, but has also gone into a wide range of other activities, including important activities in Geneva such as the Centre for International Trade, Information and Law, which we support. We see this as a very, very important objective, not just in terms of negotiations in Geneva, but also in terms of developing countries integrating, thinking about trade policy into their own development strategies. One of the features of the Integrated Framework, one of the respects in which it is an integrating framework, is that it encourages countries to think about how trade fits into their poverty reduction strategy. (Dr Drage) There is a very well-established mechanism for working together, not just the four departments you have listed of DFID, DEFRA, DTI and FCO, but our Treasury colleagues are also closely involved. Our Ministers meet in the EP Committee. A sub-group of EP is shortly to be set up which is going to monitor progress in the round even more closely and that would be meeting for the first time very shortly. At official level, for very many years, going back at least four or five I understand, there is something called the Trade Policy Group which is chaired by my Director General in DTI. This meets about every six weeks and takes papers on particular issues. That is the formal mechanism at which major issues are often decided. In addition to that, on particular topics, those of us in the particular network on the topic are in contact with each other on a daily basis through e-mail, through meetings. It is only if we cannot solve problems at official level that we bring our Ministers into it in accordance with normal government procedures. It works very smoothly and we know each other extremely well. We can disagree amicably and we can walk onto the next bit of business. (Professor Wood) I suppose really it is observation of the way in which developing countries are operating both in Geneva and in the sphere of international trade negotiations in terms of what they are doing in their own domestic policies. We were all extremely pleased at the role that developing countries played in the negotiations at Doha, which was a real step change from anything which had been seen previously and owed something to the capacity building which we and others had done to help them prepare for that. I should mention that if you are interested in knowing more about our trade capacity building work, we have a little pamphlet of three or four pages, which lists all the things we are doing and which I can give to members of the Committee. Chairman: We should be interested to see that. Mr Khabra (Professor Wood) You are quite right to emphasise that rich countries need to reform their own policies in order to enable poor countries to benefit fully from trade. Indeed one of our key objectives in the Doha round is to bring forward those sorts of changes in rich country policies. It would also be true to say though that even in the absence of changes in rich country policies, there is scope for developing countries to benefit from participation in world trade. We have seen a number of developing countries over the last three or four decades which, even in a flawed international trade system, have succeeded in making a lot of progress towards reducing poverty by expansion of exports and increased participation in world trade. Chairman (Professor Wood) Our international trade department has regular meetings with NGOs concerned with trade. These meetings are quite often addressed by ministers; the Secretary of State has played an active role in this. This is very good and frequent contact. Trade and development is certainly an area in which there are still a fair number of disagreements and precisely for that reason, we are very interested in talking as much as possible with our NGO colleagues and it would be fair to say that the areas of disagreement have actually shrunk over the last three or four years. (Dr Drage) It is not just DFID which rightly talks to NGOs, my ministers welcome the dialogue they too have. On a regular basis Baroness Symons chairs the Trade Consultative Policy Forum which meets every eight weeks or so. We sometimes discuss a specific topic and sometimes will range more generally, in addition to which NGOs come in and talk to officials on a regular basis. We welcome that dialogue as a contribution to our thinking. It is also an opportunity for us to inform NGOs in an informal way where we are in the round and what some of the constraints are, often on the objectives which we share. Mr Colman: May I say that it would be helpful, as this is a semi-public meeting, if members of this Committee could know when that schedule is taking place and if we had the time we were perhaps able to attend those meetings? I understand they are very detailed and could advance our knowledge of where the government's position is. Alistair Burt (Dr Drage) The way certainly the Department of Trade and Industry and I think the government more generally look at these issues is yes, you have to consider whether you have an important national issue, say if you are going to reduce tariffs on footwear, what the implications would be in the UK and for employment in certain areas of the UK. You need to take that into account and to balance it with the poverty reduction which might result in certain exporting countries, like Pakistan. It is for government and ministers to balance those interests in the same way that they do in a whole range of other policies. Yes, it is right and proper for the government to look at what the more narrow, domestic interests are on all these issues, but then they have to place it in the wider context and, equally, balance the short-term gains and losses with the longer-term gains and losses and not just look at the immediate issue. I know that is a point Patricia Hewitt made very strongly in a speech she made in Brussels last week, which members of the Committee will either have just had or will very shortly be having from my Secretary of State. (Mr Newton) The same goes for my department. We have an agenda for agriculture, but part of that agenda is focused on the implications for developing countries. If I might add, we also meet regularly with NGOs and we share the information we receive and impart to those NGOs with the other departments here represented. (Dr Drage) It is often a question not so much of the substance of the issue, but the tactics of how you get to an objective which is shared. Is it right to push and shove hard on EU policy at this point or is it better to wait? The same question goes to WTO. My experience over the last two and a half years, when I have had the privilege of doing this job, is that it is actually tactics which we disagree on rather than the substance of where we want to get. (Professor Wood) I would say that in so far as there is disagreement over substance, it comes back really to what Elaine was saying earlier about the need to strike balances between gains and losses and short-term and long-term considerations. Necessarily DFID is going to attach more weight to benefits for poor people in poor countries than other Whitehall departments. It is a matter of balance. I have been in DFID a relatively short time, two and a half years, and I have been very struck by the degree to which there is a shared view of a lot of these issues, much more so than I would have expected coming in from the outside. (Mr Newton) I am not sure whether the question was related to areas of disagreement with developing countries or within Europe or what? Chairman: Nuances between Whitehall departments. Alistair Burt (Mr Newton) For my part I can only add that I have never been in a job where I have had so much inter-relationship with other departments in Whitehall and it works very well. Chris McCafferty (Professor Wood) As you rightly say, gender is a key dimension of DFID policy. Most of the things which would be beneficial to women in the area of trade are really the same things which would be beneficial in other areas. When we are talking about trade, we are talking about international trade, but actually the great bulk of trade in the common sense of the word is actually within countries and enabling women to participate in production and commerce is very central. There has been a certain amount of analysis of the differential impact by gender of trade changes in developing countries, some research in which I personally have been involved. What comes out of that work, which really reinforces what I was saying before, is that there are very few distinctive things that you would want to do differently to support women in the context of thinking about international trade than simply thinking in terms of the context of domestic production of trade. (Dr Drage) Gender is an issue we perhaps have not thought enough about in the specifically trade policy sense. I went to see the National Commission on Women only yesterday to talk about it. We would acknowledge that when we published the consultation document on GATS three or four months ago now, we should have put a section in on the gender effect of that and that is an area where we need to think a bit more broadly about it. I would add of course that a disproportionate number of women and children are amongst the world's very poor, so actions which you take to relieve poverty should benefit women disproportionately. Chairman (Professor Wood) The UK Government has no formal model in the sense of a set of equations which are written down somewhere which people simulate from time to time. It does have a fairly well-defined analytical framework for thinking about it. I suppose you can really divide it into two parts: one is the impact of trade on growth, the aggregate per capita income growth in developing countries. The other is the degree to which growth in average per capita income translates into gains for poor people within those countries. Sometimes this distinction is not a very important one, because in very poor countries, most people are poor, so there is a very strong presumption that anything which accelerates growth is going to benefit quite a lot of poor people. Our view is that engagement in the world economy is good for growth, and the main long-run reason for believing this is that increased exposure to international trade provides channels through which flows from the global pool of knowledge flow into a country. A lot of developing countries are poor because they are technologically very backward. One of the most important channels in international technology transfer is actually international business linkages of one kind or another. Probably in the long run that is what we think is the main link between increased openness to trade and increased growth. Trade policy is part of what is needed to expand trade, but I would emphasise that it is only part of it. If you look at the reasons why, for example, many African countries are so little involved in world trade, it is not to do with trade policies in the ordinary sense, either in their countries or in other countries, but very inadequate transport infrastructure, very high transport costs. That is a very important component to think about in the policy context as well. The issue of the translation of growth into poverty reduction: there are only two dimensions to this. One is what does increased exposure to trade do to the distribution of income and equality? What we know from theory and evidence is the effects are very mixed. It depends very much on the country, on the particular set of resources it has, on its starting point in terms of level of development. On average the effect appears to be in neither one direction nor the other, but there is quite wide variance around that average. We understand some of the reasons why that nuance exists quite well, others we do not. I said there was a second dimension which it is very important to bear in mind, which is that even if the overall income distribution does not change the aggregate degree of inequality, beneath the surface of that unchanging inequality there is going to be a lot of turbulence. You could have a situation where you have gainers and losers who on average roughly cancel out in terms of numbers, so you do not see any impact, even in the distribution, on the degree of inequality. Nonetheless, there are losers as well as gainers, even if the gainers greatly outnumber the losers. That is something which is unavoidable. Development is all about change, change is all about very mixed effects and trade is one very important component of that. We do believe that we can do something to mitigate potential adverse effects on poor people both in the first sense I was talking about, increased inequality, and in the second sense of turbulence which causes losers. In particular, to use a phrase which comes out of the book by Alan Winters and others to which I referred in the evidence, "predict, pre-empt and protect". Before you do anything which is going to increase the exposure of a low income country to trade, try to predict what the impact is going to be on particular groups of poor people. It is not easy, but possible to make some headway. To pre-empt means try to take measures which mean that in advance you have already set in train policies and processes which will in particular enable groups of poor people who are potential losers to shift easily into other lines of activities. To protect is really development of a system of social protection which prevents those who, for one reason or another, cannot shift into other lines of activities, from suffering too badly. That is the philosophy. Mr Walter (Professor Wood) That is a very good way to put it actually. I was mentioning to Mr Khabra the gains which developing countries have experienced from trade and I particularly emphasised expansion of exports. Actually that is what it is about. Most poor people are poor because they do not produce very much. Expansion of exports associated with expansion of production is actually the way to make them better off. Increased liberalisation in the sense of increased access to imports can actually be quite helpful in that process because you need to import large quantities of producer goods in order to be able to expand production rapidly. Indeed many poor people gain from access to cheaper consumer goods of one kind and another. You are absolutely right that trade promotion is in a way a much better phrase than trade liberalisation in terms of encapsulating the philosophy of what we are trying to do. (Professor Wood) We are trying to tackle some of the barriers to exports in particular countries. One of the obstacles to involvement of African countries in trade is poor infrastructure. We encourage countries in their poverty reduction strategies to focus on reducing those barriers. Fundamentally we are simply trying to encourage expansion of production by encouraging countries to provide a better enabling environment for business. At the end of the day it is going to be expansion of private production which is going to create growth and lift countries out of poverty. We are trying to encourage poor countries to overcome a wide range of things which currently are discouraging investment in poor countries. That is fundamentally how we are going about it. (Dr Drage) I suspect you are also thinking about the issues of how we are using UK aid money to help grow entrepreneurship in a number of developing countries. I know one or two projects which DFID certainly have in South Africa and there is something going in Ghana. Things are happening on the ground in terms of growing the entrepreneurship. If you like, trade policy is about trying to open the door so that countries can export, but you need to grow that entrepreneurship to help them walk through that door and come into a better and richer world. (Dr Drage) That is a very important point. What often happens, if you look at the issue of green beans from Kenya, which you will find in many of the supermarkets you go into, is that you need to encourage partnerships with the big buyer in developed countries to assist producers in poor countries to cope with what are often rather high standards for health and safety, hygiene and packaging so they can take the opportunities of reduced tariff barriers. Addressing the non-tariff barriers is almost as important as addressing the tariff barriers in the context of the round. Mr Khabra (Professor Wood) India is a subject in which I personally am keenly interested and it is a country in which DFID is keenly interested because one third of the world's dollar-a-day poor are actually in India. The potential impact of trade liberalisation is very important to us. My own view is that actually what India needs most in order to reduce poverty is expansion of large-scale manufacturing for export in the same way that the East Asian countries have done. India has a potentially very strong comparative advantage in the production of garments, footwear and similar kinds of activities. What is striking about India is how incredibly small the formal manufacturing sector is. In the late 1990s, there were more unemployed manufacturing workers in China than there were employed manufacturing workers in India. India needs to do things which will cause tens of millions of people to move out of small-scale agriculture and small-scale non-agricultural activities into factories. The main things it needs to do are actually to improve its infrastructure and to reduce the bureaucracy which makes it very hard for Indian businessmen to do business abroad and for foreign businessmen to do business in India. Elaine was mentioning the role of, for example, UK supermarkets in sourcing green beans from Kenya, but actually if you look at labour-intensive manufactures like clothing and footwear, the key to success for low income countries is to get into international supply chains there as well. International buyers, for example of footwear, are very reluctant to engage with India. They would rather go to Vietnam, just because of the cost and difficulty of getting intermediate inputs into India and getting the final product out of India, particularly in any kind of just-in-time consumer quality oriented supply chain. Mr Colman (Professor Wood) The World Bank would be mortified at your description of them as pro-rich. They see their mission as being entirely pro-poor. There are no big differences in their modelling work in terms of the analytical frameworks or the approaches which are taken by the Bank as compared with UNCTAD or WTO. I know the UNCTAD people very well. A lot of the differences are differences in emphasis, in the interpretation of results. If you look at what numbers come out of this analysis in terms of particular countries or particular sectors and who gains and who loses through patterns of trade liberalisation, it is not particularly controversial. Everybody actually works around an increasingly widely-used international system of modelling called GTAP, which is a US-based network of modellers with models in virtually every country and most international organisations are plugged into the GTAP framework. One can take a particular set of modelled results and either look at the numbers from the half-full perspective or the half-empty perspective. Many of the differences between the UNCTAD interpretation and the World Bank interpretation boil down essentially to what kind of spin you put on the numbers which are coming out rather than any kind of fundamental difference in how they think the world works. Mr Battle (Professor Wood) The model has actually moved on in the last few years. There is increasing recognition that trade is one of a number of things which you would need to try to expand in order to tackle the problem of mass poverty in particular countries. The three other elements I would mention now fit in a much more balanced and much more appropriate way into the model: one is improvement of the business climate, the vital need just to expand investment, particularly in Africa where investment is incredibly low; another element is widespread distribution among the population of a country of access to assets such as education and land and credit and also access to markets is really crucial, particular groups of poor people are left out because of the problems of poor internal transport infrastructure. The fourth angle of this square is what I was emphasising before, social protection, the need to have something in place to help people who are losers. If you go back 15 years, a much more simplistic view was coming out of the World Bank, which was that trade policy reform was more or less sufficient to stimulate growth and poverty reduction. That view has changed. If you read what is coming out of the Bank now, and you read the way we put it in the White Paper, without a major fanfare or a change of label, the model has actually shifted in the kinds of directions you would think are good. (Dr Drage) I cannot remember who the quote is from but trade liberalisation is a necessary but not sufficient factor for poverty reduction. There need to be the other factors which Adrian has just explained. Chairman (Professor Wood) It is a point which has come out of this Committee earlier that insufficient analysis has been done of the effects of the Uruguay round. It is a fair point. What we still have is a large number of studies which were done during the Uruguay round of the potential impact on different groups of countries and particular sectors. What has not been done is a really systematic attempt to go back and see to what extent those predictions translated into reality and to what extent they did not. Part of the reason that evidence does not exist is that it is too soon; it takes a very long time for a lot of these effects to translate into practice. If you are talking about the changes in the structure of production which occur as a result of a change of trade policy, it might take a decade to work itself out, particularly in terms of the expansion of export activities. That is not to say no work is being done on this subject. The work which is being done is being done in the research community and probably the most important group of people working on this is actually the World Bank. DFID over the last five or six years put substantial money into the World Bank trade and research and capacity building effort, partly directed at that. Another thing we have done which you could interpret as a study of the impact of the Uruguay round, though not a statistical one, is the International Commission on Intellectual Property Rights which DFID funded. One of the most important and controversial elements of the Uruguay round was the TRIPS agreement. The White Paper recommended that we set up such a commission, we have done it and it has reported and the UK Government will be officially responding to it very soon. (Dr Drage) I endorse the point you have made about TRIPS. It is important to remember that in a number of areas, the Uruguay round did not actually change things, it froze things so that people could not go backwards. That is particularly true in terms of the Agreement on Agriculture, where agriculture was brought into the multi-lateral system of negotiation for the first time. You put it on the escalator, so to speak. It was equally true with the GATS. What countries did in their GATS commitments, which is a new Uruguay round agreement, was to bind what they were already doing, so there was no measurable change as a result of that Uruguay round commitment. In some areas you will in time be able to measure change. In other areas you will not, as a result of the Uruguay round. You need to differentiate between the different agreements. (Mr Newton) The important thing was that agriculture was brought into the world trading system for the first time by the Uruguay round and it set certain markers which it is now impossible to retreat from. We can only move forward from that and that is what the current negotiations within the context of the Doha round are concerned with and no doubt we shall come onto that shortly. (Mr Newton) The first thing I should like to say is that when you talk about substantial reduction in support for agriculture, we are really talking about substantial reduction in trade-distorting support because the CAP reform proposals will not actually reduce support, but they will shift the balance of that support. The degree to which it changes is difficult to say. We - we being the European Union - have submitted some proposals now to the WTO which call for tariff reductions of 36 per cent export subsidy reduction of 45 per cent domestic subsidy reductions of 55 per cent. That is as far as the European Union is able to go within its current CAP mandate. Clearly we are going to need to go further. The US and Cairns, two other big groups in the WTO negotiations, are looking for something far more substantial than that. They are talking about the abolition altogether of export refunds and maximum tariffs of perhaps 25 per cent. The result, hopefully, will be something somewhere in between, but I cannot really put a figure on what that substantial reduction is going to be. (Professor Wood) The short answer is that it has a very complicated impact and it does not lend itself to simple summary. There is no doubt that in aggregate developing countries will lose from the CAP, so when you do model simulations of the effect of CAP reform, developing countries gain in aggregate by numbers of the order of $25, $30, $40 billion a year. When you then start splitting up developing countries and looking at the impact on different groups, you find very varied effects. Many of the gains of reform are concentrated on middle income countries and if you look at the impact on low income countries it is much more varied. A lot of them stand to gain, but there are two kinds of potential losers we need to worry about: one is countries which enjoy preferential access to EU markets which would lose as a result of reform; the other is countries which are currently net food importers which would lose from a rise in world food prices as a reduction of the dumping of agricultural surpluses on world markets. In the case of food importing countries, again it is very complicated because you have to look at who within them is going to gain and lose. It may well be that a rise in world prices would provide a stronger incentive to production among poor farmers. It may well be that poor farmers would gain from a rise in food prices whereas more affluent urban workers would lose. It is very country-specific and on balance we are pretty convinced that even if you look at low income countries where the bulk of poor people are concentrated, that reform of the CAP would help to reduce poverty. Issue by issue and commodity by commodity, it varies from one country to another. (Professor Wood) We are not indifferent. We recognise that there is quite a number of developing countries, including low income ones, which are currently large-scale producers of particular agricultural commodities because of the preferential access they enjoy to the European market. Bananas are the most widely known case. The most striking in terms of some of the numbers is actually sugar where access to the European markets with very high sugar prices has provided an incentive for a country like Barbados to remain in sugar production, which would make very little economic sense in terms of the other activities they can engage in. That means that following any reform of the CAP which alters the structure of preferences or any other related trade reforms which alter the structure, we have to in some way assist these countries which are being led into producing uneconomic agricultural commodities to adjust. DFID have a very strong involvement in the Caribbean and one of the focuses of that over a long period of time has indeed been providing assistance, support, information, technical assistance, to enable farmers who are producers particularly of bananas to adjust and move into other activities. (Dr Drage) The issue of the balance between multi-lateral liberalisation and preferential access is a particularly difficult area. There is going to be a mid-term review of the sugar protocol to the Cotonou agreement. That is written into the Cotonou agreement and I am very conscious that there is a number of countries which are very heavily dependent upon sugar. We hope very much that there will be changes to the internal EU sugar regime. Commissioner Fischler is expected to produce proposals to reform the EU regime in about June of this year. The changes which will then happen in terms of the ACP countries will come out of that because if the internal EU price for sugar falls, which is what the government very much hopes will happen, it will become less worth while for some of the countries with preferential access to export to the EU than, say, to other places which may be more local to them. There was a study several years ago to look at how competitive in the world market a number of the sugar producing countries could be. That came to a conclusion that a number of them could well be productive and sell on the world market at world market prices because the EU internal prices are anywhere between two and three times the world market price. We are very conscious that this shift and this change will be difficult and it does need to be smooth for them and they need to be given assistance to do so. One way of doing that is to ensure that in the multi-lateral context tariffs are significantly reduced which will enable them to diversify to a greater degree into areas they probably cannot now because of the tariff structure. (Mr Newton) Elaine is absolutely right. What we need on CAP reform in this area is managed reform. The Commission are due to report on sugar in May/June this year. The current sugar regime is due to expire in 2006. If we were simply to abandon all our support for sugar overnight, it would not help the Caribbean countries or the African countries. The country which would benefit the most would be likely to be Brazil, which is a huge sugar producer. We need to do it in a managed way and that is what we are aiming at. (Dr Drage) Some of the LDCs under the Everything-But-Arms (EBA) agreement are beginning to make gains out of sugar, countries like Mozambique, which are now exporting to the EU where they could not before and the quantities they can export will go up. There is a very complicated trade-off between developing countries as well in a lot of these areas. (Mr Newton) First of all, it is probably true to say that the primary concern of the EU CAP reform is neither of these things. It is reform to meet internal EU consumer demand and to change the way the CAP operates in relation to the environment, rural and social development as well as to the budgetary implications of the CAP. Obviously it does have an impact on the wider world. CAP does not exist in isolation, despite what some people might prefer to think. That answers the first part of the question. The second part: will decoupling and modulation make the CAP WTO-compliant? At present the CAP is WTO-compliant, but it will certainly help to make it more WTO-compliant by shifting support away from trade distorting subsidies into what is colloquially known as green box subsidies, that is non-trade distorting or at best minimally trade distorting. That way it will also enable the EU to make a far more aggressive offer on liberalisation and to that sense decoupling and modulation will also make the CAP more development friendly. (Mr Newton) The primary purpose, as far as relations with developing countries go - and Adrian will correct me if he sees it differently - is to provide better market access for developing countries. That is certainly the message which comes across most clearly in the meetings which I attend regularly in Geneva. The developing countries want access to our markets and the ability to sell onto our markets. They would also like access to other markets where our subsidised exports tend to undercut them. Those two issues are perhaps the most important in terms of the development aspects of CAP reform. Alistair Burt (Mr Newton) I suppose most European countries have a concern for their own internal agricultural welfare, and rightly so. Some are more concerned than others about it. From a UK policy point of view, we see considerable benefit in promoting liberalisation of trade which will help not only our own producers and our own agri-industry, but also the industries and producers in developing countries as well. (Mr Newton) That is difficult to answer. You will no doubt have been following discussions on the WTO negotiations and the EU's input to those WTO negotiations in terms of its modalities and you will be well aware that the French in particular, for example, made it very difficult to get agreement on the paper which was eventually submitted. But they did agree in the end. In the final analysis, those countries which are what might loosely be termed the more protectionist countries within the CAP will come round to an agreement on agriculture. That is my hope and that is what I believe. I hope I am not proved wrong on that. It may not be everything the UK wants, but it will be a significant step, a substantial step, in the right direction. (Professor Wood) May I offer one bit of evidence. I think the fact that France and various other European countries are now mounting such an aggressive defence of the CAP is evidence that they feel that it is under threat. I think they sense, rightly, that the climate of opinion within Europe has shifted against the CAP and they need to resist this very, very strongly. That is why they have been so very vocal. That is my one bit of evidence, as it were, to support Ian's hope. (Dr Drage) May we add one point about the agreement on the CAP ceiling which has been to some degree misrepresented in the press as an absolute defeat for those who want to reform the CAP and bring it down? What it agreed was actually a cut in real terms in CAP ceilings over a period of seven or eight years and a cake which has to be shared between 25 countries not 15. That puts quite a lot of downward pressure on each of the regimes within the CAP and we believe was by no means the great defeat which some of the press held it as. It poses a real problem for those countries within the EU who have made a lot of money out of the CAP in its current structure. (Professor Wood) We have not had very much contact with them yet. If one had to guess, my guess anyway would probably be the same as your guess, which is that they would be more protectionist and less reformist. (Mr Newton) In the context of the agriculture negotiations in Geneva, I know that the European Commission, which negotiates on behalf of the EU 15 in total, has regular sessions with the new accessionary countries. Their main concern is that for the most part they are economies in transition to a market economy and that is something which underlies their approach to the negotiations at the moment. It is probably fair to say that development is not a major focus for them. Mr Walter (Mr Newton) I cannot deny that. Any subsidy is to a degree trade-distorting. We have to take things a step at a time and we have made quite considerable progress over the last decade on CAP reform, starting with the McSharry reforms in 1992. We are continuing to progress in that way. The proposals for decoupling in the current mid-term review, are very, very significant. We should like to see support made more degressive. Apart from the proposals for modulation, there is not much degressivity in the MTR proposals at the moment. At some stage that will happen, but in making our farm support and shifting it away from those which are blatantly production assisting to those which are more environmentally and socially friendly but which admittedly will make some contributions to the overheads of a farming business, we are making a big step in the right direction and I think that is the important thing to understand. I do not think in wider Europe that it would be politically possible to make such a major step as you would like to see in one go. Ann Clwyd (Mr Newton) That is happening to an extent already in so far as we have a budget ceiling imposed, which is now going to have to be split between 25 Member States instead of the original 15. Yes, the budgetary implications are going to have a major impact on the future of CAP reform. I am not here to defend the CAP, but I am trying to say that there have been some positive steps in the right direction and I think they are a bit more than you might suggest, if you will pardon me saying so. Mr Khabra (Mr Newton) There are signs already within France that they recognise the need for reform, that they cannot stand still. In certain areas of agriculture the French are well placed to benefit very well from a more liberalised market in agriculture. I am thinking particularly in the cereals sector, of which I have some experience. Yes, I think so, but they will no doubt be pulled along slowly. Mr Colman (Mr Newton) The short answer to that is that we are part of a Common Agricultural Policy and we are bound by common rules, so we cannot go it alone, even if we were to provide money to persuade farmers to quit the land, if that is what you are suggesting. Mr Colman: No, just make a direct payment. Continue living there and just pay the money. Chairman (Dr Drage) It is a little bit early to do that. It is not quite two years since Everything-But-Arms came into effect for all the areas, except bananas, sugar and rice, where there is a phasing in of access. We are also talking about the least developed countries in the world who have the least capacity to respond rapidly to changes in access. We do think there are one or two statistical signs and a report is due to come out from the World Bank very shortly looking at both EBA and AGOA. Certainly when it comes I shall make sure that the Committee is sent a copy. Just looking at odd statistics here and there, we can see that for the sugar producing countries who are LDCs, yes there are clearly some benefits starting to flow already. There are one or two very slight signs in other areas; we hope to have the start of some statistics in the not too distant future, but we are not expecting a radical change. Given the relative lack of capacity of LDCs it is going to be a slow growth thing. (Dr Drage) I think AGOA is structured extremely differently. When you actually look at AGOA, the area which is growth has been oil from Nigeria. People talk about AGOA boosting exports from Africa to the USA; a large amount is oil. There is a small area where there are textiles now being produced in Africa, but that is outdoor relief for the US textile industry. Slightly worryingly, when you look at the structure of AGOA, that depends on certain clauses in AGOA which are potentially subject to review and repeal by Congress in several years' time. We have some doubts. There are clearly some benefits flowing from AGOA, which are short term. Whether they are going to turn out to be long term, we really do not know. A lot of the benefits are in primary commodities which probably the Americans would have bought anyway. (Dr Drage) It is an extremely important and difficult area and in terms of phyto-sanitary standards one which causes concern to quite a number of developing countries, not just in Africa. It is not an area which is up for negotiation in the current WTO round. There are two things which the UK Government is seeking to do: one is that through the aid programme we are seeking to assist developing countries to meet the standards, so they actually can export, and that phyto-sanitary standards in particular do not act as a barrier even if the tariffs have come down already. The second thing we need to do is within Europe. We need to have a very critical look at whether new standards are needed, are they appropriate, what level of assessment has been done. Are we for example aiming to save one life in three years in the entire EU, but what might the effect be on lives in developing countries? A lot of that external look when the EU is drawing up phyto-sanitary standards is still not being done properly. It is a question of balance and they are very difficult issues when you are talking about risk assessment for health and safety standards; we recognise that. (Professor Wood) We ran a large international workshop on this subject about six months ago, where we had representatives from a lot of developing countries and from the EU. The object basically was to try to improve communication on this issue. We think that was helpful in addition to the more specific things we are doing. The other point I should like to make is that increasingly the private sector is setting standards which are in excess of those which are laid down by law and this is particularly true, in food, of supermarkets. That is a very, very difficult problem, because the supermarkets see their claims to health safety as a very important marketing tool. What, if anything, the UK Government can do about that is a very tricky issue. (Professor Wood) Part of it in general terms is what I was talking about earlier. The single most important plank of raising productive capacity is helping developing countries to remove obstacles to investment, particularly obstacles which arise from poor governance of various kinds. It is a very tricky issue. We are trying to do that across the board really. The gains in production that you will get in a wide range of sectors will enable this country to take advantage of better market access. The trade and poverty programme is ongoing. We are working in a range of countries. The programme is not really fully in operation yet. We have been working on it and we have put a certain amount of money into it; we are working with a range of countries, trying to fit it within the framework of their poverty reduction strategies and trying to look, among other things, at opportunities for more regional integration in Africa. This is a field in which we are trying to do a wide range of things. Mr Khabra (Professor Wood) It has to be said that many items already are exempt. Most unprocessed tropical products come into most developed countries with very few restrictions on access. Where there are still barriers, they are usually there for a reason, for a domestic political reason. This applies for example to temperate agricultural products which would compete with producers in Europe. It also applies to tariff escalation, for example where there is a much higher tariff on chocolate or something with a sugar content than there is on raw cocoa, which again has the effect of protecting European manufacturers of chocolate. We believe that these costs are not sufficiently significant to be worth defending these barriers, but there are relatively few examples of cases where you could remove a barrier to trade and there would be no losers in the EU. Most of those have already gone. Chairman (Professor Wood) Yes, it is a very sensible question. If one starts from poverty reduction strategies, we think that up to now trade issues have not had a large enough place in them, partly because of the origins of poverty reduction strategies in debt relief and in a wish that the revenue gains from debt relief would be spent on social sectors which would benefit poor people. We think increasingly there should be more emphasis on production, on growth and on trade. We have not made much progress in talking about specific sectors and in particular the way in which they are protected by specific bits of developed country policy. It is something we probably should do. How much we can do it is not clear, because you wind up getting into a lot of extremely detailed issues which DFID may not be the agency best equipped to do. What we can usually do is to provide some kind of technical assistance to enable the country to carry out its own dialogue on these particular issues. (Dr Drage) You mentioned the important issue of tariff escalation, but there are many issues which are probably very similar across a large swathe of developing countries, which is why we think pursuing the multilateral process of liberalisation is really important. That way hopefully you get wins which can be spread widely across a whole lot of developing countries, which is tariff peaks, tariff escalations, which Adrian has already spoken about. In terms of internalising trade and trade-related capacity building into the PRSPs, it is still a very new art, or science - I am not sure which it is - really probably only five years' old. Many countries, in their thinking about development, are behind us and are not yet really seeing trade as one lever for poverty reduction. There is a certain degree of resistance to thinking that way amongst a number of other countries who are involved with PRSPs as well. (Mr Newton) We are generally supportive of the concept of a development box, development box being a loose heading under which you include a list of measures aimed specifically at helping developing countries through recognising their special needs. What we would be very wary about would be a development box which included measures which in effect isolated developing countries from trade liberalisation and which institutionalised their development status. There are quite a number of ways in which we have been looking at helping developing countries in this respect. There are already quite a number of ways within the existing WTO agreement on agriculture, not just in terms of lower reduction commitments and longer time periods in which to put those reduction commitments into effect, but also things like subsidies for agricultural inputs, subsidies for rural and social development, which would normally be included in our aggregate measure of support, that is the support which is liable to reduction, in a developing country. They can be excluded within developing countries to a degree. We should like to continue with those in the new round. We are also open to the idea of the extension of the special safeguard provisions which would enable developing countries to protect their markets against fluctuations on the world market. Another idea which has been put forward is for developing countries to be allowed to notify their annual support expenditure in terms of a world recognised currency or a basket of currency, things like that. That would protect them against currency speculation, currency movements, inflation, that sort of thing. (Mr Newton) Certainly. (Dr Drage) May I ask Adrian to have a crack at the first of the two questions in question 14? (Professor Wood) Trade related conditionality could mean a wide range of things. What has actually been urged by IFIs is reform of trade policies which are egregiously distorting: quotas with quantitative restrictions on imports, whose effects on domestic markets are huge and unquantified, tariffs of up to 100 or 200 per cent which vary enormously from one sector to another for absolutely no reason and have an enormously distortive effect on the structure of production. What the IFIs have been pushing for mainly is to turn quantitative restrictions into tariffs, "tarify" quantitative restrictions and try to make the tariffs more uniform across sectors, just to try to reduce the net distortionary impact. In that sense, one can make very little defence of the regimes they were seeking to reform from any point of view. If you were to ask whether we would be happy if the IFIs insisted that all developing countries abolished all tariffs, which is something they have not intended to do, no, of course we recognise that there are legitimate economic and social reasons for maintaining tariffs which are used by developed countries and developing countries and we would not wish or expect that to be taken away. (Dr Drage) I shall talk about S&DT. One of the best things is perhaps to offer you a short paper on S&DT as well because it is not a simple issue. It is a term which is used primarily and possibly only in the WTO context and it covers a very large range of things. To some people it means longer implementation periods for them to adopt one of the Uruguay round agreements. To some people it means they would like to renegotiate a bit of it and cut themselves out of it permanently, for some it means temporary, for some it means they want a slight reworking of it and there are many issues. The answer is that the government believes in principle that there should be appropriate special and differential treatment to allow developing countries to be smoothed into the liberalised system. Some of the proposals put down by some of the developing countries - and they are not a homogeneous group - frankly would cut them out of the global system completely and we do not actually think that it is in their long-term interest to do that. Alistair Burt (Dr Drage) I will deal with GATS because I recognise that it is a very contentious issue on which my department in particular have had long and continuing dialogues, which we welcome, with a number of NGOs. I have to say from my frequent trips to Geneva, GATS is not a Uruguay round agreement which really gives much concern to developing countries at all. They have confidence that, because it is a bottom-up agreement where they can choose which sector if at all we want to liberalise in and quite how to liberalise, they have much more control over that process than they do over the negotiations for a lot of the other agreements. A lot of the concern which is generated in this country, often from very good intentions, is because people are worrying about the precise wording of the legal text of GATS, whether it will remove governments' rights to regulate, whether it will force governments to liberalise. The answer to that is: no, it does not remove a government's right to regulate internally. What GATS says is that if a country chooses to liberalise, say, its telecommunications industry, it needs to treat a company coming in from another country in the same way it treats its own telecom companies: however it regulates its own, it regulates a foreign company in exactly the same way. It does not remove a government's right to regulate. I do not know, but I hope, that a lot of the concerns about whether GATS will undermine public services in this country and other countries will be laid to rest as negotiations proceed, because I hear no demands from countries in Geneva for things which will undermine those rights. Chairman (Professor Wood) It is a point I touched on earlier. International trade negotiations are incredibly complicated, involve large numbers of highly technical issues, some legal, some technical. They operate on a very wide range of fronts. Large numbers of issues are being discussed at any one time and for any particular country to engage seriously in these negotiations you need a lot of very well-trained people. That is of course exactly what most low income countries do not have. That is the constraint. In terms of what we have been doing to help ease this constraint, we have put a lot of money and a lot of effort into trade capacity building, of which a large slice has been improving capacity to participate in negotiations. We are not the only country or organisation to have done so. I can give you a note on everything we are doing. It is quite a good list. (Professor Wood) No, it is across the board. We have tried to focus our effort on poor countries or countries with a lot of poor people. (Dr Drage) We have done it in two ways. One is through supporting projects at places like UNCTAD or in the World Bank, to help developing countries develop templates for them to use, both in the negotiations and for impact assessment on the various areas. There have been specific country projects. I had the privilege of meeting probably the entire Ghanian trade negotiating team who were in London last week to have a series of sessions with people. It brings it home to you when they say they have precisely two computers in the entire ministry in Ghana, neither of which has internet access, which means of course that they are not getting the papers from Geneva within the sort of timescale they need. There are some practical things we could be doing to help countries link up so they can actually obtain the papers, get instructions from capitals. (Dr Drage) WTO does have a large annual fund that member states put money into; I cannot remember the exact sum this year. It runs a whole lot of projects there on capacity building, but it runs projects which it is asked for by the poorer member countries, so they need to ask for it. Some capacity building is being done by the UK; there are quite a lot of other countries, particularly the northern liberals, who are putting money in to help capacity building. There are things developing countries need to do themselves as well. If somebody has been on courses and got trained, you really do not want to move them to do a completely different job in the ministry and that is happening too. (Dr Drage) There is no one simple answer to that. The issue of investment has been raised already. Most developing countries are desperate to get investment into them. What the EU means by arguing for a basic framework on investment to be negotiated in the WTO round is really a very simple and transparent framework of rules so that a foreign investor coming in will know exactly where they are. This should give greater confidence to investors, should help to create conditions more conducive to FDI and in that sense will help poverty reduction in the country concerned. That is investment. In terms of competition, I do not hear any worries in talking to developing countries about the issue of competition which relate to its substance. They all see that competition and controlling competition is potentially a really important matter for their own economy, not least in helping to ensure that the benefits of growth are spread more widely in the economy. They worry about their capacity to negotiate it but something like 100 developing countries already have competition law: their concern is not to have too bureaucratic an overhead and what the EU will be arguing for is that there should just be a very simple framework of principles which people should accede to at least at this stage. We recognise that we are not arguing for a big complicated superstructure to control multinationals even though the issue of hard-core cartels is certainly a matter of concern to a number of countries. There are potential real gains for them in going for competition. Trade facilitation is about improving your customs procedures and getting more money for you as a developing country government. That is really a very good thing for them, but it means sorting your own bureaucracies out. Some are favourable to that, some are less so. The final issue about government procurement is about transparency rules which ensure that you as a government get best value for money, so the principle has to be right. (Dr Drage) I have one I can send you. Chairman: That would be very kind. It is a bit like algebra, you have to sort out the bits of the building block before you can even get a policy debate. Thank you very much for helping us. I hope you did not find the way in which we approached it ... I think it may have been beneficial you having the questions and then we asking supplementaries on those. It has managed to save us time at a time when everyone in this place always seems now to be working against the clock. We have managed to give ourselves five minutes before prayers, so thank you very much for being both helpful and concise in covering an enormous amount of ground. |