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UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC730 - i House of COMMONS MINUTES OF EVIDENCE TAKEN BEFORE INTERNATIONAL DEVELOPMENT COMMITTEE
MAKING TRADE WORK FOR DEVELOPMENT: THE WTO HONG KONG MINISTERIAL
Tuesday 29 November 2005 MR JOHN HILARY, MS CLAIRE MELAMED and MR PETER HARDSTAFF MS SHEILA PAGE and PROFESSOR ROBERT WADE Evidence heard in Public Questions 1 - 77
USE OF THE TRANSCRIPT
Oral Evidence Taken before the International Development Committee on Tuesday 29 November 2005 Members present Malcolm Bruce, in the Chair John Barrett John Battle Hugh Bayley John Bercow Richard Burden Mr Quentin Davies Mr Jeremy Hunt Ann McKechin Joan Ruddock ________________ Memorandum submitted by War on Want, Christian Aid and World Development Movement
Examination of Witnesses
Witnesses: Mr John Hilary, Director of Campaigns and Policy, War on Want, Claire Melamed, Trade Policy Manager, Christian Aid and Peter Hardstaff, Head of Policy, World Development Movement, examined. Q1 Chairman: Can I say good morning and welcome to our Committee. As you will be aware we are undertaking an inquiry into the WTO and its workings, about which there seem to be a wide range of views and opinions. I pick up an article that was drawn to my attention under the heading "Free trade can damage your wealth" which was rather taking issues with most of your organisations, in suggesting that free trade on balance did more good than harm, whereas quite often you give the impression that you think the opposite, namely that free trade does more harm than good. I do not particularly want to give too much evidence from that article, not least because it criticises my party and me as well. But the issue really is, can you, as a movement, explain how you balance the fact that the WTO and the Doha round and everything else are all based on the assumption that freer trade is what we are trying to achieve and the belief that this is beneficial in the long run to what you are arguing for, which is actually maintaining and extending degrees of protectionism. Perhaps you could start, John Hilary? Mr Hilary: Sir, can I start by thanking the Committee for giving us the opportunity to be here and put forward these comments prior to the Hong Kong Ministerial. To pick up your question directly, yes, the Trade Justice Movement, of which we are all members, is founded on its belief that Trade justice should take precedence over the free trade and that is a position we have come to over many years of internal debate and discussion. This does mean that we are against all forms of trade liberalisation. So, for example, if a country like Ghana decides that it wants to drop its import tariffs on a particular widget or input to its own manufacturing, say, that makes perfect economic sense and it is absolutely right for Ghana to take that decision to drop those tariffs to make it more useful for is own development. What we object to is the ideological dogma of free trade, which suggests that by embracing a free trade model, where all import tariffs are meant to go down and export duties are meant to go down and you are meant to leave the market to do what it will, that is actually a recipe for disaster and that is where the evidence base from the 1980s and the 1990s comes in so strongly, which I am sure my colleagues will also refer to. But to quote one study which was brought out by the UN Conference on trade and development just last year in its Least Developed Countries Report, it showed very clearly that those countries which opened up their markets the most during the 1990s were also those countries which experienced the greatest rises in poverty. By contrast, those countries which maintained a level of protectionism - it is the developing countries, the poorest countries - managed to reduce poverty levels. So the evidence certainly supports our proposition; it is the dogma we have a problem with. Q2 Chairman: Obviously I will ask the other two witnesses to comment, but do you not have a problem with the fact that the World Trade Organisation was set up to act as a coordinating agency to advance the free trade agenda? In other words, it is there to provide the mechanisms and support the mechanisms? Mr Hilary: I have a massive problem with that, absolutely, and that really is at the root of the fact that the World Trade Organisation has been unable to deliver a development agenda in this round. We will come back to that, I am sure. Ms Melamed: I would agree with everything that John said. I would only add on the World Trade Organisation that I think the commitment to liberalisation within the WTO is actually a very thin veneer. We have seen agreements in the World Trade Organisation, for example the agreement on intellectual property, which are anything but liberalising and which in fact act to restrict the behaviour of companies and governments in all kinds of ways. So I think it is more useful in reality to see that WTO as a body which exists to regulate trade between governments and to arbitrate at the points where one government's trade and policy bumps into that of another government. In that concept it is a moot point what kind of solution the WTO might find to trade disputes between countries and issues of trade and policies between countries. I think there is no evidence that the WTO only exist to liberalise, despite it they might say in the founding arguments. Q3 Chairman: Would you not argue that it would be more helpful if you were to identify the timescale over which tariffs should be reduced, the sectors perhaps that deserve more protection - if I can use the term - than others rather than actually to run a slogan that says, "Trade justice, not free trade", in other words to challenge the whole edifice instead of saying, "Actually what we need to focus on is where the most vulnerable points are," and actually make a case for that. Would that not be more effective? Ms Melamed: I think the difficulty with that is that the answer to those questions is going to vary from country to country. So had we the resources to draw up a trade blue print for the whole world and look into the economic circumstances of each country and project forward over the next 50 years as to the likely sectors where it growth is likely to happen, et cetera, than that would be a worthwhile exercise. I think from where we stand it would probably be more constructive to simply say that that is a question, the answer to which is going to vary country by country, and the point of Trade justice is to say that countries therefore have the need to make those decisions on the basis of that evidence themselves. Q4 Chairman: Peter? Mr Hardstaff: I do not have a great deal to add to what my colleagues have said. I think the important point is that Trade justice is about managing trade, rather than an idea of progressive liberalisation for everyone. At the moment we have a system where - you are pointing out, for example, what about understanding timescales for liberalisation? We have a system of quite arbitrary timescales for liberalisation - five years, ten years, whatever, you will to implement X tariff reduction or X subsidy reform or regulatory reform. I think our fundamental problem with that is that it does not take into account the different stages of development, the differences and circumstances between a very wide range of countries, and at the moment the WTO negotiating framework has been incapable of addressing that fundamental problem of enabling countries to use appropriate trade policies for their circumstances. Q5 Chairman: I have asked you this question before and I noticed in one press item - and I do not know which organisation it was that was using the term that perhaps "poor countries should make history and walk away from Hong Kong", but is not the reality that you are getting yourself into a situation of saying, "We actually do not want an agreement with Hong Kong; any agreement would be a bad agreement for poor countries." And the implication that they should not even go there. Mr Hardstaff: I think that is based on an analysis of the current situation, so when you look at what the European Union has proposed, for example, in terms of on one side its cap reform or minimal off on agriculture and on the other side it is a very aggressive agenda on services and industrial products. What the EU has laid out on the table as what it wants would be a development disaster, and therefore that deal that the EU is seeking I think should be rejected and it is currently is being rejected, I might add. Q6 Joan Ruddock: This point about a development disaster. Can you break that down as to where it would be a development disaster? Mr Hardstaff: On industrial tariffs, for example - and John has looked into this in much more detail - the evidence that you see from the United Nations, for example, suggests that countries that have been able to use industrial tariffs and use industrial policy have done better than those that have been required to eradicate or substantially reduce their industrial tariffs, and the EU's demand on Non-Agricultural Market Access or, as it is called, NAMA, is for a sweeping tariff reduction which will reduce the policy space in developing countries to achieve development. The same as in the general agreement on trade and services; what the European Union is demanding is a radical liberalisation process, major commitments from developing countries which will curtail their development policy options. Examples include being able to require foreign investors to employ a percentage of local people, requiring foreign investors to re-invest a percentage of their profit in the domestic economy. The evidence on foreign investment is that those countries that have been able to regulate foreign investment, to ensure that it benefits the domestic economy have done better than those who just allow in foreign investment and do not regulate it, and the GATS is designed to steadily get rid of these kinds of regulations on foreign investment. So those are the kinds of ways in which the EU's agenda will steadily undermine the ability of developing countries to improve the livelihoods of their people. Q7 Hugh Bayley: Whose interests do you represent? Mr Hardstaff: We can talk about the Trade Justice Movement and also our individual organisations, if you like. Mr Hilary: One of the key foundations of the work we do is to listen to our partners across the south, and by this we mean the civil society partners, whether they be NGOs in developing countries or social movements in developing countries. War on Want certainly exists to support social movements in countries of Africa, Asia and Latin America. It is the steer that we get from them which informs the position that we bring forward in the policies base that we have in the UK. Our partners in the south appreciate the fact that we have fairly privileged access to some of the decision makers in this country and they ask us to take forward that message on their behalf into the policy in which we operate. So that, we feel, when we represent in a formal sense, or not, is certainly the message which we take forward in the work we do here - the advocacy work we do here. Q8 Hugh Bayley: How do you make yourselves accountable to those you say you represent? How could you make yourselves more accountable? Mr Hardstaff: For example, the World Development Movement has 15,000 supporters in the UK. We are primarily responsible to those supporters; we have a democratic set-up; we are governed by a council that is elected from our members. We also, in forming our work and our positions, we liaise with, consult with and work with campaigners from the global south. Ultimately we are accountable to our supporters and members. Q9 Hugh Bayley: You are saying two very different things. John is saying that he is accountable to civil society voices in the south and you are saying you are accountable to your funders and backers in the north. Mr Hilary: We have both. No, there is no contradiction about that at all because we are also run as a democratically elected and run organisation. I think what is also important to reflect is that I think Members of the Parliament can sometimes feel that the NGOs represent a community which does not have any backing in this country, whereas you are clearly people who elected when it comes to elections. I think actually the opposite is true. People have no requirement whatsoever to give us their money. They do have to vote for somebody because by default somebody is going to get elected, but they do not have any requirement at all to give us their money, but they do so in vast numbers. We have more than nine million members within the Trade Justice Movement as a whole. Q10 Hugh Bayley: With respect, it is a rather different question that I am asking. Trade policy is multi-led; different groups in different countries have different interests. You, for instance, have been arguing that there should be a slowing down of sugar reform in the European Union so that those sugar-dependent economies do not lose all their support. You were defending the interests of some countries with per capita GDPs of $2000 to $4000, $5000 a year, possibly at the expense of the poorest of the poor countries where the per capita GDP is between $200 and $500. How did you resolve those differences? How do you decide whether to speak up for the interests of sugar producing islands in the Caribbean or Mauritius rather than sugar producers in very poor countries in Africa? Ms Melamed: To clarify I am not sure that any of the organisations --- Q11 Hugh Bayley: Who are you accountable to, this is the question? Ms Melamed: Yes, I take the question. Just to clarify, I am not sure that any of the organisations here have been particularly outspoken in the sugar debate. I think you might be thinking about colleagues in some other NGOs and I am sure they can answer for themselves. Q12 Hugh Bayley: NGOs in the Trade Justice Movement or outside? Ms Melamed: Inside the Trade Justice Movement. Q13 Hugh Bayley: You are representing the Trade Justice Movement, or not? Ms Melamed: If you would like me to answer the question, then I can. Mr Hardstaff: Just to clarify, I do not claim to be able to speak for Oxfam, for example, who have been working on the sugar reforms but, as I understand it, they have not been calling for no sugar reform, they have been calling for adequate compensation for those producers in the Afro-Caribbean and Pacific countries who will be adversely affected by sugar reform. So they have not been saying, "No sugar reform", they have been saying, "Do it properly." That is my understanding of their position, but you would have to speak to them for more detail. So I think what that reflects is an organisation within the Trade Justice Movement that is trying to take into account the broader development picture, and it is not just about the interests of producers in the African/Caribbean countries, it is about the broad development picture. Q14 Hugh Bayley: Can I just go back to the co-question? I think it was John who said - and I paraphrase - "We are in a privileged position because we have great influence over the decision makers in the rich world." That influence, if you were successful, and a lot of people in my constituency would wish you every success, will have a bearing on the outcome, but to whom are you accountable for the way you use that influence? Mr Hilary: I believe I said that we have privileged access - I fear we do not have quite as much influence as we would like. In terms of the accountability, we see our work first and foremost in trying to develop a pro-poor and a pro-development outcome. We recognise, exactly as I think you are aiming at, that there are winners and losers out of any process of trade policy reform, and particularly in relation - and sugar is one just example - when you are looking at the erosion of preferences which the poorest countries will experience as a result of the gradual lowering of tariffs and the gradual liberalisation. We are very exercised in trying to find ways of gaining an outcome which does not totally destroy their economies, whilst at the same time allowing opportunities for others. We recognise that that is a very difficult balancing act. The thing about the WTO is that it does not begin to address those issues of poverty reduction and development, and that is the issue we have. Q15 John Bercow: Do you equate the agricultural policies of the north with the liberalisation? Ms Melamed: With liberalisation? Q16 John Bercow: Yes. Ms Melamed: No. I think the direction of change of agricultural policies in the north at the present time is inching towards a very slow process of liberalisation and I would not characterise them as being liberal at the moment, no, far from it. Q17 John Bercow: That I find quite a helpful and informative answer, Chair, because I do think that this is not entirely a semantic debate, it is actually quite important to get our terms right. One of the things that I find aggravating about some of the conduct of some representatives of the Trade Justice Movement, notwithstanding the fact that I have some sympathy for others of their goals, is that they do have a rather unwavering tendency to use the term "free trade" in my view rather inaccurately. It is objected to; it is said to be a bad thing; it is juxtaposed against fair trade or trade justice or pro-poor policy space, or whatever. Whereas in fact Claire has helpfully just acknowledged that the policies of the rich north are not actually free trade policies. So you are denouncing something as free trade and giving it a bad name when, for the most part, it is not free trade. What I would like to try to tease out of you is this: is it to the fact of the heavy subsidy of western agricultural production that you object, or is it to the fact of the export of that production at all? Ms Melamed: I think there are lots of different parts to that question. I think to start with the free trade part, as John said earlier, politically where we are at is the fact that free trade is being heavily promoted and pushed as a kind of universal good, as something to which all countries should aspire. And as John said also, the evidence seems to be that within developing countries, notwithstanding the policies of Europe and the US, those which have liberalised, those which have moved further towards free trade - although it is highly unlikely that any country is ever going to actually get there - have done worse than those countries which have not. So although free trade is something of a myth in that it is difficult to conceive of any international system that would ever be entirely free of government interference in any form, the evidence is certainly that those countries which have moved towards freer trade have done less well in terms of the kind of indicators in which we are interested - poverty reduction, infant mortality, all those kind of things - than those which have not. On agriculture, I think it is sometimes frustrating that debates about trade in general, and agriculture in particular, can get focused in solely on the question of agricultural subsidies in the north. Certainly they are a very big issue. I would never seek to defend a system which takes money from taxpayers and consumers in Europe and redistributes it to some of the wealthiest people in Europe, but I do not think that the debate about agricultural subsidies is the be all and end all of the debate about trade, and nor is the fact of agricultural subsidies the only problem with the trading system as it exists now. So although I think there are very big issues there and issues which, as we know, are politically very difficult to deal with, to reduce all of the debate about trade to that would be a serious mistake politically and analytically because I think the benefits of agricultural trade reform in the north, as it is currently being envisaged within the bounds of what seems to be politically possible, are quite equivocal, mixed and uncertain. Q18 John Bercow: On the subject of the evidence, there is always going to be an argument between those who say, on the whole, that protection - not just short-term but medium and long-term - has worked well, and those of us who believe that the evidence shows, if you look at the developing countries as a whole, that over a period liberalisation has tended to coincide with, to put it no more strongly than that, great increases in overall prosperity and gradually in living standards as well. What I would like to try to extract from you is this. Hugh asked Mr Hilary a few moments ago to whom he and his organisation were accountable and the response was interesting, although I thought perhaps not conclusive. Do you accept that amongst your supporters in the country - of whom I accept there are a very large number in all of our constituencies, and people come, Chair, from all sorts of political persuasions and of none - that there would probably be a feeling amongst those people much stronger against western agricultural subsidies than there would be a feeling of wanting to march in the street and say, "We must defend the right of developing countries to keep their tariffs at the level they are at." My experience in my constituency is that people who are concerned about the trade justice issue are very keen to encourage you to press our government, to press the European Union, to press the United States, to stop those trade distorting subsidies because they are morally wrong and economically damaging and because they are also hypocritical. I do not sense that there is a huge surge of public opinion amongst what I call the development lobby in my own constituency saying, "We do wish the Trade Justice Movement would say a bit more about how developing countries should be able to keep their tariffs at their present levels." This is illusory; it ain't there; it is not said. Ms Melamed: It depends on who you talk to. Absolutely, agricultural subsidies is an issue which grabs the attention of the general public here and it is an issue which directly affects their own pockets so one can see, why not? Granted there are not people walking down the street demanding the right for developing countries to have a tariff band on NAMA which does not exceed X, Y and Z, but I think that just as there are people who are very exercised about agricultural subsidies there is an equal, if not larger, number of people whose general starting point for their interests, their writing letters to people like yourselves, is that trade should work for poor people. And that is our starting point; we hear that message that our supporters want us to come here and argue for trade to be made to work for poor people. In terms of our analysis, the people that we talk to and so on, the best way to do that is partly through getting rid of agricultural subsidies but also through all kinds of policies in developing countries themselves, which are very less attractive in terms of slogans and banners, I agree, but equally important. Mr Hardstaff: Can I just add to that? Earlier on this year tens of thousands of people came out on to the streets of London demanding an end to forcing liberalisation on poor countries. We had the biggest mass lobby of parliamentarians in terms of the number of parliamentarians lobbied, as I understand it, just a few weeks ago, which was focused on the ability of poor countries to protect themselves. So I do not think it is fair to say that there is no interest in this issue. Q19 John Bercow: I do not think we are going to resolve this. I certainly do myself think that in certain situations and in certain sectors the lowering of southern countries' tariffs would actually be a pro-poor thing to do. It might not be a thing of which western NGOs particularly approve, and often they have their own agenda, to which they are entitled, but they are not necessarily speaking for poor people. They might think they are speaking for poor people in the developing world but that is not the same thing as doing so. What I want to try to extract from you - because there is some common agenda here, but equally there are areas where we clearly disagree - is this: you are operating in what is essentially a political environment and the WTO, because it holds ministerial conferences, is, let us face it, a very political organisation. One of the earlier questions from the Chair tried to tease out of you whether you thought it would actually be quite a good thing on the whole, on the basis of present trends, the state of negotiations, for them to collapse. I accept that you have your view about policy space and the importance of letting individual countries decide whether, first, and then, if so, when and to what extent to liberalise. But given that you are making demands on trade subsidies, very rightly, in my view, of the rich west - and they are not partial demands, they are not half-hearted, they are compromises, they are very rightly aggressive and justified demands for wholesale abolition - do you not accept, even in political terms if not in moral terms, that if you want to be effective - not effective in securing a destructive outcome but effective in securing a constructive outcome - that you should be prepared to accept some compromise on your own deeply held philosophical and ideological convictions? Mr Hilary: May I start, with respect, by referring to the earlier response? We do not see that keeping high blanket protection is in the interests of developing countries; we share your view, as I said earlier, that if a developing country believes that it is in their interest to lower a particular import tariff then they should do so, and that is pro-poor pro-development outcome, so we have a shared understanding of that. When it comes to Hong Kong, basically we are not just working in terms of the trends or the perceived progress within the WTO, we now have the draft Ministerial text in our possession, and that shows very clearly that the "deal" on the table is one where the rich west is going to give nothing in terms of cutting its agricultural subsidies in real terms, and in "return" developing countries are being asked to throw open their markets in industrial manufacturing and services sectors. We consider that that is a complete rejection of the basis on which this round was started. This round was said to be a development round; it was dubbed the Doha Development Agenda by none other than Pascal Lamy, when he was a Commissioner within the European Union. We consider that under the terms which it set itself it has singularly failed to deliver anything which resembles development. Therefore, that being the case we do not consider that Hong Kong is a deal worth having on what is on the table at present. John Bercow: That is very fair, in those circumstances. Q20 Ann McKechin: Given the complexity of the issues with which we are having to grapple here and the growing number of members in the WTO - because although you seem to give the very distinct impression that you really do not think a multilateral name at this time is ever going to work, there are still members joining WTO - do you think it is sensible that the emergence of the groups such as the G20, G90 and G33 are actually a much better way of trying to achieve a settlement in the first place, rather than 160 countries trying to all negotiate separately, and what do you think the consequences have been, particularly of the G20, on these negotiations? Ms Melamed: I think on balance the emergence of these kind of blocks is a good thing because it does seem to have given developing countries more clout in the negotiations, which they were certainly lacking when they were less organised and there were fewer of them. I think it has also helped developing countries to organise amongst themselves. In Geneva, certainly, among the least developed countries, for example, there is an unofficial division of labour in terms of specialisations on particular topics and that helps them to cover the very wide range of negotiations that there are, and I think in a situation where a lot of delegations have a very serious lack of resources that division of labour is an efficient way of dealing with that problem. In a sense, these different negotiating blocks that seem to have arisen, as you say, the G20, the G90, do arise out of genuine economic interests. So in a sense the creation of the G20, for example, did not create those interests, it simply solidified them and allowed them to be better represented and better organised. So some of the issues that you see in terms of, say, perceived differences of view between the G20 and the G90, for example, the slight differences of interest, those exist anyway; they are real and they pre-date the emergence of blocks with those names, but they simply allow them to perhaps be better represented within their discussions. Q21 Ann McKechin: It has always seemed to me that actually the NGOs grossly underestimated the influence of the G20 and how powerful that is becoming now in terms of negotiations, and particularly the role that China is playing in terms of liaisons within Africa and South America. Do you have anything to say about what you think that is going to mean about trade negotiations in the future? Ms Melamed: My colleagues might have a different view on this but my feeling is that China has actually been less influential than perhaps people hoped it would be because the terms on which China acceded to the WTO were so very harsh, and it had to undertake so much liberalisation in order to become a member of the WTO in the first place, that it is actually way ahead of a number of other developing countries in a similar position in terms of what it has already given up in WTO language, in terms of liberalisation. So I think China has actually been able to play perhaps a less useful role politically in terms of defending development countries' interests than people hoped it would at the time of accession. Q22 Ann McKechin: Should there then be a distinction made between the different types of developing countries as a result of what you have just said, between the G20 group perhaps on the one hand and the G90 group on the other? Ms Melamed: Distinctions are being made in the sense that there are some in the G20 and some in the G90 and people know they have different positions and they take different stances in the negotiations. So in terms of their input into negotiations those distinctions do exist simply by virtue of there being different groups. In terms of formalising that in specific agreements - so that under the agreement on agriculture, for example, you would formalise the G90 being treated differently to the G20, and the WTO has always differentiated between different members - all agreements have contained slightly different provisions for the least developed countries and for developing countries and I see no reason why that should end. I am not sure that membership of a particular political group is necessarily a good basis for that differentiation; I would prefer to see more rigorous economic criteria that are relevant to the agreement in question used as the basis for differentiation. Q23 Ann McKechin: Should that not be for the G20 to determine rather than NGOs? Ms Melamed: Yes, absolutely, and, for example, the G33 are very much promoting the concept of special products, which is precisely that, which is a proposal that contains within it criteria that will differentiate between different products on the basis of certain economic criteria, and that is something that we certainly support. I am not sure that NGOs have ever said --- Q24 Ann McKechin: What you seem to be suggesting, if I read some of the submissions that you have made, is that because of the large number of very poor people in countries such as Brazil, India and China you are arguing against substantial elements of liberalisation - and even in China. China and India have had largely protected economies for a long number of years and on the argument you are saying that that is the way that they build their economies, and they are now, in China's case, growing at nine per cent per annum. So if it is growing at nine per cent per annum, if it has had all that level of protection, then when does it liberalise? You are saying, "Not now." Ms Melamed: We are not saying --- Q25 Ann McKechin: That is what you say in your submission - you say "Not now. You should not be giving up industrial tariffs now." So if you are growing at nine per cent per annum in what is now becoming an emerging economy in the world, when are you going to liberalise and when should you liberalise, because you do not actually say when that is going to happen? Mr Hardstaff: Just to clarify on that, it seems odd to me that a country that has done well, for example, purely in terms of economic growth - and to a certain extent that has been translated into poverty reduction - for those countries that have done well the idea is that they should now change their economic policy. Q26 Ann McKechin: They should liberalise more. They have already liberalised to some extent. Mr Hardstaff: They have liberalised to some degree. Q27 Ann McKechin: And these negotiations are about continuing that progress, is that not the case? Mr Hardstaff: A country like China has gone its own way in terms of liberalising selectively over the past ten, 15, 20 years and has achieved a measure of economic success at least - and we are seeing that with Vietnam, I think, at the moment as well. Obviously China has now had to go through a significant accession process to WTO and it remains to be seen what the economic impacts of that will be in China over the next five years. Q28 Ann McKechin: They are growing at nine per cent per annum. It has been a success story. Perhaps you could just acknowledge that that has been a success story? Ms Melamed: But not because of liberalisation. Mr Hardstaff: Not because, necessarily, of joining the WTO. China's accession agreement will require China over a period of time to open up its economy and it remains to be seen if that will work. Ann McKechin: Do you not think that that is what it should be doing? John Bercow: That is simultaneously the most candid and extraordinary proposition that I have heard advanced in the debate about trade reform that Mr Hardstaff has just given us. If I understood you correctly you said, with some incredulity, if I may say so, in your voice, why should a country change its policy when it is succeeding? To which the answer is two-fold. First, it has always been suggested, not least by the Trade Justice Movement, that the justification for the retention of high tariff barriers by southern countries is that these countries are poor, they have not yet developed, they do not have a sufficient base and therefore it is justified in the short, more medium-term - a period always carefully unspecified, and now perhaps we know why. And the second reason why it is justified to change policy is that surely the whole point about trade policy, Mr Hardstaff, is that it is multilateral? Trade is a matter of mutual dependence of one upon another; we are in an inter-dependent global economy. So it may well suit a country growing at nine per cent to say, "We are doing nicely, thank you; we do not want to have now to make any new concessions," but it is in the interests of the world economy and of other countries' exporters that that country should indeed be required to do so. Chairman: Can I ask Hugh to come in on a question that is kind of related to that? Q29 Hugh Bayley: I wish to go back to Claire. You used the word "harsh" to describe the WTO's accession conditions for China. How has China's enforced liberalisation harmed its economy? Ms Melamed: We do not know. The answer is partly we do not know yet because China was allowed to phase in the changes that it had to make over a period of five to ten years. So, as with the impact of the French Revolution, it is too early to say, I think. Q30 Hugh Bayley: Why the adjective "harsh" then, if you do not know? Ms Melamed: Because what it is going to have to do over what is, if we are talking about economic growth, quite a short period is very much more than what most existing members of the WTO were asked to do at the end of the Uruguay Round. Simply in the kind of reforms that are asked of countries in the WTO China has had to do much more than most countries which have always been members of the WTO. In terms of impact, I think War on Want have done some studies on this, have they not? Mr Hilary: I lived and worked in China in the 1980s and it has been the subject of my postgraduate work since. I think it is important to recognise that China had a unique history post its liberation in 1949. It had four decades of unparalleled state investment into the infrastructure of the country rather than consumption, which characterised most of the developing countries at that time. As a result of the reforms during the 1980s and 1990s there was massive reduction in poverty, particularly within the agriculture sphere, which was the de-communisation, de-collectivisation of agriculture; that was the main spur to poverty reduction in China, and that is attested by all of the documents which relate to that. Since then China has gradually begun to open up to foreign investment in a way which links in foreign investment with the country's own development and growth. As a result of joining the WTO, and indeed just prior to that when it was trying to gain admission to the WTO, China threw open far more in terms of its industrial and manufacturing centres, and what we have seen as a result of that is massive social dislocation of those parts of the industrial proletariat, which no longer have that base in which to work. At the same time we have seen massive growth around the eastern seaboard of new manufacturing industries, which have clearly provided enormous job opportunities, particularly for young women who have come from surrounding and indeed not very near hinterland. So it is very much a question of a society in transformation but also a country which has been able to reap the benefits of joining the world economy precisely because it was predicated upon these four decades of unparalleled state investment. That is where the comparison with Vietnam is also very telling - again, a socialist market economy, which is able to base its entry into the world economy on sustained investment in the past. They have done very well out of that, but at the same time they have the potential to suffer enormous poverty. If you study the five-year plans in China they recognise the enormous poverty which has come about in the last 15 years as a result of that process. Chairman: What you have just described is a classic industrial revolution, is it not? And if China is trading the way it is then how it manages its increased wealth to redistribute is a matter for China. But it is a matter for the rest of the world how its activities engage, not least because they are importing raw materials and exporting manufactured products. So liberalising trade is in China's interests, one would have thought. But, Richard, you want to follow that up? Q31 Richard Burden: I want to come on to NAMA more generally, but could I start off on the Chinese experience because I am still unclear? I understand exactly what you say about the way China has developed and its history and so on, and indeed the great yawning gap opening up between the eastern seaboard and the interior and so on, but this was not caused by the accession to the WTO or anything to do with the accession to WTO. I am still curious, in a sense from Hugh's point, about what are the harsh conditions that have had devastating impacts on China as far as WTO accession is concerned? I am aware of some in terms of big issues around transparency and so on, and intellectual property rights and so on, but in terms of WTO accession what are the incredibly harsh impacts on China? Ms Melamed: We can go through the terms of China's accession point by point, but I think for example one of the areas that China had to liberalise much further and faster than countries had been asked previously in the WTO was in the area of industrial tariffs, for example. Q32 Richard Burden: Why has that been devastating for them? Ms Melamed: I just want to clarify what it was that I was saying in response to Ann McKechin's question. The point that I was making was not that the terms of China's accession have already had measurable negative effects in China's economy. As all of us have said separately, what China had to do has been phased in over a number of years and I am sure there are studies which are starting perhaps to point to the impact of those policy changes on various groups in Chinese society, and perhaps we can send you some at a later date. The point that I was trying to make to Ann McKechin was that politically the terms of that accession have had an impact on China's political behaviour within the WTO because, for example, on the negotiations on Non-Agricultural Market Access developing countries have a position where, by and large, they are trying to argue that they should have lower reductions on tariffs for industrial products than rich countries are asking of them. China has already lowered its tariffs to way below the level which developing countries are arguing for; therefore clearly China is not politically going to be a leader among developing countries in trying to defend the industrial tariff because it already has a WTO agreement which is demanding that it lower them. So it was a political point I was making about where China sits politically in terms of developing country coalitions in the WTO rather than an economic point about the precise effects of that reduction in tariffs in China's economy. Q33 Richard Burden: If we can move on to more general issues of NAMA. The UK Government position, if I can paraphrase it in terms of what is said, is that progressive reduction of tariffs is a good thing for developing countries as well as for developed countries, but there needs to be a good degree of sensitivity over the pace of that and developing countries themselves need to have quite a lot of say in terms of the pace and extent of that liberalisation. That is the current thinking. The EU, obviously of which we are a part, has come up with a number of proposals with a number of statements by Peter Mandelson and others over the last few weeks around the area of NAMA. I just want to be clear. Do you agree with the UK Government position and not the EU position, or neither the UK Government position or the EU position? Mr Hilary: I think you are being very generous, Richard, to what the UK really has as its position, so let us distinguish between what it says and what it does because I have worked on NAMA all the time and we have had long discussions with the DTI officials who are responsible for the NAMA negotiations from the UK perspective. Yes, the government has been very good in its rhetoric around trade and this applies to NAMA as much as anywhere else. It has said that it does not wish to force open developing country economies for the benefit of huge business; it sees it as a development round and it wants development to be put first. However, when we have met with the DTI officials in small groups to look at these issues they have said to us very clearly that there is no difference in the substance of the UK Government's position on NAMA and the EU's position on NAMA. They have reiterated that to us time and again. So we can actually take the official UK position to be that which goes through from Peter Mandelson and other Commission officials at the WTO, and in that respect there is a fundamental problem because the EU's position in Geneva on Non-Agricultural Market Access is the most extreme bar none - more extreme that the US position - in terms of trying to force open developing country markets. The document which is the best on this is the most recent one, Peter Mandelson's statement on 28 October in Brussels, where he says that he wants developing countries to have to work to the same formula and the same coefficient within that formula as developed countries do. This is the most extreme form of liberalisation being put on the table proposed for developing countries to follow. That is the UK position and that is why we have taken such issue with the fact that the UK is saying one thing and doing another. Q34 Richard Burden: We will be in a position to question Ministers about this later this week. You say that the two are the same in practice. Give them the benefit of the doubt at the moment, but if Hilary Benn was to come along on Thursday and say, "No, no, the position is exactly as we have outlined it in the various papers we have put out," and so on, is your position, if that were the case, still one of disagreement with the UK Government position? Mr Hilary: If the UK Government were to say that they agreed that developing countries should have the right to determine their own level of tariff reduction in NAMA during this round, if they said that then, yes, indeed, we would agree with them. That is the position which we in the Trade Justice Movement have come to in our joint statements, and that is a paper which we can also make available to you, which identifies those things. The UK Government tends, when it is presenting it in this more palatable format, to suggest that it only wishes to gain market access in the bigger countries, the larger economies of China, Brazil, South Africa, India, and it does not want to bother little countries like Peru, Ecuador, Namibia, Gabon. Unfortunately the position which they are in fact advocating at the WTO is one which opens up all of those countries to sweeping liberalisation and that, in our view and in the light of the evidence which exists, would be highly damaging. Chairman: Richard, we are running up against the clock, unfortunately, and I am going to run this for three or four more minutes because we have other witnesses. Two or three of your colleagues have quick questions that they want to ask. I am going to ask if they can do that and we can have a quick exchange of questions and answers. John Battle first. Q35 John Battle: It is following up Richard on NAMA really and some of the detail. I am not sure that it is a question that people raise with us on the streets during a lobby and it is incredibly technical and detailed, but you did express the view a minute ago that the position was most extreme, but there were a range of proposals within that and there have been a range of proposals. There have been the Argentinean, the Brazilian, the Indian proposal that has been rejected, I think by the EU itself, and there is the Caribbean proposal, and I think the NGOs or Trade Justice Movement described the Swiss Formula as an "extreme variant". What are your concerns about the Swiss Formula and could you say why you think it is more harmful than any of the others, because otherwise we have no formulas and where do we go from there? Mr Hilary: If we really have only two or three minutes maybe it is best if I produce War on Want's detailed study on NAMA, which I can make available. The simple Swiss Formula is the particular variant that is being proposed at the moment by the EU. That is what is called the harmonising formula, which reduces higher tariffs by much more than it reduces lower tariffs. That has a disproportionately harmful effect on developing countries which tend to maintain a higher level of tariffs in order to protect their income industries. That is why the Argentinean, Brazilian, Indian and the Caribbean proposals, whilst still remaining within what they consider to be the real world of WTO and saying, "Okay, we recognise that you want to have a type of Swiss Formula," they are trying to introduce mitigating elements within that so that they do not end up exposed to such dramatic liberalisation. The differences are quite technical so I will make the paper available to you. Chairman: That is helpful, yes. John Barrett. Q36 John Barrett: If I could turn briefly to the General Agreement on Trade in Services, GATS. A number of NGOs have suggested that key areas such as water, health and education be removed from GATS, but if the basic principle is both offer and response why should it not be left to developing countries to decide what is in their interests, what should be in and what should be out rather than this blanket approach? Mr Hardstaff: This is the result of working with campaigners from around the world and a belief that there are certain sectors that should not be subject to the rules of the General Agreement on Trade and Services. Part of that is because the rules of the GATS are so ambiguous when it comes to public services, and it would be better that essential services like health, education and water, for example, were not subject to these rules. As an example, there has been debate about what is called Article 1.3 which is around definition of public services, and that definition is very ambiguous. As, for example in the UK, we have increasing private sector involvement in our public services, it becomes more difficult to determine whether or not our public service is outside of the GATS rules or inside, so a much simpler way to deal with this would be to keep essential service sectors like health, education, water and so on outside the rules of the General Agreement on Trade and Services. Chairman: One last question. Q37 Mr Davies: If, in fact, as Trade Justice tell us this morning, what you really want is for developing countries to be allowed to do their own thing to reduce or modify their tariffs whenever they feel like it, with no bigger obligations to make any specific changes, there is nothing to negotiate about. You can only have negotiation when both sides potentially are expected to make some contribution. Mr Hardstaff: One of the key problems with this current round of negotiations is the issue of the trade-off. I will just make a point about the agricultural reforms which we support: the European Union has put forward a position that is substantially saying to developing countries we will lock in and bind our existing tariff reform that we did in 2003, into the WTO, if you sign up to this Swiss Formula on NAMA, if you sign up to the benchmarking proposal on GATS, essentially a radical minimisation agenda. It is really important to understand the nature of that trade-off because this is a reform that, in terms of European agriculture, could benefit European small farmers, it could benefit consumers, it could benefit the environment. It is going to impact on a very, very small proportion of the European population adversely, if you like, and what we are asking for in return for that something that will broadly benefit us is we want to get rid of a range of policies that affect the long term opportunities --- Q38 Mr Davies: Basically you make my point, you do not want negotiation, you just want unilateral concessions by the EU and the United States. Mr Hilary this morning said that he "objected to the dogma of free trade" - I hope I have recorded your phrase correctly. Do you object to and reject the Ricardian theory of comparative advantage? Mr Hilary: If you want it in one minute, the theory of comparative advantage is based on particular assumptions; those assumptions do not pertain in the real world and there are particular problems about applying them, particularly the assumption that they are usually done on a binary basis between two partners in the economy and also between two partners of roughly equal size. Those are two of the common assumptions which underlie the comparative advantage theory as I have put it. There are difficulties also in respect of other elements within that. What we have a problem with in this round - just to go back to an earlier question - is that this round is billed as a development round. The whole point of it was that it was meant to be different from the Uruguay Round, which widely acknowledged that there were problems for developing countries; it was meant to be different insofar as it was development proposals and not the mercantilist interests of other --- Q39 Mr Davies: I think I had an answer to my question, the answer is you do reject that theory. You have actually changed the theory this morning, it has nothing to do with the size of relative economies, it did not in Ricardo's original formulation and it does not in any subsequent theoretical formulation. Chairman: Your point is made. Joan Ruddock. Q40 Joan Ruddock: You have all told us about the problems of liberalisation and the impacts on developing countries. Christian Aid has put forward the idea of selective protectionism; can you give us any examples of where that has actually worked. You have talked a lot about negatives, let us hear something positive about where you think there is a trade-off that is good for developing countries? Ms Melamed: Where selective protectionism has worked? Q41 Joan Ruddock: Yes. Ms Melamed: We have a report, which again I can circulate, which has a number of examples of that. One of them was the case of Honduras, for example, where rice farmers were suffering an influx of cheap imports from the US as a consequence of liberalisation; the Honduran Government have put in place a fairly sophisticated protection scheme whereby the local processors of rice are obliged to buy rice from local farmers first, before they import rice from the US, and this has also gone hand in hand with a government programme to increase investment in rice production to increase its productivity and competitiveness. This has led to an increase in the fortunes of Honduran rice farmers and has actually coincided with a fall in the consumer price of rice. Often there is an absolute difference of interest between consumers and producers, but in this case the consumer price fell at the same time. Another example from the same report is the Mozambiquean sugar industry which was protected, again, in a similar situation, it was an industry which had largely fallen into disrepair in various ways and the government was seeking new investors in the industry. It was protected and actually as a consequence of that protection was far more attractive to investors than it would have been otherwise, before the protection, in other words they found it very hard to get investment. Subsequently there has been investment and an increasing competitiveness in the Mozambiquean sugar industry. This is interesting because often trade liberalisation is seen as one of the ways that governments can attract investment, but certainly in that example the reverse is true. A similar story is the Mozambiquean cashew industry - I could go on, but I sense you do not want me to. There are lots of examples which I will circulate you with. Q42 Chairman: You could also be describing the nineteenth century corn wars. Ms Melamed: Which ran for a while and then were --- Chairman: Which partly makes the point that there are hypocrisies all round. We have an awful lot of protection ourselves and what I think we are all interested in is trying to find a mechanism that actually takes us forward, most of us to freer trade, in ways that actually give people the chance to adjust and take the benefits rather than just take the hits. Although I think we have had a pretty good exchange and there have been some fair differences of view, it has also been a very open dialogue and I thank you very much for coming. I am sure we will meet again on numerous occasions, thank you very much. Memorandum submitted by Overseas Development Institute Examination of Witnesses
Witnesses: Ms Sheila Page, Senior Research Associate, Overseas Development Institute, and Professor Robert Wade, Professor of Political Economy, Development Studies Institute, London School of Economics, examined. Q43 Chairman: Can I first of all thank you for being here; apologies that we have overrun a little bit, but we have been having quite a lively exchange of views. I appreciate that you have expertise to share with us really on the issues of what, I think we all agree, is an extremely complicated agenda in trade because there are so many different issues that are being brought into play. With two weeks to go before Hong Kong and some of our previous witnesses saying that not only is a deal not possible but not even desirable, can you really indicate what you think at the moment are the stumbling blocks for an agreement in Hong Kong? What, if anything, do you think will break the logjam? Ms Page: Thank you for inviting us to give evidence on this. There are two types of stumbling blocks, there are the fundamental ones and there are the detailed ones. The fundamental one is that this round started a little too early after the previous round. Normally a WTO round starts when some country has built up a real desire to change something, a real desire for more access, a real desire for more protection of property, something. This one started more or less automatically because the Uruguay Round provided for negotiations on agriculture and services to start not more than five years after 1994, therefore the Seattle Conference happened in 1999. Then the other areas of the negotiations were added because it is very difficult to negotiate on agriculture if you are not also looking at non-agriculture, and once the negotiating started people brought other things in. But we remain with the fundamental problem that on agriculture there is a real feeling by all developing countries that they did not get what they expected to out of the Uruguay Round and they did not get what they thought they had got out of it on agriculture. The details almost do not matter, but there is a real feeling that this time something must happen on agriculture. On the other side the EU and the US - but mainly the EU - do not particularly want a move on agriculture and there is not a corresponding countervailing pressure from any private sector interests in non-agriculture or services that would push the EU on agriculture, so the EU does not face any internal pressure not to just sit there and do nothing. The specific stumbling blocks are agriculture, of course, and exactly how much the EU can negotiate beyond its currently planned reforms, and it could do this either by agreeing to do something after 2013 - and after all the round will not end until, the most optimistic, 1 January 2008, 2013 is only five years after that and it took us ten years to put all the Uruguay Round reforms through, so that is not inconceivable - or the EU will have to eat a lot of words. On the other side there have been fairly strong indications that some of the larger developing countries will offer something on non-agriculture, will do something on services, but because of this resentment over agriculture they feel even more strongly, as people always do in negotiations, that they do not want to take the first step. Q44 Chairman: It does appear hypocritical for the EU to say that reform of our agriculture is conditional on further tariff reductions on NAMA and GATS, even if people view that as a desirable step. It is a pretty one-sided approach. Ms Page: It is even more one-sided than that because what they actually said in the 28 October negotiating document was: this is what we have already decided to do within the EU on agriculture and we are not going to do any more, but we still want you to do something more. It is an odd negotiating position regardless of tariff reductions. Q45 Chairman: What you say is that the extent to which the UK can influence the position will be to press on at least with the 2013 date and some kind of principles, is that right? Ms Page: To press on with that and also to press for a slightly more accommodating approach to it, because the EU acquired at the last ministerial meeting in Cancun two years ago the reputation of waiting to give all its concessions until the early morning on the Sunday, which was the last day. This was tactically not a good idea because, as someone pointed out in the previous session, you are now negotiating with groups and groups can respond and turn around as quickly as individual countries. So the EU would be the worst country to do a last minute presentation of this kind. Chairman: I witnessed that in Johannesburg, as you did, Joan. Joan Ruddock: Yes. Q46 Chairman: Do you have anything to add to that, Robert? Mr Wade: Only that I think the conflicts of interest are so deep, the conflicts of interest that were there right from the very beginning of the Doha Round, and the term "Doha Development Round" was a kind of fudge to try and get developing countries on board to paper over these very deep conflicts coming out of the Uruguay Round and which blew apart the Seattle meeting. Those remain very deep so there are many more stumbling blocks on the way to the Doha Round than there are opportunities for solution. Right from the beginning there was a very high probability that it would fail. Q47 Ann McKechin: Turning to the NAMA discussions, under what circumstances should developing countries be allowed to protect their industrial sectors from outside competition, and also - we heard some evidence this morning - whether there is any differentiation between the Chinas and Indias of this world and the sub-Saharan countries of Africa. Mr Wade: You mean should there be any differentiation? Q48 Ann McKechin: Should there be any differentiation between the liberalisation demands and the policy debates as have been referred to by the NGOs? Ms Page: You can actually eliminate from consideration a lot of the sub-Saharan African countries from the start because it has already been agreed - as far as anything is agreed - that all the least developed countries will not be asked to make concessions on tariffs in either agriculture or non-agriculture in this round. There is a bit of ambiguity about whether they will be asked for anything on services or not, but certainly on tariffs they are not being asked to cut, so that takes 13 or 14 countries out of consideration to start with. Secondly, the cuts that are proposed in NAMA tariffs are what I call the bound tariffs, in other words the tariffs that have been registered with WTO. While developed countries on the whole have applied tariffs that are roughly the same as their bound tariffs, most developing countries have lowered their applied tariffs substantially over the last ten years and are now typically 40 to 50 per cent bound, 20 to 25 per cent or less applied, so you could have a 50 per cent cut in tariffs with absolutely no effect on what you are actually doing. The exceptions to this are quite few, and the important exception is India which still has very high applied tariffs and applied tariffs that are similar to their bound rates. Q49 John Battle: Applied tariffs are what? Ms Page: Applied tariffs are what you actually charge at the border, bound is the maximum you are allowed to charge by the WTO. If you are charging half what you are allowed to, you can very happily accept a requirement to cut your bound tariff by up to 50 per cent. It does of course reduce your freedom ever to change the policy backwards, but it does not remove it, there is always the possibility of renegotiating the bound tariff, although it is quite difficult. More importantly, most of these countries are not actually trying to do that at the moment. The point you are trying to make about industrial policy - which is of course the argument for having tariffs - is that this is an argument normally for strategically chosen tariffs, not for a generally high tariff proposal. So as long as you are allowed some high tariffs, it is within reason possible to have a strategic industrial policy and have a general tariff cut. While we talk constantly about the formulas - agriculture and non-agriculture - whatever deal is done, it is going to be like Gruyere cheese, it is going to have lots and lots of holes in it with exceptions and special products. It is very important to decide exactly what you want to do and then see whether the proposal is going to allow you to do it, rather than you - being each least developed member of the WTO - taking a blanket position that a particular formula will hurt you. It may hurt you, it may have absolutely no effect on you, it may require you to do some rather strategic rearranging of your tariffs, but there simply is not an answer. Q50 Ann McKechin: But it needs each individual country. Ms Page: Each individual country needs to do this. It is not a universal route to anything - Zaire is one of those that applied tariffs way below the bound tariffs but it is not an African issue, it is literally a country by country issue. Q51 John Battle: I wonder if I could pursue the point about services really; what would you see in the service negotiations are the main obstacles really? Mr Wade: For GATS? Q52 John Battle: Yes. Ms Page: The main obstacle, frankly, is that this is not what trade negotiations are accustomed to negotiating, and the whole structure of knowing how to do it is a lot weaker than on tariffs where we have been negotiating about them for 150 years and know all the tricks. Services has only been there since the Uruguay Round, so when the EU, for example, asked that all developing countries must include a certain number of services, this, to anyone who knows anything about services, made no sense because to include services really means to have a section in your offer on services referring to that particular service. What that section may say is that we restrict foreign providers of this in every conceivable way, but you have still included the section. There is a bit of floundering on services by trade negotiators and the one promising thing in the last couple of weeks, literally, has been a return to using the word "plurilateral", which means that you reach an agreement among the major suppliers and major consumers of a particular service, and once you have done that you can then open it on an almost every nation basis, but to all the other members of the WTO. But you do not talk about formulas, you do not talk about numbers of sectors, you actually get together some people who know about telecommunications - as was done after the Uruguay Round - to work out what is important on telecommunications. Then you get someone to transfer that into GATS language and then you put it through. If one could get some working groups going on some of the other services - transport is an obvious one that is of interest in developing countries, tourism - where you need to bind in some of the current access, possibly the questions of the movement of temporary labour from one country to another and where there are a lot of precedents within regional agreements on how you can do this. So it is not an impossible thing once you get some people who know about it but, frankly, if you leave it to the people who know about tariffs it is not going to work. Q53 John Battle: In your first answer, Sheila, you mentioned about the round starting too early and, in a sense, the thing is not building up from the base, from the south, for change, but from the top, the northern, dominant approach. In terms of service negotiations, do you detect any pressure from the south for service negotiations that could be beneficial to poor countries? Ms Page: There are two or three initiatives, particularly among the COMESA group of countries in Africa for having a negotiation on services; there is a Caribbean position on services; India has recently talked very strongly about what it should do on services because of course the outsourcing of services is becoming a major export for it. In terms of the GATS process it is years after all the deadlines but countries are now starting to get this done so that given time, which we do not have, we could start to have some sensible negotiations. It is time now that is the problem. Mr Wade: Can I comment on one aspect of GATS which is mode 4, movement of natural persons, or the idea of having a multilateral agreement for short term migration of both unskilled and highly skilled people from developing countries to rich countries. My sense is - but I stand to be corrected - that some developing countries, especially those with deep labour pools like India and China, are developing quite an interest in having a multilateral negotiation in the WTO under the umbrella of GATS on this, and they may push in Hong Kong for some substantial initiative on this kind of agreement. My guess is that the advanced countries would strongly oppose or certainly try and divert any such negotiations in a multilateral forum for various reasons, not least the sensitivity of Britain, France and Holland to restricted Muslim immigration, which would be seen as a bombshell. What they are doing is to engage in bilateral and regional negotiations to bring in unskilled and skilled labour, such as Japan making agreements with the Philippines and Vietnam, and the US of course has its H1B visa scheme. If this becomes an issue with the big developing countries pushing it in Hong Kong, then I think the temperature will go up and they will get nowhere, and it will be seen as another kind of breakdown issue. Q54 Mr Davies: Professor, do you accept the theory of comparative advantage? Mr Wade: I do not accept it as a guide to what developing countries in particular should do in their trade policy, for the reasons given earlier. I think assumptions that are integral to that theory make it simply a misleading and, indeed, a dangerous guide for developing country trade policies. Q55 Mr Davies: Trade Justice this morning referred to empirical studies which purported to show a major causal relationship between trade liberalisation and economic growth. Are you familiar with that literature and can you make any comment on it? Mr Wade: Yes. I actually do not think the evidence is as a clear-cut one way or the other as the earlier witness suggested. What I do think is the case, and this is really an answer to Joan Ruddock's point - you asked for evidence of countries that had practised selective protection as part of a larger industrial policy, the point that Sheila made earlier, and that is the critical point. We are talking of protection, not as a kind of blanket high levels of tariff all over, but the scope for protection as part of a larger industrial policy. The most obvious cases, the most devastating cases to ideological free traders, are not places like Honduran rice farmers but cases like Japan in the post-war era, Korea, Taiwan - I have written a great deal about all three cases - also Vietnam, China today; all of them have had high levels of protection. I am not talking about uniformly high protection, but protection which in some sectors was high because it was one instrument amongst others by which these countries were promoting certain industries and then subsequently the protection was brought down as the industries became successful. The fact of the matter is that this has worked; it has worked in the most successful countries of all, and on the other hand you had, for example, a whole swathe of countries in Latin America who had indeed followed something if not close to free trade then close to a highly liberalising economic strategy since the 1980s, and their economic performance has been really dire, both in relation to that --- Q56 Mr Davies: Chile? You are saying that in Chile the economic performance has been dire? Mr Wade: We are not saying Chile. Q57 Mr Davies: But that is an outstanding example of trade liberalisation --- Mr Wade: In most Latin American countries - in most - the region as a whole has clearly been something of a star pupil of the Washington consensus, as we call it, and its performance has been dire, both relative to that of east Asia and relative to that of the previous two decades when it was following an import substituting industrial strategy. Its growth performance since 1980 at a regional level as a whole has been roughly half that of the previous two decades when it was not following a kind of Washington consensus agenda. These are empirical facts, but then there are exceptional cases, I agree, such as Chile, but I do not think that the exceptional cases are the rule, they are exceptional cases; Chile is exceptional. In other words, Joan, there is a lot of evidence. Joan Ruddock: This is going to sound very odd on the record; I should say I was attempting to leave the room. Thank you. Q58 Mr Davies: I do not know whether that response was to Joan Ruddock or me, but it was interesting anyway. Can you explain to the Committee why, in a recent article in the FT, you said that projections about the benefits to developing countries from reductions in export and production subsidies are exaggerated? Mr Wade: I was thinking of Martin Wolf's article in the FT where he claims that the World Bank projections to 2015 show very large gains to developing countries of complete agricultural liberalisations in the West, in the EU, Japan and North America. I was puzzled and I went back to look at those studies, and part of the reason why he said the gains were very large was because he was talking in terms of money - that is increases in income in terms of so many billions higher GDP in developing countries --- Q59 Mr Davies: It was 350 million, was it not, the World Bank study? Mr Wade: I am just coming to that, hold that point for a moment. He was talking of numbers, billions. If you put it in terms of percentages, percentage of GDP, how much increase in the GDP of developing countries by 2015, the percentage is tiny. The current estimates - and these are estimates now based on the numbers for 2003, that is since China joined - suggest that the gains to developing countries will be of the order of 0.01 per cent gain. That is one point, the World Bank's own estimates - people like Kim Anderson's projection models - show that in percentage terms the gains are very small. The other thing of course is that we are talking about projections to 2015 and the margin of error around these projections is very large. What you cannot say, therefore, is that the World Bank projection studies show that the gains in percentage terms are large; essentially taken at face value they suggest that the gains are pretty small. Q60 Mr Davies: We shall have to look at that because I gather that in the World Bank's global economic prospects model - and of course a model is only as good as the assumptions on which it is based - what comes out on the basis of rich countries' agricultural tariffs being limited to ten per cent, manufacturers' tariffs to five per cent and developing countries' tariffs around five per cent higher, is that the gains for developing countries are in the order of US$350 million by 2015. US$350 million, even spread over ten years, is a good deal more than 0.01 per cent. Mr Wade: The critical point is that the World Bank has very substantially, in a new study, revised downwards those prospects. Q61 Mr Davies: I was not informed of that by those by whom we were briefed. We had better see the new study, perhaps we could get it from the World Bank. Mr Wade: Yes. Ms Page: Could I just say something about the study? The trick is that you have to be very careful because the World Bank, when it is talking about the gains from trade negotiations, includes the country's gains from its own liberalisation. From a trade welfare point of view it is obvious to any international economist that the principal gains from the EU reforming its agricultural policy will go to you and me, they will go to consumers within the EU, but this is not the way countries negotiate at the WTO. If the EU wants to reduce its agricultural subsidies and tariffs on its own unilaterally it can, subject to EU procedures, do that this afternoon. One has negotiations in order to force other countries to do something, so someone doing the calculations will only include the gains that you get from what other countries do. More than half of the World Bank numbers come from what countries do or do not do themselves. The second point to make is that a lot of the assumptions are considerably larger than the sorts of settlements that we are actually likely to get out of the round, but the third point, in the opposite direction, is that, yes, the gains in aggregate terms are going to be some fraction of a percentage, but the gains for particular countries and particular types of producer within those countries will be extraordinarily large for him, and some of the losses for other countries, as we heard earlier this morning, which on aggregate are point zero something, are going to be very large for particular countries. The WTO has in the end to reach an agreement that satisfies sufficiently every one of its members that they are willing to sign up for. Working through the aggregate numbers therefore is interesting, but it bears very little relationship to what the negotiations are actually about, which is will my country gain or lose. Q62 Mr Davies: All I can say is that any economist I have ever met from the World Bank - and I have met quite a number - has always seemed to me to be extremely professionally competent, so I think we had better look at these studies. I doubt they are open to very simplistic methodological challenge, but we will see. Ms Page: It is not a challenge, it is just a difference of how you do the numbers. They say how they do the numbers and from an economic point of view the gains which one gets from liberalising one's own trade are certainly gains; the question is are they gains because of negotiations or not. Q63 Mr Davies: If the assumption was that they are gains from negotiations they would be covered in that way; if not, they would not be covered in that way. It is the sort of mistake I do not think the World Bank probably would be making. Can I ask you, Professor Wade, do you believe that greater market access for developing countries would be more beneficial than the removal of subsidies, and if so for which countries and which sectors in broad brush terms? Mr Wade: Could I ask you to say that again? Q64 Mr Davies: Do you believe that actually the greater market access would be more important for developing countries than removal of subsidies. In general, do you think it is more desirable to proceed down the route of greater market access for developing countries in Japan, EU, the United States? Mr Wade: Particularly for agriculture. Q65 Mr Davies: They mostly have free access for agricultural products at the present time, so for agriculture, yes. Mr Wade: Frankly, I do not know. It is probably something for Sheila, the relative importance of subsidies versus protection. Ms Page: I would like to draw the Committee's attention to a paper that the WTO just put out yesterday on developments in the round. You might want to take account of it because it is billed as a revised version of the previous one, but it is not, it is a completely new one. One of the things that struck me in that is that although all the chapter headings are the same, the contents are different, and in particular they have reorganised it to put access before subsidies in discussing agriculture, so all their emphasis is on access. If you ask delegations in Geneva what is the one thing you want, it tends to be access, with the exception of the cotton-producing countries of West Africa, which of course are damaged by subsidies, and some of the food-importing countries who actually are helped by subsidies on food exports. It is unsafe to say most countries because most members of the WTO are actually quite small countries, and there is a very large number of countries which might be damaged by subsidies, but most people in developing countries are in countries which would gain more from access than the effect of the subsidies, which is not to say we should not get rid of the subsidies. Mr Davies: That is a very clear answer to my question, and I am grateful. Thank you. Q66 Hugh Bayley: Whether one listens to John Hilary or to you, Robert, you both, with a slightly different amount of passion, counsel that the theory of comparative advantage breaks down when you compare an elephant with a mouse. Mr Wade: I did not emphasise country size differences, I emphasised that it is not a theory of growth if it contains nothing in it which is to do with relative growth rates, and that is very important. It is a very static theory. Hugh Bayley: I had understood you to be saying that the evidence was inconclusive. Q67 Mr Davies: Specialisation hampers growth, is that what you are saying? Mr Wade: Yes, the predominant process in development is a process of diversification rather than specialisation, number one, and, number two, agricultural specialisation is a trap because agriculture faces diminishing returns and declining terms of trade, so that while some increase in agricultural exports may be a good thing in the short run, it has to be part of a larger development policy which is diversifying out of agriculture. Agriculture, except for a rather small number of countries, is a bad thing to concentrate on. I remember reading in the Financial Times a report of the impact of China on Latin America in which an analyst suggested that China's rise in manufacturing would encourage Latin America to go back to its historical comparative advantage, namely agriculture and primary products. This analyst suggested that would be a good thing for Latin America, but that is just crazy - Brazil concentrating more on primary products - soy beans - and relying on China for its imports of manufactured goods? That would not be good for Brazilian development. Q68 Hugh Bayley: Can I ask you to look at the other end of the spectrum? Trade policy has tended to protect the interests of smaller countries, or countries with smaller economies, with special and differential treatment. This question is for both our witnesses: which countries ought to benefit from special and differential treatment and what do you see as the main issues to do with special and differential treatment that need to be addressed at Hong Kong? Ms Page: I think, on a practical level to start, there is no future whatsoever in trying at this point to change the classification of countries. It certainly creates a great deal more heat than light and we can all think of reasons why a particular country should or should not get special and differential treatment depending on whether we are looking at that country or the country to which it exports. What one sees - and Claire Melamed made the point in the last session - is that in all the WTO agreements there are a lot of de facto forms of special and differential treatment, with respect to that agreement. The agreement on agriculture last time had a list of countries which were allowed to use subsidies in a particular way; the agreement on intellectual property and public health has a list of countries which say they will not take advantage of the terms of that agreement; the negotiations on agriculture this time are going to allow all countries to specify sensitive products and developing countries to identify special products, and by the time you have done that you should be able to get as much special and differential treatment as you like. There are lots of arguments about the most important areas for developing countries but it is really to identify what its interests are in a negotiation and to find a way of seeing whether, as a developing country, it can get slightly more than the normal - whatever the agreement is on it, so get better than normal access or for less than normal concessions, have more time to adjust to a rule. That is the point of some generalised special and differential treatment, as you can imagine, but if you are actually asking the question you have to say what is important for Brazil, what is important for Malawi, and the answers may be different. Q69 Hugh Bayley: Can I push you a little further, Sheila? You are talking about especially sensitive products and there is a big row about the EU proposal because although it sounds as if it is just a few percentage points, basically it will allow rich countries in Europe to protect pretty well anything that they feel would benefit from protection. If one sees special and differential treatment as a way of providing space for economies that are not competitive in a particular area, to allow them to adjust, there cannot be any case, can there, for special and differential treatment for developed countries? If you accept that premise then you must draw a distinction, you must draw a line at some point, even if you draw a line after the OECD and say special and differential treatment will apply to everybody else. A line has to be drawn at some point, but is it right that the line should be drawn there, so that any country that finds itself as a developing country gets this special and differential treatment, or should you - which seems to be happening in practice through trade negotiations - should you be drawing it to provide a higher level of protection for the least developed countries? Ms Page: But there is not a single line, there are lots of lines. The line that is appropriate for one area is not appropriate for somewhere else. India is not a developing country in agriculture, it is quite competitive in manufacturing and it is competitive in some services. For Brazil, it is a different set of things, China yet a different set, and even to say agriculture does not tell you very much because you are looking at particular products. Q70 Hugh Bayley: Do you see Hong Kong being able to tease out, at least in some areas, some sub-groups of countries that require special and differential treatment for particular sectors? Ms Page: This is what the sensitive and special products are intended to do. You mentioned the EU's eight per cent; again, according to World Bank calculations, which we agree are always very professional, you only need to eliminate two per cent in order to protect everything that is necessary and from Brazil's point of view you probably only need to eliminate about five products before it ceases to have any value, so sensitive products is one of the areas where there will be negotiations. I do not think it is useful to think about having too many exceptions, because the point of having the WTO is that countries have decided that it is worth having some costs for the benefit of certainty. Where the WTO makes mistakes is when it tries to extend the rules too far, forgetting that it now has 148 - 149 since last week - very different countries, with not just different levels of development but different approaches to development, and that is an issue about what policy is required. That needs thinking about. I have great difficulty with your question because if you were asking me about tropical products I would have one answer, if you were asking me about financial services I would have a different answer. Chairman: That is what we are struggling with, the more you get into it the more complicated it becomes and the more special circumstances there are. Q71 Hugh Bayley: Should there be a graduation strategy? Once you have agreed a package for special treatment do you provide that for all time? Ms Page: It is never for all time, it is until the next WTO round. It can be defined by income level, but in the end it is normally defined by list. The list may be based on income level but formally there will be a list of countries and there are provisions for revising the list of least developed countries and provisions for revising each of the lists within the WTO definitions, even if not for developing countries themselves. Q72 John Barrett: I am going to turn to aid for trade. What is aid for trade? Is it basically a bribe? Is it something that is only going to help winners in the most developed countries? Is it going to affect the WTO negotiations and is it something that is going to be a very one-sided equation? Ms Page: Aid for trade now tends to mean whatever the speaker thinks has been neglected recently and therefore needs some more money, but there are probably three useful definitions of it. One is the very narrowest one, doing something about the integrated framework for the least developed countries, which is not aid for doing things so much as aid for assessing the needs of countries from the trading point of view, and everyone is agreed on that one and there is no dispute about it. Then there is the broadest definition which is the argument that there should be a shift of aid resources in general towards more support for things to do with trade, with productive capacity, with helping the so-called supply side in states and countries and away from the emphasis on more social types of spending, which has probably been brought to the fore by the fact that there is a WTO round going on, but it is not of itself directly connected to the WTO round. These are countries that had supply side problems before the round and will have supply side problems after. What I think is the important one to note in the WTO context is the so-called costs of the round, costs of negotiations. In the Uruguay Round it was the expected increase in the price of food because of agricultural reform which would have an impact on food-importing developing countries. The reform never went far enough to have any effect on anything so this was not a problem, but you can see that it is an identifiable problem for a country that will be hurt by something that is for the general good. The preference erosion definition is the same sort of thing: if you reform the EU sugar policy you can try to do what has been done so far, which is ensure that even if you lower the price internally you do not actually allow any imports in, but eventually the EU is going to have to allow some imports in. This will help some countries, it will hurt the traditional suppliers, it will help more people than it will hurt, therefore you want to find a way of compensating the losers. It is wrong to use words like "bribe"; in a sense all negotiations are about bribery - if you open your agriculture I will bribe you by opening my services, so it is a bribe in that sense, but it is no more of a bribe than anything else in the round. Q73 Chairman: Some people would call that a negotiation. Ms Page: Yes. There are certain countries to whom we have offered already virtually 100 per cent market access - the least developed countries have duty free, quota fee access in the EU, the ones of them who are African have access for most of their products in the US, and with the exception of rice to Japan and dairy to Canada they have reasonably good access for their products to Japan and Canada. You cannot offer this sort of country anything but access so if, as you said at the beginning, all countries are likely to have some gain from the round, you have to think of something else to offer them, and as economists our minds naturally turn to money. Mr Wade: Can I just flag one issue under the heading "stumbling blocks" because this has not come up at all, and that is to do with the proliferation of free trade agreements or preferential trade agreements. As you know, the WTO has a clause which makes it possible for countries to establish preferential trade agreements under certain kinds of conditions, and my sense is that there already has been an explosion of these agreements, there is huge momentum on the part of the US and the EU and other countries to form preferential trade agreements bilaterally or regionally and there is certainly a worry about the relationship between the conditions which are negotiated in the agreements and the conditions that are part of the WTO agreements. It is not obvious that the two things are compatible and complementary, the PTAs may be undermining agreements reached in the WTO and there is a question of whether the WTO is going to try and exert some sort of multilateral discipline on the formation of these agreements. I think it is a very big issue. Chairman: Every time you have an agreement you are actually creating another obstacle to free trade because you are creating a separate set of regulations outside the general, and therefore when you come along and say we need to remove those, you have a whole new set of losers or potential losers, so you are just making it more difficult. What we are struggling with is that in a simple world the WTO would simply say free trade is a good idea and we try to agree how you progress towards it and whether you can categorise economies as able to cope or at what point they are able to cope - the graduated point that Hugh was raising. The concern really is whether the WTO has the capability of delivering that. Q74 Mr Davies: I want to take up a very interesting point that Mrs Page just made. It is perfectly true that since the least developed countries, the poorest countries, already have all the access they could want, they have complete industrial access - with the possible exception of textiles in some areas - and almost complete agricultural access, with the exceptions that you just pointed out, they want to get something out of this trade round and the only thing they can be offered is money, that was your thesis - very well taken, I think. The problem is, surely, that as a result of the Gleneagles commitments they have already been offered all the money that is likely to be available anyway - if you take Gleneagles plus the financial initiative - so it is hardly appropriate, is it, that we have any negotiating leverage with them by offering them money because that is another issue where they have already got the benefit in the bag; they have not received the money, but they have at least been promised it and they are entitled to believe they are going to get that irrespective of any conclusion of any deal at Hong Kong or anywhere else. Ms Page: You just answered your own question, it is not in the bag. The difference of a WTO fund, as some people are proposing, from a normal aid fund is that it would be in some way assigned to countries on the basis of their assessed needs in WTO terms, the various things that are outlined. Provided a country came up with a halfway reasonable plan for how it would spend the money, it would get it, and this is what the EU has proposed for the countries who will suffer because of the sugar reforms, they will actually work out how much each country should get. The problem with relying on the G8 promises - without being too rude about them - is that there have been promises about increased aid before and the aid, even when it comes, will be conditional, will be for the things which the donors want it to be for, whereas in the WTO --- Q75 Mr Davies: That will be conditional too, presumably. Ms Page: It could be less conditional. It could be clear that if Country A has calculated that it has lost N million dollars on food imports, Y million on preference erosion, it is entitled to --- Q76 Mr Davies: That is a very precise degree of conditionality, that is quantified conditionality, but a different conditionality might then be imposed by governmental or multinational aid agencies. Ms Page: But it would not be conditional on what it did with the money, it would not be conditional on whether it had good governance or not, it would not be conditional on whether it was on the list of countries entitled to receive IMF funding at the moment, or whatever. I think it is unlikely that it could be as clear-cut as I have just outlined, but I think it is possible that there could be more of an entitlement than there is. One of the points which the Director-General made yesterday when we were talking about development was that on special and differential treatment there was a need - he implied that he agreed with countries on this - for a binding special and differential treatment for countries that had enough disillusion with so-called best endeavours policies where countries will do the best they can to provide special and differential treatment, and he did, according to the text on the WTO website, actually use the word "binding" which is a fairly strong word in WTO terms, it is what tariffs are, it is the whole legal basis of the WTO. That would be a change because up until now a lot of the special and differential treatment has been that countries should get this, but there is no particular entitlement to getting it. It would be binding more in terms of moral persuasion probably than in terms of legal things, but that is not insignificant. Q77 Chairman: It is not realistic to assume that the WTO could agree that developing countries could just make their own arrangements on tariffs, which is what our previous witnesses were asking for. It is not a realistic proposition. Ms Page: By joining the WTO they gave up that right, and like everyone else they have a right to give three months notice and go. Mr Wade: It is possible, I think, to craft the rules so that the rules do not say that there is a simple direction, liberalisation, which all countries must proceed on, it is possible to craft rules for not just trade but trade-related industrial policies which do give countries more, as they say, policy space, but the use of which is nevertheless rule-bound so that it is not a matter of people saying give developing countries maximum policy space or unbridled sovereignty, this use of policy space has to be rule-bound and it can be rule-bound. In other words, I come back to your very initial framing of the whole issue between free trade and protectionism, and I think that that basic framing of the debate is wrong. It is wrong because it obscures where we should be heading, and we should be heading, in a way, somewhere which recognises that protection can have a place as part of a larger industrial policy, it can also be abused, it can also have negative effects on other countries, but still it has a role. Multilateral rules should allow for the constructive use of trade protection in rule-bound ways. Chairman: That is a good closing point because what we are actually grappling with is where these lines are drawn. Both of these sessions have kind of pushed the boundaries a bit, so I want to thank our previous witnesses and both of you as well. I just hope that when we get to the end of this process we have (a) something positive going on with the WTO, and (b) something useful that we as a Committee can add to that. Thank you very much. |