House of Lords - Economic Affairs

Select Committee on Economic Affairs First Report

CHAPTER 6: MANAGEMENT OF THE INTERNATIONAL TRADING SYSTEM

185. Although membership of the World Trade Organisation (WTO) does not extend to every country,[97] in effect, it governs the international trading system. Following the Uruguay Trade Round (1986-94), the WTO was created on 1 January 1995. It succeeded the General Agreement on Tariffs and Trade (GATT) which had been agreed in 1947 as part of the Bretton Woods settlement.

186. The stated purpose of the WTO is:

"… to help trade flow as freely as possible - so long as there are no undesirable side-effects. That partly means removing obstacles. It also means ensuring that individuals, companies and governments know what the trade rules are around the world, and giving them the confidence that there will be no sudden changes of policy. In other words, the rules have to be 'transparent' and predictable".[98]

The underlying principles of the WTO are that "the trading system should be:

without discrimination—a country should not discriminate between its trading partners … ; and it should not discriminate between its own and foreign products, services or nationals … ;
freer—with barriers coming down through negotiation;
predictable—foreign companies, investors and governments should be confident that trade barriers (including tariffs, non-tariff barriers and other measures) should not be raised arbitrarily …;
more competitive—by discouraging 'unfair' practices such as export subsidies and dumping products at below cost to gain market share;
more beneficial for less developed countries—by giving them more time to adjust, greater flexibility and special privileges."[99]

187. GATT dealt only with trade in goods and, at first, focused on lowering tariffs on imported goods. After 1947, there were a further seven trade rounds under GATT.[100] These extended to negotiations on anti-dumping and non-tariff measures as well as tariff reduction. The Uruguay Trade Round, as well as establishing the WTO, also brought a number of controversial new areas within the multilateral trading arrangement. These included: trade in services, intellectual property, agriculture and textiles. In November 2001, at the fourth WTO Ministerial Conference in Doha, Qatar, a new round of trade negotiations - described as the Doha Development Agenda - was launched. They include earlier negotiations on agriculture and services which were begun in early 2000. A completion date of 1 January 2005 has been set. Progress will be reviewed at a fifth Ministerial Conference in Cancun, Mexico, in September 2003. The Ministerial declaration adopted in Doha on 14 November 2001 gave prominence to the need to promote economic development and the alleviation of poverty in developing countries. Whilst asserting the objective of trade liberalisation and the abolition of protectionism, the declaration stated that the new round would be "… committed to addressing the marginalisation of least-developed countries in international trade and to improving their effective participation in the multilateral trading system."[101]

A "rules-based" trading system

188. The WTO administers trade agreements between members and offers a binding disputes mechanism.

189. During the course of this inquiry, the Committee visited the WTO in Geneva. Mike Moore, then Director-General of the WTO, told us that the "simple duty" of the WTO was "to facilitate negotiations between members and then, where members disagree, supply to them something unique in the international architecture, that is, a binding disputes mechanism". He described the disputes mechanism as "the jewel in our crown" (Ev II, Q 1102). Pascal Lamy, European Union Commissioner for Trade, distinguished between the legislative part of the WTO - the part that is involved in the formulation of agreements - and the dispute settlement mechanism (DSM). Whereas he praised the efficiency of the DSM, the process for the formulation of agreements was, he suggested, "cumbersome and UN-like" (Ev II, Q 1908). Professor Greenaway thought that the DSM represented one of the key functions of the WTO: "Trade related disputes inevitably arise. To avoid them triggering unilateral action and possible trade wars, effective dispute resolution mechanisms are essential, especially for small counties and developing countries." (Ev I, p 99).

190. Mark Curtis, Head of Global Advocacy Team at Christian Aid, although critical of the WTO, supported a rules-based system of international trade - but cautioned that "the key is what the rules are and who sets them" (Ev I, Q 900). Dr Noreena Hertz took a similar view (Ev II, Q 1667).

Governance of the WTO

191. The WTO is an ostensibly democratic organisation based on the principle of one country, one vote and underpinned by a consensual decision-making process.[102] Mike Moore suggested that this arrangement, although a source of strength, could, at times, be difficult to manage: "It is like having a parliament of 144 members with no parties, no whips, no speakers and no limit to speaking time." (Ev II, Q 1102). The Department for International Development praised the system: "The Government … believes that the WTO provides the best forum in which to achieve democracy in international trade negotiations"; this was because "rich and poor countries have an equal say, with access to all meetings. Since developing countries make up two-thirds of the 144 members of the WTO, they are in strong position for negotiations. Moreover, decisions are only made through consensus - if any country objects agreements will not be reached." (Ev II, p para 11). Lord Desai was similarly supportive: "The WTO system is right now the fairest global economic institution that I know of because it is built on one country, one vote"; he conceded, however, that, as regards the dispute settlement mechanism, there was "an asymmetric power" because the rich countries could afford more lawyers than the poor (Ev II, Q 1732).

192. A number of witnesses, however, were critical of the governance arrangements of the WTO. They alleged that the WTO was biased We detected two main elements in the complaint:

that the WTO is dominated by the major economies (especially the United States)[103] and also, through the governments of those economies, by transnational corporations; and
that, as a consequence, developing countries (in particular, those who are unable to fund representation in Geneva) are marginalised.

193. Dr Caroline Lucas MEP challenged the notion that consensus voting was "necessarily the most democratic way of doing things": "if the consensus situation was working well, if it really was truly democratic, then one would expect the interests of the developing countries to be far stronger than they are." (Ev II, Q 1393). And the Department for International Development told us:

"There are grave concerns among developing countries about the way in which the WTO works … It is a system which in the past has tended to be dominated by a small number of large rich countries and still, I think, developing countries feel that they do not have a weight in its decision making process that is anything like proportionate to their numbers of people. Many developing countries are marginalised from involvement with the WTO, for example, because the smaller and poorer ones do not have any representatives at all in Geneva." (Ev I, Q. 10).

194. Donald McKinnon expressed particular concern about how some developing countries could not be represented in Geneva since, he said, "it is a fact that if you want to have some influence in Geneva you have to go there occasionally" (Ev I, Q 820).

195. The World Bank, in Globalization, Growth, and Poverty, also commented on this issue - both in terms of the ability of some developing countries to maintain a presence in Geneva and to measure up against the greater strength of the richer countries. It suggested however (like Professor Greenaway in paragraph 189 above) that the imbalance "… would be even worse if there was no WTO, because then small countries like Bangladesh would have to negotiate one-to-one with the United States without a multilateral set of rules."[104] Clare Short made a similar point: "If we lost the WTO the biggest losers would be the developing countries because bilateral and regional agreements would be made and they would be marginalised and not consulted about the change." (Ev II, Q 2027).

196. The most striking allegation concerning the influence of TNCs in WTO decision-making is in relation to their role in the formulation of the Trade-related Intellectual Property agreement (TRIPS) (in particular that of the pharmaceutical industry) and of the General Agreement on Trade in Service (GATS). (We consider these in more detail below.) Matthew Taylor MP, Liberal Democrat Treasury spokesperson, commented more generally on the power of TNCs to influence the global trading system. They were, he suggested, "better informed and have a better chance to influence than the democratic representatives" of both developing and developed countries (Ev II, Q 1370). This was not a criticism of TNCs, he said - "they are doing exactly what you expect them to do" (Ev II, Q 1371) - but of the absence of transparency at the level of international decision-making.

197. We put the criticisms about WTO governance to Mike Moore. He agreed that until the Uruguay Round the WTO had been "a rich man's club" which reflected its OECD membership (Ev II, Q 1120). He also agreed that despite improvements since the Uruguay Round, the fact that member countries vary in size so their ability to exercise influence would vary. He acknowledged the practical implication of the cost of maintaining a permanent representation at the WTO: "we have 28 or 29 members not represented in Geneva. You have little Caribbean, little Pacific nations who, if they opened a post here, would be spending more money in Geneva than they would be on education or health." (Ev II, Q 1120). The WTO had, however, attempted to respond to this uneven representation by funding poorer countries to attend meetings in Geneva twice a year.

198. Donald McKinnon told us that the Commonwealth was also working within the WTO to assist developing countries (Ev I, Q 820) and Clare Short referred to a number of measures that were being taken to help poorer countries exercise greater influence in the WTO:

" … not all countries are represented in Geneva because it is expensive to be there. We are working with others to make sure that there is a sort of back-up system of briefing for all countries. Countries need to get briefings back at home in their trade and industry as well as having a representative in Geneva because otherwise you get people in Geneva who know a lot but they never talk to home. You have to build up the competence of both ends." (Ev II, Q 2026).

199. We recognise that member countries of the WTO vary in size and economic power. They vary, therefore, in their capacity to influence decisions in the WTO and, more fundamentally, to maintain a presence at the WTO. It would be naïve to believe that an organisation like the WTO would not be dominated by a small number of rich countries. The important question, which applies to the International Monetary Fund and the World Bank as well, is whether this domination is excessive. We believe that it is in all three institutions, but the evidence we received placed most emphasis on the WTO. We urge the Government, with its European Union partners, to consider, first, how to improve the balance of power in the WTO and, secondly, how to ensure that decisions are more transparent. We acknowledge the commitment of the Government, contained in the White Paper on globalisation by the Department for International Development, in respect of both matters.[105]

Developed country protectionism: agriculture and textiles

200. A notable example of how the trading system seems to be operating against the developing countries is developed country protectionism (through tariffs, subsidies and non-tariff barriers)[106] with respect to agricultural products and textiles. George Soros, for example, referred to the "imbalance" in WTO agreements which was due, to some extent, to the incapacity of developing countries "to fight for their cause" (Ev II, Q 1940). He cited, in particular, trade in agricultural products and textiles. Professor Stiglitz, when asked to explain why the WTO was the target for the anti-globalisation movement, said:

"After the last round of trade negotiations, the Uruguay Round, there was a calculation done by the World Bank that says sub-Saharan Africa … was actually worse off. … It is because of terms of trade effects that they were forced to open up their markets, but the market for goods on which they had a comparative advantage, low grade textiles, agricultural goods, were not being opened up." (Ev I, Q 735).

201. Dr Supachai Panitchpakdi similarly commented on the belief of developing countries that the Uruguay round had penalised them:

"… developing countries have these grievances that, while they were looking for more benefits - market access for agriculture, reductions in interventions and subsidies, a faster phasing out of textiles - as a result of the Uruguay Round they did not get that in the end, but they had to bear the burden of TRIPS …" (Ev I, Q 563).

202. UNCTAD refer to the way in which "market-driven globalisation" was deepening the "biases and asymmetries in the world economy". Evidence of "the lop-sided pattern of trade liberalisation" included developed country tariffs in those sectors where developing countries had an advantage: namely, agriculture, low-technology and resource-based industries and high-technology products which involve unskilled labour in the production of components (Ev I, p 363). In a paper prepared by the Australian Department of Foreign Affairs and Trade, based on the position of the Cairns Group of Agricultural Fair Traders, it is suggested that: "No sector is as heavily distorted and protected as agriculture, and no sector is as important to the livelihood of most developing countries … This protectionist behaviour [by rich countries] has marginalised the ability of many developing countries to participate fully in the global economy and to access many of the benefits of globalisation." (Ev II, p 287).

203. The World Bank, in Globalization, Growth, and Poverty, shed some light on the background to the problem of protectionism in the textiles market:

"Unfortunately, the rules on textiles and clothing were written in a way that allowed industrial countries to greatly delay the abolition of their quotas. Instead of specifying the progressive abolition of quotas, the rules specified the progressive integration of textiles and clothing under GATT disciplines. Industrial countries were allowed to choose the products to be integrated; almost without exception, they chose to begin by integrating the products in which developing countries do not have a comparative advantage. Developing countries that thought roughly half of their exports of textiles and clothing would be integrated by 2002 found that almost all would remain restricted until December 31, 2005 - creating concerns about potential backsliding in the industrial countries."[107]

204. Strikingly, Clare Short referred to there being "a lot of hypocrisy in the rhetoric of countries like our own" and other OECD countries, which encouraged developing countries to engage in openness but practiced protectionism themselves (Ev II, Q 2026).

205. Again, we put the complaint about protectionism to Mike Moore. He acknowledged the implications of the textiles agreement ("which was back loaded so that the greatest openings will come by 2005") but was frank about political realities: "it was the best deal you could get at the time", it was "as much as the negotiators could get." (Ev II, Q 1135). Given the level of agricultural support in the European Union,[108] we also raised this issue with Commissioner Pascal Lamy. He was optimistic about the future. It was recognised, he said, within the EU that support for EU agriculture should be "more trade-friendly … and more development-friendly than it used to be"; the reforms of the Common Agricultural Policy had exceeded commitments undertaken at the Uruguay Round and he expected that the Doha Round would see further progress in giving developing countries more market access (Ev II, QQ 1914-16).[109] Mike Moore took a similar line: "There is a billion dollars a day being spent by rich countries to make food dearer. Subsidies are a crazy mechanism but when they make food dearer they are even more stupid. However, in the Doha Ministerial Declaration for the first time the phrase 'phase out' is there." (Ev II, Q 1135).[110]

206. Earlier this year, the Farm Security and Rural Investment Act 2002 was passed in the United States,[111] significantly increasing the farm subsidy package to US farmers. Commissioner Lamy acknowledged that the US Farm Act struck a discordant note (because, he said, it ran contrary to the general strategy of de-coupling farm support from production) but suggested that it was "one more incentive to increase disciplines in the WTO"(Ev II, Q 1914). Professor Krugman was clear in his view that the US Farm Act was inconsistent with "the rhetoric" of the United States which remained "strongly pro-free trade" (Ev II, Q 1889). Like Professor Krugman, Paul Volcker, former Chairman of the Federal Reserve, suggested that the incentive behind the US protectionism was political: "Farmers have a lot of direct political support … the typical voter is not upset apparently about providing more support for farmers." (Ev II, Q 1759).

207. The deleterious effect of the US and EU agricultural policies on developing countries and the confusion - as far as the economics is concerned - underlying them were clearly illustrated by Niall FitzGerald of Unilever plc. He gave sub-Saharan Africa as an example: "If there was free access to the OECD economies for agricultural products in sub-Saharan Africa, it would have a value somewhere between $22 billion and $25 billion. All of the aid that goes to sub-Saharan Africa is $14 billion so already the economic equation is ridiculous." (Ev II, Q 1562). Nicholas Stern offered a further illustration: "The total subsidies for agriculture in rich countries are around $350 billion a year, a number which is about seven times total aid and is about equal to the GDP of sub-Saharan Africa. They are colossal and a very serious problem." (Ev II, Q 1822).

208. We consider that developed countries' protectionism (mainly in the United States and the European Union) with regard to agricultural and textile products in particular is wholly objectionable and unjustifiable. In coming to this view we are particularly struck by the evidence of Clare Short (in paragraph 204) and Mike Moore (in paragraph 205) which we believe should inform future debate on the subject. Developed country protectionism places an unfair burden on developing countries and is in stark contrast to the protestations of the leaders of rich nations that they are committed to helping the world's poor. We urge the Government, within the EU and the WTO, to take stronger steps to ensure that it is brought to an end.

WTO Agreements

209. A number of witnesses were critical of some WTO agreements. We received a significant amount of evidence in particular about the TRIPS agreement and GATS.

The agreement on Trade-related Intellectual Property Rights

210. TRIPS was introduced during the Uruguay Round in 1994.

211. The agreement has been subject to a great deal of criticism. Two fundamental charges are laid against it:

that it is the product of corporate lobbying and is likely to act in the corporate interest and to the detriment of developing countries (the principal complaint being in relation to developing countries' access to medicines); and,
that it is burdensome to developing countries which need to establish an enforcement infrastructure necessary to enable compliance.

CORPORATE INTERESTS …

212. A number of witnesses complained that TRIPS had been inspired by corporate interests against the interests of developing countries. Christian Aid, in Trade for Life: Making Trade Work for the Poor, describes TRIPS as "a case of massive corporate protectionism that enables TNCs to secure monopoly rights over knowledge and natural resources, and that transfers wealth from South to North."[112] Christian Aid alleged that TRIPS poses two major threats to developing countries: first, that by allowing companies of one country to patent the natural resources of another, TRIPS enables transnational corporations to expropriate indigenous resources of developing countries;[113] secondly, TRIPS is likely to make it more costly and complex for developing countries to access new or existing science and technology.

Box 1

TRIPS
According to the WTO's Trading into the Future,[114] TRIPS is "an attempt to narrow the gap in the way that [intellectual property rights] are protected around the world, and to bring them under common international rules". The agreement deals with the following broad issues:
·  how basic principles of the trading system and other international intellectual property agreements should be applied;
·  how to give adequate protection to intellectual property rights
·  how countries should enforce those rights adequately in their own territories
·  how to settle disputes on intellectual property between members of the WTO
·  special transitional arrangements during the period when the new system is being introduced.

The agreement covers copyright and related rights, trademarks, geographical indications, industrial designs, patents, layout-designs of integrated circuits and undisclosed information including trade secrets.

213. We asked Professor Joseph Stiglitz, a former Chairman of the United States Council of Economic Advisers, about the influence of transnational corporations in the globalised economy. He gave TRIPS as an example of the extent of their influence:

"Both the Council of Economic Advisers and the Office of Science and Technology and Policy in the White House felt that the intellectual property agreement, TRIPS, that was part of the 1994 agreement was not balanced. We worried, for instance, at the Council of Economic Advisers about what it would do to access to life-savings drugs, such as for AIDS, if it were implemented and our worries turned out to be fully realised, but we could not overcome the influence of the pharmaceutical companies and the movie companies that were dictating US economic policy in that area, and that had to do a lot with the structure of governance of the international arena." (Ev I, Q 721).

… ACTING AGAINST DEVELOPING COUNTRY INTERESTS: ACCESS TO MEDICINES

214. TRIPS has caused most concern in relation to developing country access to medicines. The recent Report of the Commission on Intellectual Property Rights[115] describes the context of this debate:

"The impact of intellectual property rules and practices on the health of poor people in developing countries has generated substantial controversy in recent years. Although this predated TRIPS, and featured prominently in the TRIPS negotiations, impetus has been added by the coming into force of TRIPS, and the dramatic rise in the incidence of HIV/AIDS, particularly in developing countries."[116]

The report, after noting the role of the pharmaceutical industry in bringing about the global extension of intellectual property rights under TRIPS, suggests that, as regards developing countries, "a major concern was how the adoption of intellectual property regimes would affect their efforts to improve public health, and economic and technological development more generally, particularly if the effect of introducing patent protection was to increase the price and decrease the choice of sources of pharmaceuticals."[117] The report quotes an Oxfam Briefing Paper to demonstrate the core complaint of NGOs: the "essential flaw" of TRIPS, according to Oxfam, was "… to oblige all countries, rich and poor, to grant at least 20 years' patent protection for new medicines, thereby delaying production of the inexpensive generic substitute upon which developing-country health services and poor people depend."[118]

215. The track record of the pharmaceutical industry in addressing specifically developing country health problems provides little or any reassurance that their interests and those of developing countries coincide. The following statistics taken from the Commission's report are revealing: "it is estimated that less than 5% of the money spent worldwide on pharmaceutical R&D is for diseases that predominantly affect developing countries";[119] "in 2002, the world drug market is valued at $406 billion, of which the developing world accounts for 20%, and low income developing countries very much less";[120] "large pharmaceutical companies are unwilling to pursue a line of research unless the potential outcome is a product with annual sales of the order of $1 billion";[121] and "of the 1393 drugs approved between 1975 and 1999, only 13 were specifically indicated for tropical diseases".[122]

216. We raised this matter when we visited the WHO in Geneva. Dr Gro Harlem Brundtland, Director-General of the WHO, when asked about intellectual property rights and research by pharmaceutical companies said that "there has been a history in this organisation to try to inspire and to argue and to work with others to have investment in research as a global good" (Ev II, Q 1205). Dr Brundtland described how pharmaceutical companies were encouraged, by the provision of public money, to undertake research into less profitable medicines. But she also thought that rules on intellectual property were necessary to ensure that research was undertaken: without some intellectual property regulation "there will not be investment in new things" (Ev II, Q 1205).

217. Sir Richard Sykes, Chairman of GSK, a major pharmaceutical company, confirmed the view that without intellectual property protection, research by private companies would be inhibited:[123]

"GlaxoSmithKline believes that TRIPS strikes an appropriate balance in encouraging the innovation that is essential if we are to see advances in treatments and vaccines for developing country diseases, while providing flexibility for governments to safeguard public health interests. … The re-opening of TRIPS … would do nothing to improve access [to medicines in developing countries], but would help to undermine the incentive to invest in the discovery and development of new medicines" (Ev II, p 99).

TRIPS was not, he said, the reason why many developing countries lacked reliable access to essential medicines. The cause was "poverty and the resulting lack of infrastructure and resources that are required to run effective healthcare systems" (Ev II, p 99).

BURDEN OF COMPLIANCE

218. Dr Supachai Panitchpakdi confirmed the complaints about TRIPS, both in relation to its corporate provenance and the burden of compliance. In describing why developing countries were dissatisfied with the WTO, he suggested that it was because, in general, the burdens of the trading arrangements outweighed the benefits, and he described TRIPS as "the main new burden" arising from the Uruguay Round, an agreement which had emerged late in the day "because of [a] proposal made by the US pharmaceutical companies". Dr Supachai did not refute the need for rules governing intellectual property rights but said that it could not be denied that "the burden that has been put on developing countries in adopting [the] regime is tremendous" (Ev I, Q. 563) because of the need to set up an adequate infrastructure to enable compliance with the TRIPS agreement.

219. Mr Otten, Director of the Intellectual Property at the WTO, agreed that TRIPS had put a burden of compliance on developing countries: "It is certainly true that the TRIPS agreement is one of the more demanding agreements on developing countries and has caused them to have to re-formulate or create new laws in some areas, to reinforce enforcement institutions, to set up new offices in some cases, to reinforce existing intellectual property offices …" (Ev II, Q 1125). He said, however, that the World Intellectual Property Organisation (WIPO), which he described as being "in the fortunate situation of being relatively wealthy", was assisting developing countries with technical co-operation, capacity building and legal assistance.

220. Clare Short shared the view that the rules on intellectual property rights were needed to ensure that the pharmaceutical companies undertook research into areas where it was most needed: "We can only get there if we have basic, fair rules so that the private sector knows it can get a rate of return on its research." (Ev II, Q 2019). She agreed, however, that implementation by some developing countries was an issue and that therefore they should be given extra time to phase in the agreement. She also referred to the Commission on Intellectual Property Rights which she had established in May 2001 and which she anticipated would recommend changes to the TRIPS agreement.

221. The Commission reported in September 2002. The principles underlying its approach to intellectual property rights and healthcare provision were that "healthcare considerations must be the main objective in determining what IP[124] regime should apply to healthcare products" and that "IP rights are not conferred to deliver profits to industry except that these can be used to deliver better healthcare in the long term".[125] The Commission made a range of recommendations about how the global intellectual property regime could be applied by developing countries more advantageously and what steps developed countries could take to assist developing countries in ensuring access to healthcare. These included, for example: additional public funding for research on health problems in developing countries (because "[the Commission does] not think that the globalisation of IP protection will make a significant contribution to increasing R&D expenditure by the private sector relevant to the treatment of diseases that particularly affect developing countries");[126] a satisfactory system of differential pricing mechanisms through improved legislative regimes in developed countries to prevent parallel importing of low-priced pharmaceutical products from developing countries; and, a corresponding improved legislative regime in developing countries enabling them to import patented medicines if they can obtain them more cheaply abroad.

222. Work on TRIPS is also taking place in the context of the Doha Development Round. The Doha Ministerial Declaration on TRIPS and Public Health has required the WTO Council for TRIPS to consider certain aspects of the TRIPS agreement.[127]

223. We are convinced of the central role that R&D play in the process of economic development, and the importance of intellectual property protection as helpful to that end. There is, however, widespread concern that the TRIPS agreement, in some respects, is acting against the interests of developing countries and placing a burden of compliance on developing countries. We share that view.

224. We also note the following: first, economic analysis tells us that intellectual property law is not the only way that new discoveries can or are protected;[128] secondly, support for legal protection is not the same as saying that the law as present constituted cannot be improved;[129] and, lastly, it is not obvious that the pricing policies of some companies, anxious though they are to maximise their own profits, give a fair deal to the poorest nations. To the extent that they are charged for past sunken costs connected with research from which they will not benefit, they are paying but not receiving.

225. We therefore support the initiatives both in the UK and the WTO that seek to review the operation of TRIPS and urge the UK Government to take the steps necessary to ensure that the interests of developing countries are properly considered in the amendment of the TRIPS agreement.

The General Agreement on Trade in Services

226. Like TRIPS, GATS was introduced in the Uruguay Round of trade negotiations. Under GATS, countries are encouraged to open up service sectors to foreign competition. At present, they are able to choose which sectors are opened up and when it should happen. For this reason, the Department for International Development described GATS as "a bottom-up agreement" (Ev II, p 232).

227. The WTO, in its information about GATS, argues that: "Since the services sector is the largest and fastest-growing sector of the world economy, providing more than 60% of global output and in many countries an even larger share of employment, the lack of a legal framework for international services trade was anomalous and dangerous - anomalous because the potential benefits of services liberalisation are at least as great as in the goods sector, and dangerous because there was no legal basis on which to resolve conflicting national interest."[130]

Box 2

GATS
According to the WTO's Trading into the Future,[131] "the General Agreement on Trade in Services is the first ever set of multilateral, legally-enforceable rules covering international trade in services"..
The agreement covers all internationally-traded services - services which are provided on a commercial or competitive basis. These include:
·  services supplied from one country to another ("cross-border supply")(for example, international telephone calls);
·  consumers or firms making use of a service in another country ("consumption abroad")(for example, tourism);
·  individuals travelling from their own country to supply services in another ("presence of natural persons")(for example, fashion models or consultants).

The agreement excludes all services provided in the exercise of governmental authority.

Unlike goods, the agreement on services allows countries temporarily not to apply the "most-favoured nation" (MFN) principle of non-discrimination. "MFN means treating trading partners equally: therefore, if a country allows foreign competition in a sector, equal opportunities in that sector should be given to service providers from all other WTO members."

228. The Department for International Development see GATS as an instrument to assist poverty reduction in developing countries:

"Research undertaken by a number of organisations including the World Bank, the UN and the Institute of Development Studies into the effects of services liberalisation on developing countries has shown that liberalisation in sectors such as telecoms and financial services often leads to significant increases in economic growth - without which sustainable poverty reduction will not be achieved." (Ev II, p 232).

Patricia Hewitt noted that "increasingly, for instance, in financial services and in telecommunications, [developing countries] are seeing the benefits of liberalisation" - India being an example (Ev II, Q 1878).

229. Although issues relating GATS did not emerge as prominently in the evidence we received as the criticism of the TRIPS agreement, none the less we have a clear impression that there is a concern that GATS, like TRIPS, in some respects, acts against the interests of developing countries.

230. Barry Coates of the WDM suggested that GATS embodied "an inappropriate extension of trade rules that have been developed to apply to trade in goods" (Ev I, Q 931). Save the Children complained that GATS worked against efforts by developing countries to link foreign direct investment with local and national economic development: the GATS agreement, they told us, "bans access conditions on FDI in services, prohibiting countries from setting equity caps on TNC investment or from requiring TNCs to establish joint ventures with local partners" (Ev I, p 335).[132]

231. Christian Aid's fear was less of GATS in its present - voluntary - form than of the implications for GATS of "the WTO's built-in agenda of accelerating liberalisation": "… the GATS framework might in future expand into social sectors like health care, education and water. The danger is that an expanded and revised GATS might threaten developing countries' ability to provide services to meet the needs of poor people."[133] They argued that GATS has (and will continue to) evolve in this way because of the business interests pursuing services liberalisation: "GATS owes its existence to pressure from services companies and governments with major services export sectors - especially the US, but also Japan, the EU and Canada."[134] They gave the following examples: "The US Coalition of Service Industries (CSI) has led international business efforts to shape GATS and directly influence the positions of the former US Trade Representative, Charlene Barshevsky, for example at the Singapore ministerial conference in 1996 where a deal on telecommunications was pushed through. The European Services Forum (ESF) has played a similar role in Europe under a mission to 'support and encourage the movement to liberalise service sector markets throughout the world and to remove trade and investment barriers for the European services sector'."[135] Save the Children similarly referred to the influence of TNCs. They quoted the Director of the WTO's Services Division as saying: "Without the enormous pressure generated by the American financial services industry, particularly companies like American Express and Citicorp, there would have been no services agreement." (Ev I, p 336).

232. Since January 2000, the WTO has been engaged in negotiations on GATS. In the Doha Ministerial Declaration it is asserted that these negotiations will be conducted "with a view to promoting the economic growth of all trading partners and the development of developing and least-developed countries".[136] There is a concern, however, that the WTO's commitment to progressive liberalisation will operate against the interests of developing countries. In particular, there is concern that unreasonable pressure will be applied to force developing countries to open up their service sectors; and that after a particular sector has been opened up, it will be impossible under GATS for this action to be reversed, even if circumstances change. It is, perhaps, too early to predict what the effect of GATS will be. We are convinced, however, that GATS will have a major impact and is something that needs close scrutiny.[137]

233. The UK Government should help to ensure that the implementation of GATS does not place unreasonable pressures on the governments of developing countries prematurely to introduce competition into their service sectors.

97 There are, at present, 144 members - covering over 97% of world trade. A further 28 countries are negotiating accession. Back

98 WTO, Trading into the Future (March 2001), p 4. Back

99 Ibid, p 5. Given the extent of protectionism to be observed throughout the world accompanied by an array of restrictive business practices, we interpret these principles as an aspiration and not as an approximation of trading reality. Back

100 The trade rounds are as follows (number of countries involved indicated in brackets): 1947 Geneva (23); 1949 Annecy (13); 1951 Torquay (38); 1956 Geneva (26); 1960-61 (Dillon Round) Geneva (26); 1964-67 (Kennedy Round) Geneva (62); 1973-79 (Tokyo Round) Geneva (102); and 1986-94 (Uruguay Round) Geneva (123). Ibid, p 9. Back

101 Doha Ministerial Declaration, 14 November 2001, para 3. Back

102 A majority vote is possible but has never been used in the WTO and was used only rarely under GATT. Back

103 Martin Wolf put this starkly: "The WTO as an organisation is nothing, it is no more than the vehicle of the concerted will of a very limited number of great powers, and so the idea of the WTO or indeed any of these institutions as autonomous agencies is a fig leaf over the decisions made by ourselves and the Americans." (Ev II, Q 1603). By "ourselves", Mr Wolf was referring to Europe. In the written evidence submitted by the UK Section of the Women's International League for Peace and Freedom concern was expressed that "whilst the WTO claims to be a democratic institution, in fact the rich countries exert much control over its proceedings" (section C) (Ev II, p 391). Back

104 World Bank, Globalization, Growth, and Poverty (2002), p 57. Back

105 :"It is true that the WTO still bears the heavy imprint of the much smaller group of mainly northern countries that have dominated the founding of the General Agreement on Tariffs and Trade (GATT). And it is true that the WTO should be more transparent and open and its rules easier to understand." (para 227). "To create a fairer multilateral trading system, an urgent priority must be to strengthen the capacity of developing countries to participate effectively in the WTO and the international trading system." (para 239). "We will work with developing countries and other development agencies to help build trade policy capacity in both national capitals and in Geneva." (para 240): Eliminating World Poverty: Making Globalisation Work for the Poor, Cm 5006, December 2000. Back

106 Nicholas Stern gave an interesting example of a non-tariff barrier: he described how a French cheesemaker and Mauritanian camel herders tried to sell camels' cheese in Europe. Not only was the cheese categorised so that it would have the highest possible tariff but a requirement was place on the milk producers that the camels should be milked mechanically. The enterprise failed as a result. (Ev II, Q 1823). It would not be difficult to cite many other examples. Back

107 World Bank, Globalization, Growth, and Poverty (2002), p 61. Back

108 In 2002, the CAP cost EUR44 billion, nearly half of the total EU budget. Eurostat. In his evidence, Professor Krugman described European agricultural policy as "one of the wonders of the world" (Ev II, Q 1891). Back