Meltzer report wants WTO powers reined in

A US Congressional commission has recommended some limits on the WTO's authority in the area of dispute settlement but otherwise toes the neoliberal line in singing the praises of trade and financial liberalization.

by Chakravarthi Raghavan

GENEVA: The Meltzer Commission of the United States has called for some significant curbs on the powers of the World Trade Organization in disputes: extending the scope of explicit commitments of countries and/or use of retaliatory trade sanctions.

[The International Financial Institutions Advisory Commission was set up in 1998 as a condition of increasing US funding for the IMF. The US Congressional panel, chaired by Carnegie Mellon University professor Allan Meltzer, consisted of six members picked by lawmakers from the majority Republican Party, plus five chosen by Democrats. - IPS]

The Commission's report and recommendations on the IMF and the World Bank have been widely reported, but not its views on the WTO.

The recommendations covering the WTO, like most other parts of the report, are by a 8-3 vote.

The only unanimous recommendations of the Meltzer Commission are those that: (1) the IMF, the World Bank and the regional development banks write off in their entirety all claims against the heavily indebted poor countries (HIPCs), and (2) the IMF should restrict its lending to the provision of short-term liquidity and end its current practice of extending long-term loans for poverty reduction and other purposes.

The majority recommendation on trade wants, on the one hand, to use IMF 'conditionality' (preconditions rather) to provide assistance to countries in crisis, by requiring such countries to open up their financial sectors and liberalize such services by accepting and joining the WTO's Fifth Protocol, the financial sector accord for financial services liberalization under the General Agreement on Trade in Services (GATS).

On the other hand, it wants the WTO remit and ability to rule restricted in cases that might involve "health, safety, environment and other regulatory policies".

Overwhelming the legislative process

Referring to the WTO's function of being a 'quasi-judicial body' to settle disputes among its members, and the use of trade sanctions against countries violating its rules, the Meltzer report says that quasi-judicial decisions of international organizations should not supplant national legislative enactments.

Quasi-judicial determination, when coupled with the imposition of sanctions, can overwhelm a country's legislative process.

"As WTO decisions move to the broader range of issues now within its mandate, there is considerable risk that WTO rulings will override national legislation in areas of health, safety, environment, and other regulatory policies. The Commission believes that quasi-judicial decisions of international organizations should not supplant legislative decisions. The system of checks and balances between legislative, executive and judicial branches must be maintained.

"Rulings or decisions by the WTO, or any multilateral entity, that extend the scope of explicit commitments under treaties or international agreements must remain subject to explicit legislative enactment by the US Congress and, elsewhere, by the national legislative authority," the report says.

"There should be no 'direct effect' on US (or other) law or the ability to impose fines or penalties until national legislative ratification is completed."

Enactment of this recommendation, the report says, "would limit the WTO's authority, and the authority of other international agencies, to impose sanctions on a country for violation of rules to which it did not agree."

The Meltzer report recognizes that this would weaken the application of the rule of law internationally, but says that "its principal benefit is that it strengthens democratic accountability and precludes delegation and erosion of the legislative function."

Trade retaliation

The report notes that when countries did not accept WTO decisions (presumably a reference to dispute settlement panel rulings and recommendations automatically adopted by the Dispute Settlement Body), injured parties had the right to retaliate by applying restrictions on imports from the offending country or region.

"The injured party then suffers twice - once from restrictions on its exports, imposed by the foreign governments, and again when tariffs or duties raise the domestic cost of the foreign goods selected for retaliation. To compensate for the injury done by others, we impose costs on ourselves as well as them."

Instead, says the Meltzer group, "countries guilty of illegal trade practices should pay an annual fine equal to the value of the damages assessed by the panel or provide equivalent trade liberalization."

[The WTO rules in the Dispute Settlement Understanding (DSU) (Article 22.1) do contemplate payment of "compensation" by the country that loses a dispute but is unable or unwilling to implement the ruling. However, as in the banana, hormone and other cases, it is the US that has in fact been demanding 'implementation' and, failing that, has chosen the trade-sanctions path.]

"Retaliation," the report adds, "is contrary to the spirit of the WTO. Sanctions increase restrictions on trade and create or expand groups interested in maintaining the restrictions. Domestic bargaining over who will benefit from protection weakens support for open trading arrangements."

The Meltzer Commission confesses that it did not have the time or expertise to evaluate all the changes in the trading system (from the original General Agreement on Tariffs and Trade (GATT) to the present WTO) and the many proposals for future changes. It therefore confined its recommendations to two areas: general principles of operation and the role of the WTO in promoting financial stability, safety and soundness.

And while its main focus was on the IMF, the World Bank and international financial institutions (IFIs), the report has also addressed some trade issues - confining itself to GATS and its annex on financial services, and the DSU.

The report notes that the fifth protocol of GATS, concerning financial services, seeks to eliminate or relax limitations on foreign ownership of local financial institutions in banking, securities and insurance, limitations on the juridical form of commercial presence, and limitations on the expansion of existing operations.

It trots out the neoliberal, neoclassical theories about the benefits of financial services liberalization and participation by foreign suppliers, and says: "Allowing foreign participation in the financial services sector improves the operation of local financial markets, lowers the costs of these services and reduces risk. Presence of competing foreign banks and financial institutions works to reduce corruption and favourable treatment of politically connected borrowers."

Many economies are too small to diversify production over a wide range of activities, and if domestic banks are limited to financing local industry, and foreign competition is prohibited, the portfolios of banks and financial institutions would have too little diversification.

But flying in the face of considerable evidence on some of the causes of the financial crises over the last decades, the report argues that the absence of foreign financial service competition and presence could result in "too much risk that a decline in a major local industry, or other disruption, would weaken local financial institutions, increasing failures and capital flight, followed by a banking and exchange-rate crisis."

Part of this risk, the report argues, would be avoided by opening local markets to foreign competitors.

International banks diversify their assets and liabilities by lending to a wider range of industries and countries and taking deposits in many places. This enables them to reduce risk. Further, diversified banks could absorb local losses. Defaults in one country are balanced by profitability elsewhere, the Meltzer report says.

At the recently held tenth session of the UN Conference on Trade and Development (UNCTAD X) in Bangkok, however, presentations and responses from international financial experts - one at a Third World Network-organized NGO forum and the other at a host country-organized seminar on the Thai financial crisis - showed that it is the financial operators who, through herd mentality and looking at the local and regional outcomes, precipitate a crisis by taking out funds and facilitating capital flight.

At the TWN-organized forum, UNCTAD Chief Macroeconomist Yilmaz Akyuz and Executive Director of the UN Economic Commission for Latin America and the Caribbean (ECLAC) Jose Antonio Ocampo had both agreed that with the apparent recovery of the global economy from the effects of the Asian financial crisis that spread to Brazil and Russia, the search for a new international financial architecture had more or less disappeared from the agenda of international discussions. And given the inherent instability of international capital flows, any country closely integrated into the global financial system was susceptible to currency turmoil and financial crisis even when adopting the best standards for information disclosure, prudential regulations and supervision.

Retaining autonomy

In the absence of changes and reforms to the international financial institutions, Akyuz and Ocampo had both agreed that, as the second best option, "it is essential that the autonomy of developing countries in managing capital flows and choosing whatever capital account regime they deem appropriate should not be constrained by international agreements on capital-account convertibility or trade in financial services."

And at a press conference relating to the Asian financial crisis, when asked about the UNCTAD advice to developing countries to retain controls on inflows and outflows of capital, and its implications in terms of the WTO drive to further financial services liberalization in a new round of services trade negotiations, Akyuz said UNCTAD did not draw a dividing line on these matters between what was being done at the IMF and at the WTO in terms of financial services negotiations.

"That is why we have cautioned developing countries against arrangements at the WTO in terms of a financial services accord that would de facto result in openness of their capital and financial markets," he added.

The Commission refers to its recommendation (in relation to the IMF) that countries be required to open their financial markets as a precondition for IMF assistance in a crisis, and says that this would both prevent the IMF from lending to countries with weak financial systems and encourage countries to reduce risk.

"Thus it serves the interest of developing countries and the world economy to encourage governments to accept the fifth GATS protocol. Foreign competition not only improves the variety and quality of financial services while making them available at lower prices, it also increases the productivity of non-financial enterprises by increasing access to credit markets and tailoring the types of lending more closely to the borrowers' requirements. Thus the WTO's programme of opening up financial services to foreign competition contributes to the growth of international trade and investment, world output and living standards, and economic stability," the report claims.

Benefits of trade liberalization

Addressing US critics of further trade liberalization and exposing US industries and workers to competition, the report argues that by concentrating on displaced firms and workers, and neglecting consumers and others who gain, critics appear to be denying that there were net benefits to a country from opening markets.

While the share of US manufacturing workers as a percentage of the non-farm labour force has declined in the postwar years, the share of manufacturing output in total output has declined much less. Manufacturing productivity has increased, with more output for fewer labour inputs. The trend rate of decline in the share of manufacturing jobs in the US was close to constant for the last 50 years, and there was no indication that successive multilateral trade agreements, or the passage of the North American Free Trade Agreement (NAFTA), had any effect on the trend, contrary to frequent claims about job loss from NAFTA. In fact, since the passage of NAFTA, the actual share of manufacturing jobs had been above trend, partly the result of the strong economy.

Trade liberalization did not affect the level of employment, since it did not create or destroy jobs in the aggregate. It affected the composition of the labour force and real wages. By making the economy more efficient, liberalization raised wages, and any resulting change in the composition of jobs was more accurately related to the ebb and flow of industry and commerce.

Data from the Department of Commerce showed that jobs supported by exports, jobs in trading companies and companies that export, paid 13 to 16% more than the national average of non-supervisory production jobs.

This, the Meltzer Commission said, supported the implications of the economic theory of trade: workers in the aggregate gain from trade expansion.

In advancing these to rebut domestic critics, the Commission appears to extrapolate this outcome globally to all countries, and to promote its thesis for financial services liberalization.

It calls for rules to enhance financial stability - rules that could reduce risk, spread best managerial practices, increase competition, and reduce the role of government in allocation of bank loans. Explicit minimum financial standards should be phased in as a condition for assistance from the IMF in a financial crisis, and "enforcement of the preconditions should remain the IMF's responsibility."

"The WTO," the Commission adds, "is an adjudicative organization that has proved effective in settling disputes about tariffs and quantitative trade restrictions.

"The WTO should not extend its procedures to set domestic policies and regulations, including regulation of banking services, accounting practices or financial standards. These should remain the responsibility of specialized agencies." (SUNS4625)

The above article first appeared in the South-North Development Monitor (SUNS) of which Chakravarthi Raghavan is the Chief Editor.

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