Trojan Horse to get investment and competition into new round

by Chakravarthi Raghavan

GENEVA, 31 Jan 2001 -- The European Commission, at a meeting with an invited group of countries (industrialized and developing alike) on 30 January, attempted a Trojan-Horse approach to get investment and competition issues onto the agenda of a new round of multilateral trade negotiations, suggesting the inclusion of the two items in the agenda of the next round but leaving open for the present the possibility that any agreement that might emerge need not be subscribed to by everyone.

The presentation by Peter Carl, the Commission’s Director-General for Trade (the Brussels bureaucrat under EU Trade Commissioner Pascal Lamy), on the need to reactivate the WTO and launch a new round appears to have received support among the invited participants, who apparently agreed that the “drift” in the system needs to be arrested and reversed and that this could be done through a new round. The Commission is the executive arm of the European Union.

[After meetings on the sidelines of the annual summit of the World Economic Forum (WEF) in late January, the WTO Director-General Mike Moore is reported to have told some journalists that in the weeks ahead, the WTO efforts would focus on the preparatory process for the trade body’s 4th Ministerial Conference (which is to be held in Doha on 9-13 November), and that he would aim to ready before July a draft ministerial declaration for the launching of a round at Qatar. - C Raghavan, “Implementation issues can’t be brushed under the carpet warning”, SUNS#4828]

However, some participants at the 30 January meeting with the Commission, including Japan and Hong Kong China, raised questions about the EC’s ideas on including the controversial issues of investment and competition, i.e., whether it intended the final outcome to be like the Tokyo Round Codes (which Members could decide whether or not to join, but those which did seemed to have more obligations and some rights too), and how it would affect the most-favoured-nation (MFN) principle of the trading system.

Hidden danger

Before the meeting, EC sources had been trying to suggest that the proposal is a controversial one among the EU members themselves; that the idea of the two items being put on the agenda on the basis that the outcome could be in the form of plurilateral agreements was not an EC “proposal” but a “trial balloon” aimed at overcoming the domestic opposition faced by some governments to accepting the two subjects on the WTO agenda.

The talk of a possible end result of a plurilateral agreement that not every WTO Member need accept appears, however, to be more of a Trojan Horse, be it in the context of classical Greek history or modern computer and information systems.

In Greek classical legend, the Greeks, when besieging Troy, were unable to assault and get into Troy. They then built a big hollow wooden statue of a horse in which they concealed themselves, and left it at the gates of Troy. The Trojans wheeled the horse in, disregarding the views of their wise men and soothsayers. At night, the Greeks emerged from the belly of the horse, sacked Troy and captured it.

In computer science, the term “Trojan Horse” is used for a program that breaches the security of a computer system, especially by ostensibly functioning as part of a legitimate program, in order to erase, corrupt or remove data.

That the talk of a plurilateral outcome is no more than a Trojan Horse is clear from the arguments or views of EC officials that they are confident that at the end of the negotiations, the outcome would be such that all participants would voluntarily join, since not joining might send out a wrong signal to foreign investors.

Push for investment and competition

At the January WEF meeting in Davos, during a session devoted to trade, Lamy outlined the importance of having investment and competition issues on the agenda of a new round.

Since Marrakesh, when the items were put on the “laundry list” - raised in speeches of the ministers and included in the final statement of the Chairman of the Marrakesh meeting as subjects that various Members wanted to bring onto the WTO agenda but on which there was no consensus - the European Commission and, more recently, some of the member states have been pushing very hard to include the two issues in the agenda and write multilateral rules of obligations on governments. At Marrakesh, the competition issue was raised by several developing countries in terms of having rules and obligations on the restrictive business practices of transnational corporations (TNCs), and cooperation between countries to investigate and eradicate such practices. However, competition policy becomes something of a misnomer when the EC talks of it. The EC seeks, side by side with investment rights for corporations in foreign countries, the ability of foreign corporations to compete in markets of other countries and get treatment equal to that accorded local enterprises; on the basis that foreigners sometimes need more favourable treatment than locals, in fact superior rights are sought.

The EC’s attempts to push these through the WTO study groups (set up at the 1996 WTO Ministerial Conference in Singapore) on investment and competition have so far failed, with many more countries than at Singapore now challenging and questioning WTO rules on these. The EC effort to include these issues in the agenda was one of the factors that prevented consensus both in the runup to the 1999 Seattle Ministerial and at Seattle itself.

Following Seattle, at the tenth session of the United Nations Conference on Trade and Development (UNCTAD X) in Bangkok last year, several EU ministers, including Clare Short of the UK ‘Third Way’ socialist movement, and four of her colleagues from Germany, the Netherlands, Belgium and Sweden, presented the case for WTO rules on these two subjects on the grounds that they were needed by developing countries to obtain investments and become competitive.

But side by side, both before Seattle and now, the EC has advanced the argument that without the inclusion of these issues in the agenda, it cannot undertake further liberalization in the agriculture sector. The argument is that the EC lobbies in agriculture and senescent industries are so strong that freeing up the trade in textiles and clothing or agriculture etc would not be politically feasible unless EU investors can invest in developing countries and benefit from this.

These arguments were put forward at the recent WEF meeting by Lamy as well as by the EC supporters. Lamy’s argument was that without WTO rules to ensure rights for foreign investors and international rules on competition to guarantee the ability of TNCs to compete, developing countries cannot attract foreign direct investment (FDI) and compete and industrialize. Also, if developing countries agree to negotiate on investment rules, then the EC could provide them better market access in the textiles and clothing and agriculture sectors.

The argument that liberalization of foreign investment, and multilateral rules and disciplines to instil confidence in foreign investors, would help developing countries to attract foreign investment and thus develop, is founded on neither economic theory nor any empirical evidence, as a number of recent academic studies have brought out. The latest to challenge and question the “reform agenda” of trade and investment liberalization doled out to the developing world has been the Executive Secretary of the UN Economic Commission for Latin America and the Caribbean, Jose Ocampo, who presented a paper thereon at a January meeting of the American Economic Association (see “Liberalization agenda’s ‘promised land’ a mirage” on pp. 13-15).

There were other luminaries at Davos who supported bringing the investment and competition issues onto the WTO trade agenda, notably Thailand’s Supachai Panitchpakdi (the outgoing Thai deputy prime minister who is now waiting to step into the job of WTO Director-General in mid-2002, when Moore will quit under the terms of a term-sharing compromise) and the South African Foreign Trade Minister, Alec Erwin. Until recently, Supachai had been insisting that the next WTO round should be limited to market-access issues. Now he says that the EC needs investment and competition on the agenda in order to liberalize.

Erwin, who has been trying to promote a new round encompassing the new EC issues (in the runup to and at Seattle, and at other conclaves and meetings), also appears to have argued at Davos, both in the panel meetings and on the sidelines with dissenting NGOs, that the South has to be “politically realistic” and must give something in return to the EC on investment and competition rules if it wants something on agriculture or implementation.

But Martin Khor of the Third World Network openly challenged the line of argument that the developing world will gain on textiles and agriculture etc by yielding on investment and competition to the EC. Khor accused proponents of this view of perpetrating a fraud. The inclusion of so many items in the Uruguay Round agenda, including services and intellectual property, had been justified on the ground that it would open up markets to the developing world in textiles and clothing, agriculture, etc. But in fact the end of the Uruguay Round brought no such benefits. The EC and others are now trying to perpetrate a bigger fraud by saying the South will get something in agriculture and textiles if they agree to a new round with new issues.

Such arguments (as used by Erwin) were used in the Uruguay Round, but the South got nothing. Now the same story is being repeated. The South countries and their civil societies can no longer believe these promises. Why should the South take on five or six new issues and undertake obligations on them in order to get something that was promised before?

Some trade diplomats note that the kind of argument which Erwin is advancing was employed in the runup to and at Seattle, but did not fly. Several developing countries said they saw no reason to make concessions to Europe in order to enable Europe or Japan to make concessions in turn (in agriculture) to the Cairns Group (of agricultural exporter countries) or the US. The idea that there could be tradeoffs if there were several subjects on the agenda had been used but had not helped the developing world.

Hypocritical concerns

The arguments advanced by the EC at the 30 January meeting were more or less the same as those contained in a paper the Commission has presented to the EU member states - to the so-called 133 Committee (the committee of representatives of EU members).

In the paper, which oozes with what comes out as hypocritical concerns over the plight of the developing world, the EC has said that the Seattle Ministerial failed because of faulty preparation and bad organization, and also because the agenda was not sufficient to accommodate the interests of the membership as a whole, in particular the developing countries. Seattle confirmed the growing weight and influence of developing countries in the system, while demonstrating at the same time that the system has not responded to the interests and needs of developing countries. Until and unless WTO  Members  recognize  this and make the WTO system more relevant and responsive to developing-country needs, in  particular  the  aims  of  sustainable growth, institutional stability and alleviation of poverty, the multilateral system is  condemned to continue to drift.

The EC paper says that if a new round is to be launched, it could only be done or successfully concluded if the interests of developing countries are more explicitly and firmly integrated in all areas and at all stages.

The EC last year had continued to press in favour of a “comprehensive round” but met with uneven success. While a number of developing countries support negotiations “beyond the [mandated] built-in agenda”, there is opposition to an excessively ambitious, or in other respects insufficient, rule-making agenda, including one that covers investment, competition and measures taken for protection of the environment. Opposition to any discussion of trade and labour standards remains strong. The resistance of a number of Asian countries to a comprehensive round covering some or all of these issues was seen at the recent summit of the Asia-Pacific Economic Coperation (APEC) forum in Brunei (see TWE#245/46). The majority of African and least developed countries at the November meeting of African trade ministers in Libreville (see TWE#247)  had said that priority should be given to the implementation of Uruguay Round commitments and better market access for agricultural and other products.

In this light, says the EC paper, the alternatives are: a market access-only round, an incremental approach beginning with market access and possible trade facilitation and progressively adding other issues on which there is agreement to negotiate, or division of the negotiations into various phases, clusters or baskets. All these have the same aim of launching a new round on a limited agenda. The risk inherent in all these approaches is that once negotiations begin on a limited agenda, consensus “would never be reached to start negotiations on other issues.”

The EC then goes on to argue that there are “strong economic and systemic reasons” why all Members of the WTO should welcome investment and competition rules in the WTO, as well as clarification of WTO rules pertaining to the environment and consumer health and safety. Negotiations confined only to market access would make it impossible to address developing-country objectives in areas such as trade defence, technical barriers to trade, etc. A multilateral agenda that includes investment, competition and environment entails substantial benefits for developing countries and would strengthen the multilateral system.

Against this background, the EC has advocated in its paper that differences between the interests of the industrialized countries and those of the developing world should be bridged and a consensus built “to firmly integrate the priority of developing countries” - through a negotiating agenda reflecting developing-country interests in a substantive way, whether on the built-in agenda, market access, rule-making or other areas.

In terms of the rule-making agenda, the EC wants negotiations to be launched on, among others, investment, competition and environment, looking in each area at the issues that have met with developing-country opposition.

The EC paper claims that the opposition to investment and competition is due to mischaracterization and misperception - an extraordinary claim given that since the 1996 Singapore Ministerial there have been study groups at work where the EC, the US, the Organization for Economic Cooperation and Development (OECD) and the division of UNCTAD promoting TNCs have been holding forth on the benefits to the developing world. But the more they have explained and promoted the issues, the greater has been the disquiet of the developing world, with more Members now being opposed than before Singapore.

According to the paper, the EU members have two options. One is to adopt a phased-in approach: launch the negotiations with a modest agenda, reserving for a later decision by consensus the addition of new subjects that are currently disputed.

The EC notes that the current agenda for negotiations on investment is now quite modest - a reference to its saying that it would now want only rules on FDI (other forms of investment such as short-term capital flows, portfolio investments, etc. may be left out for the moment) and national treatment after entry (but not before).

Pitfalls on plurilateral route

Under the second approach, agreements on investment and competition “need not be concluded by all Members - openness to plurilateral agreements”. Negotiations on both issues would be launched and concluded at the same time as those on other subjects in the round. While the results would be open for participation by all Members, the negotiating mandate would state explicitly that countries would retain the freedom to decide whether or not to subscribe.

This approach, the EC claims, would enable the EC not to dilute its modest ambitions in the two areas.

Openness to plurilateral accords, the EC says, entails some risks: at the end of the day, it might not have the critical mass of signatures to make the agreement worthwhile. Notwithstanding this risk, “we should be able to get the key countries into both agreements,” the EC paper says.

“In the case of investment, countries will have an incentive to join an agreement, since to stay away would send a negative signal to foreign investors.”

It is clear from the paper that the EC is in fact attempting a Trojan-Horse approach: get the items onto the negotiating agenda, and then at the end (when the current crop of diplomats and ministers in the developing world will have left and been replaced by others) pressure the key countries to join by holding out the scare of “sending a negative signal to foreign investors” or other such pressures.

Developing countries may not have the institutional memory to remember the twists and turns of the Uruguay Round, namely, how they were persuaded to give up the unfinished agenda of the Tokyo Round and put the issues on the agenda of the Uruguay Round (as they are now told with respect to the implementation issues), and how they were assured that they will have better rules to protect them, special and differential (S&D) treatment, and more market access. Instead, what resulted from the Uruguay Round were better rules to protect the industrialized world, obligatory S&D treatment for the developed countries in agriculture and subsidies, and the perversion of the single-undertaking concept to force every Member to join everything.

   If trade policy officials and diplomats in developing countries cannot read the story of the Trojan Horse in Homer’s Iliad (which has been translated into many languages), they can ask their children about Trojan Horse computer programs. They will be told that when such programs arrive via email, they should not be opened but erased (“trashed” in technical computer language); otherwise, the computer disk will crash - sometimes even beyond repair and recovery. (SUNS4826)                                            

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

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