TWN Info Service on WTO and Trade Issues (Jan08/06)
31 January 2008
please find a commentary by Chakravarthi Raghavan, Editor Emeritus of
the SUNS, on the current situation on the
It was published in the SUNS of 30 Jan 2008 and is reproduced here with the permission of SUNS. Any reproduction requires permission of SUNS (firstname.lastname@example.org).
Geneva, 28 Jan (Chakravarthi Raghavan*) - As key trade negotiators and diplomats, suitably "advised" or "instructed" by their ministers who last week had foregathered at the annual Davos World Economic Forum with leaders of business and industry and heads of some international institutions, return to Geneva and the "Doha talks" at the WTO, they face an existential situation.
They can follow the Lamy path, continue with the agriculture and NAMA negotiations, new revised chairmen's drafts, and then take up the two in what are described as "horizontal" negotiations for trade-offs between the two (the course being advocated and promoted by trade officials and Lamy) in a restricted "green room" type format to try to agree on Agricultural and NAMA modalities, and hold a ministerial meeting around Easter to try to seal a Doha trade deal before US President George W. Bush leaves office.
The Lamy path may enable him to "lock-up" major developing countries in terms of agricultural and NAMA concessions (to the US and Europe), but it strains credulity to think that, absent Congressional fast-track authority, a Doha deal could be sealed before Bush leaves office, more so when the US is gearing up for a Presidential election (and it looks likely to be a bitter one), with the Democratic and Republican nominees unlikely to be decided until the party conventions in summer.
this official WTO line, including a ministerial for final bargaining,
was reportedly agreed to at lunch of a key group of Ministers and WTO
head Pascal Lamy on Saturday 26 January (at Davos, on the sidelines
of the annual World Economic Forum meet). According to media reports
from Davos, this was proposed by Lamy, and accepted by the ministers
(including those from the
However, in taking this path, the negotiators will be ignoring the several elephants in the room, and at least two of them have a direct bearing on the talks.
One of the elephants is the current financial crisis, that even the "experts" heading the financial institutions (official and private) and all too many central bankers and regulators seem not to fully understand. In fact, no one seems to know the full ramifications of what a few months ago was being described as a "sub-prime" house mortgage crisis, and then as a debt and credit crunch crisis, and now as a full-blown financial crisis - with a general loss of trust and confidence - that may plunge the US and the world economy into a deep recession, if not a 1930-type depression. The house mortgage debts (as also others now coming to the fore like credit card debts etc) were "securitised" and repackaged into "collaterised debt obligations" (CDOs) through "financial innovation" and complex "derivatives" (that even central bankers and regulatory seem not fully to understand) and were given AAA ratings by the rating agencies (on the basis of ratings of the big banks marketing them, and not underlying assets), and sold off to other institutions and investors.
Wolf, a liberal economist, and associate Editor and chief economics
commentator of the Financial Times, recently described the crisis and
various views and assessments by the experts as "the elephant in
the dark room". A correct diagnosis and solutions to the crisis
appear to be outside the remit of trade negotiators, though they are
being told that they could contribute to a solution by concluding the
In fact, if developing countries agree to the demands on them in one of the sectors in these negotiations, namely, in GATS negotiations, for liberalising cross-border transactions and thus international capital flows as well as market access in trade in financial services (access for foreign enterprises to their stock markets, insurance, banking and pension funds etc and/or scheduling their existing market access via modes one and three of GATS), along with the proposed rules on domestic regulations, it would result in what the New York Times columnist Paul Krugman has called the buried "financial toxic waste" in the North to be exported to them. The few developing countries like China, India, Brazil etc that seem for the moment to have escaped the financial crisis in the US, Europe and Japan, would probably find themselves engulfed.
example of those at the top of the financial system not knowing fully
where the corpses are buried is the explanation now in the financial
media about the sudden US Fed rate cut of 75 basis points - reducing
its lending rate to banks to 3.5 percent, "barely above the (well-massaged)
rate of consumer price inflation" (as US columnist Philip Bowring
puts it in an opinion piece on Asia Sentinel). The rate cut is seen
as (at least temporarily) staving off a
And in a complete U-turn, the head of the IMF (which preaches to developing countries the merits of fiscal balance and consolidations) has joined others like Nobel Laureate Paul Samuelson, and advocated at Davos a global fiscal stimulus. And former IMF chief economist, Kenneth Rogoff, now an academic, spoke at the Davos forum of inequalities and the rich-poor gap among and within nations and need for economic policies to address them!
But, as Mr. Shrirang P Shukla, India's former GATT representative (March 84 to Feb 89) and later a member of the Indian Planning Commission, commenting on such proposals for stimulus, says: “these and other pleas are for a ‘dose of Keynesianism in the US context,’ a new New Deal as it were, with a bit of ‘new’ elements in their analysis, such as the references to non-transparency and financial shenanigans. However, they all seem to fall short of recognising the overwhelming reality of finance capitalism.”
"When capital-as-finance, as distinct from capital-in-production, takes over the state power," says Shukla in a communication, "the main preoccupation of the policy-makers is to preserve and enhance the value of the financial assets: that is how all the policies are reoriented. Epithets like ‘kinder SEC', ‘financial engineering shenanigans', central bankers in important financial centres working as ‘mediocre CEOs' - are but symptoms of the underlying shift in the power base. And unless that is exposed analytically, no real corrective action can be expected to emerge even on paper."
It is not possible, Shukla insists, to practise Keynesianism at the global level unless there is a global government controlled by "enlightened" capital-in-production. And half-way policy houses built on thin foundations of transparency, reversing excessive financial deregulation or "excellence" in central bank CEOs and a bit of new New Dealism cannot provide durable and effective solutions - certainly not on a global scale. While such policies may help shore up the US economy for a while with its beneficial consequences for some other dependent economies, particularly in the OECD, there is a distinct possibility of such a policy approach implying a continuation or worsening of two major adverse implications for the rest of the world: the continued war of aggression on the oil/gas resources in West Asia and continued pressures on growing economies of China and India to align their economic policies to facilitate the expanding domain of finance capital. Without the continuance of wars for oil and gas resources, the dollar hegemony, so essential for capital-as-finance to preserve its strength and wealth, cannot be maintained. The pressures on China and India will continue because "big emerging economies" could constitute a potential threat to the domain of finance capital, unless they are integrated rapidly into the global system as outer spaces for sucking out the surpluses as they emerge with the progress of capital-in-production in those economies or as new risk-distributing platforms for finance capital's activities or both, said Shukla.
Over the weekend, after the surfacing of the so-called "rogue trader" at Societe General bank in France, came the news that the trader had created liabilities of sorts for nearly 70 billion euros (by speculative hedging and bets on German and US stock indexes) without anyone in the Bank being aware, and that these were hurriedly closed by the bank management selling off his short positions, and in the process bringing down stock markets in Germany and the US, and as a consequence around the world.
These explanations and versions of the Societe General have been challenged by the lawyers for the "trader" (who has been arrested and is being questioned), and disclosures by the prosecutors of their questioning of the trader.
Nevertheless, last week, seeing the stock-markets collapsing (and not knowing the cause), the US Fed is supposed to have hurriedly announced a drastic rate cut. It is so unbelievable a story that it may be true, proving Martin Wolf's point about this being an elephant in a dark room!
Already over the last few weeks, Nobel Laureate Paul Samuelson has done a "mea culpa" for his "securitisation" theory (that enabled the creating and selling of securities, backed by these "assets"). In an IHT op-ed in November last he said: "As one of the economists who helped create today's newfangled securities, I must plead guilty: These new mechanisms both mask transparency and tempt to rash over-leveraging."
Martin Wolf himself, who during the Asian financial crisis of 1997, advocated that the financial markets should be allowed to sort themselves out, has now done "a mea culpa" of sorts (though not in so many words) and has come out for strong regulation of financial institutions and markets.
Paul Krugman says in the NYT, that what has really undermined trust
is the fact that nobody knows where the financial toxic waste is buried:
Citigroup wasn't supposed to have tens of billions of dollars in sub-prime
exposure; it did.
How did things get so opaque? The answer, he says, is "financial innovation" - two words that should, from now on, strike fear into investors' hearts. While some kinds of financial innovation may be good, Krugman notes that the innovations of recent years - the alphabet soup of C.D.O.'s and S.I.V.'s, R.M.B.S. and A.B.C.P. - were sold on false pretenses. They were promoted as ways to spread risk, making investment safer. What they did instead - aside from making their creators a lot of money, which they didn't have to repay when it all went bust - was to spread confusion, luring investors into taking on more risk than they realized.
Why was this allowed to happen? In Krugman's view, the problem was ideological.
But arguably the problem is even deeper and involves the conceptual foundations of the economics underlying modern finance and the underplaying of the liquidity risk. As a result, designers of financial products and financial risk managers underestimated the threat to the functioning of the financial markets posed by the disappearance of liquidity. Moreover unquestioning faith in the market led policy-makers to ignore the warning signs.
Mr. Krugman in his column points out in this regard that Alan Greenspan (then Federal Reserve Chairman) brushed aside warnings from Edward Gramlich, who was a member of the Federal Reserve Board, about a potential sub-prime crisis. And free-market orthodoxy, Krugman adds, dies hard. Just a few weeks ago, Henry Paulson, the Treasury Secretary, admitted to Fortune magazine that financial innovation got ahead of regulation - but added, "I don't think we'd want it the other way around."
"The bottom line is that policy makers left the financial industry free to innovate - and what it did was to innovate itself, and the rest of us, into a big, nasty mess," Krugman concludes.
The sum of all these assessments from Samuelson, Wolf, Krugman, and other mainstream economists - all market liberals and exponents of free trade - is that financial crisis has shaken some fundamentals, and several of the two-decades-old underlying theologies are being openly questioned. Lamy himself, just before the Davos forum, is reported to have told the media, that the pendulum is swinging back from the Market to the State, from extensive deregulation to re-regulation.
Some of those whose "theories" set the stage for what is being called the sub-prime crisis - securitisation of mortgage debts through financial "engineering" into collaterised debt obligations that have been sold off to others, with the rating agencies giving them AAA ratings (based not on the assets backing these CDOs - but those of banks marketing these CDOs, the Wall Street Investment Bankers and some of the European ones) - are now running around calling for Keynesian stimulus and actions by the Fed to save the global economy.
Now, all their financial innovation and instruments have come down like a house of cards, jeopardising not merely the investment banks and their capital, but the very basis and theories of this market economy.
Martin Wolf, now has come out for stronger regulations of financial institutions, and even regulation on the pay packages, bonuses and perks of those at the financial institutions, arguing in favour of viewing them differently from other enterprises and institutions!
As for the underlying trade theories about "free trade" and its benefits, in a forthcoming paper (available in draft form as a mimeo from the author, under the title, ‘deconstructing the arguments for free trade...'), Prof. Robert Driskill of the Vanderbilt University, has brought out that mainstream economists generally advocate "free trade" as beneficial to all, as an axiomatic truth (rather an empirical one to be based on factual evidence), and calls on economists to be more modest and provide a more nuanced view of trade offs.
In the nature of things, economic theories, cannot be proved in terms of cause and effect. At best, economists take associative evidence of sorts - of countries and economies, having "free" and open "markets", growing and prospering, in contrast to those that are closed and restricted. But even the yardsticks for "openness" are subjective, and the evidence could be interpreted either way. As Prof. Dani Rodrik and others have pointed out, the evidence is ambiguous and could be interpreted to mean that growth produces open markets and freer trade, rather than the other way.
But more to the point, are the views of the Bank for International Settlements - the central bank of the world's central banks, an institution advocating liberal economics, though more recently, its Monetary and Economics Department appears to be pioneering neo-Keynesian prudential macro-economics, rather than the mainstream neo-classical neo-liberal economics. The BIS has this to say on attempts to generalise policy conclusions: "Economics is not a science, at least not in the sense that repeated experiments always produce the same results. Thus, economic forecasts are often widely off the mark, particularly at cyclical turning points, with inadequate data, deficient models and random shocks often conspiring to produce unsatisfactory outcomes... it is scarcely an exaggeration to say that we face a fundamentally uncertain world - one in which probabilities cannot be calculated - rather than simply a risky one." (77th annual report, page 139).
As noted earlier, another elephant in the trade talks, and one that the negotiators appear to have tacitly agreed to ignore and continue with their negotiations is the lack of Trade Promotion (or Fast Track) Authority for the Bush administration. Though the Indian trade minister Kamal Nath, at the November 2007 G-20 meeting with other coordinators, reportedly flagged this issue and asked the US for a "road map" on this (see SUNS #6367 of 16 November 2007), it has not figured in the WTO talks - neither at the Trade Negotiations Committee (which under Lamy meets informally at HOD levels, and maintains no records) nor at the meetings of the General Council, which "takes note" of reports on the TNC from Lamy.
US Senate Committee Report (http://finance.senate.gov/TradePromotionAuthority.pdf)
on the 2002 Trade legislation, has given both a legislative history
of "fast track" authority (1974 Trade Act, 1988 Omnibus Trade
and Competitiveness law, fast track extensions of 1991 and 1993, and
2002 Trade Act), and details of the 2002 Trade Act. On page 22, "Senate
Committee Report on Trade Reform Act of 1974", the report has clearly
spelt out "traditional procedures" for Congress to deal with
trade agreements in the absence of fast track authority: "1. Completion
of an international agreement on an ad referendum basis and submission
to the Congress for approval through implementing legislation (or seeking
in advance approval by act of Congress for entering into and implementing
an agreement); and 2. Completion of an international agreement and its
submission to the Senate as a treaty." On page 36, the report notes
that implementation of trade agreements often requires the
The implications for other nations negotiating with the US, in the absence of the fast track authority, has thus been clearly spelt out by the Congress, and no trade negotiator from any country negotiating with the US can pretend ignorance.
on the reports out of Davos - decision of small group of ministers to
conclude the Doha talks during the Bush presidency, and Mr. Lamy keeping
open his option to table a text of his own - Mr B.K.Zutshi, former Indian
ambassador to GATT (1989-1994) during Uruguay Round negotiations ending
in the Marrakesh treaty, says: "Frankly, I'm surprised how a select
group of trade ministers at Davos have agreed to engage in serious negotiations
for concluding the Doha Round by the end of this year in the absence
of the US administration having the requisite trade negotiating authority,
generally known as the fast track authority or the trade promotion authority.
During the Uruguay Round (UR) negotiations, when a similar situation
arose (in 1987, and in 1991), negotiations were practically suspended,
although some technical work continued in agriculture and services.
It was only after the
March 2007, and certainly since June when the US TPA expired, both USTR
Susan Schwab, as well as Lamy and his officials, have been suggesting
that if there is an attractive enough market access package that the
This reminds one of a tale in Hitopadesa (a Sanskrit classic of stories), of a student returning after years of study under a teacher, setting himself up as a priest and teacher in a seaside village. The teacher is approached by villagers to advise them on how to catch a crane alive. The teacher thinks about it and advises them to take a glob of butter, place it on the head of the crane and wait until the sun rises and melts the butter, blinding the crane, when they could ensnare and catch it!
It is difficult to believe that trade negotiators, trade officials, the media specializing in following and reporting the WTO, and the civil society groups involved in the process believe in this "spin". Anyone outside this group, and with modern Internet, following the course of the US Presidential elections, knows there is no chance of any TPA being granted to the Bush administration, nor even to any new Administration until perhaps well into end of 2009 or 2010.
As for the other elephant in the room, the financial crisis could blow everything out of the water.
Lamy himself, even before he assumed his job at the WTO, had talked to the late Arthur Dunkel over the prospect of Lamy putting forward a text, like Dunkel did in the Uruguay Round in Dec 1991. Dunkel, according to some of his friends, is reported to have cautioned him. Lamy has again voiced this option of tabling his compromise text, though in response to a question at the Davos forum.
on this, Zutshi says: "I'm surprised by the impression being given
that Mr.Lamy, as the DG, or even as the Chairperson of the Trade Negotiating
Committee, can propose compromises on his own with a view to concluding
the Round early. Such an authority can be given to him or any one else
only by a Ministerial conference or by the General Council, or by the
TNC. During the
And as reported contemporaneously in extenso by this writer during the Uruguay Round talks, in 1991 Dunkel was encouraged to put forward a text, supplying compromises in a few areas that key negotiators could not agree on in the talks resumed after Brussels Ministerial of 1990. The US and EC, after encouraging him to present a text, to be taken by parties as a package, came back in 1992, calling for changes to the texts in areas concerning them, while insisting that none of the areas of concern to developing countries (for example, in TRIPS), could be reopened (From GATT to the WTO, CD-Rom, Third World Network 1999).
developing countries, willy nilly, perhaps acquiesced. But the US and
EC, first negotiated among themselves to reach the Blair House accord
on agriculture, but even then could not conclude the talks. And after
the 1992 elections, when George Bush Sr. was defeated in his re-election
bid, and Bill Clinton won the White House, the
If they are hoping to do the same this time, they will be in for a rude awakening.
a course may well result in rejection of the accord in many countries
- with coalition partners in many governments (as in
It would perhaps be wiser for everyone to pull back, put the Doha talks aside (until the US comes to the negotiating table armed with a fast track authority from the Congress), and address the issues that the General Council decided upon (after Seattle), namely, "confidence" building measures. Some of these may in fact need changes in rules, but others are issues of practice that could be decided by the members. And one of these would be for the WTO membership and the General Council, to restore the decision-making authority to where it belongs in a rules-based organisation, namely, the members and the General Council.
Ever since Lamy took over, and after the Hong Kong Ministerial, he has in a sense staged a coup d'etat of sorts. Until then, decision-making, lay fully and squarely with the Ministerial Conference, and when it was not in session, in the General Council. Even informal decision-making at the level of heads of delegations was at the level of the General Council, at meetings chaired by the GC chairs.
Lamy effectively cut this short, by holding informal HODs of the TNC (where no records are kept), and presenting its outcome to the General Council, where it is merely "taken note of".
This has continued to the point where Lamy told a questioner at the Davos forum, that he would not call a ministerial meeting to finalise a deal until the negotiations were "nearly there".
ministerial conference, at least once in two years, is mandated by the
Perhaps, a starting point, for the WTO members to restore confidence in the system among the members and their public and to ensure "transparency" would be to restore decision-making to the General Council, and make clear to all officials, including the DG, that they are "contracted parties" and not contracting parties to the Agreement - words addressed by the US to Dunkel at the post-Brussels TNC in the Uruguay Round, when he tried to suggest some compromises from the chair.
The other would be to make clear that the WTO is a member-driven organization, and not one where it is manipulated by officials, or where officials arrogate to themselves the remit of the membership.
Another, needing a decision by the General Council, would be to restore the decision-making stipulated in Art. IX:2 of the Marrakesh Treaty, and rein in the Appellate Body, which has been using the "negative consensus" stipulation to engage in rule-making and creating new obligations, under the pretence of interpretation.
(* Chakravarthi Raghavan, Editor Emeritus of the South-North Development Monitor, contributed this commentary.)