Third World Economics No. 514 (1-15 February 2012)

From bicycle to snowball approach to policy

With the world economy in choppy waters and the Doha Round talks at a standstill, Chakravarthi Raghavan ponders what may lie ahead for the WTO.

This year “Davos doesn’t deliver”, declared a headline over an opinion piece in the 30 January Wall Street Journal authored by the newspaper’s money and investment editor.

“One of the … attractions [of the annual World Economic Forum meeting in Davos, Switzerland] to its participants,” the article said, “has been imbuing the self-styled ‘global elite’ with the sense that they were helping to tackle the globe’s problems ... Not this time. With Europe’s economic crisis dominating the backroom discussions, and often taking centre stage in the cavernous Conference Centre, captains of industry, titans of finance and top academics found themselves forced to grapple with unusual feelings of impotence.”

These days too, China is very much on the minds of politicos, and financial and economic writers.

So much so, the Beijing correspondent of the Financial Times (report of 24-25 January) even went to “consult” (interview) what the abbot of the temple in the Chinese city of Suzhou – who the report describes as resident “master” and “an unnervingly accurate soothsayer” – could say on 2012 CE – the year of the “black water dragon”, a year of “uncertainty and changes”, according to the traditional Chinese lunar calendar.

Quelle surprise! The abbot, we are told, predicted a gloomy economic and financial outlook for Europe and the US, with negative effects on Chinese imports and exports. And for good measure, the FT reminds us that a previous year of the dragon, 1988, “prepared the world for the demise of Soviet Communism next year”, while the dragon year of 1976 saw the death of Mao.

As trade diplomats and trade officials come back to their daily chores in Geneva from the year-end seasonal holidays and New Year, they face several uncertainties (not merely because of the Chinese calendar).

Many of the uncertainties have their source in the continuing serious global financial crisis and its deadening hand on the real economy. This, combined with the reality of the major role played by corporate finance capital in the electoral process, ensures nothing will be done, at least this year, to tackle the root causes of a financial crisis with criminal fraudulence at its heart.

Though the multilateral trading system is conjointly linked to the global money and finance systems, there is little or nothing that can be done through the trading system to resolve or even alleviate the negative effects of the financial crisis on the real economy.

All that trade diplomats and their trade establishments back home can do is focus on their normal WTO work, marking time, so to say, on the deadlocked Doha Round talks. They can, at this point of time, neither put life into it nor bury it.

Broken promises

In terms of the WTO, the major developed countries have now reneged on all their international treaty commitments at Marrakesh – for major reforms to their subsidized and highly protected agricultural sector as well as commitments in other areas of trade.

Placing their trust in these solemn treaty commitments of the major developed economies and their good-faith implementation (a basic principle of public international law), the developing countries paid a high price in advance by accepting various disciplines on their own trade in goods, on intellectual property rights and on trade in services too, only to find the developed countries repeatedly reneging on their promises and commitments. In retrospect at least, it is clear that the majors, even when they were signing the Marrakesh treaty in April 1994, had no intention of carrying out their own obligations.

They have gone back not only on the treaty commitments of Marrakesh, but also on the conditions and promises of the Doha work programme launched as a single undertaking in 2001.

The agricultural mandate for elimination of subsidies was touted for a while as a crucial item on the “development agenda”, though soon after launching the Doha talks, Pascal Lamy (as EU Trade Commissioner) went to India to make clear that Europe could not end agricultural subsidies as they were needed to keep its farmers in the countryside.

The mandate has now been stood on its head, more so after the WTO’s 2005 Ministerial Conference in Hong Kong – with Lamy now as WTO Director-General and TNC (Trade Negotiations Committee) chair – and, even more, after the December 2008 modalities text by the chair of the agriculture negotiations. Since then, in the various Lamy-led efforts at compromise to conclude the Doha Round, the mandate has been presented as one of talks for the major emerging economies – Brazil, China, India, South Africa, etc. – to provide market access for the US.

Also, after Hong Kong, the US, the EU and other advanced industrialized countries want the major emerging economies to enter into plurilateral negotiations and agree to provide “market access” in services trade, including financial services.

With the Doha Round now at an impasse, all the original cheerleaders have walked away. Some of them, however, are promoting the view that the impasse shows that trade negotiations involving the entire WTO membership are no longer manageable, and hence there must be negotiations among a few resulting in plurilateral agreements, a la the ITA (Information Technology Agreement) model where countries accounting for 90% of production and trade have participated and joined, with others given MFN (Most Favoured Nation) treatment (very nominal since they have no production or exports).

A more recent idea being floated is that if major developing countries will not participate in the plurilaterals and provide market access in services to the US-EU service industries, the major developed countries (the US, the EU, Canada, Japan, Switzerland, Australia, etc.), accounting for about 60% of services trade, will enter into a services free trade agreement [as per Article V of the General Agreement on Trade in Services (GATS)].

This last, for liberalizing the services trade among the parties in terms of Article V, has to involve, among others, substantial sectoral coverage (defined in a footnote to mean number of sectors, volume of trade affected and modes of supply) – something which the US and others who have been trying to entice major developing countries to join the plurilateral talks have not been willing to do vis-a-vis Mode 4 (movement of natural persons).

Whether it be the call for “plurilateral negotiations” in terms of the Doha Round and the Hong Kong Declaration (for voluntary participation) or the more recent one for a GATS Article V agreement (outside the Doha single undertaking), there is no additional benefit to the demandeurs unless they can coax and browbeat major developing countries into joining.

The demandeurs, which claim to account for 60% of global services trade, the bulk of it under financial services (Modes 1, 2 and 3 but not 4), have already liberalized these trades, and merely scheduled them under GATS and its 1998 Financial Services agreement. They will gain something only if the major developing economies can be roped in and persuaded not only to liberalize the services trade but also to forget about the agricultural chapter of the Doha talks and its single undertaking. Major developing countries have however refused to fall into this trap.

So the threat that if the major developing countries don’t agree to join, those promoting the plurilateral track will conclude a separate Article V agreement, may impress some in the media, but not those who are aware of the actual realities.

“Multi-stakeholder panel” proposal

With the Doha Round now in its 11th year, not only have its cheerleaders all walked away (some publicly and others quietly), but some of them are also advocating winding up the Round as a failure or putting it in cold storage somewhere and taking on new agendas. But there are no takers among the developing countries, who are no longer amenable to being pushed around.

It is perhaps symptomatic that even the usual meeting of select trade ministers and Lamy convened by the Swiss trade minister more or less on the sidelines of the World Economic Forum events at Davos, ended this year with no statement or summing up from the Swiss chair nor any media briefings and the like by the chair and Lamy.

Trade diplomats from some participating countries said that this was according to a prearranged script, explaining that, as shown at the WTO’s eighth Ministerial Conference (MC8) last December, the Doha Round is at an impasse, with the positions of the major protagonists far apart and unchanged. Statements reflecting all divisions would serve no purpose, and partial views may create further complications and controversies.

In this situation, Lamy floated at MC8 his idea of a “multi-stakeholder panel” to analyze various elements and “equip the WTO with 21st-century software”, though he has been vague on its details.

This is seen as an attempt at repeating the history of the WTO’s predecessor, the General Agreement on Tariffs and Trade (GATT) – the setting up of the Leutweiler panel by then GATT Director-General Arthur Dunkel and its report in 1985.

In 1982, the US, at a GATT Ministerial meeting, had failed in its attempt to launch a new round of negotiations, including for bringing into the GATT ambit services and trade in high-technology goods (a precursor of the Uruguay Round TRIPS).

Ultimately, a compromise of sorts was reached for a two-year study programme on services, with interested countries exchanging their experiences on a voluntary basis. While such meetings took place in the GATT building in Geneva, they could not even be presented as GATT meetings!

After this exchange, the US and Japan wanted a new trade round, but this did not get much support.

At that stage, Dunkel, as GATT Director-General, appointed a group of high-level experts headed by Fritz Leutweiler (who had relinquished his job as head of the Swiss National Bank and the Bank for International Settlements). After setting up the panel, Dunkel informed the GATT Council (but had neither consulted it before nor sought its prior approval or, for that matter, sought approval for budgetary expenditure). The Council merely took note of his information (but did not endorse it).

The Leutweiler panel produced a report supporting negotiations on services, but ahead of it calling for an end to discrimination against the developing world, ending the MFA (Multi-Fibre Arrangement) etc. In doing so, the panel called for an end to the GATT provisions for “special and preferential treatment” to developing countries, and integrating these countries “more fully into the trading system” (another US demand in 1982).

The panel underlined that far from receiving special and differential treatment, the developing countries had been subject to discriminatory measures directed against them. But the industrial countries’ failure to implement their obligations under Part IV of GATT was used to recommend its abolition!

When the report was published, the general membership of GATT remained cool or hostile. Instead of placing it before the GATT Council, Dunkel took printed copies of the report to the spring meeting of the IMF-World Bank Interim/Development Committee, where he circulated the report. (He had arranged with the Managing Director of the IMF and the President of the World Bank for the report to be endorsed at that meeting.)

However, when he got up to speak at the meeting, Indian Finance Minister VP Singh (Governor of India at the IMF-WB meetings) asked him whether the Leutweiler report was a GATT report, and Dunkel admitted it was not.

Thereupon, Singh asked how the report had then been issued and circulated to the meeting with the GATT logo, in effect misleading the finance ministers at the meeting. Dunkel then apologized, whereupon he was told he could place the report outside the meeting room but could draw on it in his speech.

At the end of the discussions, a draft communique was placed before the Development Committee, with a paragraph commending the report and its recommendations. India objected and wanted changes, whereupon the then Development Committee chair tried to brush it aside as “unprecedented” and contrary to past practice and traditions, implying that in terms of the IMF-WB voting power, the draft reflected the overwhelming view (since the US, Europe, Canada and Japan supported it).

Singh however refused to be brushed aside and said there could always be a beginning, but if no changes would be made, the communique should have a footnote stating that the Governor of India dissented from it. Thereupon, the Governors from the Latin American region, Brazil, Argentina and others, joined in and said they also dissented like India and it should be noted.

The meeting was suspended and a smaller group was set up to work out a compromise, resulting in no endorsement for the Leutweiler report or its recommendations, but with the IMF-WB meeting calling for “liberalization of trade”.

Subsequently, when Dunkel brought the report to the GATT Council for discussion, it was noted by leading developing countries as a report commissioned by the GATT Director-General through his consultants (and not a GATT report).

There was criticism from Brazil and others over the fact that the report had been taken first to the Washington meetings for discussion before it was brought before the GATT Council, and that expenditure had been incurred without prior approval of the budget committee.

Members expressed preliminary views, but added that they would refer the report to their capitals, reserving their positions meanwhile (28 March 1985 and 2 May 1985, in Chakravarthi Raghavan, From GATT to the WTO, SUNS CD-ROM, 1999).

In mooting his “multi-stakeholder panel” idea, perhaps Lamy is hoping to repeat, but successfully, the Dunkel precedent with the Leutweiler report, and take the report to a G20 summit meeting (where summiteers from developing countries might be woolly-headed enough to acquiesce) before coming to Geneva to face the WTO General Council with it.

In the process, Lamy might be attempting to find a way to bury the “embarrassment” of the Doha Round that he as EU Trade Commissioner, with the help of then US Trade Representative Robert Zoellick, had forced on developing countries.

Right from the beginning, and it became clear at MC1 (Singapore, 1996), MC5 (Cancun, 2003) and MC6 (Hong Kong, 2005), the EU had been trying to find a way to load the WTO agenda with many issues so as to gain time and put off as long as possible further reforms in its agriculture sector (mandated by Article 20 of the WTO Agreement on Agriculture).

In fact after the Doha Ministerial Conference, Lamy went before the European Parliament, in a formal session followed by informal discussions (where they forgot to clear the room, and many NGOs were present but not the media), and reportedly told the Parliamentarians that he had gained for them 10 years (that the Doha Round might need to complete) to enable them to adjust agricultural policy and shift subsidies to what subsequently came to be described as the “Green Box”.

He also, as EU Trade Commissioner, went to India where, according to Devinder Sharma, a civil society activist focusing on agriculture and the anti-hunger campaign, Lamy made clear to Indian industrial and other groups that Europe had to find a way to keep farmers in the countryside, and they needed to be realistic that agriculture support could never be ended. If developing countries still persisted with the Round, perhaps they share some blame too.

As WTO Director-General, Lamy has continued on this path, but was somewhat checkmated at Hong Kong when, at Argentina’s insistence, a kind of parallelism was established between the agriculture and NAMA (manufactured goods sector) talks. However, since then, this equivalence has been muddied by the December 2008 modalities papers of the chairs of the two negotiating groups, and the continuing attempts to convince developing countries, particularly the majors (Argentina, Brazil, China, South Africa, etc.), that since their applied tariffs are already low, they would benefit by “binding” them in the Doha Round – as ordained by neoclassical economic theories (cited only in the trade system and on Wall Street).

Lamy, as TNC chair, missed the bus in concluding the Doha Round when in 2006, he obliged the US by abruptly adjourning the talks amongst the agriculture G6 group of countries, thus enabling the US not to have to say “no” on the cotton subsidy issue. He not only adjourned that meeting, but also announced the suspension of the Doha Round talks, only subsequently reporting to an “informal TNC”, and later getting the WTO General Council to take note of it.

Publicly, Lamy has been talking of the WTO system having to deal with 21st-century agendas such as the environment, climate change and financial issues (like currency values). In the process, he could also hope that, like the Leutweiler report that called for ending special and differential treatment to the developing world on the ground that the developed countries were not implementing GATT Part IV, his multi-stakeholder panel could come up with recommendations for making agriculture once again an exception to the normal WTO/GATT rules, formalizing and legalizing the so-called “Green Box subsidies”.

The snowball approach

Commenting in a communication to this writer on Lamy’s remarks at MC8 about the multi-stakeholder panel, Paul Rayment, former chief economist of the United Nations Economic Commission for Europe (UN ECE), suggests that perhaps there is a common thread running through such ideas as stakeholder groups, focus groups, plurilaterals, etc.

One puts together a carefully chosen group of “the great, the wise, the virtuous” (according to one’s preferred definition of what is great, wise and virtuous). Such a group is then asked to consider a problem and to produce what it knows will be the preferred solution, and then outsiders are challenged to go along with the result or be condemned as “reactionaries, obstructionists, protectionists, or whatever the fashionable adjective might be.”

This, Rayment suggests, “is the snowball rather than the bicycle approach to policy – get the momentum going and eventually the outsiders will feel they cannot afford to stay outside the group. Group dynamics or simple dynamic economies of scale!” Or it could become the OECD’s spider-web approach to ensnare.

After the failure at the WTO’s Cancun Ministerial Conference in 2003, Ram Manohar Reddy, then Deputy Editor of The Hindu, said: “The question now is not if the Doha Round can be saved; it is instead, does the WTO have a future in its present form? It does not. The only way the WTO can contribute to ‘a rules-based multilateral trading system’, as it did until the mid-1990s, is if the all-powerful role in which it was cast in the mid-1990s is taken away from the organization. That would mean a more narrowly defined remit for the WTO, which does not interfere in domestic policy. That may go against the dictates of globalization, which sees no area of domestic policy as outside the influence of global economic forces. It may even seem impossible because a WTO with its powers shrunk would not be in the interests of the US and the EU, both of whom in the late 1980s saw the organization as a vehicle to further their economic interests across borders. But do the members of the WTO have any choice other than to change direction at the organization?”

If Lamy does set up his panel, it would do well to consider and adopt this sane advice. But if Lamy is bent upon repeating history, he might read what Karl Marx, who followed and expanded on Hegel’s dialectics, has written. In The Eighteenth Brumaire of Louis Bonaparte, Marx wrote: “Hegel says somewhere that all great events and personalities in world history reappear in one fashion or another. He forgot to add: the first time as tragedy, the second as farce.” (SUNS7300)