Category Archives: Guest Commentary

Guest Commentary: Bali and Its Lessons

In late October, The Chicago Council and partners gathered some of the world’s leading experts on international trade to discuss what would come next in economic integration. Below, one of these experts, Uri Dadush, senior associate at the Carnegie Endowment for International Peace, offers his analysis of an important subsequent event–the limited global trade deal that was agreed in Bali in December. He notes the modest achievements of the Bali deal, but also draws lessons for how the World Trade Organization needs to change in the future.

At a time when US trade debates are about to heat up, a broad description of the outlook for global trade, drawing on the October gathering, is also now available here.

By Uri Dadush, Senior Associate, Carnegie Endowment for International Peace

The Bali agreement rescued the World Trade Organization (WTO) from oblivion, but it also underscored the severe limitations of multilateral negotiations and the need to reform the institution. Encouragingly, it also points the way to how the WTO can change.

In Bali, the WTO reaffirmed the importance of its development mandate, but only by reiterating the contents of prior agreements, adding little new. It also, however, took a significant step forward and one, smaller one, backward. The step forward was to establish trade facilitation—in this case essentially entailing the proper functioning of customs—as part and parcel of the WTO’s functioning, including the creation of a standing committee to oversee the implementation of the agreement.

The step backward was to allow (temporarily, but temporary easily becomes permanent in trade policy) India and other developing countries a major exception to limits on agricultural subsidies on account of food security. It is easy to imagine how such an exception will make it more difficult to make progress on eliminating all trade-distorting agricultural subsidies, traditionally a defensive agenda of advanced countries, and one on which the WTO supposedly plays a unique role. And failure to move on agricultural subsidies in the future will reduce the chances that advanced countries will obtain their long-sought quid pro quo, which is improved and more secure access to manufactures and service markets in developing countries.

But trade facilitation stood out as an exception on which many could agree. True, the significance of the trade facilitation agreement can be easily overstated, since in Bali it was whittled down to what is effectively a “best efforts” endeavor with an open-ended implementation schedule for developing countries. This includes freedom on their part to self-select what gets done faster, and what gets done on an indefinite schedule. Meanwhile, advanced countries and some developing countries have already largely implemented the good practices the agreement entails, such as prompt publication of changes in regulations, pre-shipping inspections where appropriate, redress procedures, and rapid processing times. But the importance of the trade facilitation agreement can also be understated, since extensive research has shown that the cost of custom delays can easily outstrip that of tariffs, and even a “best efforts” international agreement can strengthen the hands of reformers when the political will to improve exists.

Still, even the staunchest multilateralists will agree that Bali represents slim pickings for a wide-ranging negotiation that began in Doha 12 years before, and that negotiations involving 160 very diverse countries (Yemen being the latest addition) are very unlikely to yield anything other than minimum common denominator outcomes. Bali therefore underscores the need to move to a more efficient model for WTO negotiations, one that can involve a smaller, critical mass of players willing to engage on a narrow set of issues—so-called “plurilaterals”—rather than requiring that all countries agree on every aspect. There are illustrious precedents for this, including, for example, the government procurement agreement, the information technology agreement, and the agreement on financial services, all three of which are now the object of negotiation to be extended or deepened in various ways.

The problem with plurilaterals is not only that countries understandably resist any attempt to impose WTO disciplines on them if they have not been part of the negotiation, but they are also reluctant to let others negotiate agreements under the WTO aegis (including dispute settlement, etc.) that puts them at a disadvantage. Short of conducting the negotiations outside the WTO (as in the case currently of the negotiations on TISA—the Trade in Services Agreement), there are three complementary ways to square this circle: grant the excluded countries similar terms as the included ones, include them in the negotiations even if they ultimately opt out of the final deal, and side-payments.

The Bali package is billed as a multilateral deal since everyone was involved in its negotiation, but, given its narrow nature, it can equally be interpreted as a plurilateral deal on trade facilitation since, by allowing plenty of wiggle room in its provisions and allowing developing countries indefinite implementation periods, the trade facilitation agreement effectively bestows a near-free rider status on those that choose not to pursue it. In this light, the reaffirmation of the development mandate, especially for LDCs, and the food security exception for India were side payment for a rather limited agreement on trade facilitation.

The loose provisions in the trade facilitation deal are far from satisfactory from a narrow legal perspective. But from a development perspective, the picture is not as bleak: most countries want to undertake these reforms anyway, and given the complexities of carrying them out in a politicized environment, one can still see the agreement as a big step forward, since it establishes a roadmap and gives reforms a jolt, leaving open the possibility that more binding disciplines will be agreed in the future.

Thus, an important achievement of Bali—and one for which the new Director-General Roberto Azevêdo has to be recognized—is that it points the way to a more flexible modus operandi for the WTO, one that may allow for progress in other relatively narrow aspects of the Doha agenda in the future, or to go beyond Doha. Bali could also begin to shift the emphasis from the legalism for which the WTO and its predecessor, the GATT, are well known, onto the encouragement and support of trade reforms at a country’s own pace.

Moreover, everyone should recognize that progress in world trade does not depend only on the WTO, even though the institution continues to play a crucial role in keeping trade open and predictable. Regional agreements supplanted it long ago as the most active arena of international negotiations and will take on even greater prominence in the future as a number of mega-regional deals such as the Trans-Pacific Partnership and the Transatlantic Trade and Investment Partnership take shape, even if some of them ultimately fail.

Furthermore, technology trends and the domestic pressure to enact reforms have always been the most important drivers of global trade by far, and will continue to be. With the growth of foreign direct investment and the proliferation of global value chains, foreign investment and trade have become an essential component of production, making self-sufficiency almost unthinkable. And the rise of an informed middle class in developing countries places new demands for access to quality products at a reasonable price.

Contrary to the dire predictions of trade pessimists, there is thus little reason to doubt that world trade will resume its rapid upward trajectory as the effects of the financial crisis recede. That, in turn, will raise the stakes on revitalizing the WTO as a central plank of post-war prosperity. Hopefully, Bali will be remembered as the first step in the institution’s long and hard journey of reform.

Guest Commentary: TTIP – Views from Europe

By Fredrik Erixon, director and cofounder of the European Centre for International Political Economy (ECIPE), a world-economy think tank based in Brussels, and was the Convenor of the Transatlantic Task Force on Trade, a joint project of ECIPE and the German Marshall Fund of the US that spearheaded the TTIP negotiations. A fuller version of his analysis can be found here (PDF).

Failures in the World Trade Organisation’s Doha Round have prompted countries to turn to preferential trade agreements. But are they worth their salt? While the most outstanding feature of past FTAs is that they have not had impressive effects on growth in trade and Gross Domestic Product (GDP), the negotiations for a Transatlantic Trade and Investment Partnership (TTIP) may change this verdict. Clearly, TTIP will be won or lost for its economic merits. And the pro-growth effects of TTIP are really what persuaded reluctant officials and politicians in Europe to join countries like Germany and Sweden in their efforts to push for a transatlantic FTA. Given Europe’s poor growth rates, trade agreements that could deliver higher economic growth have been given a new hearing.

Few would deny that TTIP has the capacity to deliver a sizeable contribution to GDP in Europe. The gains from this FTA would be bigger than from other FTAs for the reason that it involves two large economies. Simply, size matters. A “conservative” estimate by the Centre for Economic Policy Research in London suggests the TTIP gain for the EU to be in the tune of 0.3-0.5 percent of GDP (the GDP gains are slightly smaller for the US).

However, political scepticism of TTIP is less concerned with the bilateral economic gains (or losses) and more directed to its consequences on the World Trade Organisation as the central forum of trade negotiations. But perhaps surprisingly to some, the debate in Europe over TTIP has taken a different view. Generally, it has not thrived on the notion that TTIP should be an attempt to build a Fortress Atlantic – or that it is a strategy to gang up on China or other emerging powers competing with the US and Europe.

So while the strange acronym of TTIP is for some a code word for the death knell of the WTO, many trade observers in Europe would argue it is the substance that should be used to give global trade policy a needed shot in the arm.

TTIP, like the TPP, was not born out of deep and genuine beliefs in the principles of free markets or the classical school of free trade. Like any other trade agreement in the past years, these initiatives build on conditional views of free trade and free competition mixed up with soft mercantilism and a growing urgency to support economic growth. Yet it is the best available strategy to rejuvenate global efforts to liberalise trade.

In the past 15 years, the multilateral trading system has been a leaderless system with no clear direction that has unified the key members. The system itself benefited for several decades from the leadership by the United States, which considered this system to be critical for its overall strategic objective of spreading market-based capitalism. There were willing followers to the US leadership, but none other than the US had the requisite economic, political, and institutional capacity to underwrite the system. Yet since the collapse of the Cold War, American leadership has withered away, and its general position on trade liberalisation has somewhat changed. Absent political leadership and direction, the Doha Round got stuck because the political instinct of many countries was to favour status quo rather than new liberalisation as long as there is no external pressure that prompts them to revisit that position.

Like many other things in economic life, trade liberalisation tends to be driven by two motives: profits and fear. Countries agree to open up for greater foreign competition because they believe it will boost their economy or because they fear that other countries will go ahead without them if they stubbornly resist liberalisation. Despite all the success of trade-oriented models of growth, many countries have grown to think that they will not stand to benefit much from new trade liberalisation – and that they have no reason to fear failure.

TTIP may partly change this. It is a big initiative. And if the two biggest economies of the world go for a bilateral agreement, it means that there is a risk for other countries that stand outside that bilateral agreement and, which is important, other efforts to liberalise trade. That risk is mostly about not having a voice in the design of the trade reforms that are likely to serve as benchmarks in future international agreements. It is far less about loosing current trade access – but it is about the fear of not having as good access to trade that will be liberalised in the future. Consequently, if TTIP is the ‘real thing,’ if it achieves the promise of ushering the world into 21st Century trade policy, the response from the larger emerging economies cannot be no response at all. The political and economic opportunity costs of status quo would have been changed.

Guest Commentary: Japan’s Agriculture and the TPP

As US presidents encounter domestic policy obstacles, they traditionally turn their attention to foreign affairs. At the top of the agenda for the Obama administration has been the conclusion of the Trans-Pacific Partnership talks, scheduled to wrap up this calendar year. The economic potential of the TPP and its degree of difficulty both increased significantly when Japan joined as a full participant this last summer. Not only is there a lengthy history of contentious trade negotiations between the United States and Japan, but there is the long-time sticking point of agricultural trade. If TPP is to succeed, Japan will need to make politically difficult concessions on agricultural liberalization. Below, Yutaka Harada, an expert at the Tokyo Foundation and Waseda University, summarizes his view of why Japan needs the TPP. A fuller version of his analysis can be found here (PDF).

By Yutaka Harada, Tokyo Foundation and Waseda University

Many Japanese industries are perceived to be strong, active, and competitive in the global market, but agriculture is usually considered an exception. For years, the farm sector has sought protection from international competition, subsidies, and favorable government treatment, and it has been largely successful in getting them until now. In spite of these privileges, Japanese agriculture is in a perilous state, and most farmers oppose any movements toward free trade.

In spite of opposition from powerful agricultural lobbies though, the Japanese government has decided to join the Trans-Pacific Partnership (TPP).

The State of Japanese Agriculture

At a glance, the situation of Japanese agriculture seems absurd. The average age of Japanese famers is 65.8. Fields and rice paddies that have been abandoned and are no longer cultivated total 400,000 hectares (Japan’s arable land is 4.5 million hectares), while another 1,100,000 hectares lie unused owing to the government policy of reducing rice cultivation acreage. Japanese agriculture is in a state of collapse.

Potential for Growth

Despite such dire conditions, there are some areas with potential for growth. Looking at the shares of sales by farm scale, we see that in the case of broilers (chicken), farms with sales of more than 10 million yen (100,000 dollars) accounted for 98% of total sales. Similarly, the shares claimed by farms with sales of more than 10 million yen were 97% or higher for eggs, pork, and milk cows.

By contrast, the shares of 10-million-yen-plus farms were 39%, 51%, and 63% for fruits, rice, and vegetables, respectively. Relatively low shares were also seen for beef, wheat, flowers, beans, and potatoes.

The figures suggest that large farms were dominant for those agricultural products that lend themselves to large-scale production. There is less economy of scale for fruits, vegetables, and flowers. There is considerable potential economies of scale for rice, wheat, beans, and potatoes, but such potential is not realized at present.

Wrong Policies

Why has Japanese agriculture been unable to develop? One possible culprit is government policy that has discouraged farmers from taking advantage of economies of scale.

One might even say that the goal of Japanese agricultural policy has not been to develop agriculture but to maintain the number of farming households, which have tended to vote for the ruling Liberal Democratic Party.

This policy might have been meaningful when the Japan Socialist Party (now the Social Democratic Party) was strong, especially among urban voters, and there was a possibility that the JSP could knock the LDP from power, but such a possibility disappeared many years ago.

What Can Be Done?

In order to correct the shortcomings of Japan’s agricultural policy, it is important to have an understanding of the distorted system of protection for agricultural products. Tariff rates for flowers are zero, those for vegetables range from 3% to 9%, and those for fruits are between 10% and 20%. By contrast, tariffs are extremely high for rice, tapioca starch, butter, sugar, wheat, potato starch, and skimmed milk, being from around 200% to 800%.

Additionally, many unprotected agricultural sectors have been growing while heavily protected ones have not. Sales of vegetables, fruits, and flowers are 2.1 trillion yen, 0.7 trillion yen, and 0.3 trillion yen, respectively. Sales of rice, meanwhile, are only 1.8 trillion yen, with sales in unprotected sectors now being larger than in protected ones. Unprotected sectors are those that can stand on their own feet, increase sales, and make profits, while the protected sectors have been losing sales and continue to depend on protection from the government.

Farm Sector Depends on Japan’s Overall Prosperity

The average agricultural income of Japanese farms is only 0.5 million yen per year. Half a million yen is only about 5,000 dollars. Obviously, this is not enough to live on in modern-day Japan.

Then, how do they live? The average income from side jobs is 1.9 million yen and average pension revenue is 2.1 million yen. Total income, including from agriculture, is 4.5 million yen. This is how they survive.

The figures suggest that for the average farmer, the most important consideration in making a living is to secure a steady income from a side job and to receive pension benefits. Getting a stable side job will become easier if the Japanese economy is growing, and for this, Japan’s best option would be to open its doors wider to the global market and to seek further trade liberalization.

And what are the most important considerations in receiving pension benefits? Since benefits are paid from the contributions of the working-age population, then it follows that Japan needs to be prosperous with many job opportunities. For this, too, Japan should seek liberalized global trade. In short, Japan needs the TPP to ensure its own prosperity.

Guest Commentary: Explaining Differing US and European Data Privacy Perceptions

By Stephen Ezell, Senior Analyst, Information Technology and Innovation Foundation

In recent months, heightened by revelations regarding the United States’ global surveillance and data gathering operations, data privacy has become one of the most contentious policy issues dividing the United States and its European trade negotiation partners. So what explains the differing approaches to data privacy between the United States and Europe?

It starts with the fact that, in Europe, privacy is viewed as a fundamental human right, and, as such, it takes primacy over other personal and societal values. In contrast, in the United States, many people view privacy more as a consumer right and as one value among many, and thus believe that privacy must be balanced against other competing interests.

In particular, in the United States, it’s viewed as reasonable to give consumers more ability to manage their privacy settings online in exchange for the provision of innovative digital services. In fact, many of the most popular Websites on the Internet would not exist today without online advertising, which supports the creation and maintenance of new online content, applications, and services: everything from Google’s free email service Gmail to Facebook’s social networking services. Online advertising provides the revenue that fuels innovative business models and drives much of the Internet economy.

But Europeans place a higher priority on privacy. For instance, proposed updates to the European Union’s 2002 Privacy and Electronic Communications Directive (PECD) would introduce restrictive privacy regulations limiting the ability of advertisers to collect and use information about consumers for targeted advertising. The regulations would limit the ability to target online advertisements to users based on certain protected categories of data, such as an individual’s race or ethnic origin, political opinions, religion or beliefs, trade-union membership, genetic information, health, sex life, and criminal history. These restrictions could potentially prevent or limit marketers from effectively creating targeted ad campaigns for services. For example, whereas it would be perfectly acceptable in the United States to present a Web advertisement for ChristianMingle.com or JDate based on one’s Web search history or social network posts, this would be forbidden by European data privacy rules.

Moreover, even in analyzing the impact of existing PECD privacy rules, Avi Goldfarb and Catherine Tucker found that they resulted in an average reduction in the effectiveness of online ads of approximately 65 percent. The authors write “the empirical findings of this paper suggest that even moderate privacy regulation does reduce the effectiveness of online advertising, that these costs are not borne equally by all Websites, and that the costs should be weighed against the benefits to consumers.” If European advertisers reduced their spending on online advertising in line with the reduction in effectiveness resulting from stricter privacy regulations, “revenue for online display advertising could fall by more than half from $8 billion to $2.8 billion.” Likewise, in a broader analysis of the economic impacts from Europe’s Data Privacy Directive, ECIPE finds that if fully implemented it would reduce EU GDP by 0.35 percent, in even the most conservative estimate.

The second difference is that the United States tends to manage data privacy issues on an industry-by-industry basis, thus we have HIPAA (Health Insurance Portability and Accountability Act) regulating health data privacy rights, Gramm–Leach–Bliley rules regulating privacy of financial data, etc. The United States is not likely to pass an overarching, across-the-board data privacy law — along the lines favored by the Europeans — anytime soon. Thus, the Safe Harbor program — a framework that allows US companies to self-certify that they adhere to a set of privacy principles enabling them to comply with requirements of the EU Data Protection Directive — will remain vital to successful Trans-Atlantic trade and free flows of data.

However, in the wake of the PRISM revelations, some European data protection authorities have called for a suspension of data transfers under the Safe Harbor agreement, since US companies are in “apparent violation.” Moreover, Germany announced on November 3 that it intends to push for tough data protection controls to be included in the Trans-Atlantic Trade and Investment Partnership Agreement (TTIP). But the US perspective is that the Safe Harbor program has worked satisfactorily, has robust enforcement mechanisms, and should be continued.

At the end of the day, data flows are critical to a global, networked economy and thus data issues need to be a component of future high-standard trade agreements. At the same time, those agreements need to preserve a framework that permits different kinds of data privacy rules to be in place among countries. From the American perspective, it’s a global economy, and we can’t have one country or region saying here are the data privacy rules that the entire world has to play by. In summary, trade policy has just barely begun to scratch the surface of issues raised by digital trade, and it’s high-time for the global trade agenda to enter the digital age.

Guest Commentary: The TPP – Big Stakes for Canada

While the Trans-Pacific Partnership started small last decade, the trade agreement has grown rapidly. One recent growth spurt came when Canada and Mexico joined just over a year ago. Below, one of our expert panelists for next week’s conference, Hugh Stephens, a veteran Canadian diplomat and trade expert, discusses Canada’s interest in the TPP and what is at stake in the negotiations. An extended version of his analysis can also be found here (PDF).

By Hugh Stephens, Executive in Residence, Asia Pacific Foundation of Canada

Will the TPP, which has dragged on for about 4 years and 19 negotiating rounds, be DOA when it arrives at the doors of Congress? If so, that will be a profound disappointment for New Zealand, which sees the TPP as its best hope to get access to the US market but also to others, especially Canada, which has gone to rather extraordinary lengths to be finally invited to join the TPP club. It took some considerable effort for Canada to pry its way into the talks in June of 2012 (it actually joined the negotiations in September of that year after the completion of Congressional review of its interest), after having initially rebuffed the invitation to join the TPP’s predecessor, the P4. When Canada did finally decide to play catch-up and seek to join the TPP negotiations, it found that the welcome mat was missing. In particular, the US Administration was not helpful; discouraging at best, obstructionist at worst.

It may seem strange that the US was cool to the admittance of its NAFTA partner and the largest single market for US goods, the 10th or 11th largest economy in the world according to most measures. But initially at least Canada was seen as an additional complication to completion of the TPP, a “difficult” negotiating partner that brought its own baggage (such as a less than robust IPR regime, a traditional antipathy to the interests of the brand-name pharmaceutical manufacturers, a penchant for protecting so-called “cultural industries”, and other trade issues that did not align with US interests) that might have resonated with some of the other TPP countries. Canada mounted a counter-offensive, both in Washington and in the Asia Pacific region, cultivating US industries and companies concerned about the integrity of the North American supply chain, as well as making direct approaches to other TPP players, none of whom (with the possible exception of New Zealand that has opposed Canada’s supply management policies in dairy for many years) had any particular reason to oppose Canadian entry. In the end, Canada got its wishes, in part because of the desire of Mexico to also join the TPP and illogicality of splitting NAFTA.

What accounts for Canada’s change of heart from disinterested bystander to ardent advocate? It lies in part with the Conservative government of Stephen Harper awakening to the reality of Canada’s vulnerability to its excessive dependence on the US market combined with the aggressive growth of economies in Asia. A succession of minority governments had left policy-making in Canada focused heavily on Canadian domestic politics, necessary for political survival. With the winning of a majority in 2011, the Conservatives put their trade and jobs platform into high gear. A key component was trade liberalization, both with Europe (Canada and the EU have just announced the preliminary conclusion of the CETA—the Canada-EU Trade Agreement) and Asia. The TPP was the best vehicle available to Canada to establish a trade foothold in Asia, given the lack of progress of bilateral trade negotiations with Singapore, Korea, Thailand and India. The addition of Japan, long anticipated, was another key element in the Canadian calculus since even though Canada and Japan have embarked on bilateral talks, the TPP might conclude first and Canada cannot afford to let the US gain the advantage as it had with Korea. And if the US was going to negotiate improved access to its market, Canada had better be at the table to protect its NAFTA access.

Looking beyond the tactical advantage of being inside rather than outside the TPP negotiating tent, Canada has been creating its own “pivot” to Asia. Although it has a long history of engagement with Asia, these links had been allowed to atrophy in recent years. Canada wants back in—to the EAS, to other regional fora, and to be a part of the regional trade architecture. The TPP may or may not be a stepping stone to a wider Free Trade Area of the Asia Pacific (which is where the true economic gains will come) but Canada does not want to take the chance of being excluded from the game. The TPP is both a short term tactical move and a longer term strategic play. If, after all the effort, the TPP gets sidetracked because of a standoff between the Obama Administration and Congress, there will be some very frustrated policy-makers not only north of the Canada-US border, but in other TPP capitals as well.