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Development coherence in trade governance: Key to the rebuilding of the global economy

BusinessMirror, Manila

Development coherence in trade governance: Key to the rebuilding of the global economy

By Rene E. Ofreneo, Ph.D. / School of Labor and Industrial Relations / University of the Philippines

7 September 2009

(Abridged version of a paper presented in the UNDP Regional Stakeholders Consultation on Cross-Border Governance Issues in Asia and the Pacific, Bangkok, Thailand. Author is a co-convenor (NGOs and academe) of the Fair Trade Alliance.)

The global crisis has one positive and liberating aspect—policymakers and even once-arrogant neoliberal economists are now openly questioning the wisdom of untrammeled liberalization. The present global recession has abundantly shown that liberalizing the financial and other economic sectors wholesale sans rules is a formula for disaster, be it applied in a developed market economy like the United States or in a small developing economy like Haiti.

Ironically, this is not a new observation. As early as the 1990s, various trade unions and civil society organizations worldwide had been complaining about the deepening mass poverty, joblessness and inequality in economies which had embraced uncritically the World Bank’s “structural adjustment program” (SAP) consisting of measures promoting trade and investment liberalization, privatization and deregulation in a one-sided manner. The IMF shock therapy for Yeltsin’s Russia, the 1997-98 Asian financial crisis, the mass peasant suicides in Third World agriculture and the deindustrialization that occurred in SAP-driven economies such as the Philippines all point to the incoherence and illogic in the SAP’s simplistic economic construct of growth automatically flowing from a narrow program of liberalization. This is the underlying reason for the waves of the antiglobalization mass protests that have hit the WTO, the IMF-World Bank tandem and the annual Davos elite summit beginning with the Seattle Revolt that crippled the 1999 WTO Ministerial Conference.

Eventually, these critical views of the CSOs and trade unions have found a hearing in two major UN bodies: the ILO and the UNDP. In 2003, the ILO-sponsored “World Commission on the Social Dimension of Globalization” (WCSDG) came out with A Fair Globalization, a report documenting the deepening global and regional inequalities across the globe and the disturbing global “race to the bottom” among global corporations seeking to roll back labor and other standards in their search for cheap and docile labor. Earlier, in 1999, the UNDP published a seminal Human Development Report, concluding that globalization has a great capacity to do good as well as inflict harm; and arguing for the promotion of “globalization with a human face” and the development of markets based on “institutions and rules. On trade, the 1999 HDR noted the rapid growth of global markets as well as the unequal global outcomes of such growth. Thus, the 1999 HDR calls for “fairer trade”, especially for developing countries, for a review of previous trade agreements and their promises before commencing any new trade talks, for the inclusion of labor and environmental standards in trade negotiations, and for the elimination of the huge agricultural and export subsidies in the developed countries. On global economic governance, the 1999 HDR calls for the development of rules and institutions based on six guidelines—ethics (less violations of human rights), equity (less disparity within and between nations), inclusion (less marginalization of people and countries), human security (less instability of societies and less vulnerability of people), sustainability (less environmental destruction), and development (less poverty and deprivation). The 1999 HDR also cites the need for global ethical standards to govern or regulate the behavior of the leading global economic actors, meaning the transnational corporations (TNCs).

These ground-breaking studies by the ILO and UNDP have been followed by more detailed reports on the uneven economic, social and labor impact of globalization and the SAP program, which has been baptized by its global proponents as the “Washington Consensus.” In particular, studies show that:

· Growth does not automatically flow from trade liberalization. China and Vietnam have shown that growth can be achieved through gradual liberalization under a regime of high tariff walls. In contrast, Haiti in the 1990s and the Philippines in the 1980s (under the World Bank’s structural adjustment program) registered poor growth despite the adoption of comprehensive trade and economic liberalization measures.

· The history of developed countries shows that they embraced liberalization after they achieved a significant level of growth and development, not before. This means countries dismantle trade barriers once they get richer. This observation is repeated in the case of Japan, the Asian NICs and more recently, by China and India.

In Making Trade Work (2003), the UNDP discussed lengthily the “special and differential treatment” (SDT) principle, which is mentioned in 97 clauses of the various WTO agreements. The SDT principle recognizes the need of developing countries to have greater flexibility in meeting their commitments under the WTO. To gain the support of many developing countries for a new round of global trade talks, the WTO reaffirmed in the 2001 Doha Ministerial the central importance of SDT. And yet, the irony is that the Doha Development Round (DDR) has not progressed, partly because of the refusal of the developed countries to give up their flexibility in agriculture (in terms of subsidies and support systems for their domestic producers and exporters) while insisting on the wholesale liberalization by developing countries of their agriculture (AoA), industry (NAMA) and services (GATS). Incidentally, Making Trade Work gave a brief overview on how the production of corn, a staple crop in Mexico, collapsed after the signing of the North American Free Trade Agreement (Nafta) in 1994, and how the Philippines, a major agricultural exporting country in the past, has become a net agricultural importing country since joining the WTO, also in 1994.

The foregoing ideas in the above UNDP reports also find resonance in A Fair Globalization (2003) of the World Commission on the Social Dimension of Globalization (WCSDG) organized by the ILO as well as in the in-depth reports produced by some global civil society organizations such as the Rigged Rules and Double Standards (2002) produced by Oxfam.

FairTrade’s trade campaign experience

The question is how come these enlightening ideas developed by the UNDP and other development institutions and embraced by many CSOs have not been institutionalized? The obvious answer: it is difficult to kick out the habits and ways of thinking developed by three decades of neoliberal indoctrination, especially in a country like the Philippines where neoliberal economists have dominated the economic technocracy for so long. With the global failure of neoliberalism, we hope to see some advances in the implementation of these trade governance ideas developed by the UNDP.

In the meantime, we would like to share briefly the experience of our Alliance in its campaign for fair and just trade policy governance at the national and global level.

But first, an explanation on why our Alliance was formed. The Alliance, ironically, was formed on September 11, 2001, in response to a different kind of devastation—the collapse of a large number of industries, farming areas and jobs and incomes in the Philippines. Examples of industries which have collapsed or are collapsing: textiles, rubber, tire, tile, ceramics, battery, petrochemicals, plastics, pulp and paper and foundry. Examples of farming areas which have declined are those devoted to rice, corn, sugar, onion, garlic and livestock. Interestingly, the Alliance was formed on the joint initiative of several industry and trade union groups, primarily to question the WB-imposed SAP liberalization.

The issue here is not trade liberalization per se, but the one-sided and virtually unqualified way by which SAP was formulated and implemented. SAP was undertaken without any consultation with nor explanation to the affected sectors; the liberalization targets put the country’s tariff rates way ahead of many Asia-Pacific countries; there were hardly any major measures instituted to make the cost of doing business and farming affordable in the Philippines; and there were no workable safety nets put in place, including measures to check unfair trade practices of other countries such as dumping and smuggling. The result was a “hollowing out” of the Philippine economy and its transformation into one dependent on overseas migrant remittances and dependence on a few export winners such as the electronics assembly industry (which accounts for two-thirds of the total exports), some tropical fruits (mainly banana and pineapple) and now ICT-based services (primarily call center or customer services).

Now, what are some of the lessons learned by the Alliance in the last seven years?

First, social dialogue and engagement with policy makers are critical but are not enough. We had dialogues with the executive department (President Arroyo, Cabinet members dealing with industry and agriculture, tariff and planning officials, ambassador to the WTO) and the legislative department (senators and congressmen dealing with trade, industry and agricultural issues). Through these dialogues, we got to learn each other’s positions. The problem is that some of the officials would only listen perfunctorily but would not budge from the positions they have already taken, or would temporarily postpone a tariff reduction program only for a year or two.

However, we managed to also register significant gains as a result of these dialogues. For example, one reason for the collapse of the 2003 and 2005 WTO Ministerials in Cancun and Hong Kong was the stubborn refusal of developed countries to give up their agricultural subsidies while insisting on the wholesale liberalization of the industry, agriculture and service markets. The Philippines sided with the countries which said ‘No’ to the draft Ministerial agreements because of the obvious unevenness in the drafts. We in the Alliance would like to claim part of the credit for the Philippine position in these Ministerials because we had intensive dialogues with key officials before and during the Ministerials. In fact, some of the Alliance members served as advisers of the government. The battle cry then was “no deal is better than a bad deal”.

Other significant gains: the enactment of the “cheap medicine law” in the Philippines based on the “flexibilities” under the TRIPS and the application of temporary safeguard duties on some commodities such as cement, tile and petrochemicals.

Still another significant gain is the Philippine consistent position on the Agreement on Agriculture (AoA) against global agricultural imbalances. The Philippines has also taken a strong position against the ambitious program of some countries to liberalize further industry (through NAMA) and services (through GATS). Again, the Alliance has contributed to this position of the government.

However, a big problem we have encountered in the campaign for fair and just trade is the proliferation of regional and bilateral trade talks, usually in the context of Asean economic integration and Apec economic cooperation. These talks, dubbed appropriately as the “Asian noodle bowl” of various trade liberalization agreements, are not only confusing; they are also conducted in a haphazard manner. For example, why should Asean go into all these regional and bilateral talks when it has a hard time addressing internal regional economic integration in the first place? The development gaps between or among Asean countries are huge, ranging from the $200 per capita of Myanmar to $30,000 per capita of Singapore. How can these various trade talks help close the gaps? Intra-Asean trade also constitutes just a fifth of its total trade compared to EU’s 60 percent and Nafta’s 50 percent, meaning there is very little economic complementation taking place in the region. In fact, Afta-CEPT preferential tariffs account only for less than 5 percent of total intra-Asean trade, which is dominated by Factory Asia products, meaning products of transnationals operating across Asean and Asia-Pacific countries through their global production chains. These chains such as those in electronics, auto parts, garments and so on do not even need trade liberalization per se because they are usually based in duty-free export processing zones!

One bilateral that has consumed so much of our time is the Japan-Philippine Economic Partnership Agreement (Jpepa). In our engagement with the government on the pluses and minuses of Jpepa, we also learned a lot. A bilateral trade agreement reduces the space and flexibility for a contracting party, especially a developing one, because its liberalization schedule is far more advanced and it covers even the so-called “Singapore issues”, which one of the reasons for the collapse of the 2003 Cancun WTO Ministerial. The Singapore issues include investment, trade facilitation, competition policy and government procurement. In effect, a country gives up so much economic sovereignty when it makes binding commitment under these Singapore issues. Jpepa also provides for a questionable trade in toxic goods and the entry of Japanese “factory ships” in Philippine waters. It has a large number of exempted economic areas for the Japanese side, and yet virtually none for the Philippines. An illustration of the imbalance in Jpepa is the exclusion of 651 products for Japan and six only for the Philippines!

However, the biggest problem we have encountered in our campaign for fair and balanced trade is the failure of our own government economic planners and trade negotiators to come up with a clear development framework as the guide for trade negotiations. For example, there is no clear agro-industrial plan in place, especially one which outlines how domestic capacities can be nurtured and how these can be supplemented by balanced policies on trade. There is no list of losers and vulnerables. It is routinely assumed that the country as a whole is a winner under trade liberalization. This is why safety nets and capacity building measures for those affected are not fully addressed. The labor and social dimensions as well as the domestic economic repercussions of trade liberalization are hardly taken up in these trade agreements.

It is in this context that our Alliance tried to develop a five-point development development agenda as an alternative economic road map for the country. Briefly, the five points are:

· Development of a more balanced and pragmatic approach to trade, growth and agro-industrial development such as the balanced development of both the export and domestic markets, reliance on both domestic and foreign investments, and the upgrading and value addition in existing capacities;

· Building the “nation’s fences” against smuggling and unfair trade practices and leveling the fences (tariff and nontariff) at a level equal with other countries;

· Building up the nation’s productive capacity by mobilizing domestic investments for business growth, prioritizing fiscal expenditures on capacity building (not on debt repayment), and re-building the country’s eroded agro-industrial base;

· Unleashing the people’s creative and productive capacity through asset reforms (e.g., land reform, urban reform) and human resources development; and

· Developing a culture of industrialism, excellence and economic nationalism.

What can UNDP and social partners do?

The initiative of UNDP to revisit the challenge of trade integration and governance to serve human development is most welcome. Based on the foregoing experience of our Alliance, we would to recommend the following:

· Coherence in economic, social and labor policies should be addressed in trade governance. Such incoherence is at the roots of the crisis in the mass discontent with globalization, WTO and global financial institutions.

· Relatedly, there should be efforts to cast aside the neoliberal framework of one-size-fits-all for not all countries are created equal. You cannot pit a lightweight boxer versus a heavyweight boxer under supposedly equal rules of boxing like no hitting below the belt. In this context, the world should rethink the mindless proliferation of bilaterals and regionals which weaken the capacities of less developed countries to determine their priorities.

· As provided by the 1994 WTO agreement, there should be a more balanced review and analysis of the world’s experience with trade liberalization, with special focus on winners and losers and development opportunities lost and gained.

· The SDT principle in global trade talks should be put at the center of global and regional trade talks. The issues here are policy space, flexibility and capacity of a developing country to participate meaningfully and productively in global trade. There should be calibration of trade policies in accordance with the development requirements or priorities of a country.

· Trade policy should not abet but should instead arrest the global and regional race to the bottom. We have seen how countries have sacrificed labor, social and environmental standards in the name of investment attraction and export promotion under globalization. This race to the bottom is anti-development and anti-human.

To conclude, the UNDP should not miss the opportunity to use the global crisis as an opportunity to help build up rules and institutions supportive of a more balanced approach to trade governance, one that is truly dedicated to human development, not just profits for a few global corporates.