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 Rough road ahead for free trade

Arvind Panagariya

The Doha Round negotiations remain stalled. Neither the United States nor European Union (EU) appears eager to jump-start them. This is a pity. Considerable progress has been made since the launch of the round in 2001.

At the Cancun ministerial meeting in 2003, contentious Singapore issues, investment, government procurement and competition policy — were removed from the negotiating table. At the Hong Kong ministerial in 2005, the EU agreed to eliminate export subsidies by 2013 as a part of an eventual overall Doha agreement. The member countries also agreed to address the major concerns of the Least Developed Countries.

Additionally, the EU has been reforming its Common Agricultural Policy (CAP), converting a large proportion of its trade-distorting subsidies into non-distorting subsidies. In principle, the United States can also adopt similar changes in the Farm Bill that is due for renewal this year.

Therefore, substantial reduction commitments on trade-distorting domestic subsidies are politically feasible. With some flexibility on the part of the EU, India and Brazil to bring down tariff barriers, a deal can be worked out. But going by the history of the past rounds, progress is unlikely unless the United States takes the initiative.

Sadly, weakened by its massive failure in Iraq, the Bush administration has lost the will to lead the multilateral negotiations. Instead, it is busy appeasing the protectionist constituencies on the Democratic side to get its inconsequential bilateral trade agreements with Panama, Peru and possibly Colombia through the Congress.

On May 10, the administration forged what it described as a “Bipartisan Agreement” with Democrats. In reality, the deal was capitulation by the administration to the long-standing demand by the US labour lobbies that future US trade deals require adherence to the five basic “internationally-recognised” labour principles, as stated in the 1998 ILO Declaration on Fundamental Principles and Rights at Work. Violations that harm the US trade or investment interests are to be punished by fines or trade sanctions.

This agreement represents further ratcheting up of the US demands along non-trade dimensions in trade agreements. The environmental and labour provisions were first appended as side agreements to the North American Free Trade Agreement (NAFTA).

Beginning with the US-Jordan Free Trade Agreement (FTA), these provisions were incorporated directly into the core FTA agreements. The FTA with Morocco greatly expanded the scope of intellectual property protection. Finally, the FTA with Chile added restrictions on the use of capital controls.

Until now, the FTAs negotiated by the Bush administration have limited labour provisions for each signatory country to the enforcement of the standards contained in its existing domestic laws. Perhaps in recognition of the fact that the United States has signed only two out of the eight so-called core conventions of the ILO, the administration has kept clear of any references to the 1998 ILO Declaration on Fundamental Principles and Rights at Work in its FTAs.

Therefore, the “Bipartisan Agreement” represents an important victory for the US labour lobbies. The developing countries have been opposed to the inclusion of labour standards in trade agreements ever since they began negotiating such agreements.

At the first WTO Ministerial Meeting in Singapore in 1996, they fought hard against the developed country demands for the inclusion of these standards into the WTO study agenda. At their insistence, the Singapore Declaration delegated these issues to the ILO.

The 1999 WTO Ministerial in Seattle failed to launch a new round partially because of developing country disagreements over renewed demands for the inclusion of labour standards in the future trade agreements by the then President Clinton. At Doha, the developing countries once again successfully neutralised the pressures by developed countries to bring labour standards into the WTO in some form.

Developed country response to this categorical rejection of a link between market access and labour rights in the multilateral negotiations has been to pursue such a link in the bilateral FTA negotiations in which they have disproportionately greater bargaining power.

For the smaller countries of Latin America such as Costa Rica, Dominican Republic and Peru, access to the US market is a matter of life and death. Once Mexico was granted duty-free access to the US market under the NAFTA, they cannot afford sacrificing the same access. Consequently, they find themselves trapped into signing on to virtually any level of labour and other trade-unrelated obligations provided they can secure duty-free market access equivalent to that available to Mexico.

In turn, the US labour lobbies have advertised the fact of ever-increasing number of US-centred FTAs with ever-expanding labour obligations as evidence that developing countries themselves support trade agreements incorporating labour standards.

Therefore, while promoting export protectionism by raising the costs of labour-intensive exports of their developing country FTA partners through these agreements, they are also propagating that the developing countries are accepting these standards because they see such acceptance in their own interest.

Yet, the truth of the matter is that there is not a single FTA agreement between two or more developing countries that even remotely ties market access to labour standards. Indeed, during the recent preliminary negotiations for an India-EU trade and investment agreement, when the EU brought up the matter of inserting a “human rights and democracy” clause as per its practice in other FTAs, India’s commerce minister Kamal Nath was quick to publicly announce that such a clause would be a “deal breaker”.

In the same vein, Brazil’s President Lula, a most distinguished labour leader, has categorically refused to discuss the possibility of a labour clause in the Free Trade Area of the Americas. Democratic developing countries such as Indian and Brazil are not opposed to raising labour standards for their citizenry. The governments and NGOs in these countries constantly aspire to raise standards but lack resources.

Recently, India made education for children below 14 years of age a fundamental right but has been unable to implement it due to resource constraints. The developing countries object to labour clauses in trade agreements out of the legitimate concern that developed countries want them to protect their domestic labour-intensive industries: if labour costs cannot be reduced at home, raise them abroad via higher labour standards.

The Doha Declaration does not admit negotiations on labour standards and explicitly delegates them to the ILO. But this should not be a reason for complacency for India. The Punta del Este Declaration did not mandate the creation of the WTO. It also provided for the countries wishing to opt out of negotiations on trade in services if they chose to do so. But that changed in the midst of the negotiations.

In the same vein, we cannot rule out the possibility that the labour lobbies in the US would insist on some kind of labour clause in an eventual Doha agreement as the price of Trade Promotion Authority to the administration. Minister Kamal Nath and Prime Minister Singh will then have to be ready to repeat to the United States what they told the EU: thanks, but no thanks!

(The author, a professor at Columbia University, resumes his monthly column today after a break of several months. His article will normally appear on the last Thursday of every month.) 

Economic times June 4 2007