Pro-Development Bilateral Trade Agreements.

1. Pro-Development Bilateral Trade Agreements. Kevin J. Fandl (May 2008).

2. Introduction There has been a significant proliferation of bilateral trade agreements in recent history. These agreements have been controversial for a number of reasons, including their ability to promote trade, their political underpinnings, and their diversion of attention from negotiations at the World Trade Organization (WTO). This presentation explores the possibility of creating bilateral agreements that are pro-trade, and also pro-economic development.

3. Road Map • The presentation will examine the following: • The development of bilateral trade agreements • The scope of recently signed bilateral agreements with particular attention to the U.S.-Colombia FTA • The role of development in trade via the WTO • Recommendations for modifying FTAs to include a pro-development focus

4. The Formation of Bilateral Agreements

5. Forming Bilateral Trade Agreements • Bilateral trade agreements are distinct from multilateral agreements. • Only two parties are involved (more if it is a regional agreement); • Additional, non-trade terms can be negotiated; • More comprehensive agreements can be concluded.

6. Rationale for Negotiating Bilaterally • Why does a country choose to negotiate bilateral agreements rather than maintaining multilateral-only negotiations? • 1. The WTO negotiation process is long and complex; • 2. Additional issues can be included in the negotiations; • 3. Liberalizing on a small scale can contribute to overall global liberalization, making WTO negotiations easier; • 4. Geopolitical concerns can be addressed prior to full liberalization.

7. WTO Perspective on Bilaterals • The WTO is not supportive of bilateral trade agreements as a general matter. • FTAs are excepted from the WTO via Article XXIV of the WTO Agreement, but only one agreement has been approved (out of over 300 submitted). • Research indicates that bilateral agreements may divert trade from more productive and efficient countries and undermine the goals of the WTO.

8. Issues with Bilaterals: MFN • The Most Favored Nation clause of the WTO requires any member benefit that is applied to one member state to be applied to all member states. No benefit should befall a particular member state and not others (maintaining equal liberalization processes). • BTAs and RTAs have the opposite result by favoring one or a handful of countries at the expense of the global trading system.

9. Issues with Bilaterals: Trade Diversion • Trade diversion occurs where a country chooses to trade with another country because of their special tariff status (usually resulting from a BTA or RTA) rather than because of their efficient production methods or price of inputs. • Trade diversion runs contrary to the idea of comparative advantage by favoring countries within certain agreements.

10. Issues with Bilaterals: Political Items • In addition to the economic issues raised previously, some authors have suggested that there are concerns about the equitability of the negotiations with respect to what is being negotiated. • Developed and developing countries have different levels of trade expertise and resources to conduct negotiations; • Developing countries have less economic power to negotiate with more powerful developed countries; • Demands of developed countries (environmental, labor, intellectual property) often have little benefit to developing countries, while developing country concerns, such as currency controls and technical expertise, are often left off the table.

11. Favoring Developed Countries • Some authors suggest that developing countries are inherently disadvantaged by bilateral trade agreements. • A Carnegie Endowment Report in 2003 found that bilaterals offer little economic benefit to developed countries and rather that they are used to promote other, non-economic interests.

12. Breaking the Doha Deadlock • Other authors, such as Alberto Trejos, argue that bilaterals are a great mechanism to move forward in Doha. He suggests that they can remove obstacles to the negotiations on a small scale to pave the way for multilateral agreement. • “Especially among neighbors…trade facilitation, the development of common legislation and regulation, and the removal of non-tariff barriers (NTBs) can be pursued in a way that, today, is not part of the discussion at the WTO”.

13. South-South Agreements There may be a difference between the benefits of bilateral agreements among developing countries, and those concluded between developed and developing countries. According to former WTO DG SupahcaiPanitchpakdi: • North-South FTAs tend to convert formerly non-reciprocal trade preferences into “symmetric market access regulations”, which may in turn be eroding Special and Differential treatment for the developing country; • Developing countries are being asked to commit to an expanded range of issues that are of interest to the developed country, such as investment, labor and the environment, while they receive no such coverage of issues important to them, such as agriculture and monetary policy; • Finally, policy coordination tends to be increasingly complex for developing countries as they try to manage multiple bilateral and regional negotiations while maintaining a presence in the multilateral negotiating context.

14. The Need for Pro-Development Bilaterals

15. Connection Between Trade and Growth • Economic growth, while important to development, is not the only factor. However, trade can promote a variety of benefits beyond economic growth, such as the development of new industry, improved education and transfer of technology, and reform of political and judicial institutions. • The linkage between trade and development is not well established. World Bank economists Art Kraay and David Dollar find a strong linkage, while economists at UNCTAD and other institutions find no connection at all.

16. UNCTAD • The United Nations Conference on Trade and Development found that it is not the simple increase in trade that promotes development, but rather the type of trade. • Their report found that the only way to reduce poverty is to create growth that leads to sustainable increases in per capita consumption. When inequality becomes too great, there is a risk for a legitimacy crisis that may threaten growth.

17. Designing a Pro-Development BTA • Institutional Economists such as Douglass North, and other economists exploring development, such as Joseph Stiglitz and DaniRodrik, agree that there are certain fundamental areas that must be addressed before successful and sustainable economic development can take place: • Institutional reform; • Sequencing of trade liberalization reforms; • Infrastructure development; • Egalitarian income distribution.

18. Case Study: The U.S.-Colombia FTA

19. Background to the Agreement • Signed in 2006 by Presidents Bush and Uribe. • Approved by the Colombian Congress in 2007. • Presented to the U.S. Congress (H.R. 5427) in April 2008; not yet approved. • Principal Issue holding-up approval: labor protections for unionists in Colombia.

20. Colombian Trade • 1950s – 1980s – Colombia maintained a policy of import substitution (encouraged by the IMF at the time); • 1980s – 1991 – Colombia began opening its economy to a limited extent; • 1991 – New constitution set forth trade liberalization as a central goal to economic growth and development in Colombia.

21. Colombia and the United States • The United States is the primary destination of Colombian exports (40%). • Colombia is possibly the most U.S.-friendly country in Latin America. • Most exports to the United States are primary commodities (flowers, coffee, sugar, bananas) and textiles.

22. The Andean Trade Preference Act • The ATPA provided Colombia with duty-free access to the vast majority of goods exported to the United States. This agreement was forged under the Special and Differential Treatment exception to the WTO’s MFN clause. • The Agreement was set to expire at the end of 2007, although it has been extended through the end of 2008 pending FTA negotiations. • Colombian businesses do not want to risk a reversion to standard tariff rates after years of ATPA duty-free access.

23. Colombian Development • The U.S.-Colombia FTA appears to be balanced toward the interests of the United States. While ATPA provisions will remain, they will not improve substantially. Colombia will be required to open its market to more U.S. goods (which was not required under the unilateral preferences in the ATPA). • The U.S. is essential “graduating” Colombia to a developed country status, despite its limited level of economic development.

24. Designing a Pro-Development FTA

25. Pro-Development Bilaterals Certain provisions could be added to bilateral trade agreements to make them more pro-development. Each case would require the application of different provisions as every developing country has its own unique economic development needs; however, we can discern a short list of several very basic provisions that would ensure a minimal level of economic development along with improved trade.

26. Independent Assessments • A provision should be included that allows for independent evaluation of the potential effects of the agreement on the developing country economy and population. Such evaluation is not often feasible as the expertise needed to do such an analysis may not be present in the developing country. Keeping the evaluation independent would prevent bias from either party that might otherwise negatively impact the negotiations.

27. Technical Capacity Building • Technical capacity building assistance must be prominent in the agreement. Training should be provided for policymakers, attorneys and other parties central to the agreement to allow for adequate understanding and subsequent implementation of the agreement in domestic law and to ensure that the necessary provisions to enforce the new law are developed.

28. Technology Transfer • Technology transfer provisions are essential to the developing country. Domestic industries in the developing country will face significant hurdles when competing with high-tech industries from the developed country. Expert training and information transfer will allow for more equitable access to relevant markets.

29. Phase-in Periods • Phase-in periods and periodic evaluations with escape clauses for the developing country are necessary. Major provisions, such as significant tariff drops, removal of barriers to investment, and open access to foreign competition, should proceed slowly to give the developing country adequate time to adapt to a new global environment. Regular reviews of a phase-in process will allow the parties to evaluate whether the agreement is having a positive or detrimental impact on the developing country in terms of economic development. Escape clause provisions will allow the developing country to temporarily opt-out of certain agreement provisions in the interests of national economic stability and security.

30. Reverse Subsidies • Reverse subsidies might be considered. The developed country could offer incentives to encourage developing country industries to trade with them by providing no-cost access to domestic industries in the developed country and tax-free treatment while operating within that developed country for a limited period of time. This proposal would encourage the development of competitive industries in the developing country and provide low-cost imports in the developed country that may promote expanded trade with that country.

31. Conclusion

32. Conclusion • With the conclusion of bilateral trade agreements between developed and developing countries occurring at an alarming pace, now is an opportune moment for developing countries and economic policy-makers to evaluate their effectiveness as an economic growth and development tool. • If such agreements are generally found to be negative to developing country interests, the question for policy-makers becomes, “are they better than no agreement at all?”

33. Conclusion • This presentation recommended reforming the process of negotiating bilateral trade agreements with developing countries to focus on their economic development. • These recommendations appear to be biased toward developing countries; however, they should be received as positive recommendations for productive global economic growth. The increased participation of developing countries in global trade is clear, and ensuring their economic growth and stability can solidify the hope for an effective system of global trade.