Commissioner Lamy's Speech on EU trade and development

It's a great pleasure to be here with you today, and I am grateful to Tony Worthington and the All-Party Group on Overseas Development of the House of Commons for having invited me today to set out how I see the trade and development agenda for the EU post-Doha.

Sorry that Kevin Watkins is not with us here today - indeed, he is receiving an OBE from the Queen for gallant service in attacking the Common Agricultural Policy, though to be fair, I suspect that his overall interests and service in development policy may have also had something to do with it. But clearly we live in revolutionary times: NGOs at the Palace, French Commissioners at the House of Commons. Not so much "Barbarians at the Gates" as "Barbarians inside the Gates, having tea."

But let me start by telling you how I see today's debate. I will not engage in a point-by-point rebuttal of the Oxfam report - and even less of the rather gimmicky double standards index where, on the basis of dubious indicators and shoddy methodology, Oxfam decided to put the EU as the frontrunner on hypocrisy. Apparently, the US envied us this position and immediately came forward with the Farm Bill which should assure them pride of place for quite a while. So if you are interested in our comments on this aspect of the Oxfam report, I would refer you to the DG Trade website. Don't get me wrong: I fully understand the need for an NGO to mount publicity stunts such as awarding gold medals for hypocrisy, and I am quite admiring of Oxfam's talents in this respect (at the European Commission, we could certainly do with a bit more of this). But we must make sure that PR actions do not detract from the real issues: what is the link between trade and development, and what can we do, in the context of the Doha Development Round and beyond, to address some of the problems identified by Oxfam in making trade more development-friendly.

Trade and development - a complex relationship

According to textbook economics, trade and foreign direct investment confer large efficiency benefits by fostering the international division of labour and by disseminating the gains from technological progress. This produces economic growth, which in turn should lead to development and contribute to the eradication of poverty. Economic studies and empirical data highlight the substantial benefits that developing countries have reaped from integration into the world economy.

However, such studies also show that the translation of trade into growth and of growth into development is far from automatic. Market access alone, however great its contribution, will not bring growth in itself. Nor does increased growth automatically lead to sustainable development.

We also see that trade liberalization has not benefited all regions of the world or all layers of society in an equal manner. There is in fact an increasing and worrisome split between a group of middle income developing countries which are successful participants in global trade and a large number of nearly 80 developing and transition economies comprising over one third of world population which are virtually excluded from it. All this is well put and substantiated in the Oxfam Report.

The reasons for this situation are manifold, but it seems to me that the key to success lies first and foremost with the domestic policies of the developing countries themselves.
A successful approach to development needs to take account of the whole range of institutional, social and structural needs of a well-functioning society, such as good governance (including policies aimed at transparency, free information flows, fighting corruption, an efficient civil service), an appropriate institutional and regulatory framework, social inclusion policies (in the field of education, health care, social protection), public services and infrastructures and environmental protection policies.
Sound domestic policies are indispensable to create the stability, predictability and security that is needed to stimulate investment, be it local or foreign. I therefore welcome and support Oxfam's stress on the importance of domestic policies.

Although domestic policies are the key for developing countries to be able to tap the benefits of globalization and to mitigate its negative effects, that does not absolve developed countries from their responsibility for supporting sound policies. We need to provide more access for products in which developing countries have a comparative advantage and which are produced in respect of core labor and environmental provisions (this is the incentive-based approach of the EU GSP) there has to be genuine involvement of developing-country stakeholders in trade negotiations more generous and effective official development assistance and an increased effort by the financial institutions to help tackle debt and co-ordinate their support and assistance better.

DDA

Let me now turn to the question of how the Doha round can be pro development, and what lessons we have learned from the past that will allow it to be a genuine development round.

• My first proposition is that progressive liberalization is inherently good for development. I emphasize the progressive nature liberalization at a rate that each country can handle in terms of its domestic and international competitiveness etc. Contrary to popular belief, the WTO does not propose free trade, whatever that rather abstract notion is. The WTO means progressive opening and with all the caveats imaginable. In this sense, the WTO has always been pro-development.
  
  
• But trade liberalization cannot be seen in isolation. It is just one component of the holistic economic and development policy I tried to describe before. The contribution of the system and other members is in helping to identify the necessary flanking policies to trade liberalization and giving guidance and aid in putting them in place. But I will say something later about the contribution of WTO rules to the establishment of the right flanking measures.
  
  
• Developing country market access. Number one priority for the Doha round for most developing countries with competitive export sectors. EC has obviously to further open its markets in agriculture, peak industrial sectors, tariff escalation and so on. We will do so, in return for some improvements in openness from developing countries where they are able to do so, and of course the DDA does not expect full reciprocity here and if our partners sign on to some rule making areas. It's quite a shrewd deal for them to trade off gains for their exports against the domestic implementation of rules that are of a systemic, not a mercantilist nature, rules that will help their development.
  
  
• To those who question the EC's political willingness to open its markets, then EBA is I hope a proof that we are ready to grasp the nettle: indeed, I wanted EBA both for its own sake to help to reduce poverty in one area where I could make a difference and to bring about a subtle cultural shift in the Community to demonstrate that we can take hard trade policy decisions for the greater international good.
  
  
• But developing countries also have to open up amongst themselves. It is a widely held misconception that poor countries face rich country protectionism that is more acute than their own. In fact, as Jagdish Bhagwati put it so eloquently in last week's "Economist", asymmetry of trade barriers often goes the other way. Rich-country tariffs, for instance, average 3%; poor countries' tariffs average 13%. The peak tariffs in textiles, fisheries and footwear do not change the picture much - UNCTAD has estimated that they apply to just one-third of poor country exports.
  
  
• Moreover, the trade barriers of poor countries against one another are more significant restraints on their own development than those imposed by the rich countries. The Oxfam report has some telling examples to support this. So my proposition is that the trade barriers of both rich and poor countries need to be tackled together to ensure effective exports by the poor countries.
  
  
• But the ability or inability to benefit from open markets is more crucial to many countries, particularly sub Saharan Africa. They may lack economies of scale, or there may be other factors linked to production, or simply an inability to meet the requirement either set by consumers or by regulators of developed markets. No silver bullet solution. Decades of preference via Lomé did not work. Resolving that problem needs a combination of measures to promote exports including access to information, simpler regulations in the major export markets (this is difficult however as consumer expectations get higher), better technology transfer and investment flows which will only come about if stable economic, social, legal and political conditions for investors are put in place, and the encouragement of regional integration to reap economies of scale and to make countries trade more with their neighbors rather than maintain post-Colonial dependency. Not all of this can be tackled at multilateral level. We can do more and go further at bilateral level, in the context of a broad political and economic partnership. This is what we propose to do in the trade negotiations under the Cotonou Agreement with the ACP countries, the so-called "post-Cotonou" process.
  
  
• On the question of rules, I am convinced that rules are also beneficial for development. Need to challenge the mind set developing in the WTO and in many circles that rules are somehow bad for development. They are not. The rule making areas we propose areas like investment, competition, trade facilitation and procurement all reflect the basic GATT principles of transparency and non discrimination which I would argue are the best friends of development. Why? Because transparency and non discrimination are the twin keys to improving domestic governance. They promote sound policy decision making, and help prevent governments from being held captive either by narrow domestic interest groups or foreign pressures. They are principles which strengthen democracy and the exercise of sovereignty by countries, rather than diminish that sovereignty, as some critics of WTO allege.
  
  
• So the issue is not whether or not to develop the rules but rather get the level of ambition right, and we can of course do better than we did in the past regarding time and transitional periods. Scope in a development round for tailoring the implementation of rules to the individual circumstance of each member rather than an arbitrary transitional period. Scope too for coupling those personalized transitions to our aid packages a notion we are pioneering in an area like trade facilitation.
  
  
• There is speculation too of course about the possible role of soft law in the future WTO system. The Community is open to that we want incentives not sticks - but equally aware of its limitations. Rules lock in reforms, soft law requires a high degree of pre-existing consensus on the benefits to lead to long term change. Rules give guarantees to trading partners, soft law requires partners to be perpetually vigilant and exercise peer pressure. Open to see what combination of hard and soft law possible. As someone said the other day : you need hard law to get married, you need soft law to make the marriage work, but you will need hard law again if it doesn't work. I tend to think that soft law for example the benchmarking of standards, peer review arrangements can only be part of a broader rules framework rather than an alternative to it. The key is to create incentives for rules to be followed rather than a stick approach.
  
  
• What other lessons from the past can we learn. From the Uruguay Round, the limits of what can be termed positive rule making or positive integration. With the TRIPS agreement we moved from the model of negative integration « thou shall not discriminate , thou shall ensure thy regulations do not cause disproportionate obstacles etc » to positive rule making : « thou shall introduce in thy legislation patent and copyright laws and set up a patent agency etc ». This has at least two consequences. One, it raises a fundamental question about the extent to which WTO members should set substantive standards that reach into domestic regulations. I think the conclusion is that there should be no more standard setting in the WTO itself, whether on TRIPS or environment or biodiversity or whatever. The "trade and" debate is about setting the rules of disengagement.
  
  
• Second, it creates a stronger link between rule making and development aid or provision of resources. To the extent that future WTO rules imply positive action in Members to build institutional capacity, infrastructure etc, then there will be a need for resources. That is why several of the new rule making areas which are mainly negative integration but with a component of positive rule making for example modernizing customs or setting up a domestic competition regime - do prefigure assistance as part of the deal.
  
  
• Technical Assistance. There are clear lessons from failure of past experiences. Arguably, the resources are sufficient, but absorption capacity is insufficient. Arguably, donors' intentions are good but recipient countries lack commitment and ownership. Possible to remedy all of this but needs enormous reserves of stamina amongst both donors and recipients and a rare ability to co-ordinate. I do see grounds for hope in the attitude of the international organizations, in the determination of donors not to fail yet again, and in the understanding of developing countries that they have to make a commitment, be responsible for managing their affairs and put in place the right public policy measures without which aid is simply wasted. I think that is what Monterrey brought us.
  
  
• The private sector. The WTO as a contract between governments has with only few exceptions been unable or unwilling either to regulate or to invite the involvement of the private sector. Some change in the offing here : investment negotiations offer scope to look at issues like corporate social responsibility, competition rules of course apply directly to corporate behavior, in TRIPS we are now seeking to redefine the nexus between public policy and private profit motives, and in doing so re-establishing the commitments in TRIPS as a ceiling and not a floor. And in the area of development aid there are enormous untapped opportunities for welding together official ODA, private sector support and FDI. This is one of the many themes that I hope would come out of Johannesburg. In the Doha negotiations we have above all to empower governments either at national level or through improved international co-operation to exercise better management and control of the private sector, particularly in developing countries where governments are unacceptably weak against the activities of multinationals.
  
  
• So to conclude I do think that the Doha round does carry within it the potential to be a true development round although we have to be clear in knowing the difference between what is really good for development and what is conventionally or for tactical reasons claimed to be good for development. If we can draw that distinction then half the battle is won.

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• EC statement on trade and development (11/11/2002)
• Developing countries and trade (18/9/2002)
• Commissioner Lamy's Speech on sustainable development (24/6/2002)