Econ 460 Social Justice and Global Trade By Joseph Stiglitz

Facts Stiglitz uses to argue that current trade arrangements hurt poor countries

• Tariffs imposed by advanced industrial countries on developing countries are about four times higher than those they impose on other developed countries.

• The Uruguay Round actually left the poorest countries worse off.

• Developing countries were forced to open their markets and eliminate subsidies, but advanced countries kept subsidizing agriculture and kept barriers against the products central to developing economies.

• Many people have been hurt by globalization, which undercuts the claim that liberalization automatically benefits everyone.

Why do tariff structures in countries like the U.S. make it hard to move up the value-added chain?

• Stiglitz says tariff structures are designed to make it harder for developing countries to move from raw agricultural produce to processed foods. The implication is that rich countries keep the lucrative, higher-value stages of production for themselves.

• As tariffs have been lowered, the U.S. has turned to nontariff barriers as the new form of protectionism.

• Trade agreements do not remove the desire of governments to protect producer and worker interests.

Has Mexico benefited from NAFTA? When does liberalization bring enormous benefits?

Mexico: No. NAFTA gave Mexico access to the world's largest market, so if any agreement should have promoted growth, this one should have. Instead:

• Growth in the decade since has been slower than in the decades before 1980.

• The poorest, especially corn farmers, were hurt by subsidized American corn.

Conditions for enormous benefits (Stiglitz lists three):

1. Good risk markets.

2. Full employment.

3. A mature economy.

None of these hold in developing countries. With full employment, a worker who loses a job to imports quickly finds another, and workers move from low-productivity to high-productivity sectors. With high unemployment, that worker may stay jobless. Moving from a protected low-productivity sector into unemployment does not raise growth; it raises poverty. Liberalization also exposes countries to major risks, and poor people are least equipped to cope with them.

How did East Asia grow rapidly, and what trade policies did it follow?

• Their growth was export-driven.

• They did not pursue unfettered liberalization. Instead they actively intervened in markets to encourage exports.

• They removed trade barriers only as their exports grew, not beforehand.

• They kept their economies close to full employment, avoiding the trap of workers moving from low-productivity jobs into zero-productivity unemployment.

• Stiglitz also notes that the popular cross-country studies are weak evidence. Most show that countries that traded more grew more, not that liberalizing caused growth. Studies focused directly on liberalization give a less convincing picture.

What is the role of economics in trade negotiations, and who are the actual parties?

Role of economics: The economics is nuanced and complicated, but it plays a small role. Each country really wants to know whether liberalization will help its own economy, with its own unemployment rate and financial markets. Negotiators, however, pay little attention to principles and mostly use them to dress up positions.

Actual parties: Special interests. The agenda is simple: exporters want other markets opened, and those threatened by competition resist. Negotiators respond to campaign contributions and votes. Later Stiglitz adds that trade ministers are more beholden to corporate and special interests than almost any other ministry.

Agricultural protectionism, small farmers, and America's cotton offer

Effect on small farmers: Rich-country farm protection is the emblem of Western hypocrisy: preaching free trade while practicing something different.

• About 25,000 rich American cotton farmers share roughly $3 to $4 billion a year in subsidies.

• This causes higher production and lower world prices.

• The damage falls on about 10 million cotton farmers in sub-Saharan Africa who barely scrape by.

America's offer (Hong Kong meeting): U.S. officials reportedly offered to eliminate import restrictions on cotton but refused to change subsidies.

Was it helpful? No. Subsidies let the U.S. export cotton. When a country exports a commodity, letting in imports of it does little good. The offer was worth essentially zero to developing countries, yet America promoted it with fanfare and scolded countries for not accepting its "generous" offer.

Why must developing countries protect their modern sector?

• Development means moving resources from stagnant, low-productivity traditional sectors to modern sectors where productivity grows faster.

• Without protection, developing countries cannot compete in the modern sector and are condemned to stay in the low-growth part of the economy.

• Example, South Korea: About 35 years earlier, free-trade advocates told Korea to stick with rice farming. Korea understood that even a very productive rice sector would leave it poor, so it chose to industrialize.

What is "Everything But Arms"? Has it worked?

What it is: A European initiative that opened Europe's economy to the poorest countries in the world. Stiglitz holds it up as a model of how to open up in favor of poor countries.

Effectiveness: Disappointing so far. Reasons:

1. Complicated regulations ("rules of origin") limit the trade increase.

2. Agriculture is still highly subsidized and restricted, so some call it "Everything But Farms."

Stiglitz's recommendation: Broaden the initiative. It would help the poor enormously and cost the rich little, and the advanced countries as a whole would be better off, with only special interests suffering.

What is TRIPS and how does it affect poor countries?

• TRIPS is the intellectual property agreement of the Uruguay Round.

• Stiglitz says it reflected the interests of America's drug and entertainment industries, not academia (the main producers of knowledge) or users of knowledge in rich or poor countries.

• It was negotiated in secret, in Geneva. The U.S. trade representative was not an IP expert, learned the subject from drug companies, and adopted their views.

• Even the U.S. Office of Science and Technology Policy and Council of Economic Advisers opposed the provisions.

Effects: Overly strong IP rights create monopolies that raise prices and stifle innovation. Poor countries lose access to life-saving medicines. Stiglitz says patent protection can mean unnecessary deaths for hundreds of thousands who cannot afford monopoly prices but could be treated with generics. He also points out the inconsistency of the Bush administration seeking cheaper drug access at home while siding with drug companies in trade talks.

What does Stiglitz mean by "asymmetry" in liberalization?

• Trade liberalization should be asymmetric, but in a precisely opposite way to its present configuration.

• Today: liberalization discriminates against developing countries (rich countries keep protection while forcing poor countries to open).

• Stiglitz's proposal: liberalization should discriminate in their favor: rich countries open up more, and developing countries are allowed to open less or more slowly and keep room to protect their modern sectors.

• Model: Everything But Arms, if broadened.

• Goal: developing countries want "a hand up, not a hand out": opportunities to earn a living through trade, which is what a true development round would provide.

How should trade talks be structured? (Changes in the last paragraphs)

Basic shift in approach: Trade talks are now pure bargaining, with each country getting the best deal for its firms. Stiglitz wants them to start from debate and inquiry about objectives and how best to achieve them, as in other areas of public policy. The WTO should be thought of as creating a legal framework based on fairness, social justice, and efficiency.

Specific proposals:

1. Transparency: More open debate and a check on special-interest abuses. Had there been transparency, the excesses of the Uruguay Round IP rules might have been avoided.

2. Representation: Replace the old four-partner system (U.S., EU, Canada, Japan) and the current "green room" procedures with a governing council of representatives of groups (e.g., least developed countries, agricultural exporters). Each representative makes sure their group's concerns are heard.

3. More focus: Keep issues like intellectual property out of trade talks, since an international institution already handled them and ministers are ill-equipped and open to special-interest influence. A very broad agenda also disadvantages developing countries, which lack resources to engage on every front.

4. Change in mindset: The most important change is not institutional. Each country should think about what international rules would create a fair, efficient trading system that promotes development.

Conclusion: Globalization has brought enormous benefits to some but not all, and some countries have been made worse off. Reforming the WTO would not guarantee fairness, but it would improve the chances that trade lives up to its potential to improve everyone's welfare.