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The path towards free trade

A Note by the Director (Ditchley 2007/07)
 
7-9 September 2007
At the invitation of the Canadian Ditchley Foundation, participants for this conference travelled to the pleasant countryside retreat of Val David, north of Montreal, for a quiet think about the increasingly complex process of trade liberalisation negotiations.  The timing of the conference was ominous, in that the progress made on the Doha Round so far in 2007 had been disappointingly slim;  but also fortuitous, as it was a good moment to take stock and make some recommendations on how the future of global trade policy could best be managed.  The mood of the conference was certainly constructive. 
Those members of the company who were closest to the actual Doha Round negotiations were adamant that what was on offer was already significant, bigger than the Uruguay Round.  A number of agricultural and industrial tariffs would either be cut or eliminated altogether;  trade between the developed and developing worlds would be increased;  and services commitments would be deepened.  The discussion did not get into detail on the precise way in which a balance might be constructed between industrial tariff cuts by key developing countries, agricultural market access offers by the EU and relevant developing countries and agricultural subsidy cuts by the United States.  Most participants, however, felt that the remaining differences were resolvable and that it was worth making a solid political effort to do so..
Nevertheless there was also general agreement that the Doha Round process had been messy.  The World Trade Organisation (WTO) had not yet generated enough strength at the centre to make negotiations anything other than member state-driven.  After the failure of the Group of 4 talks in Potsdam in June/July, Geneva had once again been asked to take up the reins without necessarily having the weight to achieve a result.  Too many deadlines had already been missed and the US election campaign would take 2008 out of the timetable.  Life would have moved on by 2009.  It was therefore difficult to be optimistic about the immediate prospects. 
The conference stood back and tried to look at the wider picture.  No-one contested the point that multilateral trade negotiations remained the best way forward.  But there were plenty of doubts that it had been right to leave agriculture so centrally under the spotlight when a whole group of other items badly needed attention.  The motivation for declaring the Doha Round a “development” round was understood, but most participants felt that it might have been a mistake to make that rhetorical promise before the substance was clear enough to back it up.  The business community had other priorities.  With the focus moving toward bilateral and regional trade arrangements (grouped in our discussion under the rubric “preferential trade agreements” (PTAs)), it was important to sustain a role for the WTO which helped it salvage something substantive from Doha and connected PTAs with the multilateral process.  This would best be done if Doha was brought to closure as soon as possible.  Then action could concentrate on the areas where the potential gains were greatest:  industrial goods and services, investment, competition, standards and intellectual property.  A new process would also be needed to bring China into active participation in the multilateral process.  If this agenda proved too difficult, the danger of PTAs taking over would increase and the WTO system, already fragile, would be further threatened. 
Our three working groups turned to the component parts of this scenario and looked at them in detail:  first, the Doha Round experience and the lessons learnt from it;  second, what was actually happening in the area of preferential trade agreements;  and third, what steps were needed to combine further progress in trade liberalisation with fair results for the great majority of WTO members. 
In the first group, the Doha experience was unpacked with a good deal of technical interest and knowledge. There seemed to be little confidence, however, that the right mix of adjustments to the various instruments was all that needed to be found.  Something more was needed on the political front.  Leaders in major countries just did not seem to be under enough pressure, against other priorities on their agenda, to find the compromises necessary to do a multilateral deal.  Much of the problem appeared to stem from the whole complexity of the process which, now that the WTO had a membership of around 150 states, and given the further effects of globalisation since the Uruguay Round, appeared to dilute the perceived gains from a traditional round.  Reciprocity had become hard to pin down.  The “developing world” was now composed of a variety of states with many different economic and commercial interests.  If non-discrimination was the cornerstone of the whole multilateral system, and if almost any foreseeable deal was bound to effect national interests in uneven ways, no solutions were likely to emerge that everyone could approve. 
If this increasingly looked like being true of a comprehensive multilateral arrangement, it was not necessarily so with bilateral or plurilateral deals with preferential elements in them.  Reciprocity was easier to calculate in PTAs;  and national political objectives clearer to identify.  This uncomfortable thought was a theme throughout the weekend’s discussions and was in the end accepted by many participants as coming close to a fact of life.  Indeed, plurilateral deals were likely to become an important component in future trade developments. 
This was confirmed by the findings in the second working group.  Participants remained just as clear that a multilateral approach was best and PTAs much less satisfactory.  But they were a reality, not as an intended substitute for a proper trade round, but as instruments that appealed to capitals on their own merits.  So PTAs would continue to be pursued, perhaps covering quite a high volume of trade, whatever the Doha Round achieved.  Some of them would have their own economic rationale quite separately from the motive of trade liberalisation:  the incentive to increase regional cooperation, the desire to achieve political success in the economic arena, the boost which a deal might bring to regional stability.  With globalisation showing an increased tendency to provoke both nationalism and regionalism, PTAs could well be gathering quite a strong momentum. 
The group nevertheless thought that there would be a strong incentive for PTAs to comply with Article XXIV of the WTO Agreement, for both legal and economic reasons.  There was no intrinsic desire amongst WTO members to weaken the multilateral process.  Article XXIV more likely to be a problem area because of differences over its interpretation, rather than over-reluctance to use it.  Participants saw two forms of PTAs growing particularly attractive:  larger ones, between major trading nations and blocs;  and the hub-and-spoke arrangement.  The scope of such agreements could become very wide, as discussions in the Asia-Pacific, the Americas and the ASEAN plus six forums demonstrated.  Often the focus could be less on trade liberalisation but more on regulatory and related issues affecting the integration of neighbouring economies.  While significant gains could come through individual agreements, it was very difficult to predict the strategic dynamic which was being generated by the PTA trend.  Would an increasing number of WTO member states join in as the process accelerated?  Or would negative reactions and economic and commercial conflicts take over? 
Whatever the answers to these questions, there was no doubt in people’s minds that the WTO was made more fragile by the trend.  It would need some very careful thinking by member states to preserve and expand what the WTO stood for.  The inclination amongst most participants was to recommend that, even if the Doha Round ended in failure, the WTO should be given a central role in relating PTAs to a multilateral system.  It could do this through enforcing Article XXIV, though there would be considerable problems in that area;  through a surveillance role, under the trade review mechanism;  through providing advice on how PTAs could more readily fit in with a multilateral structure, discouraging certain forms that went in the other direction (though it was hard to see that the WTO could actually set a template for PTAs);  or through dispute settlement, which everyone agreed was an important central function, even if it risked overloading the system in these new circumstances. 
The third working group reflected many of the considerations in the other groups.  Participants regarded the multilateral approach as indispensable.  They were clear that an early result in the Doha Round, collecting what was now pragmatically achievable, would be much preferable to waiting until 2009/10.  Whatever the results in Doha, its aftermath should be a review, after a decent pause, of the whole multilateral system and regulations, with a new trade round delayed until the world was much clearer about its potential benefits.  A review should cover quite a wide front:  (a) the overall objectives of the WTO;  (b) how to complete the handling of old issues;  (c) new issues;  (d) the processes of norm creation;  (e) WTO governance;  and (f) how to enhance the legitimacy of global trade  liberalisation.
Looking at these in turn, the group drew out a number of important points:
(a)        The importance of the WTO’s mission was (i) to promote open and competitive markets and (ii) to ensure that trade liberalisation was inclusive, fair and sustainable.  Politicians needed to be clearer about the link between global trade and the furtherance of economic welfare, environmental sustainability, social justice, democracy and peace. 
(b)        Doha would not be the last word on, for instance, agricultural and industrial tariffs, services, rules of origin, anti-dumping, intellectual property and development.  Market access and capacity-building for trade policy would be particularly important for the developing world.
(c)        Some issues related to trade had been kept off the Doha Round table and would need to be revisited soon:  anti-trust, environment, investment, labour standards, migration, new technologies and security.  Linkages would be difficult and it was important not to overload the WTO, but all these issues deserved attention.
(d)        If it was decided that another multilateral trade round might not be the best way forward and that variable geometry was more pragmatic, it would still be necessary to avoid a contentious approach in which major players felt unable to participate.  It was also vital not to marginalise the least developed countries.  If issues such as environmental and labour standards were more effectively addressed through non-multilateral channels, the WTO should regularise and harmonise them where possible and encourage plurilateral partners to leave accession open to others.  Similarly, non-binding principles could be established which might later be converted into binding arrangements.  Developing institutional capacities both in the WTO and in other global agencies would be important to strengthen inter-organisational links. 
(e)        It might soon be time to revisit the consensus rule in the WTO.  The dispute settlement mechanism could be strengthened.  A more proactive approach to trade policy surveillance was probably necessary. 
(f)        Restoring confidence in the multilateral approach was clearly going to be a huge challenge.  It might be worth considering a global-scale transitional assistance mechanism for poorer countries, perhaps administered through the World Bank on the advice of the WTO.  Presenting the gains obtained through trade liberalisation in a more effective way might increase public support for the WTO regime.  Responding to business interests, and encouraging business to lobby more for a global approach, would be useful.  So would broader political and civil society support.  The breadth of these issues suggested that, at some point soon, a comprehensive overhaul of the global institutional architecture might be necessary.
The conference as a whole continued to worry about developing world interests.  It was hard, particularly for the poorest countries, to manage their economic and trading systems in accordance with WTO rules.  It was also noted that most developing countries were more interested in preferential trading arrangements than in trade liberalisation as such.  In these circumstances it might not have been so wise to institute a “development round” at all unless these considerations were carefully examined at the beginning.  Since the turn of the millennium, and particularly since September 2001, the inclination of stronger countries to make concessions in favour of weaker partners, with the longer-term advantages of a more open global trading system in mind, seemed to have declined.  Development issues should not be lost sight of, but it would not be easy to regenerate the necessary political will in this area in the context of trade negotiations themselves.
Reflecting more broadly on global trends, participants pointed out that the climate remained poor for all kinds of collective international action.  No international institution, including the United Nations itself, seemed capable at present of pulling together all the complex strands of national priorities and international interactions.  A number of institutions were doing excellent work in their own field, but the links between security, development, trade, private sector activity and reactions to events as they happened were not being well managed.  No-one thought that this meant that trade liberalisation was not worth pursuing, but a deeper understanding was required of the overall political context and of the need to bring the capacity and objectives of the institutions up to date.
Connected with this was the question of whether further trade rounds in the future would be the right way to proceed.  Professional trade negotiators could see a good deal of utility in them and there were both old and new issues to be addressed.  But it was becoming increasingly clear that the general public felt little affinity with these processes and wondered about their legitimacy.  We asked, without finding a real answer, who the negotiators were accountable to.  Obviously, they received their instructions from political leaders, but without any clear assessment of why trade liberalisation should be a priority.  In these complex circumstances, perhaps it was natural that most governments – and most members of the public observing their activities – should emphasise before anything else the need to protect their own positions. 
In spite of these doubts and wider questions, no-one at the conference wished to dispute the need to sustain the momentum behind trade liberalisation nor the value of the WTO itself.  In some respects the WTO was the envy of other international institutions in that it gathered a wide range of countries behind a single objective and conducted its business under well thought out rules.  It had even been suggested that environmental questions could be brought into the WTO’s remit, as they were more likely to be addressed effectively there.  This would probably be a mistake.  The WTO should concentrate on global collective efforts to liberalise trade, including by linking PTAs to the multilateral structure.  Beyond that there were limits to what the WTO could hope to control.  Plenty of other economic phenomena – financial imbalances, the US dollar, the performance of the US and Chinese economies, competition over energy resources – would be making their impact felt and could not be controlled by a single organisation.  The WTO should concentrate on its area of expertise, which retained plenty of long-term importance.
This was in many ways an encouraging discussion, for all the difficulties, as it helped to clarify what might or might not be realistic to pursue in the short to medium term and how the  longer-term context was likely to develop.  The main messages to take away were the following:
  • The Doha Round continued to have value and a further concentrated effort to close it soon would be worthwhile;
  • The multilateral approach to trade was the right one and the WTO had a great deal to offer as the central institution for global trade;
  • Nevertheless preferential and other plurilateral trade agreements were here to stay and a big effort was needed to fold them into the multilateral structure;
  • The “development round” had not worked successfully.  It would be important to address the interests of developing countries, complex and varied as they were, in other ways over the coming period;
  • The bigger global picture needed to be understood in all its aspects.  The trends towards nationalism and protectionism would not necessarily go away, but were not likely to serve anyone’s long-term interest.  A vigorous approach to continuing trade negotiations probably would.  If they did not get the political limelight, that did not necessarily matter so long as they were pursued with determination.
We were fortunate in gathering at La Sapiniere a wide range of both policy-making and academic expertise.  It was disappointing, perhaps, that we had not been able to bring in more voices from the developing world, though their concerns were well interpreted by others.  In particular, we owed a great deal to our two co-chairmen for keeping good order in a complicated debate and in steering us in the final stages towards some very useful conclusions.  We all looked forward to seeing what materialised before the end of 2007.
This Note reflects the Director’s personal impressions of the conference.  No participant is in any way committed to its content or expression.
 
 
PARTICIPANTS
Co-Chairmen:  
The Rt Hon Lord Brittan of Spennithorne QC
Vice-Chairman, UBS Investment Bank (2000-).  Formerly:  Member, European Commission (1989-99);  Vice-President, European Commission (1995-99) and (1989-93);  Secretary of State for Trade and Industry (1985-86);  Home Secretary (1983-85).  A Governor, The Ditchley Foundation.
The Hon Michael Wilson
Ambassador of Canada to the USA, Washington DC (2006).  Formerly:  Chairman, UBS Canada (2001-06);  Minister for International Trade (1991-93).
BRAZIL
Professor Marcelo de Paiva Abreu
Professor of Economics, Department of Economics, Pontifical Catholic University of Rio de Janeiro (1984-);  Economic Columnist, O Estado de Sao Paulo (1995-).  Formerly:  Senior Expert in Trade and Integration, Inter-American Development Bank, Washington DC (2003-04).
CANADA
Mr Pierre Arcand
Member, Liberal Party, National Assembly of Québec (2007-);  Parliamentary Secretary to the Minister of Economic Development, Innovation, Export Trade and Tourism, Québec.
Mr John Banks OBE
Vice President and Secretary, The Canadian Ditchley Foundation.
Mr Donald Campbell
Senior Strategy Advisor, Davis LLP.  Formerly:  Executive Vice-President, CAE Inc, Montreal (2000-07);  Deputy Foreign Minister of Canada and Personal Representative of the Prime Minister for G8 Summits (1997-2000);  Deputy Minister of International Trade (1989-93).
Professor Wendy Dobson
Professor and Director, Institute for International Business, Rotman School of Management, University of Toronto (1993-);  Research Fellow, CD Howe Institute (2004-).  Formerly:  Associate Deputy Minister of Finance, G-7 and Financial Institutions (1987-89).  Member, Program Advisory Committee, The Canadian Ditchley Foundation.
Mr Russell Hiscock
General Manager, CN Investment Division, Montreal.  Formerly:  Chairman, Pension Investment Association of Canada.
Ms Sheryl Kennedy
Deputy Governor, Bank of Canada, Ottawa (1994-).
Mr Simon Kennedy
Deputy Secretary to the Cabinet (Operations), Privy Council Office, Ottawa (2007-).
Mr Michael Landry
Vice President, Corporate Development, Manulife Financial, Toronto;  Member, Financial Leaders Working Group;  Founding Member, Canadian Services Coalition.
Mr Pierre Lortie CM
Senior Business Advisor, Fraser Milner Casgrain LLP (2006-).  Formerly:  President, Transition Committee of the Agglomeration of Montreal (2004-05);  President and COO, Bombardier Transportation (2000-03).  President, The Canadian Ditchley Foundation.
The Hon Roy MacLaren PC
Commissioner, Public Appointments Committee (2006-).  Formerly:  Minister for International Trade (1993-96).  A Governor, The Ditchley Foundation.
Dr Michel Maila
Vice President, Risk Management, International Finance Corporation, World Bank Group. Washington (2006-).  A Director, The Canadian Ditchley Foundation.
Ms Marie-Lucie Morin
Deputy Minister of International Trade, Foreign Affairs and International Trade Canada, Ottawa (2006-).
Mr Grant Reuber OC FRSC 
Senior Adviser and Director, Sussex Circle (1999-).  A Governor, The Ditchley Foundation;  Co-Chairman, The Canadian Ditchley Foundation.
Mr William Robson
President and CEO, CD Howe Institute (2006-).  Author.  A Director, The Canadian Ditchley Foundation.
Mr Andrew Spence
Chief Economist and Vice President, Investment Division, Ontario Teachers Pension Plan (2004-).
Professor Debra Steger 
Founder and Director, Emerging Dynamic Global Economies (EDGE) Network;  Professor of Law, University of Ottawa.  Formerly:  Senior Trade Negotiator for Canada in Uruguay Round;  General Counsel, Canadian International Trade Tribunal.
Professor Robert Wolfe
Professor, School of Policy Studies, Queen’s University, Kingston.  Formerly:  Foreign Service Officer, Department of Foreign Affairs and International Trade (1976-95).
Mr Yuen Pau Woo
President and Co-Chief Executive Officer, Asia Pacific Foundation of Canada;  Adjunct Professor, Institute of Asian Research, University of British Columbia;  Member, Standing Committee, Pacific Economic Cooperation Council;  Advisor, Asian Development Bank.
EUROPEAN COMMISSION
Dr Péter Balás

Deputy Director General, Directorate General for Trade, The European Commission (2005-).  Formerly:  Permanent Representative of Hungary to the World Trade Organisation (2002-05).
Mr Simon Fraser
Head of Cabinet to Trade Commissioner Peter Mandelson, European Commission, Brussels (2004 ).  Formerly:  HM Diplomatic Service (1979-2004).
Mr Gaspar Frontini
Head of Unit and Chief Economist, Directorate General for Trade, European Commission (2003-).
OECD
Mr Pier Carlo Padoan

Deputy Secretary-General, OECD (2007-).  Formerly:  Director, Fondazione Italianieuropei, Rome;  Italian Executive Director, International Monetary Fund (2001-05);  Economic Adviser to Prime Minister of Italy (1998-2001).
UNITED KINGDOM
Sir Jeremy Greenstock GCMG 

Director, The Ditchley Foundation (2004-);  Special Adviser, BP plc (2004-).  Formerly:  HM Diplomatic Service (1969-2004).  Board of Directors, The American Ditchley Foundation.  Board of Directors, The Canadian Ditchley Foundation.
Mr Edmund Hosker
Director, Europe and World Trade, Fair Markets Group, Department for Business, Enterprise and Regulatory Reform.
Mr Christopher Roberts CB
Senior Trade Adviser, Covington and Burling LLP, London (1998-);  Chairman, Lotis Committee, International Financial Services, London (2003-).  Formerly:  Deputy Secretary and Director General for Trade Policy, Department of Trade and Industry (1987-1997);  Chief Executive, British Overseas Trade Board (1983-87).
UNITED KINGDOM/GERMANY
Ms Nina Richardson

Deputy Director, The Ditchley Foundation.
UNITED KINGDOM/GERMANY/INDIA
Dr Makrukh Doctor
Lecturer in Political Economy, Department of Politics and International Studies, University of Hull (2006-);  Adjunct Professorial Lecturer, The Johns Hopkins University, SAIS Bologna Center (2005-).
UNITED KINGDOM/NETHERLANDS
Professor Jan Aart Scholte

Professor, Department of Politics and International Studies, University of Warwick;  Co-Director, ESRC/Warwick Centre for the Study of Globalisation and Regionalisation.
UNITED KINGDOM/UNITED STATES OF AMERICA
Dr DeAnne Julius

Chairman, Chatham House (2003-);  Vice President, Society of Business Economists in the UK.
UNITED NATIONS (FAO)
Professor Alexander Sarris

Director, Trade and Markets Division, Food and Agriculture Organization of the United Nations, Rome (2003-);  Professor, Department of Economics, University of Athens (1982-).
UNITED STATES OF AMERICA
Ambassador Carey Cavanaugh
Director, Patterson School of Diplomacy and International Commerce and Professor of Diplomacy and Conflict Resolution, University of Kentucky (2006-).
Mr Daniel Drezner
Associate Professor of International Politics, The Fletcher School of Law and Diplomacy, Tufts University (2006-).
Mr Gary Horlick
Partner, WilmerHale, Washington DC.  Formerly:  Head, US Department of Commerce Import Administration;  International Trade Counsel, US Senate Committee on Finance;  Chairman, World Trade Organization’s Permanent Group of Experts on Subsidies.
Mr Fred Kempe
President and Chief Executive Officer, The Atlantic Council of the United States, Washington DC.
Mr Barry Lynn
Senior Fellow, New America Foundation (2002-).  Formerly:  Executive Editor, Global Business Magazine;  Correspondent, South America and the Caribbean, Associated Press and Agence France Presse.  Author.
Dr Sidney Weintraub
William E Simon Chair in Political Economy, CSIS;  Professor Emeritus, Lyndon B Johnson School of Public Affairs, University of Texas, Austin.  Formerly:  Senior Fellow, Brookings Institution;  US Foreign Service (1949-75).
WORLD TRADE ORGANISATION
Mr John Hancock

Counsellor, Trade and Finance Division, World Trade Organisation, Geneva;  Coordinator, Aid-for-Trade Initiative, WTO.