Lamy calls for debate on ‘flexibility’ and what makes good ‘policy space’

Mr President

Secretary General Dr Supachai

Excellencies and gentlemen,

It is a pleasure to be back here at this session of the Trade and Development Board. A lot has happened since I was here last year, although not as much as I would have hoped, and I look forward to our discussions this morning.

I propose to focus my intervention this morning primarily on the issues relating to trade policy that are raised in this year's UNCTAD Trade and Development Report that is before you, before moving on to the current state of the WTO negotiations under the Doha Development Agenda.

Let me start by saying that I share the views expressed in the Report about the contribution that trade can make to development and to poverty alleviation. Trade is today a crucial ingredient in a policy mix which must nevertheless contain many other ingredients to achieve successfully this objective. This means, no blind adherence to free trade. But this also means no blind adherence to governments doing pretty much anything and certainly no blind adherence protectionism. If trade opening is not sufficient, it remains a necessary ingredient. This is the core of what I have called the “Geneva Consensus”.

Market access for developing countries is therefore an important ingredient to this policy mix. Progress has been made over the years in improving conditions of access in developed country markets but it is clear that much remains to be done in the areas of agriculture and labour-intensive manufactured products. This, of course, is an important part of the Doha mandate, where a successful completion of the negotiations will bring real progress in reducing tariffs, addressing tariff peaks and tariff escalation, and making substantial inroads into trade distorting subsidies in agriculture. It is gratifying, therefore, to see Kofi Annan's appeal in the foreword to the Report for the necessary determination and political courage to bring the Round to a successful closure.

The Report rightly notes that we continue to face a challenge in ensuring that non-tariff measures and barriers to trade do not simply negate progress made on the tariff front. The Report singles out anti-dumping actions affecting the exports of developing countries. But I would point out that this is not just a North-South issue. Developing countries have become the most frequent users of anti-dumping in recent years, not only against developed countries but also — and primarily — against other developing countries.

Indeed, while developed countries still provide the lion's share of market opportunities for developing country exports, this situation is changing. South-South trade has been more dynamic than North-South trade for some years now, and its is therefore clear that the trade policies of developing countries also affect one another's trade prospects and opportunities.

An important part of this years' report is devoted to the issues of policy autonomy or policy space. The basic argument which UNCTAD is making is that international commitments in the finance or trade fields are preventing developing countries from realizing their true development potential, in that governments are prevented from intervening in the economy in ways that are essential to progress.

When using this argument, I believe it is important to make the case not just for policy space but for “good policy” space. We need to make a convincing case as to why a particular policy is needed, basing ourselves on the facts.

Take the example of the TRIMs Agreement. I believe it is more than debatable that the domestic value-added content of exports would increase if performance requirements were permitted. Are we sure that developing countries that tried to impose performance requirements would easily attract foreign investment, and if so, at what price in terms of other FDI incentives? Another question is whether the objectives of TRIMS could not be achieved more effectively, at least in efficiency terms, through the tariff structure.

Another example is the Agreement on Subsidies and Countervailing Measures, which is again accused of impinging on national rulemaking authority. The alternative, it seems, would be to have no subsidy disciplines, which raises an intriguing question. Do we want to argue that the best contribution the WTO can make to development is to ensure that developing countries have no obligations in this area? Or that export subsidies should be allowed?

Obviously, the WTO legislators — its Members — while agreeing on subdsidies rules, have also ensured the necessary flexibilities for Least Developed Countries, and in the case of export subsidies also for countries with a per capita GDP of less than $1000. Therefore, all LDCs and a large number of developing countries are exempt from the prohibition of export subsidies.

The argument of policy space is also often made regarding Industrial Tariffs. The Report argues for “flexibility” in tariff commitments on account of: i) revenue needs; ii) greater difficulty in developing countries to raise revenue for subsidization: and iii) the desirability of high variance in tariff levels in order to tailor protection levels in the context of an industrial policy. Developing countries could thus subscribe to a fairly low overall average tariff level, with plenty of autonomy to raise and lower individual rates. These recommendations go to the heart of the issue of what role governments can play in industrial development and diversification. Again, honest people may disagree, especially when it comes to the question of the degree of protection to be granted and the ability of governments to manage such policies effectively. This is fertile ground for debate, a debate which I believe must be engaged, looking at the facts.

Looking at the facts means looking at the difference between bound rates and applied rates. In the case of Egypt, average bound rates on industrial goods stand at 30%, whereas the applied stand at 12%. In the case of Thailand, bound rates stand at 22% whereas applied stand at 10% . But there are other cases: China's bound and applied rates stand at 9%. If one takes into account that the tariff negotiations are based on the bound rates, it is clear that calls for policy space would mean very different things for different countries.

Looking at the facts is also needed regarding the relationship between tariffs and fiscal revenue. It is mostly LDCs in Africa and Caribbean countries where tariff revenues are a significant proportion of fiscal revenues. But in the current negotiations, many of these countries are exempted from any cuts on bound tariffs. For other developing countries, such as China, Brazil, Argentina, Indonesia, South Africa, Republic of Korea, Turkey, less than 5 per cent of tax revenues come from tariffs. India is an exception with about 15 per cent of fiscal revenues being generated by tariffs. But this has not prevented India from reducing aggressively its tariffs, year after year.
We need hard analysis that holds up to critical examination. We need specificity. I believe UNCTAD is well placed to contribute to such efforts, and it would be a pity to miss such opportunities.


Finally, on the question of why countries — even small countries that cannot influence their terms of trade — might find it in their interests to engage in international commitments, I should like to make two considerations. First, even smaller countries with little or no influence on world markets can influence negotiated outcomes through participation. The opt-out option simply creates space for others to do as they wish, and offer only what suits them. There is then no dealing, no bargain, only a “take-it-or-leave-it” outcome. This argument is particularly important, I think, when we recognize, as the Report does, that different developing countries face very different situations in regard to their trading relations and trade opportunities. Second, as countries become increasingly engaged in international trade, international commitments help to articulate, solidify and render more stable the process and outcome of trade policy formation.

The report has an interesting chapter on the functioning of domestic markets. It is clear that the degree to which domestic markets are able effectively to transmit price signals is a key determinant of how far an economy can reap the benefits of opening to trade. If the domestic markets are functioning poorly, either because of excessive concentration, or because of government policies, then there may even be scenarios where opening up to trade could harm the domestic economy! While this is not an excuse to avoid competition and the benefits that flow from it, it is certainly a warning that trade liberalization by itself may well not be enough.

This leads me to the issue of infrastructure for trade. We know that a lack of infrastructure, be it human capital, physical infrastructure, or efficient services, will choke off trading opportunities and the growth and development opportunities that accompany them. We also know that governments, both national governments and the international community, have a vital role to play in helping to foster this infrastructure. But these efforts are pro-trade, not instead of trade. This is what is needed to turn the opportunities offered by more open markets into realities, by addressing capacity constraints in developing countries.

Trade infrastructure is part of the wider picture of aid for trade, a topic which, in my view, might deserve more of UNCTAD's attention. As you are aware, the task force on aid for trade that we agreed to establish in Hong Kong has finalised its work and its recommendations which will be consider at the upcoming WTO General Council meeting on 10 October. I am extremely grateful to the members of the Task Force under the leadership of Swedish Ambassador Mia Horn for the recommendations they have put forward on how Aid for Trade should be “operationalized” and how it might contribute most effectively to the development dimension of the DDA. This work has been on-going in parallel to the efforts to revamp the Integrated Framework for LDCs, in a clear recognition that Aid for Trade is a clear complement to the trade opening agenda.

For my part, I have been actively consulting with various partners including the World Bank, IMF, UNDP, bilateral donors and regional development banks pursuant to the mandate given to me in Hong Kong, as recently as during the recent meetings of the World Bank and the IMF in Singapore. These consultations have made it clear that Aid for Trade is a necessary complement to the Doha Round, but not a substitute. Opening up trade multilaterally and strengthening the rules-based trading system are seen by Members as being the most important contribution that the WTO can make to accelerating economic growth, promoting development and reducing poverty.

I am also aware that the current state of play in the DDA has led some to ask whether the aid for trade initiative will be realised. My position on this is that aid for trade is not part of the single undertaking and therefore should continue on its track and this view is reinforced by the political messages that I am sure you have also heard from many members restating their commitment to a comprehensive aid for trade package. Nevertheless, I also believe that its benefits will be smaller without new trade opportunities that will flow from a successful Round.

It is clear that both trade opening and Aid for Trade must fall on fertile ground to flower and that effective institutions and governance are essential to this end. The role of institutions and the quality of government are clearly crucial ingredients in any analysis of what makes the difference between success and failure in meeting the challenges of development, as well as what role trade policy can play in that process.

The relationship between trade, poverty, inequality and income distribution is a complex one and addressing them is crucial to a viable development strategy, to public support for sound policies, and to perceptions of the legitimacy of government, including in an international context. I do not think these are contentious observations, but a vast amount remains to be done to understand the true nature of these challenges and how we should tackle them.

Let me conclude by sharing with you my assessment of the state of play in the Doha negotiations. Last July, as you know, we decided to suspend the Doha negotiations to allow a period of “time-out” for Ministers to consider how they can each contribute to breaking down the remaining obstacles, particularly in agriculture. I know that serious political reflection has been taking place in capitals since then. I am convinced that the result of this process will be an acknowledgement that there is no acceptable alternative to the successful conclusion of the Round.

In the meantime, I believe it is important that we create a space for quiet discussions, hard reflection and discreet bridge building so that positions on agriculture market access and subsidies can be narrowed. Resumption only makes sense if the position of the main players changes. and this will not happen without heavy political lifting at home. While this hopefully takes place, we should advance the Aid for Trade, building on the progress and momentum that clearly exists. I will continue to work closely with others to ensure that the initiative continues to gather momentum as we deepen and widen our coherence activities.

My number one objective remains concluding the negotiations. That is what WTO members have been saying in the last weeks, and developing countries have said it more loudly than others. But it is also clear to me that we need to think more creatively about how trade, development and growth can fit together into a coherent whole. Aid for Trade is a key piece of that puzzle. It presents all of us with the major opportunity — and challenge — of translating our promise of greater global cooperation into concrete actions and meaningful results. Let's seize it.

Thank you for your attention.