Congressional briefing on the multilateral trading system

Greetings - -

The overriding characteristic prevailing in today’s multilateral trading system is that of uncertainty. There is a sense, even with trade liberalization’s ardent supporters, of uncertainty, even doubt, in relation to past beliefs about trade and its future.

An uncertain world

Thus, there is the interesting shift among trade experts and commentators from an absolute belief in trade to a more cautious and conditional stance. Today, free traders are now more apt to say that trade liberalization is good but is not enough. The Economist, an ardent supporter of free trade, recently declared that “weak infrastructure and underdeveloped credit markets can make economic restructuring difficult. These problems underline why trade liberalisation is no substitute for either more domestic reform or foreign aid. They also suggest that some of the poorest countries need more time to open their markets than others”, and admitting that the successful east Asian economies “adopted liberal trade partially, selectively and mostly gradually”. Peter Mandelson, EC Trade Commissioner, when he recently visited the Philippines, warned against thinking of free trade as a “magic wand” and goes on to say that “it does not automatically lead to greater economic growth. For this countries need high standards of governance and to invest effectively in their productive capacity and human resources in order to benefit from trade, and to deliver a better life for people.” The Wall Street Journal, in fact, recently even questioned the effect of free trade on US inflation. Which brings to mind the question that is, if a country as sophisticated and as developed as the US has an infrastructure still not good enough for trade liberalization to substantively affect its inflation rate, then what county is?

Then there is the question of bilateral trade deals. In 2003, immediately after the collapse that is Cancun, I was the first to publicly caution against the country immediately plunging into bilateral deals. In the days following the collapse of the WTO’s Fourth Ministerial, there had been a lot of pronouncements from the US and the EC that they shall aggressively follow the bilateral trade route with, in the words of Robert Zoellick, then US Trade Representative, the “can do” countries. This was followed by international essays and publications agreeable to the idea. The interesting thing about it is that if you read the local newspapers at that time, a number of our business leaders, policymakers, and academics supported the idea. I didn’t. And I still don’t.

However, now, it should be noted that even the government’s own research arm, the Philippine Institute for Development Studies, is wary as far as FTA’s are concerned. The 2006 PIDS study, entitled The Boom in FTAs: Let Prudence Reign and written by Dr. Josef Yap, President of the PIDS, goes to even express doubt as to the benefits that could be derived from FTAs. Dr. Yap instead suggests, of which I agree with and is actually the very point of my remarks today, that instead of rushing into FTAs, the government should be channeling resources to agricultural productivity, improving governance, and strenghtening institutions. In fact, the World Bank itself expressed suspicion against FTAs, highlighting the risks that poor countries face when they enter into such.

This is to not to say that the principle of trade liberalization is wrong. I am a believer in the power for good that trade liberalization can bring. However, the previous belief in an unconditionally effective and positive free trade is obviously being questioned, perhaps with good reason.

However, even assuming that there is no question regarding the form and benefits of free trade, there is the problem of the major country players not practicing what they preach. Thus, you see the spectacle of immigration issues sweeping the United States and France, of French politicians being disconcerted when Mittal (an Indian company) announced its intention to buy Arcelor (a French steel company), of the US Congress getting worried that its port operations have been bidded out to foreigners, of South Koreans refusing to open up its rice trade, and the US, Japan, and the EC sticking with their farm subsidies to the detriment of poor country farmers. Even the simple matter of a local football club in England being bought by a foreigner caused national outrage.

Note also that the progress of the Doha Round is being made to depend on the demands of local politics of the major players. The US has mid-term elections later this year and then the 2008 presidential elections. In between is the expiration of President Bush’s Trade Promotion Authority in 2007, of which there is doubt as to whether political capital shall be expended for its renewal. President Bush’s re-assignment of Rob Portman, erstwhile USTR, to the OBM has been taken as a sign by some observers that the priority right now of the US is its domestic policy concerns. France shall be going to its presidential elections next year, of which its two main contenders, Nicolas Sarkozy and Dominique de Villepin, have taken extra pains to show their nationalist credentials. In fact, both are staunch supporters of the CAP. The UK is grappling with domestic issues, such as education, while at the same time having discussions focused on whether Prime Minister Tony Blair is to step down this year or next. Recently elected German Chancellor Angela Merkel is still in her early days of national leadership.

The foregoing has made me think, in fact, of three things: one is that, while all economics may be international (as John Jackson would say), all politics is still local (as former US House Speaker Tip O’Neal would say), second is that, contrary to the belief of some free traders and multilateralists, nationalism and the concept of sovereignty are not dead and is far from it, and, third, the multilateral trading system is tagged with so many uncertainties that the need for further information is constant and highly paramount. It is this third matter that I shall discuss further.

Dealing with uncertainty
The question now, therefore, is: how do we deal with trade’s uncertainties? Before we go into that, it may be well worth recalling an editorial that the New York Times once made just a couple of years back:
“Put simply, the Philippines got taken. A charter member of the World Trade Organization in 1995, the former American colony dutifully embraced globalization's free-market gospel over the last decade, opening its economy to foreign trade and investment. Despite widespread worries about their ability to compete, Filipinos bought the theory that their farmers' lack of good transportation and high technology would be balanced out by their cheap labor. The government predicted that access to world markets would create a net gain of a half-million farming jobs a year, and improve the country's trade balance. It didn't happen.” (The Rigged Trade Game, 20 July 2003).
Interestingly, as well, it must be considered that, despite the openness of our economy, it has been observed that the contribution of value-added by Philippine manufacturers in its exports has declined in the past few years. Then there is the fact that Thailand and Malaysia have outpaced us when they did not unilaterally open up as quickly as we did. Economists are now even concerned about Vietnam overtaking us economically if the present rates of development continues.
Accordingly, there are several issues confronting the Philippines and all of them can be rooted to the problem of uncertainty. This uncertainty, I believe, comes in three forms: first is with regard to the overall direction of the multilateral talks, second is with regard to the benefits, if any, that we stand to gain from further liberalization and, third, how such benefits can be attained. The answer, I believe, to those uncertainties, is not a further opening up of the economy or a closing of it but something a little more basic and that is the improvement of the structure by which trade issues and policies are processed and addressed.
Dealing with the third question first, the same deals not only in ensuring that at the national level the benefits, if any, of trade liberalization is had but also that the benefits are not concentrated to a particular group and is, instead, felt by a great number of our countrymen. As far as this is concerned, there is really no choice and such can reasonably be achieved by improving the country’s governance, public transparency, business infrastructure (including credit access, stability of contracts, infrastructure development, transportation, energy, and a responsible workforce), other domestic reforms (such as lessening of corruption, better education, improvement of the peace and order situation, and judicial reliability), an effective competition policy, and, finally, a review of some of our trade related legislation.
With regard to competition policy, it must be stated at the outset that if ever there is an argument against an unfettered market it is competition policy. For competition policy is actually an admission that the market could go wrong and does on occasion go wrong. Competition policy, in its simplest form, primarily deals with the state of competition internally, that is, with regard to the state of competition within a country’s borders and seeks to rid it of harmful monopolies, cartels, and other anti-competitive practices.
With regard to some of our trade related legislation, we suggest a re-examination of RA 8752 (the anti-dumping law), RA 8800 (the safeguards law), Section 304 of the TCCP, Sections 401/402 of the TCCP, and RA 9135 (the customs valuation law).
Moving on now to the first and second uncertainties, I believe that the same can and should be addressed by improving the country’s monitoring, consultative, and policy formulation process - making it more effective and responsive to the needs and interests of domestic businesses, as well as to the peculiar demands of trade negotiations. These are my recommendations:
Consultative mechanism
Private sector participation in the formulation of positions and the conduct of negotiations still appears to be limited. To address the need for increased participation, hearings and proceedings would have to be institutionalized so as to lead to greater transparency and accountability in the conduct of trade negotiations. Among such would be the conduct of periodic and regular hearings in Congress to determine the state of our trade activities. This would have to involve greater private sector consultation and, as much as possible, participation during negotiations, as is practiced by many other countries. This is only fair considering that it is the very interests of the private sector that is at stake.
Congressional review of trade agreements
In connection with the point above is the refinement of our rules to remove any ambiguity as to the need for our elected representatives to have a say in our entry into any trade agreement. This is especially with regard to the ongoing confusion regarding the classification of trade agreements into “treaties (which need Senate concurrence) and “executive agreements” (which do not).
A reading of present laws and jurisprudence relating to the matter apparently indicate that trade agreements are generally classified as “executive agreements”, to the detriment of our policy making process. Considering the incredible impact that trade agreements have on the lives of ordinary Filipinos, such agreements should be made under conditions of full and public scrutiny and debate.
Thus, it is suggested that new rules be issued clarifying this matter so that any substantive trade agreement (and most trade agreements are substantive) will have to be submitted to the Senate for its concurrence or at least to a Congressional review. A process clearly needs to be established whereby trade agreements being entered into are reviewed and discussed publicly. If such review is not practically possible during the negotiations stage so as not to undermine the strategies being employed, then an oversight committee (perhaps by Congress) should be established, with powers to conduct public hearings on the propriety (or not) of such agreements on a regular or periodic basis. It is necessary that a government official or officials be clearly designated as responsible or accountable for such trade agreements. The purpose, of course, is not to lay blame but to ensure a system of accountability that will result in the imposition of restraint, intellectual rigidity, and openness when dealing in such matters.
Caution on FTAs
In the meantime, it may perhaps be prudent to suggest restraint with regard to Philippine intentions or activities pertaining to regional trade agreements or free trade agreements. While not commenting on the direction of any of the present FTA negotiations and focusing instead on the concept of FTA’s itself, it must be stated that for all their supposed benefits, they are simply tricky propositions. The very existence and potential number of the same provides an increasingly complex international trading system. Aside from what I have commented just a while back with regard to my thoughts on FTAs, I’d like to point out that FTAs come with its own set of practical and at the same time highly technical problems. Most significant among these would be that pertaining to the rules of origin, the overlapping jurisdictions by the different dispute settlement systems in place between the multilateral trading system and the different FTAs, and the non-tariff subjects (such as customs procedures, sanitary and phytosanitary measures, technical barriers to trade, and - perhaps - the issue of smuggling).
This is not to say that FTAs are destructive. Benefits certainly there may be and there is no dearth of economists who would point to such expected benefits. The point simply is that with regard to formulating a policy or view with regard to FTA’s, there is always the need for greater information regarding the environment that surrounds it. For the moment, a certain degree of caution would perhaps be justifiable under the circumstances when even exploring the idea of possible bilateral or regional trading arrangements precisely because there are no categorical indications regarding the direction, benefits, and risks that are concomitant with FTAs.
Establishment of formal written trade policy
Another suggestion is for the government to lay down publicly, in writing, a detailed draft of what our trade policy actually is. The USTR, for instance, regularly publishes a white paper containing its trade policy objectives for all to comment - thereby allowing the USTR to refine its approach and make it more responsive to US national interest. Adopting a similar practice in the Philippines would not only better inform the public as to where the government intends to take us in terms of trade but would also give the most affected stakeholders (which is us, the private citizens) the opportunity to speak out on the wisdom of such policy.
Finally, trade negotiations of today are highly different from the trade negotiations of the past. Ten years ago, our prime trade activities circled around two or three countries. Now our partners are becoming more varied and, incidentally, Asian-centric. The inter-relatedness of the matters under trade discussions is greater. Just last week, USTR nominee Susan Schwab was asked regarding China’s financial services liberalization record, as well as on currency movements and how the latter affects the US trade deficit. There is, obviously, a need for greater coordination between the different government agencies that deal in trade and affect trade. Also, most interestingly for me, considering that it is a well accepted fact that today’s multilateral trading system has definitely moved away from the previous negotiation’s based system to the present rules based system, there seems to be a dearth of lawyers working within government that focus on trade. The multidisciplinary approach to our trade activities needs to be recognized and developed.

Thus, the creation of the Office of the Philippine Trade Representative (RPTR) is recommended. This should not necessarily be a huge bureaucratic creation, at least at the outset. When the USTR was created in 1962, its legal counsel’s office was composed only of two men . Incidentally, when the Office of the US Trade Representative (USTR) was created, the reasoning of the US Congress that created it was that trade policy should not be entrusted to the State Department (which it is said looked out for the interests of foreigners or broad foreign policy goals) or the Commerce Department (which always looked out for narrow domestic political interests) but rather to an office that would take the objective position and have trade as its only mission.
For the RPTR, it is ideal that the same be peopled with professionals of diverse backgrounds: diplomacy, law, economics, finance, etc. It has to be the primary source of information on matters dealing with international trade and, at least with regard to issues arising principally from trade negotiations, be responsible directly to the President.
The office must be given the responsibility of organizing an inter-agency committee that will effect closer coordination among the different affected or involved agencies of government. There should also be a mechanism set up that will result in the constant and consistent consultation with the Philippine Congress. There should also be a process formulated that will provide Congress the avenue with which to exercise “oversight” functions over the office of the trade negotiator (i.e., annual briefings, etc.)
Finally, the office of the trade representative should be handed the responsibility - through a formalized process - of consulting directly and constantly with the members of the private sector.
In conclusion - -
In my remarks during the U/ACT workshop on trade, I made mention of the fact that when the Uruguay Round of negotiations were contemplating the need for an international trade organization to oversee the various trade agreements being then considered, a negotiation was specifically set aside to discuss the "functioning of the GATT system" and was given the acronym "FOGS". Out of this the WTO was created. Interestingly, more than ten years later, what was deliberated under FOGS is still under a fog.

There is simply a need for greater and further understanding of how the multilateral trading system works and affects countries, including, obviously, our own. Indeed, a simple fact that is sometimes overlooked when discussions come around regarding the WTO is that a reading of the WTO Agreements reveals that not once in its 492 pages - starting with the Marrakesh Agreement creating the WTO up to the Ad Articles of the GATT - do the words “free trade” appear.

I am definitely not calling for us to be isolationists or protectionists. Nevertheless, if anything, if experience and history could be taken as a guide, there is nothing absolutely certain about trade and no one size fits all formula that we could or should want to duplicate en toto. Put simply, what we need is to find the right trade “mix” that is necessarily unique but appropriate for the Philippines.

Trade is merely a means to an end. It is an utterly complex matter and for which the Philippines need a strong and deliberate foundation from which to move out and confidently engage our trading partners.

Thus, for the present, rather than burdening ourselves with further international obligations or seeking to do so, it is suggested instead that that we prioritize reorganizing and making our house in order: improving governance, refining our laws and processes, and strengthening our institutions.

Thank you. I think I shall stop here.