Romesh Vaitilingam interviews Partha Dasgupta for Vox

November 2009

Transcription of an VoxEU audio interview [http://www.voxeu.org/index.php?q=node/4307

Romesh Vaitilingam: Welcome to Vox Talks, a series of audio interviews with leading economists from around the world. My name is Romesh Vaitilingam, and today's interview is with Patrick Low, Chief Economist at the World Trade Organization. Patrick and I met at the ‘Thinking Ahead on International Trad’e conference in Geneva in mid September 2009, where he presented a paper called "WTO Decision Making for the Future." I began by asking him to explain the significance of this issue.

Patrick Low: The WTO consists of a membership that is extremely varied: big countries, small countries, rich countries, less rich countries. And we need to think about how to make decisions in a context where we value universality. We need to be sensitive to differentiated levels of interest in particular things and priorities. And so one way of providing space to do that is to think about involvement in agreements being a function not necessarily of simply being a member of the WTO but of having certain characteristics, certain interests, in particular types of decisions and in different needs or areas.

So it's really about not obliging everybody to sign on to everything, especially if they're being asked to sign on to agreements that do not necessarily serve their best economic interests.

Romesh: Can you explain the tools that you use, as an economist, to think about these issues of decision making?

Patrick: Well, I think the literature on voting is useful for this, partly because it deals with the notion that the welfare implications of different types of agreements and different types of international cooperation can be highly varied. It's quite possible that a group of countries could get together, agree on something that actually made welfare worse, but they still benefited from it because they were able to extract economic merits from the rest. Even if an agreement was Pareto improving, that means that globally there was a benefit from it, you could still have a situation in which some won and others lost, because when we talk about negotiating rules, we're talking about some element of harmonization.

So this element of harmonization is what throws up costs and benefits, which traverse national boundaries. Unlike in standard trade liberalization, where for the most part, under usual assumptions, the winners and losers from trade liberalization will be located in the same jurisdiction and governments can deal with it in their own terms, in their own territories. With this, you have a distributional implication, which needs to be attended to as part of the deal cutting exercise at the international level.

Romesh: Can you explain in a little more detail how the process of decision making currently works at the World Trade Organization and what the alternative systems might be?

Patrick: At the moment, most decisions in the WTO, practically all of them, are taken on the basis of consensus. Consensus, in the WTO, is defined as not objecting. That's how you define it. So it's a bit different from unanimity. But, in practice, of course, there are large countries and small countries that are more influential and less influential players. In practice, this could be argued to be a hidden majority voting system. We don't use voting very much, and I don't suppose there would be much chance whatever of using voting. It would be extremely difficult.

We certainly wouldn't be able to use voting on the basis of one country, one vote. We would have tremendous difficulty working out how to weight the voting, and we'd then have additional difficulty in deciding what an acceptable majority was.

So I think this is not a practical option. And so, if we're not going to do things by consensus, what is left? And that's where critical mass comes in.

Critical mass decision making would be a situation in which a subset of governments could decide that they wished to pursue a particular negotiation. The presumption would be that they wouldn't have to involve all the membership in the negotiation, nor implicate them in the results of the negotiation.

However, in order to allow that to happen and to make it a viable system, we would need to have certain provisions linked to establishing a critical mass negotiation and approving the outcome. I don't think it would fly if it created a situation in which some countries who were not party to the agreement would be discriminated against.

So I think it would have to be…everyone would have to enjoy the benefits, and those who wanted to be part of the critical mass would obviously assume the responsibilities and the costs of the agreement, such as they would be.

Now, that raises a fear amongst some that countries would decide not to sign the critical mass agreement and free ride on the benefits of it. So we have to think quite hard about what a free rider is in this context. My argument is that a free rider is only a party that can destabilize the agreement.

Now, if you're a party that could destabilize the agreement, in order for the critical mass arrangement to prosper in the first place, you would have had to be inside of the tent. You couldn't be outside, because the others wouldn't do it. It's a self defining group of players who recognize the necessity of having particular countries inside, because if not, then you truly have a free riding problem.

Those who are left outside are the ones who are not perceived as being able to free ride, because they're too small to influence the outcome. At the moment that an agreement is signed, I think the question of whether or not you have free riders is quite clear, and it will be determined by parties who would take on commitments.

Now, over time, perhaps the argument would be, well, later on these countries who are not free riders today could become free riders tomorrow. How are we going to make sure that they come on board when they are in a position to destabilize the agreement?

The argument there is a bit more subtle, but it is essentially the notion that the perception of free riding would not be well rewarded. Much is fungible at international corporation. So the incentive to free ride is not nearly as high as some people think it might be.

And secondly, if the agreement makes sense and is welfare enhancing, why wouldn't you, as a country that is in a particular position in developmental terms, why wouldn't they want to be part of this agreement? One assumes that these agreements are not impositions, but they carry net benefits.

So I think even over time, the notion that free riding is a big problem is more of a red herring than a reality, and I don't think it weakens the case for cooperation via critical mass decision-making such that you get an additional degree of freedom that allows a sub group of countries to go ahead with an agreement without worrying about the implications that that has for the entire membership. And, at the same time, enjoying the possibility of maintaining multilateral oversight and the essential globality of the multilateral trading system.

Romesh: How would critical mass decision making in the WTO compare with it in other organizations like the European Union, where they have these ideas of variable geometry and the enhanced corporation?

Patrick: Well, I think the community enhanced corporation arrangements are very interesting as an example of an attempt to do something like critical mass, but they are so well covered with safety valves and guarantees against a situation in which a sub set of the membership could do something that would be against the interests of the rest of the membership, that actually, the enhanced decision-making procedures haven't ever been used. But it was an interesting example of such an attempt to design decision making. But for many of the other agencies that you might think, or institutions that you might think we could make comparisons with - like the World Bank, the IMF - they have weighted decision making. They have weighted verdict decision making, so it's not really applicable.

As we know from current discussions, they're having a huge amount of difficulty in dealing with the fact that the weighting was a reflection of how the world used to be, and is not a reflection of how the world is today. And it's creating a huge amount of difficulty for them in the whole discussion and ongoing discussion on what should happen about that.

Romesh: Are there particular issues in world trade at the moment that you think critical mass decision making would particularly help with? I think, for example, of this issue of regional trading arrangements and some potential conflicts with the multilateral trade system.

Patrick: I don't think that this is really much to do with regional trading agreements. I think there's a relationship between what we might do multilaterally with critical mass, and what governments attempted to do regionally, that the prospect of critical mass might help us to manage the regionalism issue, but I think in lots of areas where you might want to go more deeply into disciplines, or where you might want to develop new disciplines, there may be an argument that these things would be easy to carry forward if there was a critical mass option. So some of the recent issues which didn't make it on to the agenda, I’m not necessarily advocating for them as part of the agenda, but they are illustrations of issues that could have been dealt with in this way. I'm thinking of competition policy, rules on investment and so on.

Romesh: Final question in particular. What do you think the chances of something like this actually happening? Is it something that lies in the future, something that would have to come after the completion of the Doha Round?

Patrick: I'm certain if this was ever to be given serious consideration, it would not be in the context of the Doha Round. I'm equally certain that governments are not ready for this kind of conversation in any systematic way until they've got the Doha Round off their agendas. Because the Doha Round is everyone's preoccupation and I don't think there's any convincing scenario under which the WTO fails to close the Doha Round and prospers there after. So it's a sine qua non of any of this, that we complete the Doha Round first.

Romesh: Patrick Low, thank you very much.

Patrick: Thank you.
 

Romesh Vaitilingam interviews Simon Evenett for Vox

Septmeber 2009

Transcription of an VoxEU audio interview [http://www.voxeu.org/index.php?q=node/4013

Romesh Vailtingam: Welcome to Vox Talks, a series of audio interviews with leading economists from around the world. My name is Romesh Vailtingam and today’s interview is with Professor Simon Evenett from the University of St. Gallen in Switzerland. Simon and I met in Geneva at the “Thinking Ahead on International Trade Conference” in mid-September, 2009. We met just ahead of the G20 Summit in Pittsburgh and spoke about the latest report from Global Trade Alert, called “Broken Promises”, all about the protectionist juggernaut threatening the world.

Professor Simon Evenett: The Global Trade Alert team, which is made up of researchers across the world, is seeking to identify state measures which have knock on affects which are adverse for foreign interests. Really, we are looking for state measures which tilt the playing field away from foreign commercial interests, whether that be exporters, investors, migrants, or intellectual property deployed abroad. So unlike some exercises of monitoring, where people look for WTO legalities, is something reasonable, is it crisis related, we look for whether or not it tilts the playing field, that is the objective.

We have investigated 428 state measures and looked for whether or not we can document – and the key word is “document” – discrimination. Where we can we write it up and we explain why and we also provide the sources. And there are also many cases which we have investigated and we couldn’t find any discrimination as well. We use a traffic light system to differentiate between the good and the bad, and the maybe bad. And we found that there is some traditional protectionism which is being employed – your classic tariff raises which are transparent instruments. But we have also found governments resorting to either measures which they haven’t used so much in the past, like public procurement measures during crises, or to state aids, which are a relatively new phenomenon. And where there is a lot of potential for selectivity and for governments using their discretion in order to favour domestic firms.

That latter type of protection is often called “murky protectionism”. And I think it is fair to say that we have seen some of the original protectionism, the traditional type, and murky protectionism during this crisis.

Romesh: You have just published the second Global Trade Alert report and you describe what is happening as a “protectionist juggernaut”. Can you explain what you mean by that and what is exactly happening?

Simon: We estimate that of the 428 cases that we have investigated about just under 300 are being implemented. And of them 192 have beggar-thy-neighbor features. Month by month, or quarter by quarter, let’s say quarter by quarter, there are about 70 cases which are protectionist cases which are being implemented. And these are wide ranging, some have narrow impacts, others go across many countries and many products or many sectors. So we found this dynamic is not abating, it is not slowing down. If people think that this protectionist dynamic is coming under control, if that means a slowdown in the number of measures, then that is not happening. We think the juggernaut is maintaining its speed.

Worse, we have identified 134 state measures, which, if they are implemented, are likely to be protectionist. So these are ones that are in the pipeline; they have been announced but not yet implemented. It turns out that this pipeline protectionism is worth about half a year of actual protectionism.

We have had since November of last year about 192 protectionist measures put in place, and we have another half a year’s worth of protection which is just working its way through the system. So we think the juggernaut is going to roll on for quite some time.

Romesh: You called the new report, Broken Promises, by which you mean the repeated promise made by leaders of the G20 countries to have no new protectionism. Can you explain which of those G20 countries are the guilty parties? Which ones are breaking the promises, and then, which ones are feeling the pain, who is being hit the worse, and which sectors are being hit?

Simon: The way that the Global Trade Alert works is for each measure that we investigate we don’t just say whether or not it is discriminatory or not, we also look to see how many product lines are likely to be affected by it - that is often how much trade is affected by it - how many economic sectors are affected; and how many trading partners are affected. So that means that we can measure harm in four ways: number of protectionist cases, number of product lines affected, sectors affected and countries affected. We have put together rankings of the top ten worst offenders on these four dimensions.

It turns out there are 18 countries in those top ten lists, the hall of shame maybe. And of those 18, 12 are G20 members. Those 12 countries are Russia, Germany, India, Indonesia, Italy, UK, China, Argentina, Japan, US, Mexico and France.

The country which stands out, which is always in the top five of those rankings, or four, is Indonesia, which is a country which is very conflicted, it seems, on its trade policy response. China and India are always in the top ten in all four criteria, and in three of the four criteria China and Russia are always in the top ten of the ten worst offending countries. And Germany and India are in for three of the four indicators. So what you can see is that at least five of the G20 members are serial offenders here. And there are a lot of others who aren’t exactly acting like angels either.

Now when it comes to sectors which were affected, this was a very interesting finding. We thought, with all the talk about supporting green growth, innovation and alike, that we would see a lot of protection and favouritism towards sectors which are sort of more advanced in high tech. But in fact it turns out that the bulk of the sectors where protection is being imposed are the old traditional sectors of agriculture, textiles and apparel, and low productivity manufacturing – like smokestack manufacturing.

So that makes you wonder, are corporate interests taking advantage of this particular opportunity, the crisis, to reinforce their protection? And how much do we really believe that the state intervention is actually being directed towards restoring economic growth?

It is probably the case that some of it is going towards the latter, but more of it is probably going towards existing recipients of protectionism then we probably thought before.

Romesh: How do your findings reflect on the global body monitoring world trade, the World Trade Organization, and how do they reflect on the European Union, which is supposedly all about a single market?

Simon: The WTO has had an increasingly elaborate monitoring exercise, and it has got richer and richer in qualitative detail. And there is a real difference in approach between the GTA approach and the WTO approach: which is that they are quite reluctant to count, whereas we are. Meaning that we will enumerate, we will try and summarize intelligently the contours of protectionism, whereas, for good reasons, the WTO is a bit more reluctant. They have a different role to play and their report plays a different role.
But I think people will look at these two reports and think, “Wow, they are very different” and hopefully be informed by both of them.

Now the EU has its own monitoring report as well, but more interesting, as your question pointed out, we are supposed to have this common market in the EU with very strict rules. But that is very hard to square with the huge number of distortionary state aids that we found, or subsidies which have been implemented. The last time I checked there were 619 of these applications for state aids under what is called the temporary framework for state aid within the EU. And what we have left as information about those applications, the Commission writes a letter to the Member States.

And normally they turn around and say, “Your state aid does distort the single market but we are going to let you off doing this using a loophole and an exception for the duration of the crisis, or for some fixed period of time.” And so what this really raises is the question just how much is the single market being distorted during this crisis? And to what extent is Europe really a free trading zone anymore? And whether or not much of the progress towards European integration of borders and markets has actually been unwound in the last two years. I think that is a particularly European problem, which they are going to have to face, and I think much of it turns on this state aid regime.

Romesh: Simon, we are talking on the eve of the Pittsburgh Summit of the G20, what advice would you give to the policy-makers there? Do they first have to apologize for breaking their promise?

Simon: Maybe some contrition would be nice, but that’s not what’s going to happen. I think trade has been demoted before the G20 Summit and it needs to be restored to its central place on the agenda. I also think that as far as trade is there at the moment, they are going to make a recommendation that the Doha Round be completed in 20ten. Rather than talk about the completion of a negotiation at some point in the distant future why not do things to deal with this protectionist juggernaut which is taking place now. And I would say two things in this respect.

First, this pipeline of measures which you talked about earlier, they should try and drain that and refill it. In other words countries should systematically review just how much they need to impose these measures which are anticipated to hit the world economy.

The second thing they should do is look at the measures they have put in place since the first G20 Summit on the crisis, which was last November. They have got to go back and look at that. A lot of those measures were put in place in an awful hurry, perhaps not with the most thought. And now is the time to go back, and every six months, see just are these measures still needed? Are the measures which have been chosen actually likely to meet the objectives which the government has stated? Is there another measure which could do the same thing but hurt trading partners less? And if there is there should be some type of substitution.

Ultimately, over time, you should encourage the unwinding and the substitution away from more trade distortive measures to less trade distortive measures. And this could be a process which goes forward, I think it would a very evidence-driven process whereby governments could review, more systematically, in a slightly less hot-headed atmosphere, the types of intervention in which they want to take forward.

Romesh: How optimistic are you about some good news coming out of this?

Simon: I think the key determinant here is how quickly the world economy recovers. If it recovers for non-export related reasons, the stronger is the non export related impetus, then I think the unemployment increases will be less, the pressure on governments will be less and we might end up with a situation, which, a few years from now, looks bad but was nowhere near the 1930s. I do think things have got to get really a lot worse before we are going anywhere near the 1930s. I hope that is the case, although the recent frictions between China and the United States are a source of serious concern.

But I think much depends on how politicians respond to the growing unemployment, the growing bankruptcies, which we will see over the next six to 12 months. That is the key thing I am following.

Romesh: Final question Simon, I wonder if you could reflect on the contribution of economic research makes to discussing these crucial issues for world trade?

Simon: I think economic research is often pursued by academics looking for what is the latest high tech technique I can use to try and show the effect of this or that. But sometimes some of the most useful economic research is about enumerating what has happened. About getting the factual record right and on the table and done in a way where people can intelligently compare and contrast what is going on to get their picture of whatever is the policy question. Now here the policy question is to what extent are governments resorting to protectionism? And I think economic research and economists in general can add a lot to the understanding of what has actually happened and why it is happening.

Because governments who are indulging in this, don’t want to have a discussion on this issue, they clearly don’t want to discuss this that often. And I think we need to overcome that information barrier and independent researchers who have the resources and the time can really make a contribution here.

Another thing we need to realize in economic research in this area is that the political decision cycle is really quite short. And in crises things move really quickly. Banks have fallen over weekends, and the fate of banks is decided over weekends. That is what we saw last year.

So what we have to recognize is we have to get high quality information into the public debate. And that may mean that we might not be able to do the sort of high tech sophisticated analysis of effects of every single measure which is out there. Instead we may end up having to inform the debate by the use of sophisticated facts and the summarizing of it.

And indeed I think it would be a real mistake to turn around and say, “Oh, we can’t possibly understand current protectionism until we have done economic analysis of all of the 400 or so measures that we have investigated.” I think that waiting the five or ten years, or ten0 years that that would take would clearly miss the relevant political cycle.

So I think we need to remember that our academic instincts…we shouldn’t make the perfect the enemy of the very good, and the very good often amounts to high quality information delivered on time, at the right time in a way the policy-makers and decision-makers find useful.

Romesh: Simon Evenett, thank you very much.