Wednesday, 20 February 2013

The latest WTO trade dispute: Can the US stop India?

By Musab Younis

Barack Obama’s visit to India on a trade mission in November 2010 was thought to mark the start of a newly revitalised bilateral relationship. In fact, almost precisely the opposite has taken place. At the beginning of this month, a new front was opened in the two-year battle between the two countries at the World Trade Organization (WTO):

Trade policy and the Rising Powers
There is more to these cases than tit-for-tat litigation or worsening bilateral relations. If we take the most recent sixteen formal dispute cases at the WTO, the vast majority are between an OECD member (US, Japan, EU) and a BRICS (Brazil, Russia, India, China and South Africa) country or regional power (Indonesia and Mexico). The only exceptions are two cases against Argentina by Mexico and Panama, and a case against Australia by the Dominican Republic.

A key concern of the BRICS has been international trade rules, especially in relation to agriculture. A useful paper by Braz Baracuhy (2011) examines WTO Doha Round negotiations over the course of a decade – between 2001 and 2011 – and argues that the impasse ‘captures the new geopolitics of multilateralism’. Baracuhy notes that a set of draft modalities, agreed in December 2008 as a basis for negotiations, were disregarded by the US in the wake of the financial crisis.

Another recent paper by Lars Brink, David Orden and Giselle Datz (2013) found that while a new Doha agreement looks remote, the negotiated provisions tell us a lot about the future policy space the BRICS sought to maintain.

Brazil, China, and India (BIC) are members of the G20 group of developing countries (not to be confused with the other G20, comprised of major economies) which argued in the Doha negotiations for substantial cuts to agricultural protection in developed countries. But while the BIC have often been united in seeking concessions, they have been less united when it comes to initiatives that affect their individual trade interests, the paper notes.

A resolution?
This month’s solar panel case at the WTO shows that divisions run across more issues than agricultural protection. Developing countries have long criticised the WTO for inhibiting the type of industrial policy many of them argue is necessary for their industrial development. Members of the BRICS, including South Africa, have recently adopted large-scale industrial policy plans.

At the same time, the economic crisis has increased calls for protection within rich countries, especially the US. Indian-American relations are unlikely to improve while anti-outsourcing policy in the US continues to damage India’s software industry. And of course, China has been the main target of Obama’s trade protection measures (though some have argued vigorously for a policy change.)

The results of the latest WTO case could go either way. But it seems unlikely, going into the future, that the WTO as a forum will be able to resolve a growing divergence in policy perspectives. In the meantime, as the Financial Times reports, “far away from the emerging trade dispute, Indian companies and their partners are powering ahead with innovative solar schemes.”

Musab Younis is the Research Officer for the Rising Powers in International Development Programme at the Institute of Development Studies. He will be posting here regularly on the programme and related issues. 

Friday, 15 February 2013

Tobin's taxes

By Stephen Spratt

In 1972 the Nobel prize winning economist James Tobin proposed a small tax on all spot currency transactions. Following the break-down of the system of fixed exchange rates drawn up at Bretton-Woods, Tobin was concerned that speculative trading would increase the volatility of exchange rates, damaging the real economy. The aim of what would become known as the Tobin Tax was to discourage short-term speculation and thus ‘throw sand in the wheels of our excessively efficient international money markets’.

In its more recent incarnation, the revenue raising potential of the Tobin Tax has been the main argument used. Those concerned with international development have been prominent in this, seeing taxes on financial transactions – particularly currencies – as a way to raise large sums for development. Environmental groups have made the same case, arguing that funding for climate change could be raised in the same way. These advocates have largely stayed away from the possible impacts on market volatility, however, preferring to focus on the (very large) sums that could be raised.

Forty years after Tobin’s original proposal, the European Commission yesterday announced its own plans for a ‘Tobin Tax’ in 11 European countries. According to the best estimates, this could raise €30bn-€35bn through a 0.1% levy on equity and bond transactions and 0.01% on derivatives. So how does this relate to the earlier versions?

First, there is no talk of throwing sand into any wheels. The tax is presented as a way of raising revenue, or of ensuring that the financial sector ‘pays its share’. Tobin’s original goal of reducing volatility by discouraging speculation is nowhere to be seen.

Second, the EC version would apply to equities, bonds and derivatives, but not currencies, reflecting the fact that not all Eurozone countries were prepared to sign up. The foreign exchange market – which as the largest financial market in the world turns over more than the UK’s total annual economic output every day – remains untouched.

Third, as well as not talking about reducing volatility, nobody has heard about tax proceeds being used to fund development or environment goals. The appeal to European governments of a new source of tax revenue in these times of austerity is strong. Campaigners may finally get what they want – a version of the Tobin Tax – only for the money to disappear into the coffers of European governments.

But will it work? On this front, the proposal looks quite robust. A change from earlier drafts sees the tax apply to instruments as well as actors. That is, not only do institutions based in signatory countries have to pay the tax, but so does anybody else trading financial assets issued in those countries. US banks trading German shares in London would be liable for the tax, for example. This is very important, as without it trading in these instruments would simply migrate outside the jurisdiction to avoid the tax, as happened in Sweden when a transaction tax was introduced there. The only tricky areas will be certain parts of the derivatives market, but these should be surmountable.

Expect the usual howls of protest from the financial lobby, as well as protracted legal challenges. One issue of dispute is likely to be the extraterritorial nature of the tax, where non-European institutions would still be liable if they trade assets issued in signatory countries. If you hear voices from the City of London making this point, however, you could point out that this element is modelled on the extraterritorial nature of the UK’s Stamp Duty on shares transactions. At 0.5% this is many times larger than the ‘Tobin Tax’ proposed in the Eurozone, and it too is liable regardless of where UK shares are traded or by whom. To those who fret about transaction taxes destroying the financial sector, you might point out that the Stamp Duties were introduced in 1694 in the UK, and have not exactly impeded the growth of the financial sector...

Wednesday, 13 February 2013

Food scares ... again

By John Humphrey

Food is once more in the news in the European Union. This time it is about a variety of food products containing horsemeat when they are meant to be beef. The same scandal has led to the identification of DNA from other animals in supposedly beef products. These events highlight, once again, the complexity of food chains within the European Union, the difficulties in maintaining control over complex food production systems, and the ways in which food from one point in the food chain spills out to many products sold in many countries.

So far, this crisis has been identified predominantly as a labelling issue. Consumers think they are buying and eating beef, but it is actually horsemeat. Concerns about food safety have been mostly limited to the possibility that the horsemeat might contain residues of a veterinary drug that can be harmful to human health. However, there is a more fundamental food safety problem here. If the factories producing horsemeat burgers and horsemeat lasagne don't even know what kind of meat they are using, then they should not have very much confidence about the information they received on where the meat came from and the conditions under which it was processed. This information is basic for the food safety system. Even if the meat in these products was genuine beef, the safety of the system would depend upon accurate knowledge of the animals' origins, the safety of the abattoirs in which they were slaughtered, etc. It has to be assumed that no reliable information on these issues is available.

This food scare might appear to be just a problem to the European Union. But in the past the response of developed country food safety authorities to food safety scares and resulting falls in consumer confidence has been to tighten up on food safety. This was seen in the European Union after the BSE (‘mad cow’) epidemic in the 1990s, and it has been evident more recently in the United States with the passing of the FDA Food Safety Modernization Act in 2011. In both cases, new food safety legislation aimed predominantly at addressing domestic food safety problems has had substantial impacts on exports from developing countries to these markets (for an analysis of the impact of the Food Safety Modernization Act, see ‘Food Safety, Private Standards, Schemes and Trade: The Implications of the FDA Food Safety Modernization Act’.

In the case of horsemeat, the impact of any new legislation or any tightening up of controls in the European Union is likely to impact a relatively small number of developing countries. Trade in meat is already highly restricted because of concerns about human and animal health. But the next food safety scare might have broader ramifications.

Friday, 8 February 2013

Does the Giving Pledge translate for non-US philanthropists?

By Noshua Watson

South African billionaire Patrice Motsepe recently announced that he would commit to The Giving Pledge, a club of billionaires who pledge to philanthropically donate the majority of their wealth. Motsepe’s announcement is auspicious as it marks the arrival of the black African super-rich class into the club of ultra high net worth individuals and signals the potential for well-funded indigenous philanthropic initiatives in Africa.

Led by Bill and Melinda Gates and their friend Warren Buffett, the Giving Pledge aims to encourage the wealthiest American families to give away most of their fortunes and also share their methods and results. The Giving Pledge leaders have met with Chinese and Indian billionaires to begin to spread the effort and share information about international philanthropic efforts.  They have obviously made an impression in South Africa as well.

The Giving Pledge will certainly increase giving to foundations and other causes. Signing on to the pledge does not put any limitations on to whom and how the billionaires can give. One of the implications of the pledge is that it will decrease economic inequality by slowing the reproduction of generational wealth, whilst pre-empting confiscatory tax regimes and giving the wealthy some say in how they benefit society.

But there is reason for caution in exporting The Giving Pledge model to other countries. Giving to philanthropy or charitable causes in the US implies donating funds to a legally registered organisation (called a 501c3) whose tax records (called a Form 990) are publicly available. The ability to legally register, have government oversight and employ tax incentives for philanthropy are considerably limited in Africa, the Middle East, Eastern Europe and parts of Asia.

The Giving Pledge does not explicitly recommend where and how the funds should be given. One suspects that many philanthropists won’t be able to resist the lure of giving to their own foundations. Motsepe’s bequest will go to the Motsepe Foundation. Although it is important to establish major philanthropic institutions in Africa, the burden will be on such foundations to establish and lead best practices. Outside of the US and Europe, what does giving away half of one’s wealth even mean? Many owe their riches to state-financed enterprises or joint ventures and it is more common than not to own fractions of multiple companies in intricate cross-holdings. It may be more developmentally effective for the rich in developing countries to leave their money in their business interests.

The Giving Pledge is an impressive and unprecedented mobilisation of funds. But there are major barriers to scaling it outside of the US and I fear that Patrice Motsepe will be the exception, not the rule.

Friday, 1 February 2013

More on UNCTAD's alternative voice

By Carlos Fortin

In a previous Globalisation blog I reported on the attempt by some developed country governments in UNCTAD to exclude consideration of international financial issues from the mandate of the organisation.  This was justified on the grounds that those issues are best dealt with by the Bretton Woods institutions. The attempt was defeated, at least temporarily, through the determined stance taken by developing countries and international development NGOs. An open letter from a large group of former UNCTAD and UN staff, academics and development activists was instrumental to bringing the issue into public debate and galvanising support for UNCTAD's role as an alternative voice to those of the IMF and the World Bank.

The forthcoming selection of a new Secretary-General for UNCTAD, to replace Dr. Supachai Panitchpakdi whose term of office expires in September, has reopened the issue.

Again a group of interested individuals have written a letter to UN Secretary-General Ban Ki-moon offering views on criteria for the selection. The number of signatories is larger this time comprising of 143 individuals, including:
  • 49 academics
  • 25 national and international current or past development officials
  • 25 former UN high officials
  • 35 former high UNCTAD officials, including all former Secretaries-Generals and Deputy Secretaries-General.
The essential message of the letter is simple but powerful:
‘We very strongly urge that the next Secretary-General of UNCTAD, in addition to all the necessary experience, knowledge and management abilities, should have in particular the capacity and courage for independent thought…  A demonstrated ability to provide strong and independent leadership to global analysis from a development perspective and to promote fresh thinking on trade and development issues is needed today more than ever.’
The point was elaborated by former UNCTAD Director and prime mover of the initiative John Burley at a press conference in Geneva last month where he stated that:
‘The Western liberal post war paradigm of international economic cooperation is melting partly under the weight of successive economic, financial, environmental and social crises. No-one yet knows what will replace it.  As the historical standard-bearer for developing countries, UNCTAD is in a special position to contribute to the new thinking that is desperately required.’
The selection of the new UNCTAD Secretary-General is the responsibility of the Secretary-General of the United Nations, with prior consultation with member governments and subsequent ratification by the General Assembly. On this occasion, for the first time, there has been a vacancy announcement issued, calling for personal applications as well as government recommendations. A welcome element of transparency has thus been introduced.

The hope is that at the various stages of the process, the criterion of intellectual independence the letter calls for will be a guiding principle.