First it was climate change, then the food crisis, now it’s the financial crisis that’s being used as the pretext for the latest round of calls to conclude global trade talks. It appears many G20 countries are unable to make the connections between these crises and the free market policies that not only created them, but remain on the global trade negotiating table.
The recent G20 summit on the financial crisis, as well as the APEC meeting in Peru, published a strong declaration calling for the conclusion of World Trade Organisation (WTO) global trade talks, the “Doha Development Round”. The APEC declaration even went so far as to direct their ministers to meet in Geneva in December to work towards its conclusion.
For many of the leaders at these summits the conclusion of the Doha Round would send a positive signal to the world about continued economic growth. Kevin Rudd explained that a conclusion of the Doha Round would be a “huge shot in the arm for the global economy” and to business confidence as well.
The WTO Doha Round talks collapsed spectacularly in July when India and China disagreed with the US over the protections for farmers in developing countries. Whilst this issue stopped the talks, there are a range of other deal breakers that are yet to be touched upon. Sensitive issues like US cotton subsidies, cuts to tariffs on manufactured goods, protection of agricultural products deemed important to food security, and trade in services will all need to be thrashed out at any upcoming meeting.
These recent calls for a conclusion of the round, however, seem to miss the fundamental problems associated with the free market ideology that plagues the financial system and also governs international trade. Governments all around the world are now realising that regulation and government involvement is essential to ensure that disasters like the financial crisis, and food crisis don’t happen again. Yet the Doha Round calls for exactly the opposite - less regulation for goods and services, including financial services. At the talks there were 20 world leaders, and not one connected the dots.
On the Doha negotiating table is an expanded agreement of the General Agreement on Trade in Services (GATS): this sets the rules and commitments that governments make for the trade in services. The GATS has been a notorious agreement from its inception with global protests against the inclusion of essential services like water, education and health within its legally binding claws.
These concerns arise from restrictions that the GATS can place on government control over services. Under GATS, domestic regulation cannot be an “unnecessary barrier to trade” or “more burdensome than necessary” to ensure the quality of the service.
The definition of “necessary” is painfully ambiguous, creating uncertainty about just what can and can’t be done; leaving the final decision to trade lawyers who arbitrate challenges to such regulation in WTO tribunals. In GATS, governments are also committed to entering into future negotiations with the intention of making greater offers for liberalisation (i.e. less regulation), known as the “ratchet effect”.
When countries commit services to the GATS they are also able to exclude specific sectors from its conditions. Unless exceptions are made in the sectors of the services committed, governments are prohibited from a range of regulations on the access that foreign companies have to those service markets. These regulations may include: limits on the number of suppliers, value of transactions or assets, the total number of service operations, the total number of persons that may be employed, training required for employees, technology transfer, and policies that restrict or require joint ventures to provide a service.
Exceptions are essential for governments to salvage the policy space needed to regulate and ensure that investment and trade, and the conditions it happens under, benefit everyone.
Removing the space for governments to determine how businesses operate in a country can have a major impact when those services carry great significance for that country. India, because it has no commitments in the sector, has been able to ban trading in risky products, like agricultural derivatives, after speculation was driving the price of food to unaffordable levels. South Africa on the other hand would have difficulty doing the same as it has liberalised derivative trading with only a condition remaining on how service suppliers establish themselves. It’s unlikely that anyone would now argue with the need to regulate other types of risky derivatives, say for example, sub-prime mortgage credit derivatives.
Despite the GATS promotion of less regulation of services including those that are financial, it does contain exceptions for governments to act. The Annex on Financial Services contains a “carve-out” that precludes anything in the agreement from preventing governments establishing regulatory policies for “prudential reasons”. It follows this up, however, by saying that if such measures taken do not conform to the provisions of the agreement, they cannot be a means of countries avoiding their commitments. This means that even if prudential measures are taken, they could still be challenged in a WTO tribunal if they, in effect, undermine the regulatory constraints otherwise established in the agreement.