Chapter

IV Post-Uruguay Round Agenda

Author(s):
Arvind Subramanian, Richard Harmsen, Peter Uimonen, Naheed Kirmani, and Michael Leidy
Published Date:
February 1995
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The Final Act of the Uruguay Round provides for completing negotiations in key service sectors within specified time frames, including financial services, telecommunications, transportation, and movement of natural persons, and for instituting rules on other aspects of services. Apart from this, the post-Uruguay Round “agenda” is not strictly defined but comprises a loose list of old and new issues that have a bearing on the conduct of trade and trade-related policies. At the Marrakesh meeting concluding the Round in April 1994, many issues were mentioned for future discussion.37 Clearly, efforts will also be needed to pursue further market liberalization in specific areas where distortions remain high despite progress under the Round (e.g., agriculture, steel, and civil aircraft).

This section discusses two categories of “new” issues that were not explicitly addressed by the Round but that appear to be taking a prominent place in the post—Uruguay Round agenda. The first category covers the manner of achieving certain important non-economic goals—better environment and labor standards—and their interface with trade policies. The second relates to the trade effects of domestic policies, such as competition and investment policy, which are becoming important determinants of the conditions of competition between domestic and foreign suppliers. Both of these categories will feature prominently in the OECD’s future work program.

Trade and the Environment

As concern about the global environment has grown, the interface between trade and environment policies has received increased attention. Trade conflicts arising from environmental considerations have increased,38 while international trade agreements (e.g., NAFTA, WTO. and the Uruguay Round) are increasingly incorporating environmental concerns.39 Trade ministries agreed at Marrakesh to establish a new Committee on Trade and the Environment under the WTO (this will encompass the work of the GATT Group on Environmental Measures and International Trade). The Committee will have a mandate to examine a wide range of issues and will report on its deliberations to the first biennial meeting of the WTO.

One dimension of the trade-environment nexus relates to the environmental effects of trade policies. The environmental impact of trade liberalization is difficult to predict ex ante because of the variety of its effects on the scale of activity, the composition of output, and techniques of production. A number of studies suggest a positive correlation between liberal trade and a better environment.40 However, when environmental resources are inappropriately priced, trade liberalization can lead to environmental degradation.41 But that should not generally be a reason for eschewing trade liberalization or maintaining restrictions, since they are seldom the most effective instruments for addressing environmental problems. This is because such problems emanate from distortions in production or consumption, or both, rather than from trade. Under these circumstances, maximizing economic and environmental benefits would suggest that implementation of trade liberalization be accompanied by domestic (production or consumption) policies aimed at correcting the environmental externality at its source.42

A second dimension concerns differential environmental standards across countries, their implications for competitiveness, and how to design appropriate international responses to them. Some have argued that low environmental standards (particularly in developing countries) confer an “unfair” advantage in international trade and in investment (“eco-dumping”). A related argument is that the competitive advantage conferred by lower standards abroad puts pressure on all countries to lower their standards.43 It has therefore been argued that either standards should be harmonized upward or trade restrictive actions should be allowed against countries with lower standards.

While not contesting the desirability of improving environmental standards, developing countries have questioned whether they have the financial means to do so in all cases. They have argued that differences in environmental standards between countries, particularly where they pertain to environmental problems confined to national borders, reflect assessments about the costs and benefits of environmental preservation that can vary according to a country’s level of development. According to this view, trade restrictions should not be permitted to offset differences in standards because they will deprive countries (with lower standards) of the benefits of freer trade, create the risk of protectionist abuse, and prevent the search for other more appropriate solutions.44 The commonly shared concern to raise environmental standards could be achieved through raising incomes (e.g., through more trade), and by providing financial assistance where there are costs involved in doing so.

In cases involving transborder environmental spillovers, there are a number of multi laterally negotiated agreements that provide financial and technical assistance to countries to adopt first-best domestic policies to deal with these problems. Some of these agreements incorporate trade restrictions as ultimate enforcement mechanisms; the assistance provided would make countries willing signatories to such agreements, rendering unlikely the need for restrictive measures. The GATT/WTO’s future work on the environment is expected to address the issue of the appropriate safeguards under which trade-restrictive measures may be used as enforcement mechanisms in such multilaterally negotiated agreements.

In its own work, the Fund would need to remain sensitive to environmental concerns; its policy advice and program design would need to ensure that environmental problems are not aggravated but rather made easier to solve.

Trade and Labor Standards

Protection of labor standards on human rights and social welfare grounds is a long-standing, internationally accepted objective and an essential element of the conventions of the International Labour Organization (ILO).45

International trade unions and other public organizations have long called for outlawing certain labor practices and for conditioning freedom for international transactions, including trade, on minimum labor standards and employment conditions. Strengthening enforcement mechanisms for ILO conventions is the most appropriate international response to securing adequate labor standards. The GATT permits restrictions on products made with prison labor, but otherwise does not sanction the use of trade actions as a means for improving labor conditions. 46 While recognizing that labor standards are not a central element in the Fund’s work, the Fund needs to be sensitive to labor concerns and help countries implement economic reforms in a manner that is conducive to improved social conditions, including labor standards.

There is also the perception that low labor standards enable countries to keep tabor costs low, thereby conferring “unfair” competitive advantage on them in trade and in attracting investment (“social dumping”). However, low labor standards per se need not confer comparative advantage, especially if they reflect low productivity; wages and labor standards can be expected to rise over time as labor productivity and incomes grow with development. Differences in labor standards between countries reflect many factors, and attempts to offset such differences through trade restrictions are likely to reduce global trade and welfare and worsen labor conditions in labor-abundant countries.

As regards the argument that unrestricted trade with developing countries that have low wages and labor standards contributes to rising unemployment in industrial countries, preliminary work done in the OECD shows that while there can be sectoral effects, there is no firm evidence that these factors result in higher aggregate unemployment.47 Long-term trends in unemployment in industrial countries are related to deep-seated structural rigidities, particularly labor market inflexibility and the extent to which skills required in a declining industry can be adapted to the needs of expanding industries.48

Trade-Related Competition and Investment Policies

As conventional trade barriers (tariffs, QRs) are lowered, attention is shifting to domestic policy instruments (subsidies, regulations) as a source of trade friction between countries. Competition policy aimed at addressing “private barriers”—arising from certain practices of, or arrangements between, firms—is one such instrument. An example is complaints by Japan’s trading partners that exclusionary business practices emanating from weak standards or inadequate enforcement of Japanese competition laws contribute to problems of market access for foreign suppliers.

The agenda for future work on the international dimensions of competition policies is not yet clearly defined. The first task is to identify the issues and concerns of countries, with a view to determining the approach, contents, and forum for future international cooperation on competition policies. The OECD is at the forefront of such analysis. One issue is to explore whether and how antidumping laws might be incorporated into a competition policy framework, rendering them less subject to misuse. A second issue is to identify competition policy standards that give rise to trade conflicts. An example would be the use of competition laws to provide advantage to domestic firms in home and world markets (e.g., by granting exemptions for domestic firms involved in import and export cartels, and research and development joint ventures) at the expense of foreign firms or consumers, A third issue is to explore ways of improving enforcement of competition laws internationally, including through use of multilateral dispute settlement procedures. Future work would also need to take into account the concerns of developing countries, many of which do not have competition laws per se but are beginning to institute them.

The rapid growth of foreign direct investment (FDI) in recent years has brought attention to the importance of investment policies in trade relations between countries. Openness and nondiscriminatory treatment of foreign direct investment will be critical in maximizing the global gains from international specialization. The Uruguay Round agreements on services and on trade-related investment measures (TRIMs) address some investment issues, but the latter provide for a more wide-ranging review of investment and competition policies within five years of the WTO’s entry into force. The OECD has nonbinding rules on investment under its National Treatment Instrument and the Liberalization Codes for capital flows and invisibles. The World Bank has nonbinding guidelines on policies that might be followed by countries regulating foreign direct investment.

Future multilateral discussions on investment will need to address two types of policies: first, those that restrict FDI through rules on rights of establishment, discriminatory treatment of foreign investors, and onerous standards of performance; and second, policies that serve to attract investors away from other locations (e.g., through subsidies and other incentives), resulting in inefficient use of world resources. The forum in which future rules are negotiated would depend on the need for enforceable rules on investment, as well as the number of countries willing to undertake greater obligations on such rules.

These include internationally recognized labor standards, immigration policies, competition policy including rules on export financing and restrictive business practices, investment, regionalism, interaction between trade and Financial and monetary matters including debt and commodity markets, company law, mechanism for compensating preference erosion, links between trade, development, political stability and the alleviation of poverty, and unilateral or extraterritorial trade measures.

A well-known dispute in this regard was the one in which a GATT panel ruled that trade restrictions applied by the United Slates against tuna imports from Mexico contravened GATT rules; the restrictions were defended on the ground that Mexican tuna fishing practices resulted in the killing of more dolphins than prescribed under U.S. law.

The preamble to the WTO states “… while allowing for the optimal use of the world’s resources in accordance with the objective of sustainable development, seeking both to protect and preserve the environment and to enhance the means for doing so in a manner consistent with their respective needs and concerns at different levels of economic development” (GATT(1994), p. 9).

See GATT (1992). If first-best domestic policies are not available, efficiency gains from trade liberalization would have to be weighted against its possible adverse environmental consequences.

See Bhagwali(1994).

The avoidance of protectionist trade measures and adherence to multilateral disciplines in relation to environmental Objectives are recognized in United Nations Conference on Environment and Development’s (UNC ED’s) Agenda 21 and principle 12 of the Rio Declaration. See United Nations (1993),

A large number of ILO members have already adopted certain “core” standards, including freedom of association, protection of the right to organize and to collective bargaining, establishment of a minimum age of employment, protection against discrimination, equal remuneration, and prohibition of forced labor.

Proposals for the inclusion of a social clause in international trade agreements may be traced back to the 1947 Havana Charter for the International Trade Organization (ITO), which included a draft provision on “fair” labor standards (Charnovitz (1992) and Hansson (1983)). However, the definition of “fair labor standards” was not spelled out, nor were trade sanctions contemplated. More recently, considerations of fair labor standards prompted the introduction of a supplemental agreement on labor standards to NAFTA. In the context of the Uruguay Round, no agreement was reached on the inclusion of labor standards in the future work program of the WTO on account of opposition from many developing countries. This topic is included in a list for possible future discussion in the WTO.

See, for example, Oliveira Martins (1993).

For a discussion of these structural problems in the labor markets, see, for example. Commission of the European Communities (1993).

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