6:31 AM Sep 7, 1993

FRANCE KEEPS EVERYONE ON EDGE

Geneva 7 Sep (Chakravarthi Raghavan) -- GATT Director-General Peter Sutherland is travelling Tuesday to Paris for talks there Wednesday with French Prime Minister Edouard Balladur, in his drive to persuade France not to reopen the Blair House accord but conclude the Round.

Sutherland has been publicly warning that any attempt to reopen the Blair House accord would wreck chances of conclusion of the Round by the 15 December deadline set by the US administration's fast-track negotiating authority and that it may even endanger the European Community itself.

On Thursday, Sutherland is also due to visit Berne for talks with the Swiss government, which is also under pressure from its domestic farm lobby.

Last week he had visited Bonn on a similar mission, though admittedly his task there was easier than in Paris, given the fact that the German economic and foreign ministries support his views, and only the German agricultural ministry supports the French position, with Chancellor Kohl formally for conclusion of the Round but also talking of need to find some compromise to help France.

But on the eve of Sutherland's visit to Paris, a "senior" French official has been quoted (in the Financial Times) as saying Sunday that France would refuse to sign the Blair House accord unless agricultural discussions are reopened.

"Unless it is now reopened, there will be a crisis in September rather than December...If the Commission does not budge, we will invoke the Luxembourg compromise (exercise of veto by a member in defence of vital national interest)", the French official has been quoted as saying, adding "And if it (the Commission) does not budge, the Commission which is charged with the solidarity of the Community, will be responsible for its breaking up".

All this may just be part of EC brinkmanship and internal manoeuvres, but it has meant that the Uruguay Round negotiations are really at a standstill again in Geneva, atleast till the 20 September meeting of the EC 'Grand Conseil' and perhaps even thereafter for early or mid-October, until the situation becomes clear.

In the meanwhile, the EC Commission insists it is sticking to the Blair House accord and ready to negotiate, but in private EC negotiators use the French stance to make the point to its interlocutors in market access negotiations that the concessions it has made cannot be easily improved upon.

The German foreign minister, Klaus Kinkel was quoted in Bonn as telling a German radio that he hoped France would settle for reinterpretation rather than reopening of the Blair House accord and that "Perhaps we will come to a point through interpretations where a change in the Blair House accord will not be necessary".

Whether semantically there is to be a renegotiation or reinterpretation of the Blair House accord, it is not so simple or a matter between the US and EC. But if the US does want to accommodate (and reaches a modus vivendi with the EC compromising in other areas -- services? MTO?), it can all be done within context of the Uruguay Round multilateral process.

The Blair House accord, though a US-EC agreement, has to be incorporated into the agricultural part of the Draft Final Act, the text that Sutherland's predecessor, Arthur Dunkel had tabled in December 1991. This would be a multilateral process.

The EC Commission had presented in December 1992 in the informal Uruguay Round talks the changes in the DFA necessitated by Blair House accord. But that is still to be discussed and accepted.

In a paper presented to the EC Commission in Brussels (and to the German officials in Bonn), and reported in the European media on Tuesday, France is reported as having said that unless modifications were made to the Blair House, it would block a deal on farm trade. The only alternative to modifications, the French government paper reportedly has said, is a blanket rejection of any restraint on volume of subsidised food exports.

The EC Commission has always claimed that the CAP reforms would reduce the exportable surplus and thus cut need for subsidised exports. IN the EC view, the exportable surplus will be cut to 19 million tonnes after three years.

France, in its paper, however, contends that the surplus will be 15 million tonnes over this or 34 tonnes after six years, and that the Blair House will need a further overhaul of beef regime.

The French reportedly have also presented several alternatives: no volume limits on value added food products, food aid, or current EC food stockpiles; delaying export volume cuts until CAP reform is fully implemented and/or backloading the cuts to the end of the six-year agreement (by when the EC may be able to dispense with subsidised exports); a market sharing approach guaranteeing the EC a slice of growth in world cereals market proportional to its current share; greater guarantees against imports, especially of cheap US cereal substitutes or aggregation or export curbs applying to a whole sector, and not individual products.

None of these would be acceptable to the United States or to the Cairns group. And unless the US agrees and leans on the Cairns group, there will be a deadlock and prolongation of negotiations.

Though Sutherland has made it appear that he will close the negotiations, whether successful or a failure, on 15 December and the pro-GATT media that has been presenting it as such, in reality it will be for the Contracting Parties to decide. And there is some doubt whether even the US will just announce such a failure and leave the table.

In such a contingency of negotiations not being concluded, it will go on the backburner, to be revived if and when the trading partners are ready, but will not be formally ended as a failure, long-time observers of the GATT and international negotiating processes note.

The restraints on US cereal substitute exports to the EC (now brought forward again as a possible compromise option by France in the paper presented to Brussels and Bonn) was also flagged by France at the time of the US-EC accord on oilseeds (which was concluded at the time of the Blair House) and was not accepted by the then Socialist government. But the Balladur government when it came in accepted the oilseeds accord.

Unlike his predecessor Dunkel, Sutherland has so far taken a high-profile approach, trying to reach ministers and virtually bypassing the Geneva negotiators, and a public media campaign, to force the hands of governments to accelerate the negotiations and conclude them by the 15 December deadline.

He has been talking of the dire consequences of a failure, and the promises and benefits of a success.

But in doing this last, he has trotted out a two-year old OECD development centre study, hurriedly put together and published last year (on the eve of the Bush-Delors meeting, about a $200 billion income gain as a result of a successful conclusion of the Round) to argue that a successful conclusion of the Uruguay Round would result in a $200 billion global income gain, but that the gain would be more since the OECD study did not take into account the effects of liberalization of trade in services.

In November 1992, when the authors of the study, Ian Goldin and Dominique van der Mensbrugghe, were being cited in various media articles and statements by British Prime Minister John Major, Jean Claude-Paye, the OECD Secretary-General told French journalists at a luncheon that it was a pretty theoretical exercise, that journalists were quoting it out of context, and that the real message of the study was that many developing countries would lose and had to be compensated (through more aid).

The authors themselves, in an interview to Wall Street Journal in November 1992, made clear that their projections of benefits would come after ten years -- a time span that no government or politician can hold out to his electorate, nor for that matter any investor to his shareholder to secure support.

After Sutherland took over at the GATT, the $200 billion dollar benefit was officially cited by him, and the GATT also began talking of the benefits of the Round in creating jobs in the OECD countries who were facing a major and growing unemployment problem.

Sutherland and the GATT secretariat have repeated these claims in recent days.

Soon after the Sutherland/GATT campaign for a successful conclusion of the Uruguay Round and promoting the job creation potential of the Round, Samuel Brittan, a conservative economist and columnist of the Financial Times questioned this, pointing that trade could shift jobs from one sector to another but can't create jobs.

In response to Brittan's column in the Financial Times, GATT economist Richard Blackhurst said the income gain would be larger than the OECD's study of 200 billion since that study had not taken account of effects of liberalization of services.

The study though claims that its estimations take into account the 1991 Uruguay Round DFA text and that, in terms of goods trade and border measures, it has applied a 30% tariff reduction, and also talks of several assumptions in the simulations.

While not specifically mentioning the question of services and assumptions about liberalization on this (some service trades involve border measures, others not excepting in terms of allowing (through border or domestic measures) delivery of services via labour, communications or investments.

The study claimed that the model used by it to make assessments was an applied general equilibrium model that was superior to all other models and in its commodity composition, listed in its annex, listed under 'non-agriculture': other manufacturing, energy, services, equipment and fertilizers.

Nowhere in the study, and the details of the annex claiming superiority for its RUNS model over other trade models, nor in the presentations and interventions of one of its authors early this year at the Trade and Development Board of UNCTAD, has it been clearly stated that services are excluded, leaving the suggestio false impression that they have been.

On the question of effects of a successful conclusion of the Round on the present recession/slow growth in the world economy and industrialized countries, the authors of the OECD study stayed away from such assertions.

When the one of the authors, Mensbrugghe appeared at the UNCTAD Trade and Development Board in March this year to propound the benefits of trade liberalization under their study, Mensbrugghe made clear that the model used was not an economic model and hence could not answer questions as to what effect the conclusion of the Round would have on current world recession, but would only say that the liberalization would bring about structural changes which were more important.

As for the employment effects of trade liberalization, the evidence is even more equivocal.

While trade theories generally speak of net welfare gain as a result of trade liberalisation and its being reflected in increased economic activity and thus creating employment, there has not been any direct correlation established in recent periods.

Whatever the merits of this Adam Smith/Ricardian views of the invisible hand of the 'market' and the benefits of free trade on comparative advantage, there are no perfect markets (within countries or globally) or free trade and neoclassical economists have fallen back on the benefits of competition even in terms of oligopolistic competition.

But there are increasing challenges to these simply because the theory based on immobility of factors of production (capital, land and labour) no longer prevail and recent data suggest a dissonance between growth of trade, gdp and employment.

President Bill Clinton, in the context of his efforts to push ahead with NAFTA and the Uruguay Round, talked for a while of trade liberalization creating jobs, but since then has not repeated it, presumably on the advice of his economic advisors pointing to the patchy evidence and even negative correlation in the United States during some periods when trade increased and so did unemployment.

The post-war evidence, and more so since the mid-1970s in patchy at best on the links between trade liberalisation, GDP growth and employment.

There is some evidence that employment has grown more in the US and Japan than in the EC, with the neo-classical economists blaming EC's 'labour market rigidities'. However, while the US has managed to create more jobs, these have been mostly in the low-paid service categories.

The UNDP in its 1993 Human Development Report, has pointed out that employment has consistently lagged behind GDP growth in the OECD countries, and has stayed above six percent throughout the 1980s, reaching a high of 6.9 percent in 1991 or 30 million jobless.

OECD projections, which suggest recovery next year, nevertheless point to unemployment rising.

The UNDP report brought out that in the past, employment did not growth as fast as GDP (and GATT has been making the point for several years that trade growth is faster than GDP growth). In France and Germany, (taking 1960=100 as the base), while over the period 1960-1991, GDP index rose from 100 to 268 and 222 respectively, employment index in France went up to 105 in 1973 and then fell to 91 in 1987. In Germany the index fell to 96 in 1973 and 85 in 1987.

The UNDP projects for the OECD as a whole, with 1990 as the base, for the labour force index to grow to 105 in 2000 and employment in 104.

Neo-classical economists have the standard response that the failure to create jobs is due to labour market rigidities, and if social protection and job security is reduced, there will be more employment with employers more easily willing to hire.

But these propositions generally come from those who have assured professorial tenures in universities or in the civil service in national international institutions.

The UNDP report though called for new strategies of growth and employment.

Neither current trade theories nor GATT economists make categorical statements that a successful conclusion of the Round would result in growth or produce jobs.

All that GATT economists are willing to say is that a successful conclusion of the Round would provide a stimulus to economic recovery.

But even this proposition is not without contradictory evidence. The Tokyo Round, hailed at that time as the most comprehensive trade liberalization measure, came at a time of world economic recession, but did not produce any growth.

As a more general proposition, trade theorists advance the view trade liberalization does not produce any new jobs, but changes the composition of jobs, and in normal times of growth, by adding to income gains and consumer spending and investor confidence leads growth and employment stimulus.

Also, the view is also advanced, when faced with the failure to create more jobs in Europe when trade grew, particularly in an export-oriented economy like Germany, is that if there had been no liberalization, things would have been worse.

As a cause and effect proposition, this is a non-sequiturs, and calls for "beliefs" -- alright in terms of religion, but difficult for politicians and governments to accept and act upon in real life.

Perhaps all that can be said is that if the Round fails, it may have some psychological effects on business generally, particularly those who have counted on its success. But businesses and markets, based on the available public information, have already discounted the effects of failures, it would be difficult to suggest that there would be a biblical 'fire and brimstone' effect.