6:38 AM Sep 13, 1994
HARMONIZATION NEEDS GRADUAL, FLEXIBLE APPROACHGeneva 12 2 Sep (Chakravarthi Raghavan) -- If the creation of a "level playing field" in international trade rules is carried to the extreme of establishing uniformity of standards, international harmonization will be trade-impeding, with the implication that dissimilar economies ought not to engage in trade with each other, warns a Latin American trade policy economist in the 30th anniversary issue of the UNCTAD Review. Writing on the policy harmonization debate and what developing countries could gain from multilateral negotiations, Diana Tussie of the Facultad Latinoamericana de Ciencias Sociales (FLACSO), Buenas Aires, notes that while sustainable outward-oriented growth by increasing numbers of developing countries requires internal commitment and enabling external environment, this has come under increasing pressure. GATT principles have been put in question and it has ceased to be the principal vehicle for US trade policy, while new issues have been put on the GATT agenda -- with important implications for developing countries and with global bargaining arrangements posing new challenges for management of open economies. The Uruguay Round she notes has been a milestone international trade policy, with the World Trade Organization (WTO) becoming a legitimate forum for regulating interplay between domestic policies and international interests. Global harmonization of domestic practices has become an internationally negotiable proposition and this could eventually lead to an international system whereby a set of norms, rules and economic policies have to be accepted by every party as an entry fee for market access. Past trade liberalization and bargaining had been on exchanging concessions over products on an item-by-item basis. Rule-making in contrast (a major focus in the Uruguay Round) in contrast entailed reaching agreement on a framework of principles, norms, rules and decision-making procedures for transactions spread over time. Once a government agrees to negotiate its national regulatory regimes, its autonomous economic management is gradually undermined, the country's economic policies are exposed and become intertwined with those of its negotiating partners until pressure to reduce differences grow. The Uruguay Round was thus confronted with uncharted territory and two solutions emerged to address disruptive effects of domestic regulatory differences: harmonization and mutual recognition. Harmonization requires alignment of policy preferences to a specified benchmark and negotiations between countries with unequal bargaining strengths will be skewed in favour of policy preferences of the more powerful, as happened in the case of Nafta, Diana Tussie says. The principle of mutual recognition of national rules and standards, on the other hands, accepts national diversities and allows a high degree of institutional competition which eventually could lead to convergence on the most efficient institutional arrangements. Because of the disruptive factor movements that competition can cause, it is an easier option to pursue among countries with small divergences in standards and policy preferences -- the route that the European Union bas followed after a failed attempt to impose harmonization and centralized regulations. But both mutual recognition and harmonization are an endorsement that convergence will eventually take place and a central point in negotiations is how much convergence to pursue. Positive or structural approaches for convergence call for harmonization of rules on conditions of production while negative harmonization aims to ensure government honouring agreed upon commitments for market access. But there are some logical and procedural limits to pursuit of positive or structural harmonization. The contention that structural harmonization must be exacted as a condition for freer trade has a logical flaw. If "level playing field" is carried to the extreme, international harmonization will be trade impeding, with the implication that dissimilar economies ought not to engage in trade with each other. In sum, a great deal of research, assessment and negotiation is needed before an international consensus can be built on issues like these. They raise thorny issues since the "distortions" touched upon may be deliberate government policy choices designed to tackle priorities other than trade -- and generally inspired by social welfare considerations, or engrained in local values and culture. The road ahead on policy harmonization is thus fraught with a morass of political, legal and economic difficulties. The GATT system was not predicated on making countries identical, but built on the proposition that differences were many and various and the system was designed to allow countries to trade despite and because of such differences. But gradually GATT has been pushed to extend its domain and seek positive integration goals. A good deal of the Uruguay Round Final Act is devoted to clarifying and extending GATT's aegis over non-tariff barriers stemming from domestic institutional divergences. The current road to deal with variations in policy preferences and domestic differences has not included a wide acceptance of mutual recognition that could entail substantially greater competition. In some areas, there has been an attempt at harmonization within very broad bands of national discretion as in the GATS. In other areas, much tighter harmonization has been pursued, though with different implications for competition. In area of technical standards, tighter harmonization can be trade-encouraging, with potential abuse of standards as trade barriers being reduced by gradual harmonization. Wide variations in standards would mean exporters have to adapt to different requirements in different markets. Increased transparency of standards may even have beneficial effects on technology transfer. But the TRIPs agreement is a milestone in upward harmonization, providing extra-territorial protection of intellectual property rights and for gradual integration of this agreement into broader framework of international economic law. Global harmonization of IPRs, Diana Tussie stresses, is based on debatable economic logic. The adverse consequences for developing countries include higher royalty payments to foreign innovators, corresponding loss of investment opportunities in domestic R & D, higher prices for products under monopoly rights, and greater dependence on imports in general. "It is thus a testimony to pressures towards positive harmonization when conditions of competition depart in excess from an established benchmark... Harmonization under this option is likely to result in fewer, rather than more, open markets for developing countries... When harmonization provides for upward alignment to industrial country standards, it inhibits market entry by developing countries. Contestability of markets is reduced and transaction costs in developing countries are increased." The predicament of developing countries in the post-Uruguay Round system is now in direct relation to the problems inherent in developing rules of international cooperation on non-trade issues and practices. The search for new rules must allow developing countries to reap the benefits of specialization. In a globalizing world with intensified economic links, the proper functioning of international markets is decisive. This is most true of small open economies that are particularly exposed to trends in international markets and the uncompetitive behaviour of private agents. Confidence-creating measures, Diana Tussie argues, will be required to reduce mistrust and reservations if negotiations on non-trade issues in trade fora are to be taken on board, "The WTO will have to do its utmost in the realm of dispute resolution to allow negotiated compromises to regulate the interplay between domestic policies and international interests and thus curb resort to unilateral measures. Such actions should be forcefully resisted, not only to defend the existence of the multilateral process that the developing countries demanded in the first place, but also for the integrity of the expanded WTO". The process of policy harmonization within the WTO must be tailored to accommodate the capacity, needs and different paces of developing countries. To enable such accommodation, more time and effort will have to be dedicated to study the appropriateness of rules and procedures in an unfolding agenda -- an agenda which will mould the WTO. Rules and institutional procedures may not by themselves solve asymmetries. But the absence of inappropriateness of legal forms and procedures becomes a part of the problem and can make asymmetries insoluble, Tussie adds. A gradual and flexible approach seems advisable for development than upward harmonization regardless of economic rationale. Different levels of overall development, as well as development of domestic judicial and administration systems need to be accommodated. The approach with "bands of harmonization", she suggests, should be given more thought. These are more advisable for the debate on labour and environmental standards, the brand new areas increasingly under discussion and also areas which hinge on conditions of competition. Totally free access to markets of industrial countries for manufactured exports of the Third World is an "unviable short-term proposition", but the debate over harmonization should not be used -- as was the case with the concept of 'market disruption' under the MFA -- to justify discrimination against developing countries. "Market disruption" was considered to stem from dislocation in trade between low-wage and high-wage countries, but there was no accusation that the low-wage country was doing anything improper. "The recent discussions on intellectual property, labour and environmental standards are in a way more awkward because they have taken a highly moralistic tone. (This) is regrettable because, in contrast to the MFA which was initially conceived as a temporary expedient, accusations of social or environmental dumping posit trade measures as 'the' solution. "This does not mean that western campaigners are wrong in trying to upgrade environmental protection or abolish slavery, child exploitation or bans on trade unions. But to the extent the focus of the solution shifts away from these objectives per se, and concentrates on international harmonization to make countries comply via trade measures, the underlying problems facing poverty or the environment will remain unresolved." The binary division in GATT, with all developing countries de jure and de facto free from any obligations, is indeed obsolete and should not be resuscitated. "But a powerful case should still be made for 'differentiation', and criteria for graduation should be adhered to. Per capita GNP, the contribution of manufacturing to GNP and to exports are good starting points. Careful thought must be given to establishing 'bands of harmonization' around these criteria, so that the poorest countries can be allowed longer transition periods, even temporary derogations on specific issues bearing directly on competition."