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Earlier this year, I was asked to write an article that would anticipate Jamaica’s place in the global economy in 2030. What would the trade rules look like then, and what would Jamaica be trading? It was supposed to be a very futuristic approach.

As I wrote, however, I realized that the best thing that a developing country could do, in my opinion, to become global players in the world economy, was to put in place the prerequisites that would allow any talented and entrepreneurial individual anywhere in the country to become an active participant in the knowledge-based global economy that will surely predominate in 2030.

So, I imagined a scenario in which “Benjy” from a rural town grew into the head of a multinational corporation headquartered in Jamaica. This scenario could apply equally to “Asa” in Nigeria or “Jose” in Columbia.

“Benjy” graduates from of a high school where his innate talent for telecommunications technology was nurtured. He goes on to design a revolutionary new application for mobile phones. As just about everyone in Jamaica has at least one cell phone, this application holds the promise of revolutionizing the way in which everyone, in particular small farmers and entrepreneurs, do business.

Benjy has access to the information and resources that he needs to design and develop a prototype and to seek patent protection for it:
• He establishes and registers his own company using streamlined procedures that allow him to do this in one day for a very low fee;
• He obtains a low-interest loan that he is able to use to develop and test a prototype, as well as to ensure his design is protected in Jamaica, Canada, the United States, and the United Kingdom;
• He is accepted into a small business incubator program, operated out of the University of Technology, which provides work space, and support services including financial assistance and management training at a discounted rate.
• He is introduced to an angel investor who, in return for a share in the company, funds the development of the application through to the market.

The application is a huge success!

Benjy begins to market the application to the rest of the Caribbean, as well as to provide technical support services to existing customers. He also develops other applications. Not one to rest on his laurels, Benjy decides to explore the possibilities generated by the existing patent protection in other countries as well as the existing trade agreements which give Jamaican entrepreneurs preferential access to these markets. Benjy puts together the following business plan.

He establishes a sister company in the United States, headquartered in Kingston, Jamaica. Relying on the presence of a large Caribbean diaspora in the United States, Benjy expands into the US market. Then, as a company with a U.S. address, he receives assistance from the U.S. Department of Commerce to begin marketing his products and services in markets in Costa Rica, Panama, and Honduras, countries with significant Caribbean populations where he is able to gain a foothold in the market. Furthermore, his US-based company is able to take advantage of the US-Central American Free Trade Agreement (CAFTA) to gain access to the restricted telecommunications markets in these countries.

By 2030, Benjy’s company has profitable operations throughout the Caribbean, in Central America, and in major US cities. The favourable business environment in Jamaica makes it convenient for him to keep his headquarters in the land of his birth, from where he continues to base the technical support services to all the countries in which the company operates. He is even able to hire Spanish-speaking graduates to service the Central American consumers. The operations generate jobs for several hundred Jamaicans and other nationals. Paying it forward, Benjy donates a state-of-the-art computer technology training center to his old high school.

The most unlikely aspect of the above story is the reality that, for the most part the services and facilities to which “Benjy” gains access do not currently exist. Yet, these are the services and facilities most likely to make the above scenario a realistic outcome for a talented but otherwise resource-poor Jamaican, Nigerian, Colombian, or person anywhere in the developing world.

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Trade and development

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Wal-Mart is accused of having paid out over US $24 million in bribes to Mexican officials in order to acquire the over 2,000 stores located in Mexico. If true, Wal-Mart has violated the U.S. anti-bribery law, the Foreign Corrupt Practices Act (FCPA), which makes it illegal for U.S. persons to offer business bribes. A bribe is any offer to pay, promise to pay, or actual payment of money or anything of value to a foreign official to secure or retain a business opportunity.

The United State is one of thirty-nine countries which has signed the OECD Anti-Bribery Convention and adopted the Anti-Bribery Recommendations. The 39 signatory countries include Mexico, which reportedly has had a much more muted response than has the United States to these allegations of corruption within its borders. So, monitoring and enforcement of these anti-bribery laws differs across countries, with the United States and the United Kingdom being among the most aggressive.

For individuals and companies found guilty of violating the U.S. anti-bribery law, the penalties can include huge fines and imprisonment. The allegations alone can cause serious harm to one’s reputation, even for a giant such as Wal-Mart. An Internet search for Wal-Mart now finds the company’s name linked to this bribery scandal, and vice versa, for the foreseeable future. Wal-Mart Stores, Inc. lost $10 billion of its market value the day after the story appeared in print, and is being sued by its investors. The company faces hundreds of millions of dollars in fines and possible jail time for its top executives.

Bribery carries even bigger consequences for countries and their inhabitants. Transparency International (TI) is a global NGO devoted to exposing and addressing the costs of corruption. TI reported in its Global Corruption Report 2009 that almost two out of five business executives polled have been asked to pay a bribe when dealing with public institutions. Corruption also is reflected in nepotism or reliance on personal and family relationships to determine or influence the award of contracts.

Bribes raise the cost to citizens of the public projects that create roads, bridges, schools, hospitals, and other needed infrastructure. Nepotism raises the likelihood that contracts could be awarded to unscrupulous characters, leading to such problems as the collapse of poorly constructed infrastructure or the sale of unsafe medicines. The more corrupt countries also tend to be less fiscally viable. See the cost of a bribe in Greece, a country whose debt ratio of 120% of Gross Domestic Product (GDP) triggered the crisis in the euro zone.

TI has created a Corruption Perceptions Index which measures public perception of the extent of corruption — bribery of public officials, kickbacks in public procurement, embezzlement of public funds, and the effectiveness of public sector anti-corruption efforts — within a given country. Perceptions are used because corruption is a hidden activity which can be difficult to measure while perceptions have proved to be a reliable estimate of corruption. The Index shows that the problem of corruption is endemic in many countries. Only 49 out of the 183 countries ranked scored between five and ten points, (10 being “very clean” and 0 being “very corrupt”) on the Index.

Large corporations, such as Wal-Mart, have an important role to play in either undermining or supporting corruption where it exists. The payment of US$24 million in bribes is the equivalent of pocket change to a multinational conglomerate such as Wal-Mart. However, such payments support the culture of corruption within that country. Companies that either cannot or refuse to pay such bribes lose out on the business opportunities. And the culture of corruption extends to average citizens who can even less afford such payments. It is estimated that one-fifth of the income of poor Mexican families is spent on paying petty bribes.

The anti-bribery laws in the United States and other countries recognize these connections between business and the continued culture of corruption, and this is why Wal-Mart is in such big trouble.

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Trade negotiators and policymakers of the developed world seem to have very short memories. They have apparently already forgotten the lessons of the failed 1999 WTO Seattle Ministerial when anti-globalization demonstrations played their part in delaying the start of the WTO Doha negotiating Round. This distrust has continued to provide the backdrop to the WTO round, which was launched under heavy security in Qatar, Doha.

The 2003 Cancun Ministerial held two years later also failed spectacularly as developing countries refused to expand the talks into new areas which they felt ill-equipped to handle. In response to the continued protests of developing countries and of citizens around the world, the negotiating agenda for the Doha Round has been so watered-down that the corporate interests and developed countries no longer see any benefits to be gained from concluding the Round.

Instead, they have turned their efforts and interest to negotiating bilateral free trade agreements, apparently, however, ignoring the lessons of the past.

Trans-Pacific Partnership (TPP) Talks

The Trans-Pacific Partnership (TPP) trade deal is being negotiated between the United States, Australia, New Zealand, Singapore, Malaysia, Vietnam, Brunei, Chile and Peru. The Obama Administration has made the TPP the center of its external trade policy. Civil society organizations, on the other hand, are viewing the TPP as a “secret deal” to serve corporate interests. (Trans-Pacific Trade Pact Reveals U.S.’s Unbridled Corporate Agenda) Reports are that leaked copies of the text indicate an aggressive campaign by the United States to restrict access to affordable generic medicines, in the name of protecting intellectual property rights of the pharmaceutical companies. Reportedly, the provisions would bypass the WTO measures that ease access by poor countries to affordable generic medicines. This provision has generated concern from such eminent NGOs as Doctors Without Borders (MSF) which relies on access to generics to carry out its mission of providing impartial and independent medical assistance to poor countries.

Other TPP provisions generating concern include proposed investor-to-state dispute settlement mechanisms that would allow corporations to sue domestic governments if they disagreed with public policy. This could be another way to undermine a country’s policies aimed at protecting access to affordable medicines, or to protect the environment, for example.

EU-India Trade Talks

The European Union-India trade talks are generating similar concerns. Reportedly, a leaked copy of the text indicates that the EU is seeking provisions that will ultimately reduce India’s capacity to continue to produce and export generic medicines. Enforcement provisions would include detention and destruction of medicines at the border, increased sanctions against alleged patent and trademark violations, extended liability against distributors of generic medicines including such non-profits as MSF and even regulatory authorities. Stronger investor-to-state dispute settlement mechanisms would also allow corporations to bring suit against the Indian government.

Protests against these provisions have been held in India, Malaysia, and Thailand. The MSF also protested in front of the offices of the European Commission and has launched a campaign to have the provisions removed

Yes, trade deals bring winners and the inevitable losers. But the losers are supposed to be uncompetitive businesses and industries. It is not acceptable that ordinary citizens be counted among the losers. Agreements that reduce access to life-giving medicines create losers of poor countries and their citizens. Trade negotiators and policymakers who pursue such agendas are inviting more Seattle’s and Cancun’s, or alternatively agreements that can be signed only in relative secrecy and under high security. None of this fits the rhetoric of trade deals as a means of promoting growth and development.

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Here’s just one example of why it matters that the people and institutions setting economic and trade policy actually know what they’re talking about. Americans have been experiencing sticker shock at the gas pump. Knowing how much cheaper gas is in the United States than in so many other countries I’m usually quite sanguine about gas prices here (it helps that I don’t have a daily commute, I admit) but even I’ve been shaken by the fact that it takes $40.00 to fill up my little car. Well, one of the Republican candidates has promised to get gas back to $2.50 per gallon if he is elected. This statement ignores the reality that the price of gasoline is affected by a world market, not just by what happens in the United States. And it appears that one of the factors causing this price increase has been the rising demand for gas in the emerging economies. As consumers there get more disposable incomes they buy cars, among other things. Their growing demand is one of the key factors pushing up the prices for everyone, notes the Christian Science Monitor. Meanwhile, US refineries are losing money and closing, relocating to the markets of the immediate future. India is home to the largest oil-refining complex in the world, with a refining capacity equal to what exists in the Northeast US. Increasingly, however, its products are being reserved for domestic consumption.

So, false and illusory promises aside, what are the Republican candidates saying about what would be their trade policy, if elected President?

Rick Santorum’s agenda focuses on negotiating free trade agreements so that US companies can export more. Point 8 of his 10-point First 100 Days Economic Freedom Agenda says within his first year in office, he would negotiate and submit to Congress at least five trade agreements that increase US exports. Putting aside his questionable timetable, his best bet would be to focus on negotiating with the emerging markets, and be prepared to make significant reductions to US subsidies of domestic agriculture, an issue which has stalled the WTO’s Doha Round, Free Trade Agreement of the Americas (FTAA), and other trade negotiations. Alternatively, he could instead focus on concluding negotiation of the Trans-Pacific Partnership (TPP) with nine countries begun by the person he hopes to succeed.

Newt Gingrich’s Contract with America includes a plan for job creation, which focuses on tax cuts and regulatory reform, but contains no details on what his trade policy would be.

Mitt Romney’s platform more clearly articulates a direction for his trade policy, very briefly on his website, and more explicitly in his American Century White Paper. In this paper he articulates a plan to rebuild the foundations of US economy by, among other things, increasing trade, energy production, human capital, and labor flexibility.

With respect to trade, the paper’s highlights include:

The launch within his first 100 days in office of a public diplomacy and trade promotion effort in the Americas – the Campaign for Economic Opportunity in Latin America (CEOLA) to “extol the virtues of democracy and free trade” and build on the benefits conferred by the free trade agreements already in force between the United States and countries in the region (with Chile, Colombia, Panama, Peru, CAFTA, etc.) Apart from planning to use it as a campaign to isolate Cuba and Venezuela, CEOLA will also seek to involve US and Latin American private sectors to expand trade through the region with initiatives that help US companies do business in LA and vice versa. CEOLA will be a Latin American precursor to a second key highlight of Romney’s plan –

Creation of a Reagan Economic Zone which will involve pursuing deeper economic cooperation among like-minded countries (code for excluding Cuba, Russia) around the world that are committed to principles of open markets. The benefits of the zone, which will codify the principles of free trade, will be a “powerful magnet that draws in an expanding circle of nations seeking greater access to other markets”. China, the plan continues, will be offered the opportunity to join as an incentive to end its “abusive commercial practices”. However, should it choose not to join, the trade with its regional neighbors will isolate China; similarly, trade pacts with Russia’s neighbors will presumably have a similar effect on that other giant.

There is so much to criticize in these quite vague and grandiose plans — not least of which is the value of any plan which aims to isolate two of the world’s largest economies — but this post will limit itself to one comment. Romney’s plan ignores the existence, and the lessons to be learnt, from the World Trade Organisation (WTO), which already has the mission of liberalizing access to markets around the world among its 153 members, including China, and soon to be Russia. The WTO is the club to which all countries aspire to join because, despite its shortcomings, it provides a multilateral forum within which developed and developing countries can assert their concerns and issues. Despite the challenges of operating in such a forum, it is unlikely to be replaced by a US-led Reagan Economic Zone any time soon!

Any US President should focus his or her administration’s efforts on building on the existing foundations, and working to address those aspects of its trade policy which pose such challenges to the countries to which it wants to export.

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The U.S. Congress has begun its work on the 2012 Farm Bill which will shape US agricultural and food assistance policy between 2013 and 2108.

The US Farm Bill is the primary agricultural and food policy tool of the U.S. government, and is passed every five (5) years by the U.S. Congress. Covering such a broad range of issues and impacting so many industries, the start of discussions by the Congress on the Farm Bill has been the signal for the start of lobbying efforts by various constituents to make reforms aimed at:

Increasing food security
Supporting the production of healthier foods
Improving the environment; and
Leveraging the playing field for U.S. small farmers

Farm Bills have become most contentious because they have been the vehicle used to authorize the payments to U.S. farmers to provide guaranteed incomes and price supports – subsidies. The United States has subsidized and protected the production of cotton, milk, peanuts, rice, and tobacco, and other commodities. The United States currently pays around $20 billion per year to farmers in direct subsidies. Most of these subsidies, it is reported, are paid to large agribusiness concerns, making it difficult for small US farmers to compete.

These subsidies have also been harmful to small farmers outside of the U.S. A paper published by the CATO Institute in 2005, during the last debate on the Farm Bill, remains relevant to today’s debate. Ripe for Reform: Six Good Reasons to Reduce U.S. Farm Subsidies and Trade Barriers lists additional benefits for reform:
• lowering the cost of food prices for consumers and food inputs for businesses,
• rationalization of farm production so farmers produce what is actually in demand, and
• leveraging the playing field for small farmers around the world.

Subsidies paid by the U.S. Government, and other developed economies, to their cotton farmers provide them with a guaranteed income, which in turn allows them to sell cotton on the world market at below-market rates. This uncompetitive practice depresses world market prices for cotton. Cotton farmers in other countries, particularly poor countries, are unable to compete at these low prices and lose not just money but their livelihoods. A 2010 report calculated that this practice was costing West African farmers £155 million each year. This scenario is repeated with respect to the other crops being subsidized by the U.S. Farm Bill, and by other developed country programs.

Reduction or elimination by developed countries of the support they provide to their farmers remains a key demand by developing countries at the Doha Development Round, and U.S. failure to reform its programs has been one of the stumbling blocks on the way toward achieving a comprehensive deal at the WTO. In July, 2006, WTO Director-General, Pascal Lamy listed as the requirements for a successful deal – the United States must make deeper cuts on its domestic supports; the EU must offer increased agricultural market access; and the large developing countries must offer more on industrialized tariffs.

The 2012 Farm Bill provides another opportunity for U.S. reform. This time, it is being developed in the context of the US deficits and the existing high prices for a number of agricultural goods. President Obama has already unrolled in his budget proposals to cut the subsidies, albeit to strong resistance. However, this action has placed elimination of subsidies in the debate for the first time. Here is an action that promises benefits for U.S. farmers, U.S. consumers, and small farmers around the world. The stakes are huge, making this an issue worth fighting for.

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Carbon trade programs developed by countries in an effort to address climate change are entering the arena of cross-border trade, with potentially serious implications for developing countries, particularly those whose economies are dependent on tourism.

These programs operate as a market-based mechanism for controlling the emission by industry of harmful pollutants, particularly carbon. Carbon, which is present in all forms of hydrocarbon fuels, notably petroleum, coal, and natural gas, is released as harmful carbon dioxide when these fuels are burnt. The emissions trading programs operate by placing a cap on the amount of carbon emissions allowed on a yearly basis. The cap is allocated to firms as permits which represent the right to emit a specific volume of carbon. Firms are required to hold a number of these permits, which are equivalent to their emissions volumes. The total number of permits cannot exceed the cap, limiting total emissions to that level.

Companies respond to this cap in the manner that best suits their needs and their pocket. They may either:
(1) Reduce emissions by developing cleaner technology, leaving them with excess permits; or
(2) buy the excess permits from their more efficient rivals so that they can continue to pollute at the same level.

The transfer of permits between companies is called a “trade”. The United States has initiated the “cap and trade” program. The European Union Emissions Trading System (ETS) is the largest such program in the world.

Extending to Cross-Border Trade
The European Union has extended the ETS to cross-border trade, notably the airline industry, to the vociferous opposition of its trading partners and airlines around the world. Starting January 1, 2012, the reach of the ETS was extended beyond companies operating within the EU, to all airlines flying in and out of EU airports. Any airline that does not comply could face a fine of €100 or US$128 for each ton of carbon dioxide emitted for which it has not acquired a permit. Thomson Reuters has calculated that airlines face a carbon pollution bill of €505 million or US$670 million for 2012 under the ETS. Persistent offenders could be banned from EU airports.

An unlikely coalition, led by China and the United States, has taken the lead in protesting this application of the ETS beyond the EU’s borders. China has been particularly vociferous and has barred its carriers from taking part. A key argument against the EU plan is its discriminatory application, which penalizes those airlines, and eventually their passengers, which make stop-overs at an EU airport as opposed to flying non-stop. Governments also argue that the program is exceeding its legal jurisdiction by calculating carbon costs over the entire flight rather than just over Europe.

Another key concern is the very real possibility of overlapping programs and fines. Although not cap and trade programs, other European countries have initiated environmentally-motivated taxes on airlines. The United Kingdom’s Air Passenger Duty (APD) program assesses a per-passenger tax on airlines depending on placement of the flight within four geographical bands based on the distance from London to the capital city of the given country. This approach, however, results in an APD tax which can at times bear little or no relationship to the distance travelled by a given passenger, and therefore to actual carbon emissions. Austria and Germany have similar taxes.

Developing Country Concerns
Developing countries that operate their own airlines face the difficult choice of either bearing these additional costs or making themselves less competitive by passing the costs onto their passengers. South Africa has spoken about the competitive disadvantage for South African carriers, as well as the potential for the double counting of emissions under the conflicting measure of the EU ETS and the other environment-related departure taxes.

The international travel association, ABTA, has expressed great concern that the APD bands based on the distance from London to the capital city are illogical from an environmental perspective and puts off travelers to such tourist destinations as the Caribbean and Kenya. As an example, a higher tax is assessed against the passenger on a flight from London to Honolulu, which is calculated as a London-Washington, DC trip, than against the passenger on a London-Jamaica flight, which is actually half the distance. Competing tourist destinations, this situation places Jamaica at a competitive disadvantage.

Need for Global Framework
The obvious solution is to develop a multilateral framework for addressing the important issue of curbing carbon emissions by airlines. There appears to be general agreement that such a framework would best be developed by the United Nation’s International Civil Aviation Organization (ICAO). What appears lacking so far is the political will to accomplish this goal. This failure is in fact what has spurred the EU to act unilaterally to implement the ETS. At the same time, as noted by Andrew Herdman, director general of the Association of Asia Pacific Airlines, the European policy alienates the United States, China, Russia, India, and three dozen other countries and so “is simply not going to work.” Meanwhile, the EU continues to insist that it is going ahead. This EU insistence has in fact spurred countries into action, although unfortunately the focus appears to be to thwart the EU program.

Meanwhile, as is often the case, developing countries which have the least room to maneuver, stand to lose the most as this impasse continues. There is urgent need for a solution which does not place an inordinate burden on developing countries, especially those dependent on tourism for their livelihood.

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This time last week, the attendees at the 2012 World Economic Forum’s annual meeting in Davos, Switzerland (held January 25th – 29th) were just recovering from their jetlag and round of meetings. The Davos meeting brings together the world’s top business leaders, international political leaders, and selected intellectuals and journalists to discuss the most pressing issues facing the world.

As is customary, one of the sessions was devoted to a discussion on global trade, in this case specifically the future of the World Trade Organisation (WTO) Doha round of negotiations. Participating on that panel were people who would be in a position to know. They included:

Pascal Lamy, the WTO’s Director-General; and the chief trade officers representing the two most powerful players within the WTO — Ron Kirk, the U.S. Trade Representative and Karel De Guch, the EU’s Commissioner for Trade. Also on the panel were a representative from Brazilian industry, (President of EMBRAER, the aircraft manufacturer), and trade ministers from Australia, India, and Indonesia. They represented a good sampling of the interests in WTO, as reflected in the following discussion highlights.

Countries would prefer to conduct trade negotiations in a multilateral forum, i.e. the WTO, because:

• Today’s businesses operate and source their supplies globally and would find it more efficient and cost-effective to have global rules and standards.

• Many of the issues that need to be addressed to rationalize the trading regime, such as intellectual property rights and investment, need to be addressed multilaterally.

Nevertheless, the Doha multilateral negotiations have stalled because:

• Bilateral negotiations allow countries to choose their partners and yield quicker results, whereas multilateral talks require greater efforts to bridge wide differences and arrive at consensus;

• As we have noted elsewhere, the area of biggest divide is the differing perceptions between developed and developing countries about the meaning and focus of the “Development” dimension of the Doha Round. In particular, there is the new perception among developed countries that the emerging economies, such as Brazil, China, and India, are competitors who should be doing more to open their markets to developed country trading partners. Meanwhile, the emerging economies counter-argue that they are still in a phase of development, and that the Doha mandate was to correct historical imbalances from which they continue to suffer. India gave a clear articulation of this divide (starts 10:15 minutes into the video below).

• There is a lack of political leadership to take the hard decisions required to arrive at an effective compromise. To India’s position, the United States highlighted the skepticism among the public about the benefits of trade. U.S. consumers, he said, have come to feel that they have swapped cheap t-shirts and I-Pads for jobs, and therefore no longer accept the mantra that “trade is good” unless it’s also possible to show a clear line between trade and economic growth and job creation. One could imagine the violins in the background as Mr. Kirk went on to compare the plight of poor children in villages in India, Zambia, and Harlem? – stop the violins! There is a leadership problem when the trade representative of the world’s largest and most powerful economy ignores the difference between historical disparities resulting from unfair distribution of wealth at the global level, i.e. between a metropolis and former colonies, and the results of racism and poor income distribution at the national level.

• The WTO governance mechanisms, notably the principle which says there is no deal until everyone has agreed to everything (the single undertaking) came under attack from the representatives from Australia, Brazil industry, and the EU. One solution, they feel, is to adopt the approach proposed by Pascal Lamy, of dividing the negotiations into stages and signing off on those areas on which agreement has already been reached. There does appear to be a difference in opinion as to what those areas would be, however. Everyone seems to agree that Trade Facilitation (rules to clarify and simplify countries’ import-export requirements and procedures along with the relevant technical assistance to developing countries) would be one such area. In principle, as well, there is agreement on the need to address the special concerns of the world’s poorest economies — the least-developed countries (LDCs) — but even here agreement is being stalled over the details. Perhaps the Indonesian representative, who said the single undertaking approach protects developing country interests and that the problem is lack of proper leadership, has a point?

Conclusion: Don’t bury Doha just yet. But understand that it’s in a deep freeze unless countries find the political will and energy to revive it. Meanwhile, countries will continue to pursue the low-hanging fruit of bilateral negotiations because they yield quick results, also continuing the effort in the WTO to sign off on those aspects of the Doha agenda on which they are able to reach consensus.

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The World Trade Organization (WTO) estimates that, as of January 15, 2012, it has been notified of the existence of approximately 511 Regional Trade Agreements (RTAs), 319 of which are in force. A number of these agreements have been formed among the developing and emerging countries, which view regionalization as a tool with which to more effectively engage in the world economy in today’s trading environment.

Traditionally, African, Caribbean, Pacific, and Latin American countries have benefitted from preferential programs which have allowed them to export their goods to the markets of their industrialized trade partners on a duty-free basis. These preference programs provided a real benefit when the products of other countries were being subjected to high tariff rates. Today, these preferences are being eroded by WTO negotiating rounds and free trade agreements (FTAs) as a result of which their industrialized trade partners have lowered the tariffs on goods entering from other countries.

More and more of these trade preference programs are also being permanently eliminated. For example, the European Union is in the process of negotiating the transition from preferential access programs to reciprocal Economic Partnership Agreements with the African Caribbean and Pacific (ACP) countries. The United States has negotiated free trade agreements with most of the former beneficiaries of its preference programs; these include the US-Dominican Republic-Central American Free Trade Agreement (DR-CAFTA) and FTAs with Colombia, Panama, Peru. In this climate, regional arrangements among developing and emerging countries seek to create alternative markets closer to home and to enhance members’ ability to negotiate the terms of their integration into the liberalized world economy.

Regionalization encompasses more than trade cooperation and liberalization; it extends to other areas of economic integration, and even to the political arena. The process can include any or all of the following four stages:

1. A Free Trade Area (FTA) in which the barriers against the movement of goods and services of member states are removed. The FTA is the easiest type of regional arrangement to create and to administer. Once goods enter an FTA member, they move within the entire FTA on a tariff-free basis.
2. A Customs Union, in which a common external tariff (CET) is imposed on the goods of non-members entering the free trade area. The goal of the customs union is to permit the free movement only of those goods produced by the members, imposing a cost on other goods entering the region. This level requires the harmonization of customs and other trade policies and regulations.
3. A common market, in which the free movement of capital and labor is introduced into a customs union. At this level, the goal is to create one regional market for a broad array of goods and services.
4. An Economic Union, where the members introduce one currency and harmonize their monetary and fiscal policy. This is the most advanced form of regional integration. The European Union is the most developed example of an economic union and its successes have served as a model for many of the regional efforts in developing and emerging countries.

RTAs can offer several advantages to companies interested in doing business in a particular region. In addition to removing tariff barriers, they can lead to harmonization of the regulations and procedures which affect the movement of goods and services across borders and within the regional economic space. Harmonization reduces the cost of compliance and generates a level of comfort that the rules, standards, and protections will remain consistent within the region. A region that shares a common currency further diminishes the costs of foreign exchange transactions across borders.

At the same time, implementation of these agreements is uneven and at times inconsistent. Nevertheless, all four forms of regional integration can be found among African, Caribbean, Latin American, and Pacific countries.

Future postings on this blog will periodically examine these RTAs, their operation and their potential benefit for businesses.

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An earlier post discussed the reality behind the proliferation of “Made in China” (or other countries) labels on the goods that we purchase. The product of outsourcing of the manufacturing processes, these labels can nevertheless hide the origin of other often more valuable inputs, such as the design and brand of the product. The post challenged readers to “look behind the label to better understand the real threats to jobs and economic growth, and how to address them” . One of these realities, the post explained, was that China would remain a manufacturing superpower only so long as it is able to keep its labor and other manufacturing costs low, a situation which was already changing.

A recent Financial Times article has underscored this point. While in 2000 the average hourly rate in China was about 50 cents, today (2012) it is $3.50. Other manufacturing costs have also risen, the article continues, as the Chinese government has begun to enforce environmental regulations. Hurrah for these changes, which speak of improved standards of living for the Chinese workers. At the same time, they bring higher manufacturing costs which, when added to the shipping costs are making inroads into the competitive advantage that China has enjoyed. All of these changes are also creating an opportunity for “in-shoring,” i.e., the return of manufacturing jobs to the United States. It could also be an opportunity for other countries to take up the mantle of “manufacturing superpower”.

Which brings us to the other essential point raised in the Financial Times article. The United States or any country wishing to develop a manufacturing base in the 21st century faces the key challenge of ensuring an adequate supply of skilled labor. In the article, a U.S. furniture manufacturer whose family had been in the business for five generations had been forced to sell the factory to new owners, who then moved production to Asia. Today, the manufacturer is getting ready to re-open a factory in his North Carolina home town but faces a problem shared by many other US manufacturers – few of the unemployed former furniture workers know how to use the latest equipment. In order to pay the high wages that US workers seek while remaining competitive, US-based manufacturers need skilled workers who are comfortable with the sophisticated machines and other equipment that characterize today’s factories. Such workers appear to be in short supply. Providing vocational skills to high schoolers and retooling the skills of older workers are among the steps that must be taken to provide long-term approaches to job creation and economic growth.

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"Made in America", "Made in China", "Made in USA", Trade and development

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Today’s (Friday, January 13th, 2012) Foreign Policy Brief contains a slideshow that aims to show a side of life in Haiti that is rarely, if ever, depicted in the media. It shows a glimpse into the lives of Haiti’s “one-percent”.

As the country marks the second anniversary of a devastating earthquake, while retaining the title of “the poorest country in the Western Hemisphere”, these pictures are a good reminder of the importance of local business and commercial interests in rebuilding the Haitian economy. As the piece also notes, however, Haiti’s local bourgeoisie has been labeled among the “most repugnant elite” for its past role in reducing Haiti to its current state of abject poverty.

Particularly in Haiti and other developing countries, the “one-percenters” are the beneficiaries of a system of inadequate and unfair allocation of resources and of wealth. The gaps between the “haves” and the “have-nots” are typically unimaginable to people who have only known life in the developed world. Meanwhile, few persons with real-life experience in a developing country will even raise an eyebrow at the images of a life well-lived among the contrasting images of deprivation that continue to define Haiti.

For the most part, the “one-percenters” in developing countries represent the progeny of a mercantile class that created and benefitted from the importation and resale of products from the colonial and neo-colonial hubs. Few of them have grown wealthy by actually producing anything locally. Meanwhile, they hold most of the available land and other productive resources.

This reality is perhaps one key reason why the services sector represents such an area of growth and innovation for many developing countries. This sector holds the most promise for someone with talent and an entrepreneurial drive but little else; though one still needs access to capital and to opportunity. The Haiti slide show of the “one-percenters” includes pictures of a telecommunications mogul who worked his way up from the middle class, and the two internationally-known singers from among whom emerged Haiti’s current President, Michel “Sweet Mickey” Martelli.

This is why trade agreements, negotiations and rules that purport to address development needs are incomplete without provisions that increase the access of developing country service providers to global markets. Meanwhile, the services sectors remain among the most protected in most countries, both developed and developing. Caps on foreign ownership, minimum capital requirements, nationality/residency requirements, or mandatory use of local joint venture partners are examples of these barriers. Removing these barriers and providing access to credit and opportunity for the 99 percent remains one of the primary challenges to addressing these inequalities in the developing world.

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Haiti recovery, one-percent, Trade and development