RAY EVANS

AusIMM

Melbourne Branch

Kelvin Club, February 1, 2000

The Seattle Fiasco and its Implications for International Trade

Ray Evans

International trade in metals goes back for at least two millennia. For example, one theory concerning the Roman incursions into Britain, which began in 54 BC, is that the Romans wanted control of the lead and copper mines of Cornwall and elsewhere in England.

During the C19 demand for copper and other base metals increased dramatically, and exploration and mineral discoveries in what were remote parts of the world as far as Europe was concerned, led to a mining industry which was global in its range of activities and understanding of the benefits of international trade.

So to members of the AusIMM, international trade is just a normal part of life, to be understood in just the same way as we understand our working lives in the domestic economy; a life in which we all specialise in doing one particular thing well, and trade with other people for all the many necessities and luxuries of life which we could not produce, and would dream of trying to produce, for ourselves.

There are two aspects to trade and the prosperity which trade promotes. One is the division of labour, and the larger the market the greater can this division proceed. (When we talk about the division of labour we tend to forget that the most important element in that concept is specialisation of knowledge). The other is factor endowment. A country may have many skilled mining professionals. But if there are no orebodies within the national boundaries, those professionals have to spend at least some part of their working lives in countries where there are orebodies. There are other possibilities of course. A country may have an extensive mineral endowment, but the exploitation of that endowment may be forbidden. The consequences for the mining professionals are the same.

Factor endowments, of course, go far beyond orebodies. Climate, soils, rainfall, rivers and harbours, for example, can be critical in determining the economic possibilities which a society can entertain at any given time in its history. An interesting contemporary example is Iceland, a small island with a population of less than 1/4 million, in the far north Atlantic, which enjoys a very high standard of living based on fishing and on the exploitation of low-cost, subterranean, thermal power. Such prosperity is only possible if international trade takes up something like 80% of their GDP.

People in the mining industry take it for granted that a country which is rich in mineral endowments should exploit that advantage, and trade in metals with the rest of the world. That understanding can be taken further which I will illustrate with a story taken from Australian economic history. Prior to the invention of refrigeration, cattle were grown in Australia primarily for their hides, and beef, a by-product, was typically a penny a pound, in Australia. In Britain, beef was 13 pence a pound and so the difference between one penny and 13 pence was an important driver in the pursuit of effective ship-board refrigeration. Once it had been achieved Australia, and then Argentina, could develop a beef industry, and the British had access to much cheaper beef. The domestic beef producers in Britain might have been disadvantaged, but since they were producing a different product, fresh beef, their losses may have been inconsequential.

But if we take the argument about trade up to the next rung of our understanding, we find political resistance. The next step is as follows. A nation in which labour costs are very high will benefit greatly if it can trade efficiently and freely with a nation in which labour costs are very low. The low wage country will also benefit, greatly, from this arrangement. The corollary which follows is in some degree counter-intuitive, and which would be vehemently denied by many. The greater the difference in wage levels between the trading partners, the greater are the benefits which are there to be realised from a free-trade agreement between the two countries. And it is this fact which has underpinned the huge economic success of the Mexican-US free trade agreement (Canada, of course, is also a party) called NAFTA.

NAFTA was politically inspired by geographic proximity, and by President Bush’s understanding that an economically growing and increasingly prosperous Mexico would be a much better neighbour than an impoverished and politically unstable Mexico. The cost of transport from Mexico to the US is obviously low. But that fact is not nearly as important as the differential between labour costs in Mexico and the US. I mention this because Australia would benefit greatly if we were to conclude a free trade agreement with a low wage country. The Philippines could be for us, what Mexico is, under NAFTA, for the US; with for us the added benefit that the Philippines is an English speaking country.

The mining industry, because of the fact that orebodies and metal markets are in different parts of the world is, generally speaking, instinctively a free trade industry and the people in it tend to be, by virtue of their working experience, free traders. But the historical fact is that protectionism has had a very successful political career over the last millennium or so. And since the WTO is at the centre of this age-old debate, and has become at the same time a political target for NGOs and protest movements in Europe and North America, we need to consider why protectionism, which economically hurts those nations which indulge in it, has nevertheless done so well politically.

Protectionism combines distrust of foreigners, which I think is a universal characteristic of people everywhere, with marvellous opportunities for rent-seeking. In Australia, ever since the days of the gold rushes 150 years ago, fear of foreigners generally, and of Asians particularly, has been a powerful political fact. The Labor Party was carried to extraordinarily rapid political success on the widespread appeal of White Australia, and federation itself owed its success, in large part, to the desire to exert control of immigration on a continental basis.

The fact that international trade does not require the immigration of the foreigners with whom we trade does not detract from the accusation made against those of us who are in favour of free trade, that we prefer trading with foreigners to doing business with our compatriots.

I should note here that fear of foreigners is not necessarily irrational or unreasonable. One of the problems we found in Australia in 1941, was that we had not taken fear of the Japanese nearly seriously enough.

Rent-seeking is a huge topic on its own, but in the context of protectionism, the rent-seekers use distrust of foreigners as a vehicle for transferring wealth and income from those who are engaged in export industries, or in import-competing industries, to themselves. In Australia, protectionism steadily impoverished Victoria from the 1860s onwards, and then impoverished Australia when it became a settled part of national politics after the defeat of George Reid and the Liberals in 1908 or there abouts, by Alfred Deakin and the Protectionists.

International trade, like domestic trade, is wholly beneficial. People only trade with each other if each party believes it is going to benefit from the exchange, and this is true whether the trade is within national borders or across them.. Few governments have sought to suppress trade between the citizens within their borders. Many governments have sought to suppress trade across their borders. Why they have done so is a question which goes to the heart of the protectionist debate.

For centuries many people believed passionately that the basic purpose of international trade was to accumulate gold and silver at home, and that the more gold and silver a country had stored up within its vaults the better off its citizens would be. There is a small measure of rationality about this belief which is connected with the fact that soldiers and sailors in those days had to be paid in gold or silver, and that a country which was known to possess substantial reserves of these precious metals was, at least potentially, in a good military and diplomatic position. But beyond that point the desire to accumulate gold and silver becomes totally irrational and “mercantilism” was the name given to this belief in the C18.

We still find vestiges of it in the widely held belief that exports are a good thing and imports are a bad thing. Graham Campbell, the former member for Kalgoorlie, took this view to an extreme in that he was in favour of banning imports and promoting exports as an incommensurable.

We export in order to be able to import. We produce in order to be able to consume. Exports and imports are equally valuable to us.

Of course, problems arise in international trade which do not occur in domestic trade. Commercial law is usually different in different countries. The problem of getting paid for exports, or getting delivery of imports, is usually more onerous than when trading within domestic borders. Over the centuries banks have developed all sorts of procedures to solve these problems. Governments have sometimes facilitated exports by guaranteeing exporters against default.

The second half of the C19 was a golden period of international free trade and of economic growth and development around the world which still remains unsurpassed. The Great War of 1914-18 brought that golden age to an end, and during the inter-war period Protectionism increased its hold on government policy in the US, in the UK, and certainly in Australia. It was President Hoover’s failure to veto the Smoot-Hawley Act early in 1930 which turned the Wall Street crash of 1929 into a real crisis of confidence, and that in turn led, through the disastrous monetary policy of the Fed, to the Great Depression.

The experience of the 1930s and the opportunity created by the allied victory in 1945 enabled the establishment of new international institutions which it was hoped, would guard against a repetition of the disasters of the 1930s. The United Nations, the IMF and the World Bank, were all designed at meetings held at Bretton Woods, a New Hampshire resort town. One of the great ironies of post-war international politics has been the transformation of the GATT, the Cinderella of the immediate post-war international institutions, into the most effective and important of them all. The GATT was all that was left after the collapse of the proposed International Trading Organisation (ITO) which was abandoned when it became clear, in 1948, that the United States Senate would not ratify the Havana Charter.

The post-war allies therefore fell back on the GATT, which had been agreed to in 1947, following the Bretton Woods discussions, and out of this inauspicious beginning there grew a rules-based international trading system, under which global trade has doubled, on average, every nine years; many member-states of the GATT have experienced a ten-fold or more increase in per-capita incomes; and the degree of interdependency which the members of the GATT now enjoy is a powerful force for continuing international peace.

Alan Greenspan testified to the contribution which the GATT has made in a speech given in Dallas in April 1999.

“One of the most impressive and persistent trends of the last half century is the expansion of international trade. Adjusted for price change, trade across national borders has increased fourteenfold – far faster than the fivefold increase in world GDP.

“The evidence is overwhelmingly persuasive that the massive increase in world competition – a consequence of broadening trade flows – has fostered markedly higher standards of living for almost all countries who have participated in cross-border trade. I include most especially the United States”.

The GATT, as it established immediately after the War, was a contractual arrangement in which the parties to the contract were nation-states, which contracted to each other on a common basis. The basis of this multi-party contract was, first, that each party would not discriminate between other parties in access to their domestic market. In other words, tariffs had to be applied uniformly to imports from other parties. This principle was prescribed in Article I and known as the “Most Favoured Nation” or MFN Principle. The second was the equal treatment principle. Once goods had crossed the border it was agreed that they would be treated identically to domestically produced goods. This was prescribed in Article III. The third was the tariffication principle. Members were entitled to discriminate against imports in favour of domestically produced goods, but they were to do so only by imposing tariffs – not quantitative restrictions (QRs) or other non-tariff forms of protection. (Articles II and XI)

The tariffication principle has a subtle but profound corollary. A tariff is an instrument of border taxation (and of domestic protection) which is based completely on price. When an importer receives a shipment of goods at the wharf, before he is legally entitled to bring the goods into the country he has to pay a tax set at, say, 100% of the f.o.b. price he paid to the exporter at the point of export; or some similar formula. A substantial literature has developed over many years involving litigation over the reality of the prices on which these border taxes are calculated.

Thus when the GATT rules forbid QRs and require trade barriers to be expressed only as tariffs, the GATT rules endorse the world of markets and prices, and eschew the world of political discretion.

These were the guiding principles which defined the international trading regime established after the War, but exceptions were allowed under GATT rules, and these exceptions were defined in Article XX (known therefore as the exceptions clause). Further, the political problems with agricultural protectionism were so widespread and intractable that it was agreed at the outset that the GATT rules did not apply with anything like the same extent and rigour to agricultural products as to other goods.

From Australia’s perspective, although it was not foreseen at the time, this was a most serious fault with the GATT. In 1947, Australia was still deeply intermeshed with the British economy, and Australian farmers supplied the UK market with meat, dairy products, cereals, fruits, and wool, then our major export industry. Britain was by far our most important trading partner, and no one then predicted that the UK, in a few years time, would abandon the Commonwealth and seek entry into the European Common Market, to the extreme detriment of our agricultural export sector. Fortunately for us it was at that time that the minerals boom of the sixties created a new export base for Australia, thus masking the consequences of the loss of the UK market for our agricultural exports.

Given that these GATT contracts imposed both rights and obligations on the contracting parties, the problem of dispute settlement had to be solved. Under the GATT a complaint which a party had concerning the conduct of another party was (after conciliation had failed) sent to the Council of the GATT, the executive organ of the body comprising all of the contracting parties. If the Council agreed by consensus to do so, the complaint was referred to a Dispute Settlement Panel. This process meant that powerful members of the GATT could easily block the reference going forward, and less powerful members, if they really wanted to raise a stink, could also do so. The Panel, having been chosen, would hear the dispute, come to a view, and then forward that view to the Council. The Council, again by consensus, would either accept or reject the Panel’s view. Once again, the defendant, if found against, was perfectly entitled under the GATT processes to prevent the adoption of a Dispute Panel’s finding.

This procedure meant that the only force which could be brought to bear on economically powerful nations such as the US and the Europeans, was the force of argument.

This apparently nonsensical arrangement nevertheless worked extraordinarily well. Under the GATT, world trade doubled, on average, every nine years, and the unprecedented growth of the Asian tigers, for example, was possible only because of the GATT and the trade rules which developed an authority based entirely on the force of argument.

When, following the Uruguay Round, the GATT gave way to the WTO, the dispute settlement procedures were changed in crucial ways. First, the process involved in forwarding a dispute to a Dispute Settlement Panel was turned upside down, in that once a complaint was lodged the Dispute Panel was established and hearings began unless a consensus of the membership determined otherwise. So preventing a hearing going forward became very difficult instead of relatively simple. Likewise, once a Dispute Settlement Panel had reached a view, that decision did not require to be accepted by consensus but could only be overturned by consensus, a change of profound importance.

As a sort of quid pro quo the GATT membership agreed to establish a sort of supreme court, the Appellate Body, to which parties losing at the Dispute Panel stage could appeal. The Appellate Body, like the US Supreme Court, comprises a permanent membership of seven judges, currently one each from the Philippines, Japan, NZ, Egypt, Uruguay, the US and the EC.

It is the AB’s judgement in the shrimp-turtle case which has created considerable angst, particularly amongst developing countries, and especially from the appellants, Thailand and its neighbours, whose complaint was upheld by the AB. The three member bench which heard the appeal comprised Mr Florentino Feliciano (Philippines), Mr James Bachus (US), and Mr Julio Lacarte-Muro (Uruguay). A broad outline of the case follows.

In November 1989 the US Congress passed legislation which instructed the President to negotiate conventions for the protection of endangered sea turtles. The President was also instructed to ban the import of shrimp from those countries which did not have comparable programs of turtle protection to those mandated in the US. The US did not at first apply the law to shrimp imports from outside the Carribean region. A US NGO, the Earth Island Institute, sued the Government before the US Court of International Trade and that court enjoined the US Government to apply the law to all shrimp imports not later than May 1, 1996. Soon after India, Malaysia, Pakistan and Thailand requested the WTO Dispute Settlement Body to establish a panel to determine whether the US import ban violated the United States’ WTO obligations.

It has long been part of GATT law that importing countries cannot use distaste for the production and processing methods of obtaining a product as a reason for import bans. If this were not the case, all international trade could be subjected to unpredictable interdiction, because there would always be something in a manufacturing or production process to which someone with political influence in the importing country could object. But more important was the implication for national sovereignty. A sovereign nation which is required, under pain of interdiction of its exports, to adopt extraterritorially imposed labour market regimes or environmental policies, at the behest of an importing country, is no longer sovereign. One of the most important features of the GATT has been its role in protecting the sovereignty of its members from the application of extraterritorial power by the powerful against the less powerful nations.

Up till now, therefore, no GATT Disputes Panel has accepted an argument that an import ban based on distaste for a particular production or processing method (PPM) has been legitimised by anything written in Article XX (the exceptions clause). This particular issue was examined with great care in the tuna-dolphin cases. These were challenges to restriction imposed by the US on imports of Mexican tuna, not only from Mexico, but also from countries which processed Mexican tuna for on-shipment to the US. The objection which the US had to Mexican tuna was that the nets used by the Mexicans to catch tuna, also trapped dolphins. Two Dispute Panels heard this case and found against the US, although the findings, for various reasons including US opposition to the findings, were never formally adopted by the GATT parties.

There is obviously a very close similarity between the tuna-dolphin case and the shrimp-turtle case. What is different is that the latter case is being heard under the new dispute settlement procedures of the WTO. This makes it difficult to block acceptance of a Disputes Panel finding but provides for a right of appeal to the Appellate Body. The US exercised this right. And although the Appellate Body found against the US, it did so in a way which has created grave misgivings to GATT observers. And is it at this point that “sustainable development” suddenly becomes very important.

The preamble to the GATT, drafted in 1947 included the words “developing the full use of the resources of the world”. These words were replaced in the Preamble to the WTO (1994) with “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…”. The WTO Preamble, like its GATT predecessor, contains other desiderata, notably full employment. In its judgment in the shrimp-turtle case the Appellate Body referred to the Preamble and used the preambular reference to sustainable development to conclude that the US measures (to restrict imports of shrimp because the incidental kill of turtles was not in accordance with US standards) fell within the scope of Article XX (g), but that the procedures used by the US to implement these measures did not satisfy the tests set down in the rest of Article XX.

The US lost its case, in the view of the Appellate Body, on procedural grounds, not on the fundamental basis of national sovereignty. This is a change of the utmost importance. Suddenly the WTO has become an international law maker, not a contract negotiator between sovereign parties. By appealing to “sustainable development”, a new preambular declaration, as a legitimising principle for the lawful use of extraterritorial power, the exceptions clause in the GATT (Article XX) now takes on a totally new and unforeseen dimension. The Appellate Body is asking a political slogan to carry a load which it cannot possibly sustain. The AB has forsaken the familiar world of markets and prices and has entered into a new world of political discretion, where (as could have happened in shrimp-turtle if the parties had been aware that sustainable development was on the agenda) it might be asked to make judgments as to whether methods of sustaining turtle populations other than through the use of US-manufactured Turtle Exclusion Devices (TEDs) would meet the preambular criteria of “sustainable development”.

The move from markets and prices into political discretion is an entirely new development in international trade relationships, one which will, if the precedent is expanded upon, place the WTO Appellate Body in a position of a supranational supreme court. The list of desiderata in the WTO Preamble could certainly allow for wide ranging excursions into the domestic policies of the sovereign members if the AB was to continue to refer to it as a source of juridical authority.

The letters WTO have now become part of the politics of protest and resentment, within the countries of the OECD, in a way in which the letters GATT never did. Paddy McGuinness wrote in his editorial in the latest Quadrant: “Possibly it was a mistake in the concluding days of the Uruguay Round . . to rename the old General Agreement on Tariffs and Trade. “World Trade Organisation” sounds so much more sinister. But the attack on it is coming as part of an attack on “globalisation” (the modern version of the international communist Jewish banking conspiracy) which, in essence, is sheer millennial panic”

I agree with Paddy about the change of name from GATT to WTO. It was a serious mistake. Even more serious was the change in the rules and the creation of an Appellate Body as a court of appeal in trade disputes.

The WTO Ministerial Meeting, which was held in Seattle from Nov 29 until Dec 3, 1999, was subjected to unprecedented media attention. You will all recall the images of demonstrators, tear gas, police vehicles like armoured personnel carriers, police in their riot gear, broken shop windows and looted premises; images which were carried around the world. The media were geared up for this confrontation because the Green NGOs had been promising just such an event for more than six months. Although they had declared that 50,000 demonstrators would make Seattle uninhabitable for the WTO Ministers, the meeting did eventually begin, a day and a half late.

Nevertheless, the Seattle Ministerial had become a sort of gladiatorial contest. Would the Greens win by shutting down the meeting, or would the WTO win by holding its meeting and emerging from it with an agreement to begin a new round of trade negotiations – the so-called Millennium Round.

The result was without doubt a win for the Greens and the Protectionists. Although the meeting did take place, it concluded without reaching an agreement on the terms for beginning a new trade round. President Clinton was a key figure in ensuring that no progress was made. He welcomed the demonstrators and although denying the fact, he legitimised their violence. He did so again at Davos a few days ago. There are many theories which seek to explain why he did what he did, many of them bizarre. But the fact remains that the failure at Seattle was indeed a setback to the cause of trade liberalisation, and the fact that the President of the US, today the world’s super power, was content that it should be so, and helped to bring it about, is not good news for those countries, and I include Australia, which need the WTO, and trade reform in crucial industries, for their future progress.

The big losers out of Seattle are Australia, because the WTO members had agreed on a major breakthrough in Agriculture, an agreement which is now back in the melting pot; and the developing countries, because they need the US and the EU to deliver on the promises made during the Uruguay Round on access to developed country markets for textiles and clothing. The failure at Seattle increases the likelihood that the US and the EU will renege on those commitments.

The recent speeches at Davos show that the fundamental issue which was paralysing the WTO at Seattle is still the same. That issue is the unqualified ambition by interest groups in the US and Europe to use the WTO as an instrument of extra-territorial power, and the continuing willingness of US political leaders, President Clinton particularly, to legitimise those ambitions. Charlene Barchevsky rubbed salt into the wounds which were inflicted on the developing countries at Seattle by referring at Davos to “the inflexibility” of WTO members. By this she meant the refusal of these countries to entertain changes to the WTO rules which would enable the US, for example, to impose labour market standards such as minimum hourly rates, upon other countries, in return for access to the US market.

At the heart of the WTO debates, and of the use of the WTO as an instrument of imperial design, is whether or not the nation-state, as the elemental political institution in the global order, and as described and understood in the UN Charter of 1945, will continue in that role; or whether, contrariwise, the nation state will give way to empire, and the relatively brief time which the nation-state has enjoyed in the political sun, will pass away.

The world of nation states came about through the dissolution of Catholic Europe, as the competing Christian visions of Rome, Luther and Calvin struggled for not just survival, but for total victory. In these bitter disputes there is no doubt that economic interests were in play; economic interests are always in play; but the drivers in this terrible conflict were the passionately held beliefs which Europeans then held about God and man, and the relationship between them. It was, in essence, a replay of Augustine and Pelagius. God was the gut issue of the C16.

The Thirty Years War, 1618-1648, was the last desperate attempt by the parties to win a knock-out blow, particularly by those who sought to maintain the medieval political order as it was manifest in the Holy Roman Empire. It is said that between 30% and 40% of the German-speaking peoples of Europe died in this conflict. Out of it came the Treaty of Westphalia, which recognised that the Holy Roman Empire was spent; which proclaimed the full territorial sovereignty of the former members of the HRE; and resolved the religious issues by recognising the right of private worship, liberty of conscience, and the right of emigration, everywhere in Europe except for the hereditary lands of the House of Hapsburg. The Treaty of Westphalia laid the basis for the global order we have today, and the UN Charter of 1945 is a contemporary version of it.

All political arrangements suffer from defects of one kind or another, and as a particular set of arrangements rolls on from century to century, or in our times from decade to decade, the problems which were solved as a consequence of adopting these arrangements are forgotten; the inevitable defects grow in their capacity to irritate us; and our willingness to put up with them diminishes. Contemporary events indicate we are now entering such a phase.

The US is now in a position of overwhelming economic and military power. The American people, or at least those Americans who are politically active and influential, see no reason why that power and influence should not be used in support of the values which they hold dear. But they do not wish to see American soldiers killed for that purpose, and so the use of trade sanctions is a very appealing substitute. The US currently imposes economic sanctions against 26 countries accounting for more than half the world’s population. These sanctions are seldom effective and can impose terrible costs on populations that have little if any control over their governments. These sanctions cost the US export income recently estimated at $20 billions, admittedly not a huge amount for the US, but nonetheless a high price for policies which have only this positive result, that they make some Americans feel better.

So where do we go from here?

The first thing Australia ought to do is to be quite candid about seeking to improve its economic position, and to increase its political influence in international trade fora. We should abandon our long held opposition to regional or other free trade agreements, and we should seek to do bilaterals, just as we have done with New Zealand. Our CER has been beneficial to both of us, and we should extend it to cover investment. I have mentioned the Philippines as a primary target for a bilateral free trade agreement. There is currently a proposal of enlarging NAFTA to include Chile, NZ, Australia and Singapore, the so-called NAFTA plus 4, and we should certainly get behind that proposal. The point of all these exercises in expanding markets and creating new business opportunities is, very simply, to become more prosperous. Prosperity and influence go hand in hand.

Australia does box above its weight in international fora. We should seek every opportunity to improve on that. But the point of this activity, and it costs money to engage in it, is to protect and enhance our national interest. Increasing wealth, increasing population, increasing influence, all go hand in hand.

We should seek out friends in the US and encourage them to get involved in the trade debates in that great country, because until the US resumes the leadership role in these debates which it first undertook under Cordell Hull, back in the forties, and which President Clinton abandoned at Seattle, we will not be able to make significant progress on the WTO front.

The Commonwealth, because it includes developing and developed countries, is another institution which could become influential, and Australia can play a leading role in that institution.

The set-back at Seattle should energise us. Australia was on the verge of a major break-through in agriculture, and the collapse of the meeting was a great disappointment. We must now pick ourselves up and get on with the job of creating new opportunities for ourselves and for those who want to trade with us.