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Practice Areas

UN Report Cautions Developing Countries on Trade and Investment Agreements

Thursday, September 18, 2014
Sandler, Travis & Rosenberg Trade Report

The annual “Trade and Development Report” from the United Nations Conference on Trade and Development cautions developing countries that pursuing bilateral and regional trade and investment agreements can restrict their ability to pursue policies that could help them achieve sustained income growth, full employment, poverty reduction and other socially desirable outcomes.

The new report argues that negotiations on rulemaking need to refocus on multilateral agreements that recognize the legitimate concerns of developing countries. Multilateral rules and disciplines check inward-looking national economic policies through which influential countries can harm the economic performance of others, the report states. At the same time, multilateral agreements should not encourage or push developing countries to relinquish policies that support economic development. The report notes that while existing multilateral agreements have maintained some flexibilities for all World Trade Organization members and incorporated some special and differential treatment for least-developed countries, they have also come with restrictions on the conduct of a widening array of trade and industrial policies.

The report also cautions developing countries to carefully consider the loss of policy space when engaging in bilateral and regional trade and investment agreements. Such agreements often come with stricter commitments in areas covered by multilateral agreements or extend to new areas, requiring policymakers to forsake the use of instruments that have proved effective in supporting industrialization. The report suggests that while such stricter policy and regulatory commitments may provide short-term trade and employment benefits, in the longer run they can trap producers into commodity enclaves or low-value niches of manufacturing. The report cites China as an example, noting that while China now accounts for as much as one-third of total trade in electronics, Chinese firms account for just three percent of total profits in this sector.

The report also points to problems arising from the current international investment framework and the related ad hoc arbitration tribunals that have assumed important law-making functions usually allocated to states. In addition to the lack of transparency and coherence often observed in the operations of those tribunals, the report states, this set-up follows a model developed for resolving disputes between private commercial actors, and as a result the tribunals have no reason to consider the broader interests of a host country and its development strategy.

In light of these concerns, the report highlights the following elements of a more flexible approach to the choice, design and implementation of policies to attain development goals.

Industrial policy – The report asserts that there has been a “global revival of interest” in industrial policy as many developed countries “have begun to explicitly acknowledge” the important role it can play in maintaining a robust manufacturing sector. The United States itself is “an avid user” of industrial policy despite being portrayed as a country that takes a hands-off approach, adopting “a wide range of policies to support a network of domestic manufacturing firms that have the potential for innovation, exports and the creation of well-paid jobs.” By contrast, the European Union’s experience illustrates how the adoption of a more horizontal, or economy-wide, approach risks hampering the achievement of wider policy objectives.

Industrialization – In commodity-dependent economies, converting natural resource rents into sustained growth and structural transformation will require accelerating industrialization through a high level of investment and incentivizing a virtuous link between trade and capital accumulation. An industrial policy that supports the private sector in identifying and expanding activities in promising manufacturing sectors could greatly facilitate such diversification efforts.

Global value chains – The evidence that integration into GVCs spurs industrialization is at best ambiguous: structural transformation episodes, even if initially successful, are often linked only to “thin” industrialization that offers few opportunities for economic and social upgrading. The risk of being trapped in a low-level niche of the value chain may be too high for countries to forsake the use of instruments that have proved effective in supporting industrialization.

Exports vs. domestic demand – The developmental effects of export-led growth strategies more generally appear to be running out of steam in recent years due to the growth slowdown in developed countries and a reduced elasticity of their demand for imports from developing countries. Developing countries may therefore wish to rebalance their growth strategies toward less emphasis on exports to developed countries and a greater role of domestic and regional demand. Pursuing proactive trade and industrial policies could help to make the necessary adjustments to developing countries’ productive capacity.

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