Is Brazil turning "protectionist"?

A series of measures to increase import tariff on selected products by Brazil to promote domestic industry were taken last month. Reported here, here, here and here. While this may not in itself violate WTO obligations (WTO allows tariff increases within the bound rates), one measure caught my eye - a tax reduction of 95 per cent on production of iPads in Brazil until December 2014."

Essentially "Tablets" produced in Brazil, subject to certain conditions, will be subject to a 95% tax reduction compared to "Tablets" produced outside the country.

"The company has a 95% reduction of the Tax on Industrialized Products (IPI) for the manufacture of the product until 2014 and will have to meet the specifications of the Basic Productive Process (PPB) established by Ministerial Decree No. 126 of May 31, 2011. On the other hand, will invest 4% of net sales (gross sales minus taxes) in research and development (R & D).

The PPB is the minimal set of steps that characterize the local industrialization of a given product, which must be met for the company be entitled to tax benefits granted to companies in the Manaus Free Trade Zone and producing information technology and automation goods with tax incentives the Information Technology Law (Law No. 8.248/91), installed anywhere in the country. It is also a compensation to be met for the exemption of PIS / Cofins as Provisional Measure No. 534/2011, which included the tablets in the Good Law (Law No. 11.196/05)."

It seems that Brazil is surprisingly exercising its "domestic policy" space when its exports to the Arab world grew by 20% in 2011.





As reported here,

"Exports from Brazil to the Arab world generated revenues of $15.13bn in 2011, a 20.3 percent increase on the previous year.

Imports grew even faster, by 43.36 percent, and reached $9.98bn, according to figures issued by the Arab Brazilian Chamber of Commerce.

“We are running a surplus in trade with the Arabs,” said Salim Taufic Schahin, president of the Arab Brazilian Chamber in comments published by the Arab Brazil News Agency, adding that he expected further growth in trade this year.

For 2012, trade between Brazil and Arab countries is expected to grow by 10-15 percent, Schahin said."

Are Brazil's tax incentives violative of the "national treatment" principle? Is this not treating a domestic product more favourably than an imported like product? Further, the tax benefit is given subject to local industrialisation. Isn't this subsidy "dependent on domestic content" requirement violative of the TRIMS and SCM Agreements? While I could not find the English translations of these tax rules (here and here), the implications in the reports seem that the tax concession is for "domestically produced" Tablets as well as domestic content requirement. While import tariff increases for certain products may not be violative of international trade rules, the domestic content requirement and violation of the national treatment principle need closer scrutiny.

Environmental WTO on the cards?

The World Trade Organisation (WTO) is often faced with the challenge of dealing with issues other than international trade like environment, labour and human rights. There are strong views on either side of the debate - while one side recognises the limitations of WTO addressing these issues and the possibility that it would be used as a protectionist tool by developed countries, the contrary view is that WTO must address all issues related to making international trade more efficient, sustainable and humane.

In all these debates the effectiveness of the WTO as an international organisation and  its ability to enforce rules of international law seem to be the guiding factors. The strong dispute settlement mechanisms and the treaty based approach of the organisation is a tribute to its perceived effectiveness that compels stakeholders to insist that issues other than international trade be brought within the prism of the international organisation's mandate to ensure compliance in an otherwise weak institutional setting.

This piece brings another idea to the table: creation of a United Nations environmental agency following the model of the World Trade Organization (WTO) or the International Labor Organization (ILO). 

"The idea to create an United Nations environmental agency following the model of the World Trade Organization (WTO) or the International Labor Organization (ILO) is growing. The proposal to create the World Environment Organization (WEA) came from European Union and it is being discussed by France and Germany and can be one of the major achievements of the United Nations Conference on Sustainable Development, Rio+20, in June, in Rio de Janeiro. 

More than one hundred countries support the strengthening of the United Nations Environment Program (UNEP). The UNEP would be the natural embryo for the new environment agency. Various countries suggest the creation of the WEA or a similar agency. The emergence of the agency could be a strong decoy to attract large number of leaders to the Rio +20 and it could ensure the success of the event. 

However, the establishment of the World Environment Organization (WEO) has strong opponents. The United States does not want to even hear about it. Historically, the USA does not accept agreements or international organizations that can interfere in its own domestic decisions. Moreover, the American resistance is a great obstacle for the idea. Ironically, but for other reasons, the USA is aligned in this position with Venezuela, Cuba e Bolivia. The Latin countries fear that such an agency will serve to mask protectionist trade actions of rich countries."

Is an environmental WTO on the cards? It would be interesting to see how these international organisations operate when disputes touch areas of trade and environment. While the goal of the reduction of trade barriers and facilitating international flow of goods and services, albeit with constant rumblings, is accepted as the way to go, is there a clear vision for an environmental agreement to be enforced by an international organisation?

General Agreement on Trade in Services - A need for a re-look?

Found this critique of the WTO Ministerial process in a piece that was critical of GATS rules and its possible impact on financial sector de-regulation in the context of the financial crisis. It argued for a renegotiation of the rules of GATS in order to ensure more domestic policy space in the financial sector in the context of the global financial crisis.

"Unfortunately, the official proceedings of the Ministerial Conference went on in Alice-in-Wonderland - style as if no financial crisis had ever happened.   Without anything real to deliver after more than ten years of negotiations on the Doha round, the WTO struggled to demonstrate its continued relevance by trumpeting the accessions of Russia and Samoa – even though accessions are rarely considered to be news at the Ministerial Conference level.  If the powerful countries in the WTO – and its Secretariat – continue to refuse to acknowledge that its extreme deregulation rules require revision, the WTO will continue to lose legitimacy on the international stage.

The good news is that Ecuador’s efforts did raise the profile of the issue among important WTO countries and that the Chair of the WTO’s Committee on Trade in Financial Services has agreed to keep Ecuador’s proposal for a review of the rules on the agenda for the Committee in 2012.  It will be important to watch closely to make sure that the U.S. and EU allow a robust review of the rules to go forward."

Does the GATS require an overhaul or does it give in its present form, sufficient policy space to deal domestically with financial crises?

Australia's plain packaging tobacco law and WTO - A weak case?

In my  earlier blog piece on the Tobacco packaging case in Australia the issue of whether the measure is violative of Austraia's obligations under the WTO was raised. 

Tania Voon and Andrew Mitchell in this article titled "Face Off: Assessing WTO Challenges to Australia's Scheme for Plain Tobacco Packaging" address squarely the above issue and  have concluded that "that the high likelihood of a WTO dispute settlement challenge to Australia‘s plain packaging scheme is offset by its low likelihood of success." They have categorically analysed the provisions of the GATT Agreement, TBT Agreement, SPS Agreement and TRIPs Agreement and have concluded,

" Although tobacco companies may have arguable points to make on certain limited issues, Australia has a robust position in maintaining that its plain packaging scheme is fully compatible with all of its WTO obligations, when the relevant provisions are properly interpreted taking into account public health concerns. In particular, the scheme does not breach: Art XI:1, Art III:4 or Art I:1 of the GATT 1994 because the scheme is both de jure and de facto non-discriminatory, with a limited impact on international trade and a sound public health basis, as borne out by the WHO FCTC and its agreed implementing guidelines; Art 2.1 of the TBT Agreement because the scheme is non-discriminatory; Art 2.2 of the TBT Agreement because of its limited impact on trade and its contribution to the legitimate objective of protecting public health; TRIPS Art 2.1 (incorporating Paris Convention Arts 6quinquies(B) and 7) or TRIPS Art 15.4 because those provisions concern trademark registration, whereas plain packaging affects trademark use; TRIPS Art 17 because the scheme does not affect the rights conferred by trademarks, which – as indicated in TRIPS Art 16 – are negative rights to prevent use by others rather than positive rights to use trademarks; or TRIPS Art 20 because, even if the scheme encumbers trademarks with special requirements, that encumbrance is justifiable and indeed justified by relevant evidence including the public health objectives of the Australian government."

The authors do not visualise the matter coming up before the WTO due to the inherent weakness in the merits of the challenge. Nevertheless, if it reaches the doorstep of the DSM, it would give an opportunity to the panel and Appellate Body to "interpret" Article 2.2 of the TBT to establish what constitutes an "unnecessary obstacle to trade" int he context of the TBT Agreement.

Another interesting fact brought out in the article is the positions taken by different member countries at the WTO  to the measure:

"On 7 June 2011, at the meeting of the WTO Council on Trade-Related Aspects of Intellectual Property Rights (TRIPS Council), the Dominican Republic objected to Australia‘s plain packaging scheme on the basis that the scheme would be inconsistent with Australia‘s obligations under the TRIPS Agreement. Supporting the Dominican Republic‘s stance were other WTO members: Honduras, Nicaragua, Ukraine, the Philippines, Zambia, Mexico, Cuba and Ecuador. In contrast, New Zealand, Uruguay and Norway supported Australia‘s draft law, while India referred to studies showing the effectiveness of plain packaging in reducing smoking. India, Brazil and Cuba all emphasised the right of members to implement public health policies, as noted in the Doha Declaration on TRIPS and Public Health. The WHO also made a statement in its role as an observer in the TRIPS Council."

Positions necessitated by "domestic trade interests" would be the obvious conclusion. Those supporting are probably tobacco exporting countries. India, Brazil and Cuba (though a major tobacco manufacturer and exporter) have emphasised the supremacy of the domestic policy space in protecting public health. Whether this space is legitimate in the context of WTO obligations, only a WTO dispute can tell!

Friedman's "Made in the World" - Domestic politics vs. International economics

Thomas Friedman in this edit in the NYT titled "Made in the World" highlights the importance of international supply chains, the need for understanding and integrating into these supply chains and the future of globalisation.He makes an important point of the "disconnect" between domestic political leaders and global corporate, business leaders.

"There is today an enormous gap between the way many C.E.O.’s in America — not Wall Street-types, but the people who lead premier companies that make things and create real jobs — look at the world and how the average congressmen, senator or president looks at the world. They are literally looking at two different worlds — and this applies to both parties.

...

Politicians see the world as blocs of voters living in specific geographies — and they see their job as maximizing the economic benefits for the voters in their geography. Many C.E.O.’s, though, increasingly see the world as a place where their products can be made anywhere through global supply chains (often assembled with nonunion-protected labor) and sold everywhere."

This disconnect is seen across the globe. While the reason for the different approaches offered in the edit seem to be the compulsions of electoral politics vis a vis reality of trade and business, the relationship is far more complex. The domestic politician has to face the "local" impacts of globalisation which the corporate CEO need not bother about. A local industry, due to reduction of barriers in international trade may face intense competition and wither away. This has an impact on the local employees of the industry and general living conditions of the community itself. The domestic politician cannot ignore this since he/she represents the interests of the local community and has to deal with the devastating impact of the new trade reality on local communites. To argue to them the benefits of a globalised world in this context would be rather futile. This dichotomy was articulated by the USTR Ambassador Ron Kirk here,

"Mr Kirk said compromise at those talks - where developed and developing countries are arguing over the levels of trade tariffs - would only be possible if the public supported world trade.

"The principles on which the statement 'trade is good for the world' have not been visited for some time," he told a session at the World Economic Forum gathering in Switzerland.

Unless politicians around the world explained why they thought trade would bring jobs and help consumers fight rising prices, then a global agreement could not be reached, he said.

"Than it becomes easier, frankly, to just do something practical [and make bilateral agreements]... rather than continue adding to our balance of trade by signing onto agreements to which the American public believes there's no benefits for us."

It is also interesting to note that not all CEOs (Friedman has rightly referred to as "many") would take the position that is opposed to the stand taken by local political stakeholders. Their response, at times is dependent on the impact globalisation is having on their particular industry. It would be interesting to analyse top CEO's reaction to globalised trade in raw materials that benefit their industry vis a vis their final products. The reaction may oscillate from being a "free trade" proponent to a 'protectionist". Nevertheless this dichotomy of reactions of "local democratic politics" as against "corporate  trade interests" is a reality that signifies the complexity of globalisation as well its impact on domestic economies. It would get shriller if the benefits of a global, multilateral trade regime do not percolate or seem to be percolating to all segments of society.

    

Regional trade, Africa and the WTO

While exhorting countries in the African sub-continent to strengthen regional integration as well as a domestic demand of goods and services Pascal Lamy commented on the state of trade there,

"All of this means that Africa can no longer just depend on external demand for its goods and services to support its growth. This must be complemented by robust domestic and regional demand. One of the clear strategies to promote this is through accelerating regional integration and supporting greater intra-regional trade. A policy focussed on this will help to mitigate the reduction in global demand by creating new poles of growth, and markets at the regional level. Global supply networks are the prevailing production frameworks of this new century and are fundamentally supported by open and transparent regional supply networks. Creating a platform premised on a continental area free of restrictive trade barriers can create an environment receptive to the growth of these regional and global supply networks in Africa.

Despite this potential the statistics on intra-African trade illustrate pervasive underdevelopment and under exploitation of the opportunities which intra-trade can provide. At a figure of 10%, which if the important informal sector is included could theoretically rise to 20%, intra-African trade is still substantially lower than the 60% in Europe, the 40% in North America and the 30% in ASEAN."

Emphasising the point that there is no contradiction between regional integration (as against Regional trade agreements) and the multilateral trade rules, Lamy said,

" First, there is absolutely no contradiction between accelerating regional integration and deepening the multilateral trading system. In fact, there is an urgency to ensure that the global regulatory environment is not worsening and that protectionism is not deepening. Both elements can severely undermine the benefits which boosting intra-African trade can offer. Use multilateral trade negotiations and the WTO system as impetus for greater regional integration.

Second, removing the barriers to intra-regional trade can ignite the interest of business and lead to investments and partnerships. Business will respond to actions that make trading easier. The Aid for Trade initiative is an excellent platform to focus on removing these barriers and investing in soft and hard infrastructure that make trade easier."

The African continent itself is such a vast and diverse continent with countries having diverse interests at the WTO. South Africa is an emerging economy while most of the other African countries would be considered LDCs. Can they have a common strategy at the WTO? Would their national priorities be able to converge to take advantage of multilateral rules? 

At the 8th Ministerial Conference at Geneva in December 2011, it should be noted that the African countries gave a common statement by the Kenyan Minister which was, unsurprisingly, very different from statements given by other countries. While other countries spoke about the need to reduce protectionism and for giving a boost to reduction in barriers, the African statement reflected the reality of the member countries in the WTO and the need for taking special care of their interests. Would the multilateral trading regime be capable of handling such diversity across the globe?

Doha Round impasse - Way forward?

The China Post reported that Pascal Lamy, the Director General of the WTO predicted weaker global trade in 2012. It noted;

" He also forecast that growth in 2011 “will finish at around 5.6 percent,” itself weaker than forecast in November, and added: “With an economy that is taking a nose dive globally, I would be surprised if we did as well in 2012.”

Lamy noted that “for now, we have not seen a protectionist wave” that would probably hamper exchanges even more.

Calls for protectionist measures have begun to multiply in countries like France where competitive positions have been undermined by globalization."

With the Doha Development Round not making headway, many commentators have forecast a gloomy next  few years for the multilateral organisation. 

In a refreshing piece "Don't give up on World Trade Talks" Sherman Katz and Gary Clyde Hubauer in an op-ed in Washington post have suggested a "grand bargain" to resuscitate multilateral negotiations.

"We propose an ambitious idea to break the resulting logjam: a grand bargain that couples an early harvest from the Doha agenda with a blessing by the WTO membership as a whole for the future negotiation of specific plurilateral agreements among willing countries.

The early harvest should start with subjects that create minimal commercial pain for any member but deliver widespread gains, thus minimizing the need for difficult tradeoffs (the underlying rationale for the single undertaking). Three possibilities are trade facilitation, duty-free-quota-free (DFQF) treatment of imports from least developed countries, and reforms to the dispute settlement system.

Trade FacilitationTrade facilitation is the concept of moving goods through customs faster and more efficiently, generating annual gains of at least $130 billion, with a disproportionate share going to developing countries. Reforms will slash unnecessary documentation requirements that create delay and abet corruption but do nothing for security or revenue collection. Singapore is the world champion for trade facilitation and a model for everyone else: Singapore requires just four documents, and clears imported merchandise in five days, on average, at a cost of only $400 per container. Sub-Saharan Africa, with double the number of documents, takes up to 44 days to clear imported merchandise at an average cost of $1,986 per container. The need for improvement is obvious and substantial.

Duty-Free-Quota-FreeA second area with strong potential and little commercial pain is the duty-free-quota-free offer made by industrial countries at the 2005 WTO ministerial. DFQF would allow market access to all goods from the least developed nations, as defined by the United Nations, unfettered by tariffs or quantitative limits. These countries account for less than 1 percent of world trade. Like any other offer in the prolonged talks, DFQF was conditioned on completion of all other items on the Doha agenda. Nonetheless Brazil and Norway have already implemented DFQF without regard to the single undertaking. There is no good reason why other large players, including the United States, cannot subscribe to DFQF as part of an early harvest and, at the same time, narrow the percentage of excluded tariff lines, primarily textiles, apparel, and shoes, from 3 percent (the current figure) to 1.5 percent. Precisely by exporting goods now in the excluded categories will the poorest countries—think Bangladesh and Cambodia—have their best chance of lifting themselves out of abject poverty by their own efforts.

Dispute SettlementThird, there is a soft pitch at hand which the United States can knock out of the ball park: reforms to the "crown jewel" of the WTO, namely the dispute settlement system that enables countries to resolve serious differences more effectively. The changes are not major: faster decisions, more control by countries to settle without going to final judgment, and more transparency of hearings and submissions by parties, just to name three on a pending list of 12 revisions."

Along with these three steps, the authors have suggested plurilateral agreements (like the Government Procurement Agreement) to break the impasse. Who needs to take the initiative to revive the talks? Are countries in a mood to revive the talks and think creatively for a solution in times of slow growth in world trade and "protectionist" tendencies? Would pursuing an aggressive line on RTAs sound the deathknell for the multilateral system?