American Enterprise Institute

June 26, 2008

[Edited transcript from audio tapes]

3:45 p.m.	Registration
4:00	Presenter:	Jagdish Bhagwati, Columbia University, Council on Foreign Relations, and AEI
	Discussants:	Brian Hindley, European Centre for International Political Economy
		Philip I. Levy, AEI
	Moderator:	Claude Barfield, AEI
5:45	Adjournment

Proceedings:

Claude Barfield:  Good afternoon.  I’m Claude Barfield, a resident scholar here at the American Enterprise Institute and I would like to welcome you to our book forum, Jagdish Bhagwati’s new book which is just out called Termites in the Trading System:  How Preferential Agreements Undermine Free Trade.  I should say before I say anything else that there are copies that you can buy in the lobby out here and I’m sure Jagdish would be happy, maybe for an additional fee or maybe freely, to autograph the copies.

There are several reasons that I’m particularly happy to be holding this forum.  The first of which is when you buy the book, and if you buy the book, you will see that the book is dedicated to the memory of Gottfried Haberler.  Now for those of you who are not economists, Haberler was one of the giants of international trade theory.  I guess his career spanned from the 1930s to the late ‘70s and early ‘80s first in Europe and then he had a long career teaching at Harvard, but his last years were spent here at the American Enterprise Institute. 

I remember when I came here, I knew him only by reputation but I quickly got to know him - we did not have email at that time - through notes, and Gottfried, he did not know me, began peppering me with notes about things I was writing - about the trade issues.  And in his last years, he became increasingly infirm, he could not walk for several years and then in the end, barely could he speak. 

I remember several times when he would call me, I could not understand, he might have to get somebody who is in his house but until almost the day he died, he was still reading everything and still peppering me with notes that he would hand to his housekeeper and then would come down here.  So we were delighted to have the dedication to Gottfried in this book.

There is a second reason actually and that is more specific to AEI.  We were one of the – probably – I’m just trying to remember, probably one of the first think tanks to publish Jagdish’s and others reservations about preferentials -– are called preferential or bilateral trade agreements.  We published a book that Jagdish and a colleague of his, protégé Arvind Panagariya, put together in 1996 called the Economics of Preferential Trade Agreements and then I think it was a year later or a year after that, Jagdish and Anne Krueger, who was then I think the president of the American Economic Association at that point or right about that point, published a little pamphlet called the The Dangerous Drift to Preferential Trade Agreements.

I should say that one can understand when I took off what happened subsequently, why Jagdish has got to come back to this subject because I think it was not -- at the year after 1996, another 50 or 100 free trade agreements were signed despite Jagdish’s warnings, then after the second and third volumes, another 100.  So we have had several hundreds since then so it is a daunting task for intellectuals whether you are up in Columbia or here to really get this point across so there is still work to be done.  And Jagdish, in this particular book, goes over some of the old ground but also covers new ground.

I also think, and I’ll come back to this in any brief comments that I have, that this is quite timely in terms of not so much the increasing number each week, each month of preferential trade agreements but that the gauntlet has now has been thrown down, I think, finally, though we have said this to ourselves before, about the completion or non-completion of the Doha Round.  And if I have any comment, criticism and one should not criticize an author for the book that he did not write as opposed to the book that he did write. 

One of the things that Jagdish does not take up, but I think we ought to talk about a bit is, yes, we deplore and there are all kinds of reasons not to have preferential trade agreements but we ought to start with what is happening with the World Trade Organization.  My own view is that even if they cobble something together, the Doha Round is a failure.  Any discussion, it seems to me, of what is happening in regional agreements and bilateral agreements, ultimately, has to go back there because why are these biases happening when Jagdish and others give quite good arguments about this being suboptimal.

Jagdish is an adjunct fellow here at AEI and he is also a professor of economics at Columbia, and a senior fellow in international economics at the Council on Foreign Relations.

Let me introduce the two commentators so we can go right through this when we start.  To his left is Brian Hindley who is now a senior fellow at the European Center for International Political Economy.  The three of us have known each other for probably 25 or 30 years.  I first knew Brian when he was at what is now a defunct think tank - a very good think tank in London - the Trade Policy Research Centre which is a leading small think tank in the ‘70s and ‘80s for free trade and for multilateralism.  He was also, at the time, a reader at the London School of Economics, and he has been a consultant, and he is now with what is a relatively new think tank in Brussels, the European Center.

Immediately to my right is Philip Levy, my colleague here, is a resident scholar here at the American Enterprise Institute.  He came to us from the policy planning staff of the Department of State.  Before that, he was on the staff of the Council of Economic Advisers and before that, for some years, he taught at the economics department of Yale University.

We are going to start with Jagdish who prefers to stand in his initial comments and then we will go to comments from the two commentators.

Jagdish --

Jagdish Bhagwati:  No, it is a bit easier for you to see me when -– after you cut -- 

Claude Barfield:  Is it on?

Jagdish Bhagwati:  Yes.  So to a quick answer to you because I’m not going to get to that issue, sometimes in certain cases, it is better not to do anything than to do something and even if the WTO is not doing well, when the Doha Round has problems with it, it still does not mean that we should be doing all these crazy preferential trading agreements.  So they are actually undermining the trading system which is really what I want to argue in this book.  And that is what I’ll basically speak to, and that is what the book is about actually.

The book is actually about preferential trade agreements which mean mostly free trade agreements.  They are the ones we really talk about.  Customs union is really just mainly European Union.  [Indiscernible] which is not quite there yet but it is at least intended to be there.  As far as I know there is nothing comparable at the level of customs unions today, but one cannot rule that out.  Even the North American one - the NAFTA - is nowhere near our customs union, and probably will not be ever.  It certainly will not be a common market, maybe a de facto common market with Mexicans coming across freely despite all the attempts of stopping them - thank God.  You know, but that is not a formal common market in the sense in which EU is.

I’m not talking also about one way of preferential trade agreements of the kind where you have free access for the developing countries and for their lessees and so on.  That is not what I’m -– I’m really talking about free trade agreements, essentially, okay?  So that is just to make sure we know what we are talking about.

I call the book Termites in the Trading System quite deliberately because that is what I think they are.  They are pox on the trading system; they are undermining it.  It is an unwitting undermining of multilateral free trade by people who are good hearted, who are free traders.  At the same time, you have, in the body politic today, large numbers of people who would wittingly actually be protectionist, and then there are some who are wittingly and unwittingly protectionists like the ones which Senator Obama has to worry about, but it is probably too late, because the Trade Promotion Authority already built in the stuff, namely those are one to put in labor and environmental standards and other things into trade agreements largely because -– and we are turning Thomas Friedman on his head, essentially, because Thomas Friedman says the world is flat and actually the world is not flat, as everybody knows since the time of Copernicus, so it is a terrible analogy to use - we are very productive financially.  But if you are competing with poor countries and they have different standards from Europe, particularly lower standards, then you would want to level the playing field by saying, “They should adopt the same burdens as I do, right, in this country.”

Of course, the fact that my burdens are very different from the ones in Canada and EU is neither here nor there.  I’m a super power, okay?  So I go ahead and say, “Look, you should have my environment and labor standards or whatever you can push, shove it in,” largely with a view to moderating competition.  So it is a form of export protectionism, which we are quite familiar with. 

It is masked in the language of altruism like we are doing it for you, which is particularly galling when, in fact, they are doing it for themselves because they cannot stand the competition.  And so it is an alternative way in which protection masquerades as concern for people’s standards and so on and so forth, and if you come from the Third World, as I do, it is particularly galling and, you know, and then they almost justify some of the ranting by Joe Stiglitz and so on that, you know, we are hypocritical and unfair.  In some respects, we are, but so are a lot of other people in preying on developing countries.

But this one I think -– that is another story but this is something which affects the PTAs because it is in the PTA, or the preferential trading agreements, that you really get countries one by one, right?  I mean, you get weak countries and look at the way we have treated Peru, and look at the way we are trying to do -- Uribe and so on.

These trade-unrelated issues - I’ll come back to it - are actually the ways in which lobbyists, whether good or bad, are shoving in all kinds of things because you can do that there and you cannot do it in Geneva.  And this is, you know, this is another asymmetry which also favors the growth of FTA.  So I’m not going to talk about the many reasons why FTAs are growing.  I’ll come back to simply the consequences of these but I did call it, as I said, termites.  And if you look at the cover, you know, I commissioned the Financial Times cartoonist who is the best in the world and he did a lot of beetles because you cannot see termites obviously until your house is gone. 

So he had drawn beetles around the globe and the CEO of Oxford Press lost sleep that night, he was seeing in his nightmare all these beetles going around so he preferred this one with different countries where the FTAs are basically cracking up the globe, which is the multilateral trading system.  So that is what you will find as a fairly -- 

Okay, so this is unwitting protectionism that we are talking about; it is really something which is not understood.  Certainly, Senator Obama does not have a clue because he has not thought about this problem at all, nor does his adviser who is really a student of Jim Porteba who is a public finance guy.  He is an MIT PhD [indiscernible] Business School, and eventually, presumably, he will acquire some decent economist on trade but right now, he has got the wrong guys on. 

I mean, he has people who are not hooked around with trade, except the trade is good.  So Obama does think trade is good but I do not think he understands these PTAs or free trade agreements are basically protectionist instruments as far, because of the trade-unrelated things, and this is under -– unions are pretty clear that is the game they are playing and he has got to learn that.  What he can do anything about it as something else.

As far as McCain is concerned, which is [indiscernible], McCain just thinks free trade areas are the same as free trade.  He is an unabashed free trader so, you know, if I was a one issue warrior, he would be my guy.  But he, too, has to understand that FTAs are not such nice creatures, all right, and so that he -– what he can do about it is different but at least he has to be aware.  So I’m in touch with the advisers to all of these people but, essentially, before you go into the policy space, you have to understand - for both parties - that these are very different kinds of things on free trade.

Why is free trade different from free trade areas?  Because free trade is, basically, multilateral - MF and free trade.  I just lower the trade barrier for all of you, all right?  So that is what we call free trade.  Free trade area means only, you would say, the left half of the people are actually entering into a free trade agreement so -- as Professor Viner pointed out, you know, right after the war, we are lowering barriers so that it is free trade among us, all right, we are freeing up trade.   But as soon as we do that and with any given external barriers the handicap of the non-members in our markets against our producers increases.  So that part is a protectionist part.

So free trade is not the same thing as discriminatory free trade.  Discriminatory free trade or preferential free trade automatically inherently implies in the way in which it is done that it is two-faced.  It is free trade and protection at the same time, which is why the economic analysis gets more complicated purely on the economics front, leave out all the things about trade-unrelated issues which happen to get into this kind of treatment.

So that is the -- I mean, all of us were brought up on Viner’s sort of basic point about trade diversion being a possibility but sure is either or both sets of members, or all the members and certainly distorts world production.

Now, there is not a completely decisive argument because trade also can be created and that may outweigh so it is a matter of which specific FTA you are talking about, if you want to say whether it was a good FTA or a bad FTA.  And then the whole literature on it, which I would not go into, but Article 24 was built in as an exception to the MFN, which is the fundamental principle of the GATT and that reflected the wisdom of people like Gottfried Haberler and all the great people of that time, economists, who have seen the interwar period and wanted to go back to the pre-interwar period which had broken into protectionism and preferences on a massive scale, which I have documented in the first chapter of the book.

They wanted to get back to that world which is, you know, every institution is built in light of the experience preceding it.  And so that is what they were into but they made an explicit exception, there are three or four other exceptions, but there were exceptions explicitly made to MFN.

And one of them was Article 24, which said that if you were doing an FTA, meaning going all the way to free trade among members, then that was kosher, okay?  Now, you might think that is rather crazy, I mean, why should complete discrimination - meaning we go to free trade - be better than, you know, than doing just 5 percent reduction of trade barriers among ourselves but that has to do with, I think, two facts.  And I have not read the recent book of Doug Irwin, and Mavroidis and Sykes, which goes into the history of the GATT. 

But the hypothesis I have is that, one, nobody expected that this would amount to a hill of beans; there might be one or two exceptions.  And two, they really thought they could reduce it to one or two exceptions by saying you have to go the entire way if you are going to get Article 24 benefit, all right?  So if you have to go the whole way that is going to be more difficult than if you have to go a little bit, okay?  So Article 24 was really built on this political economy assumption, in my view, although as I said, I have not read the archives that I have discussed with people because some of them taught me - James Meade, et cetera.

So I think at that time, this was the idea.  It has not worked out, they are not over 350 and they are growing by the day, but the reason is, of course, that all the restrictions or what are called by the lawyers, disciplines, which was put in Article 24 have been basically overlooked and, you know, that is part of the reason why these are expanded.  There are road blocks put in as it were which were not particularly restrictive, but they were restrictive when simply not honored.

So I think that was the way we got into it.  Originally, the intention was to confine it to customs unions, and it is quite interesting if you read the -– there are people who have done archival research and it was by sheer accident that since U.S. and Canada were contemplating an FTA, at the time that all of these was being done in the State Department and with the other negotiating partners, to accommodate that, you know, bunch of five people working in the State Department without any discussion generally, shall put in also FTAs, opening it up to a much wider possibility of expansion, all right?  So I think those are the kinds of things which you get.

So now, let me say, what are the problems, okay?  First, I already pointed out the static case that you could have trade diversion, so this is Jacob Viner’s major point at the end of the war for Carnegie Endowment for International Peace.  He called it the customs union issue but he just meant -– he was not really thinking about customs union versus FTAs as uncommon one [sounds like], he meant the preferential trade agreement, essentially.

Now, today, we have over 350, as I said, so we have a different problem and this is the new problem and this is something which I thought of about 15 years ago when we were writing about it and I could see them developing.  I could see the reasons why they were going to develop more.  So I should be happy that they have developed into the kind of problem which I had foreseen, but I would be happier if I had been proven wrong.  But now, we have a truly systemic problem.

When you are discussing a policy or a phenomenon which is going to be just an isolated FTA between, say, U.S. and Mexico, that is a very different problem from having 350 and probably, you know, a thousand by next year because everybody is into this game.  That is a very different kind of phenomenon.  And so that is when, looking at it, I call it a “spaghetti bowl” problem that is developing mainly that is because I cannot eat spaghetti without damaging my tie and so on and it is very difficult. 

Once, I was using that analogy years ago and my chairman was --I dared [sounds like] a speech.  He was not Italian and he did not know what the hell I was talking about.  He had no a problem with spaghetti like I did.  But it was essentially crisscrossing preferences and it leads to a variety of problems and I do not have time to -- because my opponent says we will pick it up -- 

Male Voice:  [Inaudible]

Jagdish Bhagwati:  Oh, no, I do know.  So he will leave time for me to respond.  No, I'm joking, partly.

So you had, therefore, a situation where when you have one particular, say it is a country, it may even be EU, which is de facto like the United States of America.  And then you have a whole lot of spokes here - different FTAs or different countries.  This is called the habit spokes sometimes.  In that situation, the specific tariff, meaning the actual tariff which you have will have been negotiated for all of these during a time path which is going to ultimately towards negligible tariff if you are going to follow the FTA requirements of having really effective, negligible trade barriers within the FTA by a certain point of time. 

So during that trajectory, you could be going at different rates on different products.  And you may be going on the same products at a different rate and different spokes.  So that itself creates arbitrage and complexity, okay?

Two rules of origin, which I think [indiscernible] written about and Anne Krueger in a very big way, they are called ROOS, rules of origin.  I have produced worse acronyms so I should not complain.  These rules of origin mean -- and that is a central problem about preferential trade agreements or any preferential agreement.  Well, I want to give a special tax or tariff treatment to one party and not to another.  I have to know whether that product comes from you rather than from the other party, which means I have to know it is really a Canadian product and not a Japanese product, for example.  And that is essentially inherently arbitrary.  It requires some specification of the rule by which I determine that it is really the Canadian product.

So there are two classical rules of origin.  One is what is called the substantial transformation test and the other is the valued-added from that source, right, because you may be importing from other source.  Now, at the moment, unless it happened in the last few months, no agreement on which of these two the world will agree on.  There is another story as to why they do that. 

Secondly, people who go in for preferences do not want any uniformity because part of the game in this is to take away with one hand, as far as protection lobbies are concerned, what you are giving with the other.  So you are giving away the output tariff on some sort of schedule.  But on the other hand, you say, “Look you have to import so much from the United States before you get qualified for this NAFTA tariff.  That means you really want to negotiate such high content ROOS that, in fact, is going to prevent this from really taking effect.  It is going to increase the cost of production.  And therefore, that is going to countervail the decline in the tariff which you were just really going through.

Now, as a result, you will find - and this is just something we know in depth now - and what happens is, that in the rules of origin are varied depending down to the product.  The hundreds of rules of origin, different ones apply to different industries, different product lines and so on.  I did not believe it until actually, you know, many people convinced me. 

And then I realized why when I was debating Laurie Wallach in the old days; unfortunately, she has disappeared from the scene.  Maybe she is polishing her sword or something for the next round.  She is a lawyer and she would come into a debate and then plump down a big, fat volume and said that is the NAFTA treaty.  And if this is trade liberalization, this is free trade - that is a joke - which is what all of this is doing. 

In fact, you should have no book.  You should just say you have free trade, right, and of course most of that stuff was trade-unrelated issues but a lot more was on the trade, different rules of origin.  So there are hundreds of rules of origin and it is mind-boggling for economists so do not look at fine print error.  Lawyers do, right?  That is the way they are smuggling on kinds of things like Chapter 11 which we did not know about in the NAFTA treaty and so on.

So I think that is the main problem with preferences.  Today the world is so cosmopolitan.  There are products coming in from everywhere that to try and imagine that you can decide which product is whose, I mean that is a mug’s game.  You have got to be stupid to do it, but there are lots of stupid people in the world and they continue doing it.  If you are going to talk to CEOs, which I have, many of them say, “This is ridiculous because we are now in a world economy.  And to try and to have to worry about where something is coming from and so on is really cockeyed.”

And so the big firms, of course, can hire MBA students and try and work it all out and minimize the cost of production and play this game like Honda fought with us on whether it had enough in either content or value content from NAFTA because RITC - if I remember correctly - said that they did not.  So they hired lawyers and they argued against it, and it is essentially a completely arbitrary even if you agree on the rule of origin because say, you are importing steel to produce Honda from Japan, how do you know that sheet or an ingot has gone into the Honda rather than to 50 other users. 

So you have to make an arbitrary assumption.  Then the Japanese production of steel, it still requires chemicals and so on which may have come from us.  So how do you determine all of this?  So you have to be crazy, as I said, you know, you cannot in the modern world really do this.  So unless there is an overriding reason why you want to have preferences, right?  I mean there can be offsetting reasons but I cannot think of any real reasons to why you would want to live in a world which is so crazy.  And this really hurts.  And I see Mr. Wolfowitz who used to worry about them but I'm sure still does about developing countries, “Did you really have to?”

The small countries and the small companies cannot handle all this.  It is too complex a system.  It is chaotic - totally chaotic.  And I heard, Alec Irwin who was, you know, you must have know from the South African minister for trade, an excellent man, he said, “This is really getting to be impossible for us to function in this kind of system.”  And we really have to have MFN rules, all right?  Simplicity.

So I think this is, I think, the biggest problem.  I mean there are lots of other things I could talk about but I’ll just leave it on that one.

Then there is another one - as I said, the trade-unrelated topics.  The problem is -- now this does not apply to the two types of FTAs in general.  Those among developing countries and they never have, it is interesting.  I was at the OECD Forum the other day and there was an Australian trade unionist, she is a very bright woman and she said, “You know, not everybody is having labor sundries [sounds like] and all sorts of things in their free trade agreements and their trade treaties.”  And I said, “I beg your pardon.”  I said, “Look at the entire list of FTAs among developing countries only; it is all about trade issues.” 

None of it has anything relating to trade-unrelated issues whether you think in terms of restrictions on the use of capital controls, or WTO plus intellectual property protection.  This is all in one side of the political spectrum.  Then you have labor standards and environmental standards and what have you which is on the side of the political spectrum - meaning the democratic.  So the Democrats also, some of them have embraced this lot as well.

So there are lots of lobbyists operating on it but these are not lobbyists that are active.  And when they do FTAs among the developing countries, they do not have it.  Japan does not have, of course.  They are the only major power that does not have it.  EU tries to do it and the U.S., of course, par excellence does it all the time because I say they are constituency-responsive democracy.

So the lobbyists really get their core into the water.  And then people have no option.  And they think, you know, they are just getting access to our big market.  And in fact, we threaten to withdraw that access in order to get them to sign on.  It is a little complex issue but that is what we did with Central America, because of the GSP being potentially withdrawable.  So we have actually used threats - reduction of market access to get these kinds of things in.  So that is a game which the big powers like Brazil, India, refuse to play.

China, of course, is a different case.  But EU wanted an FTA with India with all the usual trappings, human rights and so on, and India just told them, “I'm sorry, go back, come back without all these rubbish.”  It is not that we are devils with horns flaying our people alive and so on, or putting them into Guantanamo and so on.  It just is not true.  I mean, you know, that might be partly true in certain cases but it is not that we are off the charts in terms of these things and there other places you can discuss these things.  So EU went back, it is working at the table.

And Brazil, as you all know, I mean, President Lula, I think you could say was the most eminent trade union leader of our time and he, you know, -- well, I enjoyed meeting John Sweeney and others around here, I do know them.  They are no patch on Lula in terms of unionization and union leadership.  And he does not want all these issues.  He wants to confine -- he told on FTAA, he told President Bush to go back and that he was not going to sign on all these other things. 

He said, “Just concentrate on trade issues.”  And so President Bush had to come back.  And then, of course, the USTR said that Lula was proposing FTAA light, meaning without all these other extraneous consideration and that we were going to go to the Andean group for all the things which would have come in there.

Of course, they are forgetting that FTAA light is actually a good word, not a bad word today.  I think most of us drink Coca-Cola light and so on and so forth.  In the cholesterol age you do not think of “light” as a word of abuse which is what they were doing.  So I think that is a big problem.  And I think Obama is going to run into that and so is McCain - both of them - because none of them understands what these -- Obama really wants all these things inside because the unions want them, and some of the environmentals want them and it is not going to go through if he really wants trade, which I think he does, because no leader in this country could ever be anti-trade. 

I mean I just think when the rubber hits the road, they are going to be for trade.  But he is going to run into problems, his constituencies, as soon as he tries to negotiate agreements because you can reach agreement among yourselves to have this.  International trade means two parties; you have got to get the other side also to agree.  And so this is no way you are going to get it.

Finally, there is also the perennial question of - which is also new - if we do this, do we actually undermine the world trading system in terms of moving towards reducing barriers through Doha, et cetera.  So is there a malign connection or a benign one?

Now, Mr. Zoellick believed that -- he is the author of the -- and I think Fred Burks, and they have a little tiff among themselves as to who thought of it first, but I think it is not a workable idea so maybe they will stop trying to take the discredit for it rather than the credit for it.  But if one manages to convince them -- but I think, essentially, the idea of a new [indiscernible] competitive liberalization, the idea was you would be able to get people to agree on the Doha by saying, otherwise, we are going down the PTA route, the FTA route.

That was essentially the notion that there was a benign relationship for you, and down this road we would go faster, on the other one would bring about a dream.  And there, Fred Burks, in particular, believes and I’ll just give one example, and he believes that the reason why Uruguay Round was settled, because we threatened in Seattle to go the APEC route.  But there was no way anybody could have believed that it was a real threat, for the simple reason that even today, despite many American efforts APEC is just an association.  It is not under the -- for years, they had what they called concerted unilateral trade liberalization, meaning on an MFN-basis. 

And we were going bananas because Japanese, Australians, all of these people wanted MFN and we said, “No, no, we have to have reciprocity.  We cannot extend this automatically to others.  And we wanted to turn it into an Article 24.  But an Article 24 agreement with China, Japan and U.S. inside that system is almost utopian.  If you are going to do that you might as well be getting pretty close to Doha itself.  So I have never understood that but he said that that is what goes around.

I have my own views about what goes around but, certainly, this one does not wash because I have talked to many European officials and they simply said, “Look.  That is a joke.”  It is just -- and after Leon Britain - all sorts of people and it is because nobody who had any gray cells here, right, could ever think that APEC could be a serious threat at that point or even today to the multilateral system, to the Uruguay Round at that point.  So it is simply something which Mr. Burks believes, but nobody else does.  And as I said, you know, people just laughed, but see, that is his main argument.  And I think having these things happen is a plus or minus depends very much on the circumstances in which you are dealing with it.

Let me give you one argument and then I’ll go to what we do about these things.  Look at the political economy of it.  If I'm spending a dollar, let’s say I'm Eastman Kodak, and I'm spending a dollar lobbying effort to open up Mexico or Janeiro, right, for the multilateral system.  If I open it on Mexico via NAFTA, then I get the entire returns.  The Japanese and the Europeans do not become free riders, all right, into mine so I'm opening it for myself.  So I will be inclined to really go for backing NAFTA where I get a high rate of return for my investment than I’ll get from Geneva where everybody participates.  So this is just a [indiscernible]-and-a-free-rider problem operating.  There are a number of such examples which one can produce which suggest that actually you will have.

Secondly, I think it is true that a lot of energy is spent on these things - on the FTAs.  Bureaucrats can be supplied like Marxist reserve army of labor.  But that is not true of the talented bureaucrats like Mr. Wolfowitz and so on.  I mean those are few in number and those are all tied up.  They are all tied up pursuing this wretched little agenda, you know, the free trade agreements have very little consequence in terms of trade. 

And once, Mr. Portman, who is terrific, when he was USTR, he came to the Council on Foreign Relations on the way to London -- meeting in London on pushing the Doha Round.  And he spent 10 minutes on how many FTAs he was pursuing and one minute on Doha.  So here was a man who really was critical to Doha’s success, simply going for something where he could show that he had accomplished something even though it was negative, in my view.  Because that was a flag which you wear.  So that is another thing.

So now, you could go down the list in a variety of ways where it does, you know, there are really negative relationships - malign ones rather than positive ones.  And, you know, I also assume Mr. Zoellick is wrong in thinking that if I open up, I mean if I start an FTA, they will want to come in and therefore, you know, that is also part of the reasoning and I think my good friend, Dick Baldwin, had a model.  I do not know if you have one, too, Phil.  But anyway, Dick Baldwin had one.

But actually, what you observe in the real world is not just that, there is a bit of that, but it is tit for tat.  I mean look, we went South, United States.  We did not tell Indonesia, Mahathir and so on that they could be part of FTAA, right?  So that was our show.  So then, when they start doing their own thing, they were the last holdouts, so Asia finally gave up being entirely MFN.  And then, they started doing their own thing.  So what do they do?  ASEAN Plus Three, ASEAN Plus Six, I do not know if it h as changed some more, but U.S. was always out.  U.S. was never in.

So the U.S. then had to react, right, because they suddenly realized it was down in an area which was unstable, low growth rates, right, but Asia was a big winner, right, I mean growing rapidly and we were out of it because we have been foolish enough to go down South without bringing them in and now they are coming at us by saying, “We are going to do our own, you are not going to be at the table.”

That is essentially the kind of thing that goes on - tit for tat - not just competitive people trying to get in because they are, you know, “Oh, that is such a profitable club.”  The U.S. is trying to do that so now, again, we are trying to turn APEC now, finally, into an FTAA or saying you should not divide Asia from the Pacific but by Pacific, we mean us, of course.  We could not care less about what happens to Uribe and so on and so forth.  I mean in my judgment, I mean, you know.  So we are worried and we now want a seat at the table.  So I think all of this, politics is always part of every economic policy, but this accentuates it so much.  So I think, essentially, the relationship is not as benign when compared to liberalization as Burks and Zoellick were making out, so I raise some of these questions.

So it is an essay in persuasion, you know, I have taken all these arguments and analyzed them, and you will see here the downsides to my arguments.  But essentially, if you want to now do something about it in a way -- there are so many of them.  So even if you agree to stop them at the margin, you cannot do that anymore at all.  I mean you can stop them at the margin but there are so many of them already now.  So many being projected that it is utopian to say, you know, just stop them.  Others would like to dissolve them which is even more utopian.

Then there are arguments about taking the spaghetti bowl and turning it, as one of my friends put it, “turning the spaghetti into lasagna.”  Meaning, try and bring some harmonization, order into rules of origin.  But I told them, [indiscernible] Hamada at of Yale and I think Phil knows that.  And I said, “I know nothing about Italian food except how to eat it.”  But not, again, properly, but I said even I know that you need flat pasta to make lasagna and you cannot make it out of spaghetti, right?

And so you really -- the harmonization -- we had a beautiful conference by Dick Baldwin.  I think Phil was there, too, trying to see how far we could go down this line, but I was not convinced by anything dramatic we could do.  At the margin, we could probably agree on certain rules, but for what was actually there, is very hard to convince anyone that we can really do it.

So the only answer, finally, is two-fold and which is to say, look, preferences are relative to MFN so bring the MFN quickly down to negligible levels and the preferences will disappear.  All these games we are playing with trade-unrelated objectives, I think only the developing countries can actually unite.  Many NGOs are now acutely aware of these games that we are playing through the -- I mean the biggest consumers in my book are actually the more radical NGOs in the Third World, which surprised me because I normally do not meet with their approval.  But they now see that we are really imposing on them all kinds of obligation which have nothing to do with trade in the name of trade.

And I think this is really now coming to a head, but it is only if you get public opinion there, like look at what happened with Seoul in these demonstrations.  I'm not commenting on whether they look good or bad but they certainly made everybody go back to the table and I think the trade-unrelated aspects, ultimately, the developing countries themselves and their civil societies will have to come together and say, “Look, I mean you are not going to tell us what we are going to do on these dimensions if we are democracies.  We are going to do it through our democratic processes.  And you look after your thing. 

And if you really think your labor standards should be part of the treaties, I have one excellent suggestion - U.S. should stop all trade, all exports because U.S. has about the worst labor standards we know.  It has not ratified most of the ILO core standards, less than 10 percent almost are unionized.  They can start imposing obligations themselves before trying to get it to other people.  And you know, let’s just be self-sufficient, if you are really serious about these standards.”

So I would just call the bluff and say but that cannot be done by an individual country except very big ones like India and China and Brazil, but it needs a political response.  But the Doha would help because on the trade side, where you have preferences, on the trade side you can have definitely a response in terms of reducing the MFN.  So the effect of the preferences is eroded.  You may not be able to remove the preferences, but since it is a ratio, you can actually go the other way.

So I think a combination of vigilance, responsiveness, awareness of what is going on, on the trade-unrelated issues, and pushing really further the Doha Round seems to me to be -- and then for the next round to have more MFN reduction, seems to me to be the kind of combination which I think we ought to push for and I think it could be done.  I mean it could be done but it is going to take some time but in this presidential election, I do not see any -- I mean some of these issues are going to come up but not the ones which relate to what we are doing to other countries, I'm afraid.

Thank you.

Brian Hindley:  Well, it is always a pleasure to listen to Jagdish, and it is a pleasure to read him and I enjoyed reading what I read of this book, but I should make one comment before I start making commentary on it. 

What I have is a manuscript, a typescript, I do not know how far back, I do not know how it relates to the actual published volume so number one, I'm going to quote -- 

Jagdish Bhagwati:  It is more or less the same.

Brian Hindley:  Yes, probably, but I'm going to quote, but I will not be able to give you page numbers because I do not know what the page numbers are in the published volume, and it may even be that what I quote has been changed or extirpated or -- 

Jagdish Bhagwati:  That is the folks’ defense.

Male Voice:  Jagdish never changes anything all the -- 

Brian Hindley:  Okay, let me, first of all, state my general position on Jagdish’s argument.

First of all, I agree quite strongly with the general thrust of what he is saying.  I'm quite a lot less persuaded of the central importance of the problem of PTAs, or of the threat they represent to the world trading system.  What I'm going to do in my comments is to explain why I'm on the skeptical side of thinking this a central issue.

First, however, let me make a comment on Article 24 - the article in the GATT/WTO that authorizes PTAs.  It always seems to me a difficult article - a difficult subject.  People talk about high politics and low politics, and trade policy is without any question, low politics.  It is nitty-gritty, it is not high concept, it is very low but Article 24, in principle, deals with high politics.

If France and Germany, for instance, decide that they wish to unite their economies in a customs union on the basis that this will prevent the recurrence of wars that have disrupted them on three occasions in the 19th and 20th centuries, what moral authority would the GATT or the WTO have to claim a right to judicially review this decision?  It is perfectly sensible for the GATT/WTO to place restrictions on what you can do but the fundamental decision is something, it seems to me, way beyond the purview of the GATT or the WTO which is, as I said, dealing with low politics, not with high politics.  And France and Germany is high politics.

Jagdish, I think, does not disagree with this.  He says the core EU could hardly be judged by narrow trade criteria.  That would almost amount to the tail wagging the dog.  I’m not certain what that is saying but I think it is saying something like I have just said.

Now, having made that general comment, let me turn to the issue of motives.  I’m not going to focus on these comments, but I cannot resist picking up Jagdish’s analysis and thoughts in his first chapter.  The current tide of preferences has been a result of politicians’ mistakenly in an uncoordinated fashion, again, pursuing free trade agreements because they think erroneously that they are pursuing a free trade agenda.

Now, I see virtually no evidence that the politicians in the world wish to pursue a free trade agenda.  It may be that they are all making mistakes all of the time.  But I just do not see this as a central motivation for politics and I, therefore, find the idea that they are actually pursuing free trade but they are making mistakes as completely unpersuasive description of motivation.

But what I do want to focus on is something else.  I have already mentioned politics in the context of Article 24.  Jagdish, a couple of times, mentions political motivations in the text.  He talks about the EC and the quotation I just gave and he comments about the first U.S. PTA, U.S.-Israel, and he says, which is a purely political phenomenon that had nothing to do with economics, Israel being a special case in U.S. politics.  Well, I accept that but when we come to the list of motivations for forming free trade areas, PTAs, I agree with that terminology, I shall try and convert to it completely but I have not done it yet.   When he comes to the list of motivations towards forming PTAs in chapter two, politics drops out so far as I can see.  There are various related concerns, security, for instance, but politics as such drops out.

Now I do not think that is right.  I think that politics is a motivation for many PTAs, and I want to make the same distinction Jagdish makes here.  There are PTAs in which the U.S. and the EC are major partners.  I am not talking about them in this context.  I’m talking about PTAs between other countries.  And I have recently been studying Central Asia.  Indeed, I’m talking tomorrow about Kazakhstan presumably in this room. 

But one of the interesting things about Central Asia is that, again and again, there are attempts to form customs unions, economic spaces, free trade areas - the current one is the Euroasian Economic Community - and it seems to me perfectly clear the economics of this, you would have to be very badly mistaken because the last thing they want to do from an economic point of view is to form customs unions.  They are expressing some kind of little motivation towards unity.  That they were all unified and then it all broke up and they are expressing when they talk about customs unions and negotiate the customs union in which the letouts [sounds like] are so broad that it hardly affects anything.  They are expressing a little motivation towards a previous stated unity which, in some sense, they would like to recreate.

My impression is that that happens in quite a few other places.  Jagdish was talking about APEC.  ASEAN has not, so far as I know, been a resounding success.  I have recently spent quite a lot of time in Egypt which is a member of half a dozen PTAs.  One of them is the Pan-Arab Free Trade Area - had virtually no effect on trade.  Trade between the Arab states is tiny.  It is the middle -- the Central Asian motivation of expressing a wish; this is the first step to something that in a century, two centuries might turn into something else.  It is not a serious economic thing.  It is an agreement on political symbolism - no more.

Now, I think that politics is much, much more important than Jagdish says in the text that I have so when he comments, for instance, that Jim Mathis, a friend of both of us, a lawyer dealing with these matters, the fact remains, however, that as a lawyer James Mathis has argued, the reviews that the WTO are more “political” than “judicial”, it is not clear to me that that is inappropriate.  WTO action under Article 24 should have a political element.  That seems to me to be quite right.

Whatever the motivation towards a PTA, however, it has economic consequences.  The consequences are well discussed by Jagdish - the standard classic trade diversion problems of free trade areas.  I was thinking, as Jagdish spoke, one of the worst afternoons of my professional life, I think, was being jet lagged in Guatemala.  The Guatemalans were thinking of forming a PTA with the United States and it seemed to me that it was my job to explain to the Guatemalans that it was possible that they would lose. 

I did not want to say they would lose because I did not know whether they would lose but I wanted to say, “This is something you should think about.  You might lose.”  And I was utterly jet lagged.  I had this audience that was staring at me of, I suppose, what you call opinion formers in Guatemala.  I had this audience staring at me and I could not get any response whatsoever.  It was just an awful, awful afternoon.

Anyway, but what Jagdish focuses on is the spaghetti bowl.  And, okay, spaghetti bowl makes nice diagrams - I like that.  Is it really that harmful, though?  Jagdish several times uses the word “chaos” to describe the effect of the spaghetti bowl.  But I do think it has to be said that the evidence in the manuscript that I have read, “Foolish Proposition,” is really quite slight.  A couple of speeches by businessman, a reference to 10- or 15-year-old case involving Honda in Canada on rules of origin - if it really was chaos, it seems to me that it will be possible to generate much, much more evidence of chaos. 

And in principle, there is no chaos involved here.  It is messy, it is untidy, but in principle, there is no mess involved.  So somebody in country A trades with somebody in country B and each of them have 25 PTAs with different people, what happens, well, somebody goes on to the Internet and sees what the rule of origin is for widgets from exporter from A to B goes to the origin agent to be certified as A widget comes up to the customs person, “Here is my certificate of origin,” and the customs officer says, “Oh, yes, well, that will be 4.5 percent.”

Now, I think that vastly oversimplified the story in many ways.  In particular, rather than this process of information, I would expect principal beneficiaries from the spaghetti bowl to the customs officers.  I would expect the level of bribery, the level of bribes to rise substantially with the increase in opportunities for shifting things around between different categories.  So I would expect that customs officers would do pretty well and maybe there are some positive correlation to be drawn between the number of PTAs and the observed welfare of customs officers, not their salaries, but their observed welfare.  Somebody should do this work, however.  It needs to be done.

The final point which I have some difficulty with Jagdish’s argument is the non-economic, what he calls the non-economic aspect of bargaining, intellectual property, for instance.  I have, absolutely, no doubt that this happens.  I’m a rather strong opponent of the TRIPS Agreement in the WTO.  I do not think it should have been done.  I do not like it.  But what exactly is the proposition being made?  What is being made here?

I would expect that if the United States negotiates with Costa Rica, I would expect that the value of the exchange is equal just as I expect it to be equal in a transaction in a shop here.  Costa Rica gives something on intellectual property, the United States gives something else - some market opening.  I would expect the two sides to be giving the same amount, except, in the case that Jagdish mentions in which the United States or the EU has unilaterally given something to a country and threatens to withdraw it unless the country does what the United States or the EU wants. 

But absent that, it seems to me that the exchanges on the two sides, they are going to be complicated to look at and assess but that is not only true of PTAs.  I would expect the exchanges to be equal.  I would expect Costa Rica to come away from the negotiations thinking, “Oh, we got a good deal.”  And I would -- 

Male Voice:  [Inaudible]

Brian Hindley:  I’m finishing, anyway.

I would expect both Costa Rica and the United States as one comes away from negotiations; both come away thinking that they have a good deal.  And I do not see how absent the unilateral element that the United States can withdraw, I do not see where the bargaining power is to subject partners in PTA negotiations to worse outcomes than they give.  And if they do not, then I’m not sure that it is a problem.  I dislike TRIPS in the WTO.  I dislike it much less in PTAs because of this equality in bargaining.

Okay, I’m coming to an end here if I could find the last quote that I wanted.  I’m going back to Jagdish’s first chapter in the version that I have read, he says, “In short, we now have, once again, a world marred by discriminatory trade much as we had in the 1930s from which all sensible men and women had recoiled.”

Now, if we are talking about the 1930s “marred by discriminatory trade” seems to me to be an understatement.  Marred implies some slight blemish.  And in the 1930s, discriminatory trade patents were not a slight blemish.  They were the core of the system and it was a bad system.  Marred may be the way we should talk about it.  No, Jagdish would object, the word is too weak I suspect but maybe, in my view, maybe we should talk about a system marred by PTAs now.  But as we had in the 1930s, from which all sensible men and women have recoiled, Jagdish writes so well.  Maybe he gets some poet rights in exaggerating in stating but I think you need a little bit of poetic license to make sense of that statement.

Thank you.

Philip I. Levy:  Well, thank you.

I have worked on these kinds of issues, actually this particular topic, ever since I was in graduate school and yet I still learned a good deal from the book.  I always do when I read Jagdish’s work.  He is a seminal thinker on the topic and he has really been intimately involved in the policy debates.  And I think it is fair to say that the multilateral system really has no more staunch defender than Jagdish.

However, like Brian, I also emerge more optimistic about FTAs, perhaps certainly than Jagdish.  Many of the problems that he raises are real, but there are some other considerations that I want to raise.  I’ll try to be brief since I’m quite certain that Jagdish will not take all this sitting down and all of you probably have a great deal you would like to join in on.  So I think the question that Brian raised is a good one, which is: Why are countries pursuing these free trade agreements?

There are answers in the book but it often goes down to the argument that proponents are either foolish or venal, and I think it might be worth considering a few other possibilities.  I think that there is a heavy focus, and here, Jagdish actually reflects the economic literature, there is a heavy focus on tariffs and I think that many missed some of the points.  So is this really about trade diversion? 

If it is, it raises some puzzles in trying to figure out what countries have been doing exactly.  We see countries involved in a multiplicity of arrangements joined with many partners – Mexico, for example.  We see countries with fairly complacent attitudes about what would be preference erosion in a straight tariff model where you gain preferential access and someone else joins.  Mexico offered to host the free trade agreement - the Free Trade Area of the Americas.

Also, if you look at it continuing with the NAFTA theme, the United States had 2.5 percent roughly average tariffs on Mexico prior to the adoption of NAFTA.  Surely, there were areas of protection where you had tariff peaks but we still do have protection.  You have anti-dumping [indiscernible] applied before, they apply now and it is taking quite a while and things like trucks from Mexico to get anywhere.  So Mexico, in turn, had substantially higher barriers, why would it want to do this?  Well, I think there is a number of reasons why and I think Mexico is emblematic of this.  The idea that there are political motives and that this symbolizes some political allegiance, I subscribe to it.  I think that is a very good one.  I’m going to offer two others.

I’m going to talk about free trade agreement as a means of locking in economic reforms and signaling to the world that you would like to attract investment and you are worthy of investment.  And also, I want to, then as my second point, take up this question of what Jagdish refers to as trade-unrelated issues and ask whether really they are all trade-unrelated.

So first, let me talk about the locking in reforms.  Coming back to Mexico’s example, Mexico joined the GATT in 1986.  It was some years later that they started talking about joining NAFTA.  Jagdish notes in the text either one should signal a commitment to openness.  But, in fact, I would argue that GATT was very ineffective.  And it is ineffective for a particular reason - one that Jagdish also describes in the text - which is, that there is a tradition in the GATT, and now in the WTO, of not really requiring terribly much of developing countries. 

You do not commit too much as a developing country when you say that you are joining the GATT or the World Trade Organization.  And you might be pursuing truly wonderful policies but you might not be and either one is consistent and, therefore, if you are trying to tell everybody, “Look how I have changed.  I know I used to nationalize industries and do the like,” joining the GATT does not disprove any belief that anyone had.

What could a nation like Mexico do to really signal to the world that things were different?  What could possibly be more telling than an economic embrace of the United States?  And that is what they did.  And you can argue that it actually worked; that the test of NAFTA was not what happened with sort of sectoral movements because you have very small barriers in many cases but the fact that it was not subject to some of the international financial crisis that came in the late ‘90s, that was anywhere nearer subject as to what you would have expected otherwise.

So I think this reflects a failing in the multilateral trading system.  This does not have to do with sort of relative tariff levels.  It has very little to do with tariffs, but it has to do with the requirements that are placed or not placed on developing countries and the ability, therefore, to use these things as a signal to attract investment.

I will sort of elaborate on why this works as I get to this next topic which is what Jagdish refers to as trade unrelated issues.  And he has a striking image both in the book and in his talk of the unjustifiably thick volume of NAFTA where if you are really interested in free trade, it would be a page.  I question that.

I think he is quite right to go after labor issues, environmental issues.  I think there are a lot of really serious questions about the appropriateness of talking about intellectual property but I’m not sure that we can conclude from that that, therefore, everything is about quotas and tariffs - about border barriers.

Well, first, let me just throw out a number, which I find a compelling number, which is that when we look at United States trade, for example, we can ask what fraction of U.S. trade is simply the classic version that we might have in mind from reading Ricardo [phonetic] where you make a good and you put it on a ship and it goes off somewhere else and then something comes back in exchange, or what part is actually occurring between related parties that this is either a parent sending a good to a subsidiary abroad or subsidiary here sending something to a parent abroad.

The figure that the U.S. Census Bureau came out with last month was that of U.S. trade, 40 percent of goods trade - I would imagine it is a bit higher for services but I’m speculating - 40 percent of U.S. goods trade is among related parties.  What is the relevance of that for this?

The relevance is that there is intimate linkage, therefore, between trade and investment.  If you are going to have a subsidiary abroad or if you are going to be a subsidiary, this gets into your investment policy as well.  It is hard to argue that investment policy is entirely trade unrelated with these kinds of figures if we are seeing an awful lot of trade occurring between different ends of an investment relationship.  And yet, that is the kind of thing that has been kept out of multilateral discussions which I think is one thing that it has heavily prompted the push into the regional or poor or preferential trade agreements.  It is not the push for preferences so much as there is a great desire to talk about these things.

And the list of issues does not really end there.  So could we really just, well, the thing was, could we really just say free trade and have our one page sheet.  Actually, the last I looked, WTO agreements were not a single sheet either.  But we can say what about product quality standards and sanitary and phytosanitary regulations –- once you learn to say it, it is fun to whip that out.  But you may say we have a problem which is that there actually is not equivalence between telling somebody that they have a zero quota on their good and declaring that their good is unhealthy and may not be imported.

Now, you may say that a good is unhealthy for perfectly legitimate reasons; this may be a sincere belief.  You may or may not have scientific evidence to back this up but it can also be done as a bit of artifice trying to keep the good for protections reasons.  How do you distinguish between those?

Now, these are issues that have been addressed in the GATT negotiations, WTO negotiations, but they also add sort of a complexity.  Continuing the list - dispute settlements - you are dealing with investments, you are dealing with commercial things, what happens with disputes?  How will you work this out?  Again, a push for sort of deeper integration.  What about the question of, say, whether doctors from abroad can practice in the United States - service as trade is very important. 

Can other countries export medical services to the U.S.?  Do they need licenses?  Do they need the same licenses; can we require the people graduate from U.S. medical schools?  On the other hand, could you have U.S. lawyers with the right to go practice in foreign courts?  Again, services - we got plenty of lawyers.  Can we export this to the world?  Maybe, maybe not.  We tend to regulate this fairly heavily at home.  We do the services trade.  How are you going to get into this, how are you going to deal with these things? 

So I would argue that you have this whole range of issues that actually are quite trade related and that you go beyond tariffs.  And I think there has been an extremely unfortunate reluctance in the part of developing countries to keep these issues out of the multilateral negotiations.  Services are in.  You have had gaps but not huge commitments and it is actually the one of the very least productive of the negotiating areas in the Doha talks.  Investment is not the end.

So I think this is why I actually saw this rather disappointing when Brazil decided to not support, having sort of the deeper integration, having these discussions in a broad Western hemisphere of Free Trade Area of the Americas, not really something to praise but the idea of an FTAA light was we will ignore this range of issues which are actually very central to modern trade.

So in the interest of time, let me stop there.  I’ll say I think the concerns are quite real.  I think there is a complexity that comes to this.  I completely subscribe to the notion that my ideal would be that we take on these important issues in the multilateral forum.  I think it would be better for developing countries, I think it would be better for the U.S., it would be better for business.  But we have had some failings in the multilateral setting, and I think this is something that has to be overcome and there is a question of how one overcomes this.

So I would suggest that it is broad - that the analysis is fascinating in the book.  And broadening the discussion to address these additional issues, which really would take some awful lot of negotiating time when one talks about these things, could be quite fruitful.  And, of course, no one is better equipped to talk about such things than Jagdish.

Claude Barfield:  I want to make three quick [audio glitch] turn it back to Jagdish for about five minutes and then we will come for the rest of the time to the audience.

One, I want to pick up on what Phil ended or said somewhere in the middle of that but he can confused a couple of things.  One, you went back, several people who said to the fact you got 400 or 500 pages but when Laurie Wallach slaps it down all but maybe 10 of those are probably all about rules of origin.  It is not the kinds of things you would -- it is not about services.  You could have that but it is really rules of origin.  And let me just throw out some of the work I have been doing about Asia.

Clearly, in East Asia, rules of origin really are not a big issue because what has happened and this gets back to the production sharing that you alluded to, that you are a part -- a lot of trade is not end product to end product.  It is trade with components and parts and that is certainly true in East Asia with everything, a lot of things ending up now in China.

But what has happened out there, clearly, and this gets to the question of chaos or disruption, is that for the sectors that are important, particularly almost the entire electronic sector, it has now moved to chemicals and I understand is moving into automobiles - the tariffs that unilaterally have been made so low that you paid no attention to them.  They go around or they are low enough so that it is a half a percent or 1 percent.  You do not worry about the rule of origin, you pay it.

And so I think, in terms of dealing with the contemporary situation, and I say I know more about Asia than, say, Latin America or other areas or East versus Western Europe, you have to keep that in mind and that is why it has worked out there.

Now, this is a fragile system because it is not locked with the bilaterals.  You have not locked anything in.  It has been very pragmatic, but I think the issues are different and the things that we worried about, and I wrote about, too, Jagdish and Anne Krueger raised about rules of origin first have got at least to be tempered a little bit.

The second point, to defend Jagdish, and I will let Brian say what he wants, but the idea that you have a bilateral relationship and that both sides get the same, it is unreal to me.  I mean the Perus of the world, the Colombias of the world, are desperate to get in or they think they are desperate to get into our market so they will give away things that they would not normally give whether it is labor, environment, whatever. 

That is not true with Brazil.  It may want to be in our market but -- or India, you are not going to have -- so I think Jagdish is right about that.  And that is what we see here.  And it is going to be interesting here in, let’s say, in an Obama administration when they come back in 2010, they want to go back to trade and they are doing bilaterals, what will happen when they try to do them with a large country or you go back to the Free Trade of the Americas, or something in Asia which is a regional because what we have found is that it is very easy whether it is a Democratic president or Republican president to entice, lure and make demands on small economies in a bilateral sense just what happened in South America.  When you go to the regional, you face the same kinds of issues of larger power against you that you face with WTO.

And one final thing about the -- and I’ll turn it back to Jagdish, about -- I said, at the beginning, I think we cannot get away from what is happening and not happening at the WTO in the Doha Round, and why is it failing.  And I would put forward idea that many of the trade rules, not just something that Phil started with, are not about tariffs.  There are a lot of fights right now but those last couple of percentage in tariffs and how much the developing versus [indiscernible] but the real place of negotiations is inside the border.

It is domestic regulatory issues, and health and safety, and issues that are fairly complex issues and particularly if you do not have an infrastructure of regulatory structure.  And I think what is happening and would you look at some of the increasing number of the bilaterals, nations are willing to experiment on a bilateral level in ways that they are not willing to do if they take on the entire apparatus of the WTO with its very strong and very complicated, from their point of view, judicial system.

You are getting services.  You are getting investment agreements in bilateral agreements.  And I think the reason is, as I say, they are willing to do it, edge into it but they are not willing to take on the whole world.  I cannot tell you, Phil has heard me say this before, how many times people have come up to me in the last six or nine months with developing country trade people through AEI and they make the point, you know, if you guys sign this agreement and services and you thought that you had a special deal in gambling and you just got hit with a case that said you were in violation, how do you expect us with our limited resources to commit to things when we really do not know?  If United States did not know what it signed, how do you expect Senegal or Peru or Colombia to understand sort of the nitty gritty here?

All right, let me turn now -- Jagdish, why do you not take maybe five minutes because I want to get for the next 15 to the [audio glitch].

Jagdish Bhagwati:  I think I handled most of it.  Let me turn to Phil first.  The [indiscernible] was really with multilateral one.  Now, we know the investment agreement has been struck [sounds like], you know, my view is that we ought to go ahead with it.  The only reason why I do not think it makes much sense to push for it in the multilateral system, is the NGO opposition is so enormous to that and some developing countries which do not understand exactly what you were explaining about the integral nature of investment, production and trade decisions that I think we just need to pool it.

But I do not think having it in bilateral is necessarily the way to go about it.  So I’m taking for granted on all the other issues.  We have agreements and we are continuously improving them, but to have them in a fragmented basis does not seem to me to be a particularly smart way to set about it.  So the focus I have, therefore, is not on tariffs as such but because all the other things are in the background and being done multilaterally, but I think what I’m really worried about is essentially that doing it on a bilateral basis does create diversionary tendencies and complexity.

So I think, generally, I agree with most of what you said, but I think I would not agree with the view that bilaterals are the way to go on this.  We are doing the other thing and it is probably better to carry everybody together and to have different points of view if you are going to have something which is really going to work in a decent way without questions or unfairness, et cetera, continuously arising because, as Claude pointed out, there are inequalities in relationships.

Precisely, if you had a bilateral with Brazil or with India, that is much more likely to be more balanced in terms of perceptions of interest.  I mean, I have been to Colombia and I know many people there including the president want to and, in fact, I promised them when I went there not to ever mention free trade agreements ever throughout the week and I did not.  It was very hard because everybody kept asking me.

But my objection was to the systemic impact, and Colombia has to go back to the Viner issue, basically, like is it good for us or is it not good for us because nobody cares what they do as far as the systemic impact is concerned because what we do affects people.  So there is not asymmetry of the way you regard these things.

And then there was great upset over -- just to show the inequality among many people because what they are being held up on, I mean, this was special to them - it would be with Afghanistan if we went there - which was a drug traffic.  Now, I think most people I know, although, they will not dare to write about it, see it is a demand-determined problem rather than a supply-determined problem.  It is the fact that we are not able to legalize in the sense of having access to doctors and drugs if you get hooked so you do not have to go and kill and create an illegal demand.

So if you manage to have a system, not slot machines, you just get whatever you want, that would be the way to kill that but we do not do that, therefore, we create incentives for these guys to have the Medellin cartel, et cetera.  Now, if that is the situation, and many people feel that way and correctly in my view, then they get upset with Human Rights Watch [indiscernible] I work and so saying that you are fighting a dirty war and so on and so forth.

But that war is being fought lightly because of our having forced it on them, in the sense that once you have things like Medellin cartel you want to take them on.  And fighting such cartels is a bit like handling macro economics, fine tuning is very difficult.  You cannot fulfill all the conditions by which you fight a decent fight.

All you can do is, if the things go out of line, you could try and bend it back.  But to say that you can control paramilitaries right down to the last, you know, prevent any atrocity from breaking out and so on, it is just crazy.  And the problem really -- so when I came back, I contacted Human Rights Watch and I told them about it.  They said, “Oh, yes, we are aware.”  So I said, “Why did you not condemn the United States alongside with Colombia and said this is where the problem arises?”  They said, “Oh, we have done that once in a while,” but they have not done it.

I mean the public perception is Uribe must be forced into doing things, and so, that is where the inequality arises because if Bush was on the other foot, you can imagine what would happen.  Then, if they were more powerful, they would be accusing us of lack of enforcement, right, and creating this problem for them.

So I think there is something in the bilateral relationships.  Some of these questions do not arise when countries go together among the developing countries, or when we were doing it a little more lightheartedly without sort of forcing things down their throats and so on.  But now, I think, it is beginning to be a problem.  And I think some of the Korean thing was partly that.  I mean, not entirely. 

I mean, it had a trade aspect and it had a non-trade aspect, you know, cars, we never found out here.  You probably have talked with people but on cars for instance, again, we were in an unequal relationship with them.  And with cars, we were trying to do to them according to the Korean ambassador in U.N. who is a trade negotiator, he is a Columbia Law School graduate, he said just like with Japan in the 1980s, we are asking the Koreans for import targets.  You shall import so many cars because it is the same argument we have gone through, you were probably too young [indiscernible], Brian.  They are importing so many cars and we are importing so many more and using those kinds of arguments -- quite a lot of problems with them.

So now, we are saying you have got to buy so many cars and the ambassador was saying - he is a brilliant young man - and he said, “That is one thing we are never going to agree to because that is exactly wrong.”  And the Japanese always said, “Yes, we will agree to it,” and never did it because in Japan, you know, they warn you, never take yes for an answer.  They will never say no but they will not do something which is cockeyed.

Claude Barfield:  I want to get to the audience so -- 

Jagdish Bhagwati:  Okay, so I would say that these are the kinds of issues with bilaterals.  You do not even know what is going on sometimes because Chapter 11 also came in that way [audio glitch] expanded view of takings.  Only the lawyers who were negotiating at the end knew it; whereas, the multilateral system is a little more transparent I feel and I think you are more likely to get some.  But these are not the issues I would go into but I [audio glitch] you raised a good set of points.

On the politics, you are right, but the choice of partners is political obviously with this thing.  And you do not go and do the FTAs with everybody and anybody, but given that if you are not integrating deeply, then I think you have an obligation to say, “Look, just because you say you have got a cooperative agreement or a trade agreement or something, therefore, you should be free to abrogate your obligation under MFN.”

I mean that, I think, is all that I’m referring to.  Obviously, the initial move is political, no question about it.  And the biggest example is the German reunification on your side.  If you are going by the economics and Germany would not have been unified in the way they were.  It was a purely political decision.  But then, what the consequences of that are for third countries when it is simply the trade agreement; then, I think it does make sense because the WTO is an overriding system of rules, right?  So I do not think there is any fundamental disagreement among us and when you go for deeper integration, as I said, you cannot have the tail wag the dog.  I mean, you know, that is a very different kind of animal, okay.

Claude Barfield:  Okay, we got a few minutes, anyway.  We have a microphone here and so right there in the back; she is coming right behind you.  And as usual, please give your name, affiliation. 

Joe Gavin:  My name is Joe Gavin.  I’m with the U.S. Council for International Business.  And I want to say that we are very grateful to Professor Bhagwati for his defense of the multilateral trading system which we are strong supporters of, and we appreciate, in particular, his lucid explanations to the public about the complex issues.  We also, however, our members are strong supporters of regional free trade agreements.  And why is that?  I think we associate ourselves with the remarks made by Dr. Levy, he said the magic word - economic integration.

It is possible to see these agreements as a spectrum of steps toward greater economic integration in which a trade agreement with just tariff measures and related things does not nearly get to the complexity that the global supply chain needs to operate today.  He mentioned investment.  You can also throw in regulation to a greater extent than he did trade facilitation.  Even intellectual property and the knowledge society is very important to companies.

And, we note also that the market for FTAs, both political and economic, has a very strong demand.  If there are costs, they seem to be overwhelmed.  We seem to be in the situation of King Canute, trying to hold back the waves.  But my question is about what can we do to relieve the tensions even if they are not as great as perhaps as suggested by Dr. Bhagwati?

He mentioned two things.  He mentioned reduce the tariffs and keep a vigilant eye on the social add-ons.  I would suggest one more for your consideration and ask you for more solutions to relieve the tensions.  How can we make what is happening more compatible and less toxic to the WTO system?  That is the question.  Also, I have is transparency becomes very important.  We have companies as -- 

Claude Barfield:  Could you wrap it up in 30 seconds?

Joe Gavin:  Is it important that companies can adjust if they know publicly what the new rules are?  That seems to be more of an issue as more of these agreements come along.  So my question is, what else can we do to relieve the tensions whatever their magnitudes may be?

Thank you.

Claude Barfield:  Thank you.  I think I want to take a couple of questions and then -- so, let’s see.  Was there somebody in between, come right forward here and then -- here.  Right there, go ahead, stand up.

Jim Kenworthy:  I’m Jim Kenworthy and I’m a consultant on trade but I’m also an adjunct professor at AU Law School where I teach regional and bilateral free trade agreements.

I guess my first question is to Jagdish.  What, realistically, can be done to roll back this cattle march to regional and bilateral free trade agreements?

When the GATT was started in ‘47 and Article 24 was there, the idea was free trade agreements might be a good idea, if indeed, a smaller group of countries could get together and decide on what should be the rules and the tariff commitments and things like that that the broad spectrum of the multilateral negotiators could not arrive at.

And maybe in two or three agreements over the next few years, they would be successful enough that this would then evolve into the multilateral framework of the GATT and then the WTO.  The fact is now, though, that I believe out of the now 153 members of the WTO, there are only four, I think, that are not signatories to one free trade agreement or another.  And the question, really, is what can the WTO do about it?

The WTO has rules in Article 24 and also in the other area that was added on in the ‘70s for developed South-South Trade that it should be, for instance, it should cover most trade between countries, it should be dealt with within a 10-year period - various conditions.  None of these are really enforceable.  And it also includes a provision that -- 

Claude Barfield:  Could you wrap the question?

Jim Kenworthy:  Yeah.  Now, the WTO should analyze and opine on every free trade agreement that is submitted to its committee on regional free trade agreements.  It is never - now we have what, nearly 500 of them - it is never said that anyone of them was unacceptable or violated provisions of the trade agreement.  So what can be done really?

And then, of course, many of these trade agreements do not mean anything anyway.  I was international trade adviser [audio glitch] minister of foreign trade in Egypt for four years.  Egypt is a member, as you mentioned, of a number of them.  The minister told me, quite frankly, “One of the reasons we are signatories of these countries is it is the only way for our president and their president to get their picture taken together when they visited.”

Thank you.

Claude Barfield:  Here, and I think the last one.

Fran Smith:  Fran Smith, Competitive Enterprise Institute.

And I would like to pick up on something that Philip Levy had mentioned that [audio glitch] I think some of your writings have definitely refuted, the fact that you think many of the trade-unrelated issues should be included in the multilateral system, some of the issues that are in the bilateral trade agreements.

And then you mentioned, just a quick comment, specifically, sanitary and phytosanitary standards and whatever - my contention is that, following I think Professor Bhagwati’s, is that there are other international fora that deal with these issues in detail and in their complexity.  For instance, the SPS Agreement defers to Codex Alimentarius for all of these specifics, that WTO does not include all of the various definitions of food, sanitary standards, et cetera - defers to it.

There are multilateral BITs, bilateral investment treaties, in such they deal with investment.  There is the ILO as you mentioned.  Why do we need these various non-trade related issues to be included?  Why not pursue the other fora and eventually shore up anything we feel is not acting in the best interest.

Claude Barfield:  Okay, Jagdish and then Phil.

Jagdish Bhagwati:  On this last issue, I did not talk about the question of going to relevant agencies but that is clearly important.  Even Senator Kerry, the presidential candidate, in Dallas I heard him say, actually, before he became a candidate that we needed dual-track approach - take the labor issues to ILO the trade issues to WTO.

So it is a question of not whether you want these issues discussed but where.  And one of the reasons why bilaterals, to some extent, are liked by some of these lobbyists is because it can take countries one by one and establish templates.  So it is a little slightly Leninist policy of divide and conquer.  I mean you cannot take the politics.  I totally agree that politics and all of these things are quite important in the way people think about it.

But I think that is clearly the way to go and I think you are right to point that out.  Whether you can be WTO compatible, I mean, the problem is that there is no way anybody can make anything WTO compatible because there is no WTO discipline in effect.  Everybody is a sinner.  I mean, by now, I think there is nobody left.  Almost every country is into it so who is going to throw the stone at the other ones.

So I think it has gotten to a stage where the old-fashioned discussions we had from the theoretical side, what do we do to strengthen Article 24?  I mean you can strengthen it as much as you like but it is going to be -- it makes wonderful PhD dissertations but I do not think it is going to get anywhere because the horse has fled the stable or whatever the phrase is.

So I personally feel, in the last chapter of the book, I said the only thing we can do on ensuring that the preferences are not acute or biting is to make sure that the process do not [sounds like] work.  And I tell a story of Beryl Sprinkel, whom you probably knew, in Reagan’s time because he did not understand ratios and he said, you know, what I’m suggesting is that if you cannot affect the numerator, affect the denominator.  There is nothing you can do about this wretched free trade, they are going to multiply then multiply and you had mentioned 500, as I said, there will be many more, you know, if you do your permutations right.

But if you can bring the denominator down, the MFN, relative to which the preferences are defined, I mean, then you can forget about the problem on that dimension, namely as leading to all kinds of complexity and so on.  And so, Beryl Sprinkel is supposed to have said in exasperation once - I have not tracked it down, it must be in Google - “Let the Europeans look after their exchange rates and we’ll look after ours.”  I do not think he quite understood what the ratio meant.  It was exasperation more than anything else.

I’m not into the WTO compatibility very much anymore because I just do not see, like you were saying, Professor, it is just impossible now to go down that road.  It is too late.

Claude Barfield:  Phil? 

Philip I. Levy:  I’ll just be very brief and maybe clarify what I said.

I did not say that I thought all kinds of trade-unrelated issues should be [audio glitch] WTO.  What I said is we need to think about which issues are trade-related and trade-unrelated.  I’m perfectly happy having labor issues at the ILO and environmental but I think services trade is trade-related, for example.  And when we are talking about services -- 

Fran Smith:  -- as trade.

Philip I. Levy:  Well, exactly, that is why I was hoping that if I put it that way it might be completely transparent - I’m a fan of transparency as well.  So, yes, services trade is trade but it is not a simple question with services trade of what is the relative tariff level and are we introducing discrimination that we are going to get into more intricate issues.  Similarly, when you have investment intimately related with a lot of these things

And so, what can happen is, and particularly if you look at the forces that support trade liberalization from the United States, which is often the exporting forces, they are heavily invested in this.  So if they look at a trade agreement and say, “Is there anything in this for us?”  It will often depend very, very heavily on, will services be addressed well?  Will investment be addressed well?

So I think that is the problem.  You absolutely should ask how central is this to trade?  I think Jagdish is exactly right.  They are in these many of these issues which you can do very tenuous links and I think that we should question those.  But I think the way that this has been cast to say, often, by the developing world which is straight tariffs, keep it as simple as possible, is something which is not going to meet the needs of business, certainly, in the developed world but also often in their countries which is why you get the push for these bilateral agreements or plurilateral.

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