Quid pro quo in services sector negotiations is needed. But so are rules on hiring and firing

Jagdish Bhagwati, University Professor at Columbia University and Senior Fellow in International Economics at the Council on Foreign Relations, is regarded as one of the foremost international trade economists of his generation. He has been Economic Policy Adviser to Arthur Dunkel, Director General of GATT (1991-93), Special Adviser to the UN on Globalization, and External Adviser to the WTO. In this interview to The Hindu in Chennai, Professor Bhagwati outlined some of the key challenges that remain for India in the climate change discussions in Copenhagen in December 2009 and in the upcoming negotiations on the Doha Round. Edited excerpts:

On climate change: how much progress do the recent discussions, including agreeing a cap on global temperature rises, represent for countries like India and China? In some cases domestic constituencies may be hard to convince on the actions required to meet targets.

If you look back at Kyoto, we have two problems. One is that there is a carbon sink up there and the bulk of it, something like 80 per cent, has come from the West, predominantly from the United States and the European Union (EU). So you have that as one fact. The other fact is the current flow obligation. Call the carbon sink the stock problem. Then we have the flow problem because we are currently discharging CO{-2} into the air. That is where China in particular, in gross emissions, is almost exceeding the U.S. now and we are the third or the fourth.

There the compromise was arrived at when people said, “You have been doing a lot [of polluting] in the past, you have damaged the environment, do not blame us, we should have no obligations now” – that was taken at face value. Tim Wirth, who represented the U.S., and Madeleine Albright, agreed that the way to fix this disparity between flow and stock obligations is to say “You do not have to pay anything now.” That was stalled in the Senate. Senator Byrd and Senator Hagel led the fight in the bipartisan [debate]. But the resolution was passed 95-0; they said: “We should not let off India and China; it will affect the competitiveness of our industries.”

I came up with the idea that we should address the stock problem separately from the flow problem. We should expect India and China to assume flow obligations but part of that solution has to be that the stock obligation is fulfilled by the West. Then I found that the Americans themselves have what they call a “Superfund,” under which strict liability is assigned for past damage – they have a tort liability.

But this addresses the stock side; what do you propose for the flow side?

If we say that the West has to give us money for us to adopt new technologies, why should they want to do that? They are all saying “No” right now. But if you say “You have got to pay for past damages if you want us to accept current obligations;” that is fair and equitable. Then that money, once the superfund is established, can be used for exactly the kind of things India is asking for — for mitigation, for accommodation, and for financing the creation of public goods and so on.

I have also tried hard to get the Indian side to accept this. I have sent my paper to the Prime Minister. Sometimes they say “But we have already asked for funds.” But that is not the issue. If you simply ask for funds, that sounds like asking for aid. This is not aid – it is really a matter of what the West owes if they want us also to do something. That is fair and equitable. So I think that is an area where you can really make progress on this issue. We will also have to decide what the current flow obligations we take on are. On the stock side, I think it should really be a way to get at this problem.

The U.S. has taken the approach of the Waxman-Markey Bill which was just passed in the Congress House. They are going to use cap and trade, which is the quantitative equivalent of a carbon tax. If India, for example, does not have a similar carbon tax, then they will put in a tax adjustment, meaning essentially it is a tariff against the Indians, thereby making them pay for it. At one level it is a matter of intimidation. I do not think it will work when we are objecting to it.

Supposing we lose [this debate] — do we then surrender? We cannot go against the WTO but the only thing we have to and should say is, “We can also take WTO action against you, if you start playing this game.” For one thing, we can say our petroleum tax is much higher than that of the U.S. and we can call it a carbon tax as it does relate to carbon also. So we can say “We will put a tax on your exports to us.” We can do that. We can play the same game within the carbon game or we can shift the two nuclear reactor sites under the G8 to the French or the Russians. We are now big enough, in my opinion, to contemplate such options.

Recent reports have indicated that 83 new measures that go against free trade principles have been enacted across countries. Are you not worried that these will be difficult to roll back?

Most of the actions reported are safeguard actions and anti-dumping actions. Those are actions where you are exercising your rights. One wishes they were not doing so, but you cannot really object to them as such exit strategies are built into WTO rules, at least on a temporary basis. Especially when things get rough – and right now they are – the ability to toe the line is being strained in many democratic countries. So that part does not really bother me that much. But if you go beyond that and look at protectionist interventions where you are violating your obligations, by doing things that you agreed not to do, that is something that is still not on a scale that you need to worry about.

In terms of effects on trade, are they any different from actions that violate WTO rules?

The effect would be identical. But the effect in terms of the prospective impact may not. When you undermine rules, people feel they can do a variety of things and they are not constrained. Therefore the expectations you set up are important. This is the problem about settling the Doha trade negotiations. Therefore the rules such as we have built in will get undermined. That is what people are worried about – the effect on the system. It is hard to quantify that because that is actually a matter of how the situation will unfold.

Do you not think protectionist “Buy American”-type clauses associated with the bailout funds will stall the Doha process further?

If you look at all these actions, it is a matter of what value of trade they cover. Look at anti-dumping actions. You find, typically in the literature, the argument that India is the worst user of anti-dumping actions, not the U.S. or the EU. But when you actually look at the value of trade you discover that it is minuscule compared to what [the U.S. and the EU] are doing. So you have to put it into some perspective like that. I do not think in the value of the trade covered, it amounts to anything very substantial.

[Regarding policies] like “Buy American”, they are going to realise as soon as they are out of trouble that this is not really what they want to do because there has been so much criticism. Even Obama, because of all these criticisms coming particularly from people who are worried about export markets, like Caterpillar and GE and so on, put in a rider or qualifier saying it has to be consistent with our WTO obligations.

What would be the elements of the open world economy? You mentioned trade and investment and the movement of natural persons.

What we are talking about is temporary immigration. We should be able to export services, but embodied in people. That is what we call the movement of natural persons. We are talking about service transactions. So the second leg is GATS, the General Agreement on Trade and Services.

These are some of the issues that can be put into the Doha Round but so far we have no real concessions on these issues. It is something which could be taken up by the Indian administration. But against that you have to give something in the services sector. What would we give? In areas like banking and insurance we are sufficiently developed and resilient to be able to offer something. It is difficult to offer, in my view, any entry subject to a given level of protection simply because we do not have a safeguard clause in the services sector.

This is what we could do – have a service sector quid pro quo, where both countries would be better off. But I think we need rules also on hiring and firing because that is where everybody is going now. Even in India there is great pressure. Is not that what the recent trouble in the airline industry is about?

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