Welcome!

In this edition we look at:

• the intersection of trade and climate
• the rise of sovereign wealth funds
• the development of carbon abatement technologies

Plus we bring you highlights from the 2008 APEC Study Centres conference in Peru.

We encourage your feedback.

ANALYSIS: by David Harris, D N Harris & Associates

The most recent discussions on the Doha trade negotiations ended without agreement. A number of issues remained unresolved but the issue that caused the talks to break down was the operating conditions for safeguards on agricultural imports.

Special safeguards (SSGs) were introduced as part of the Agreement on Agriculture (AoA) in the Uruguay Round of multilateral trade negotiations. They were an extra import protection measure for tariffied products. SSGs allowed extra import duties to be imposed if specific price and quantity based formulas were breached.

The Doha negotiations have discussed a Special Safeguard Mechanisms (SSM) for developing countries. Concerns have been raised about the potential for frequent ad hoc trade disruptions if SSMs have formulas that are too easily triggered. But some countries would prefer low trigger thresholds to limit import growth.

Trigger thresholds and the protective effect of the extra import duties are important issues for the market access negotiations. Experiences with the application of SSGs are illuminating when considering the risk of SSMs diluting the trade gains from a new WTO agreement.

There are weaknesses in the design of SSGs. The original intention was a provision to manage the effects of excessive import competition on domestic industries. It was to reflect exceptional circumstances where the import competition caused severe industry adjustment pressures.

A wide range of products have SSG status but many have never been activated. This is because high tariffs discouraged commercial trade. That could change if the Doha talks agree to large tariff cuts for highly protected products.

In the major developed economies quantity based SSGs have been invoked from time to time on selected products. Price based SSGs have been triggered by the US and Japan on several products. The EU has regularly triggered price based SSGs on sugar and chicken meat imports.

An assessment of the application of SSGs indicates they have not operated as they were intended. They are acting more like a new layer of trade restrictions than a safeguard for exceptional circumstances. In many cases they have delivered unintended trade restricting outcomes.

It is in the interests of all countries that deficiencies in the design of SSGs are not carried over to the SSMs. In the Doha discussions the proposed changes to the design of safeguards don’t go far enough. There is a real risk of ad hoc trade disruptions arising for relatively moderate increases in import competition:

• imported products with zero or very low historical import levels will be highly vulnerable to the misuse of SSGs and SSMs.

SSG provisions have remained in place even though the AoA implementation period has finished. As an extra transitional mechanism the need for SSGs passed some time ago. Industries subjected to tariffication have adjusted to the trade liberalisation that was required.

There doesn’t appear to be a need for SSGs as a transitional mechanism for the Doha market access proposals. Phased tariff cuts along with the sensitive and special product provisions would seem to provide ample scope for facilitating domestic industry adjustment:

• it suggests there is no need to retain the SSGs in a new AoA and a sunset clause on the use of SSMs should be part of a Doha trade agreement.

A significant number of SSG actions have been taken since the AoA was implemented. Safeguard actions have been especially evident on dairy products. In some cases SSGs have been regularly activated. The US and Japan have been the most active users of their SSG provisions.

The use of SSGs by the US has mostly involved price based actions on dairy products, beef and sugar. The EU has invoked regular price based actions on sugar and chicken meat imports. SSG actions by Japan have included numerous price based actions on dairy and processed cereal products. Japan is also the largest user of quantity based SSGs in world trade:

• regular triggering of price based SSGs and Japan’s extensive use of quantity based SSGs indicates they are operating more like a permanent import protection measure.

The issue in the Doha discussions involved the question of allowing safeguard tariffs to exceed bound tariff rates established in the Uruguay Round. Some countries have legitimate concerns this would be inconsistent with the principles of negotiated agricultural trade liberalisation. It also seems to stray from the original intention of a safeguard that allows for reasonable trade growth.

Trade liberalisation gains could be stifled if safeguards are too restrictive and not reflective of exceptional circumstances as they were originally intended. The SSGs have several deficiencies and the formulas are vulnerable to statistical anomalies. Problems with the use of SSGs have been highlighted in a recent study that may be of interest to readers – it is available here on the Australian APEC Study Centre web site.

The author is an economic consultant with considerable international expertise in the development and impact of agricultural policies. He has published policy reports and has led capacity building courses on structural adjustment in agricultural for the APEC Centre.

OPINION: by Alan Oxley, Chairman of the APEC Centre

For many years, the Greenpeace and the World Wildlife Fund for Nature (WWF) argued for changes to the WTO to legitimize use of trade barriers to pressure countries to change environmental policies. They saw WTO rules as an obstacle. These generally rule out use of trade barriers to achieve non-trade objectives. Not surprisingly, Green groups put most pressure on the US Congress and the EU Commission to implement such controls. They are the world’s largest traders and prospectively could exercise the greatest leverage.

Calls for trade sanctions are now being made in two of the most contentious environmental areas – forestry and climate change. The EU has pioneered a strategy in which it proposes that developing countries where illegal logging is a problem should enter a “voluntary” agreement with the EU to set up matching regimes that will require exporters to demonstrate wood products are legally sourced and enable importing authorities to restrict entry of products unless there is evidence it is legally sourced.

This “voluntary” arrangement is negotiated under coercion. There is an open threat by the EU to ban imports unless the countries comply. Such controls violate WTO rules, but that problem is got around by both countries entering a legal agreement to sanction the arrangement, both countries thereby surrendering their WTO rights.

In addition, Greenpeace has been lobbying the US Congress, the EU Parliament, and the UK Parliament to pass legislation to create powers to stop imports of illegal timber. They have also mounted similar campaigns in Australia and New Zealand. This is poor law. The UK and US legislation puts the onus on third parties to prove the timber is legally procured under the laws of another country.

It would be more effective if the EU focused on fostering sustainable forestry in the developing countries which are its targets. In the Asian Pacific region, they are Malaysia, Indonesia and Papua New Guinea. In all cases the incidence of illegal logging has been significantly exaggerated and the policies they are endorsing are actually WWF and Greenpeace policies to cease conversion of forest land for other purposes, not policies to ensure environmental forest heritage is protected or policies to promote sustainable forestry. They oppose any forestry in native forests.

This is anti-development policy. In most countries forests are cleared to enable other productive economic activities, like agriculture, not to undertake commercial forestry. Restricting the right to use forests for economic development restricts the capacity of countries to use their natural resources to raise living standards.

Now there are proposals to impose carbon tariffs on imports from countries which do not take action to reduce emissions of carbon dioxide. These emanate principally from Europe where local climate change rules are raising costs for producers who use power. Under pressure from the EU Environment Directorate, the Trade Directorate attempted to design measures, but could not develop any that could operate consistently with WTO rules.

Proposals to restrict emissions have been tabled in the US Congress. They have been accompanied with proposals to apply carbon tariffs. China is the target. The Bush Administration has opposed this. But what would a new Administration do?

In Europe, the question has been deferred until the negotiations over a new global compact to manage climate change are completed.

Alternative measures to protect the environment which don’t entail use of trade coercion and do not conflict with WTO rules can be easily developed. The Agenda 21 program adopted by the UN Conference on Environment and Development (UNCED – The Rio Summit) specifically obliges members of the UN do this. When it comes to forestry it seems to suit the EU to turn its back on UNCED. Will it do the same on climate change?

PERSPECTIVE: by Ken Waller, Director of the Melbourne APEC Finance Centre

Sovereign Wealth Funds (SWF) are government-owned investment funds, set up for a variety of purposes, including stabilization, intergenerational equity, portfolio diversification; they are commonly funded by the transfer of foreign exchange reserves invested on a long-term basis overseas.

A number of developments have occurred in response to SWFs. These include the recently drafted voluntary code of conduct by the IMF, a parallel code being developed by the OECD, other relevant international developments such as the recent agreement between the US, Singapore and Abu Dhabi.

There are around 30 funds internationally and in APEC there are SWFs in Russia, Brunei, USA (Alaska) Canada, Malaysia, Singapore China, Australia, Korea, Chinese Taipei and Chile. Outside of APEC other key funds include oil exporting nations Abu Dhabi, Norway and Kuwait.

Key Issues

SWFs have been around for a long time but rising energy prices and export lead economic development are leading to strong growth. At around US$ 2 to 3 trillion they are relatively small in terms of total global financial assets of around US$ 190 trillion, but growing rapidly with recent estimates that they will be worth around US$ 10 trillion by 2013.

At this rate increase, SWF activities can be important in terms of their impact on global financial stability. In the main, funds are a force for good and the various purposes for their establishment soundly based.

However, transparency about their operations and purposes is often obscure and there is uncertainty about accountability. Most recently there have been public concerns about some fund investment activities which are seen by some to be of a “strategic” rather than of a commercial nature.

Scope and size of Sovereign Wealth Funds

Estimates of foreign assets held by sovereigns (governments) are about US$ 7 trillion in international reserves (including gold) and an additional $US 2 to 3 trillion in SWF assets (this compares with hedge funds of around US$ 1.7 trillion and global financial assets of US$190 trillion (stock market capitalization US$ 50.9 trillion, public and private debt securities US$ 68.7 trillion, and bank assets, US$ 70.0 trillion).

In recent times SWFs have grown quickly on the back of the boom in energy demand. It is estimated they could reach US$ 13 to 14 trillion over the next decade.

Characteristics of SWFs investments

While some information is available, there is no uniform disclosure of the assets, strategies, and governance of SWFs. Some funds reveal little information. The information that is available suggests SWFs have been largely conservative investors and while some larger funds behave as portfolio investors, investing relative to a market index and holding only small stakes in individual companies, newer funds rely mostly on external fund managers and in contrast to hedge funds, leverage is generally thought to be low.

Concerns

The IMF has previously noted that the actions of SWFs need to be consistent with national monetary and fiscal policy goals and that they contribute to, rather than detract from, better public-sector balance sheets. For countries with SWFs, they need to ensure funds contribute to external stability both in the current account and capital account.

For smaller economies receiving SWF investment, large inflows may impact on prices and external stability, and such activities could cause volatility in capital markets as SWFs grow in size.

Shifts from reserve assets to SWFs can also affect asset prices that could impact on global imbalances, while diversification out of mature capital markets into higher risk assets may also affect interest rates and equity prices.

Therefore SWFs carry important implications for multilateral surveillance and financial stability analysis.

International responses

The IMF in a deal with 26 countries has established a new guidance. It is expected the guidelines will be voted on in an IMF policy meeting this October and will be published thereafter.

The World Bank and the OECD are also reviewing existing codes and while these in the main are highly relevant to the safeguarding of good investment regimes as they apply to SWFs and their activities, more work is needed toward best practices for the activities of SWFs – in both the originating country (the home country) and in host countries, the recipients of SWF investments.

The broadly agreed central purpose of this work is to ameliorate public concerns about the activities of SWFs and to help bring them into the mainstream of approaches on international investment flows – where they clearly ought to be. More work is also needed and is being undertaken on data collection by the IMF through its various surveillance modes.

There is valuable cooperation between international agencies and SWFs themselves in arriving at best practice codes and this work should help resolve concerns about SWFs. The private sector, through the Financial Stability Forum, is involved with the IMF and other agencies in developing best practices.

The US, Singapore and Abu Dhabi have recently agreed a set of principles aimed at ensuring that SWFs base their investments in a host country on commercial rather than strategic grounds, conform with investment laws, improve disclosure and compete fairly with the private sector. The principles also note host countries should ensure non-discriminatory treatment of SWFs investments, should not erect protectionist barriers, provide predictable investment frameworks, avoid intrusive policies toward SWFs and ensure any restrictions on national security grounds are proportional to risk raised by a transaction.

The principles in a statement issued by the US Department of Treasury can be viewed here.

PUBLICATIONS

'Undermining Mitigation Technology' is written by Tim Wilson and jointly published by the Institute of Public Affairs and the Australian APEC Study Centre.

Technologies including clean coal, wind power and solar panels can all contribute to abatement. They are technologies developed and owned by individuals and enterprise and are protected by patents that enable innovators to generate a commercial return to offset their investment costs.

But NGOs and developing economy governments are claiming such patents are acting as a barrier to transfer and diffusion. They want to see patents removed through the application of compulsory licensing (the waiving of property rights that patents confer for an invention).

The WTO TRIPS agreement binds many countries to international IP treaties. Compulsory licensing is part of TRIPS, but only to be applied under exceptional circumstances (national emergencies, cases of extreme urgency). This obligation has been exercised by Thailand and Brazil through issuing licences for the production and distribution of heart medicines, in contravention of agreements.

Having used medicines to undermine IP regimes, attention is being turned to carbon abatement technologies. ‘Barriers’ to accessing technologies by developing countries and talk of amending TRIPS were discussed in the margins of the UN climate change conference in Bali last year and signal the beginning of a campaign led by NGOs for compulsory licensing under the UNFCCC process.

But actions that undermine the property rights of individuals developing responses to reduce green house gas emissions would be retrograde. Developing countries need IP protected goods and services to help them build stronger economies. The World Bank concludes stronger IP regimes result in higher quality and levels of foreign technology inflows and improved productivity. A system of compulsory licensing would erode the transfer of green technologies.

Government agencies are trying to create investment regimes to promote and incentivise individuals and agencies to research and develop new, ground-breaking approaches protected under the international patents system. Meanwhile the systems of compulsory licensing advocated by NGOs and developing countries will only steer investment away from the creation and realisation of products and services to reduce green house gas emissions. But this only part of the story.

Tariffs and non-tariff barriers in developing economies also hinder the transfer of new technology that will enable meaningful participation in a global effort to reduce the production of carbon in our atmosphere.

In Asia and Latin America the average tariff for environmentally sensitive technologies is between 15 and 20 percent. A simple, immediate response by developing economies to aid transfer would be to lower these trade barriers (a table of applied average tariffs and non-tariff barriers, or NTBs, is available in the report on page 8).

Both the EU and US have recognised the problem these impediments are presenting and are working to remove barriers to green goods and services, and to negotiate a Environmental Goods and Services Agreement (EGSA) that would see the removal of NTBs and bind existing market access.

On the contrary, the NGO, Friends of the Earth, promotes the maintenance of tariffs arguing they are necessary to enable developing countries to build their own supply capacity in green technologies.

The report concludes that the call for compulsory licensing is being used to skew the debate from the real issue: the removal of tariffs and NTBs to promote technology transfer.

The full report is available here.

EVENTS

Members from across the ASC network descended on city of Piura, north of Lima to attend the annual conference. A range of policy issues pertaining to trade, structural reform and the Asia Pacific region’s architecture were discussed and debated.

Excellent presentations were delivered over the two day event. The highlights were numerous and we have selected but a few for this article.

Anlaysis by Peru’s Diego Urbina Fletcher of APEC’s trade relationships shows how greater convergence and economic integration could be achieved through the current swathe of bi-lateral trade agreements. Graphic representations of progress in the reduction of tariffs demonstrate the positive rate of convergence taking place. Market access provisions are also highlighted but show a large variation across trade agreements. Convergence of customs procedures, technical barriers and sanitary barriers are also factored. To read the conclusions the presentation can be viewed here.

Douglas Brooks of the ADB Institute considers the costs of trade not only in terms of policy barriers, transportation and distribution costs, but also information costs, contract enforcement and other border-related barriers including language and currency conversion. As Asia continues its rapid economic development, infrastructure pressure points are continuously emerging. Elements of time, transportation modes and the impact of further economic integration on costs are also analysed. The full presentation is available here.

University of Auckland’s Robert Scollay addresses a range of issues surrounding trade liberalisation and the development of bi-lateral and region wide trade agreement models. As the region’s architecture continues to evolve, the presentation considers what avenues exist for future developments. Rationalising the rules of origin, and the pros and cons of bi-laterals and an Asia Pacific FTA are analysed, as are related institutional matters. The presentation can be viewed here.

For the complete set of papers and presentations from the conference click here.

Finally, congratulations and thanks are to be extended to the members of REDAP (the Peruvian network for Asia-Pacific studies), and in particular the Meeting's Chair and REDAP Coordinator, Mr Braulio Vargas, for their excellent work in organising the 2008 conference.