July 26-27, 1999
Montreal, Canada

Appendix II: Issues For The Next WTO Negotiations -- A Quest For A Balanced Approach

Kazunori Ishiguro
Professor Of Law
The University Of Tokyo
Faculty Of Law

Paper submitted to Session 3 of the Sixth JIIA Conference on Asia-Pacific Cooperation held at Hakone on March 12 and 13, 1999

I. Asian Economic Crisis And Further Liberalization Of Trade And Investment

Although the trend of further, one-sided liberalization of trade and investment seems almost irresistible at present, we must reconsider the balance between economic and other, social and cultural, aspects of such a trend. In the next WTO negotiations, there seems to be a consensus that reform of domestic regulations is one of the main targets of further liberalization. However, aims of domestic regulations are not so simple. Even in cases of the so-called economic regulations at least partly, there might be some social and cultural implications. To view governmental regulations only as barriers to trade and investment often reflect the supply-side voices, especially those of foreign, often major, suppliers. It is quite reasonable to seek to remove "unnecessary" barriers to trade and investment, but we must be cautious not to throw away the baby with the bathwater.

Confronting the difficulties in a number of WTO members, including Asian countries, the WTO Ministerial Declaration of May 18, 1998, emphasized: "[K]eeping all markets open must be a key element in a durable solution to these difficulties". We should pay some attention to the fact that the article added there to the word "key element" was "a", not "the". Such a wording might be a hunch that OECD activities with regard to the Multilateral Agreement on Investment (MAI) would collapse. If the strong voice of foreign investors had won a victory in the MAI, we might have had to face more and more predominance of such a one-sided voice also with regard to the next WTO negotiations. The French government, supported by European civil society, played a role of the show-stopper in the OECD negotiations on the MAI, as stated in a recent article written by Deputy Director-General Seiichi Kondo of Economic Affairs Bureau, Ministry of Foreign Affairs, Japan ("This is Yomiuri", March 1999). If one examines each provision of the MAI draft in detail, one can easily understand that the French resistance was really unavoidable.

There are still some voices even in Japan which insist on a simple playback of the MAI at the WTO level in its next negotiations. However, if we take the example of Asian economic crisis, it would be clear that "our emphasis should not be on deregulation, but on finding the right regulatory regime to re-establish stability and confidence", as Prof. Joseph Stiglitz correctly states ("New York Times", October 31, 1997). He also states with regard to the crisis in Thailand: "Thailand, for example, had a sound bank regulatory system which restricted lending to real estate. ..... These restrictions were eliminated, however, under the influence of those who claimed that such restrictions interfered with economic efficiency. ..... It seems fairly clear that too little government, not too much, was the problem." (MITI Research Review, May 1998, at 63). It would be almost clear that "those who claimed that such restrictions interfered with economic efficiency" were equivalent to the voices claiming further liberalization of trade and investment. If the deregulation trend under the WTO regime expands simply to further liberalization of domestic regulations, similar crises might occur in other countries, too, based on legal obligations set by new agreements. Of course at present, measures for prudential reasons in financial sectors are in principle outside the reach of legal obligations under the GATS. However, one should not forget that the MAI, especially its 1998 draft, sought to intrude into that area using investor-state dispute settlement proceedings.

II. Economic Efficiency vs. Human Dignity?

Often emphasized are the so-called horizontal approach to domestic regulations or pro-competitive regulatory disciplines, the precedents of which are, inter alia, the "Reference Paper" of the WTO Agreement on Basic Telecommunications and even the "Understanding on Commitments in Financial Services". Similar disciplines might be introduced into other sectors in the next WTO negotiations. This line of arguments is an echo of those in the “Regulatory Reform" led by the OECD, which supported the negotiations on the MAI.

However, one must scrutinize the real meaning of "competition" in such arguments. These arguments are often based on a notion of "global contestability". Namely, they tend to argue that, after the establishment of the WTO, the main target of every trade (and investment) negotiation should be set upon the notion of contestability of national markets in global competition and/or the full de facto national treatment. In other words, every domestic market must be open to foreign competition, and every barrier to market access for foreign suppliers should be simply removed for the purpose of free trade (and investment). The theory of contestable markets itself was originally proposed by Prof. Baumol in the 1980s, and it has some implications of supporting monopoly or oligopoly. But now the theory has been hijacked by trade people and has become a major tool for further opening of domestic markets for foreign competition.

On the other hand, preparatory works for the so-called GATS 2000 have already had some outcomes with regard to the accountancy sector which are often viewed as leading precedents for professional services, and even for other service sectors. The accountancy sector is clearly under the global oligopoly of the so-called Big Six (or Big Five). There seems to be some impression that the establishment of global oligopoly, or even monopoly, in most sectors is the real target of the next WTO negotiations. Namely, an "Aufhebung" of Baumol's contestability theory which now supports global oligopoly or monopoly might be the real feature of the next WTO negotiations. If so, it seems to be impossible for such negotiations to be sustainable, just as seen in the collapse of the MAI.

In this regard, one must be very cautious of the real feature of the "Reference Paper" and the "Understanding on Commitments in Financial Services" mentioned above. Concerning "Non-discriminatory measures", the said “Understanding" (B. Market Access: 10) provides that, even if the relevant measures are non-discriminatory in nature, each Member shall endeavor to take actions to further market access, "provided that ..... [such] action[s] ..... would not unfairly discriminate against financial service suppliers of the Member taking such action[s]." The meaning of this provision is, therefore, the legal obligation of each Member to take measures of counter-discrimination against domestic suppliers for the purpose of furthering foreign market access. In this sense, the meaning of the word "market access" exceeds the sound principle of equality and becomes almost equivalent to the "affirmative actions" under the U.S. constitutional law. Here again, the prerequisites for such (affirmative) actions must be actual discriminations in the past proved by sound evidence, setting aside the problem whether such a way of thinking can automatically be transplanted into trade contexts. Also with regard to the said "Reference Paper" one can find similar scenarios in the notion of "competitive safeguards" which will function as a tool to suppress domestic service providers one-sidedly even in situations where foreign market entrants are "mega-carriers" and much more powerful than a major domestic service provider.

The reason why such a "warped" notion of competition has been introduced into trade contexts can be found in the OECD activities on the MAI. One thing emphasized there was the revision of, and actually paralyzing, the OECD Guidelines for Multinational Enterprises which were originally issued for the better protection of fundamental human rights, environments etc..

Freedom of market activities seems to be, under such a trend, clearly superior to social and cultural values. One should recall here that, in the U.S., there was a similar antagonism concerning the identity of the so-called Chicago school of economics, namely the antagonism between F. Knight and M. Friedman over the very notion of freedom in economics. Deregulation trends in the U.S. have followed the Freedman's notion, and the same is true of the main stream of trade negotiations at present, as described here.

However, even in New Zealand, a world leader of regulatory reform, there is an earnest voice which emphasizes the need to see "both sides of the story" and that all people have the right to live in dignity (J. Kelsey, "Economic Fundamentalism", 1995 Pluto Press, at Preface vii). Prof. J. Stiglitz also refers to "a quest for a more humane and a more egalitarian society"in the concluding remark of his very impressive book (J. Stiglitz, Whither Socialism?, 1994 The MIT Press).

Sadly enough, if nothing happens, the next WTO negotiations will definitely be led by voices which fundamentally ignore such human (social and cultural) aspects. The major point is that trade people do not understand the true meaning of Amartya Sen's winning in 1998 of a Nobel prize in economics. Whether such negotiations and their future outcomes are sustainable or not: That is the question for all of us.