6:14 AM Nov 10, 1994
THE URUGUAY ROUND PIE DOUBLESGeneva 10 Nov (Chakravarthi Raghavan) -- The implementation of the Uruguay Round trade liberalisation package will result in year 2005 in an increase in world trade, production and incomes -- with estimates ranging from a low $109 billion to a high $510 billion, the GATT secretariat said Thursday in a new study. The upper range estimates are double the income gains in a previous GATT document of December 1993, but slightly less in terms of projected trade gains. Full of caveats and cautions against misreading them as 'forecasts' and 'projections', but rather as broad indicators, nevertheless the GATT economists put their bets on the $510 billion figure, saying that the assumptions underlying this figure in their models "more closely approximate the real world economy and therefore it is a more plausible estimate". Their 'real world economy', when their assumptions are carefully read, is one of the global market with monopolistic competition; another footnote speaks of firms competing for scarce resources of labour, capital and land and expansion on basis of resource accumulation and technological improvements on the assumption "that unemployment rates remain constant". The study estimates increase in world trade in goods to range from a nine to 24 percent over 1992 actual trade flows, once liberalization has been fully implemented -- with trade gains ranging from a $244 billion to $668 billion. But whether called forecasts, plausible estimates, or broad indicators, they perhaps prove what Samuel Brittan, the conservative columnist of the pro-business British newspaper Financial Times recently said: "... The numerical estimates in the various macro models are adjusted to fit the most fashionable theories and not the other way round -- and necessarily so". On their view of the more plausible estimate of their upper-range assumption, the GATT economists go on to project a $122 billion annual income gain for the United States, $164 billion for the European Communities, $27 billion for Japan and $116 billion for the developing countries and transition economies lumped together. GATT economists explain that a large part of the 'gains' come out of reduction of barriers to imports, and the income gains coming out of lowered prices for consumers. The US and EU having large restrictions -- MFA textiles and clothing restrictions and agricultural protection -- gain more by reducing them. The study is clearly aimed at, and timed to influence the vote on 29 November and 2 December in the US Congress on the implementing legislation. Even the original embargo was moved forward to suit US publication in Thursday morningers (Friday being 11 November holiday for many newspapers there), while the GATT press office in recent days has been known to be encouraging newsmedia aiming at the US market to run sidebars of the likely US gains -- and give some reassurances to the doubting public, legislators and business lobbies and workers in many other countries. But GATT economists have to thank themselves if some of the plus points get drowned out and critics read the study and find, from the footnotes and assumptions, the GATT ideology as one proving their case against: that for the benefits of the Uruguay Round agreements current levels of unemployment may have to increase, or atleast keep constant; and that the GATT/WTO advice for maximising benefits of liberalized trade is to send to the wall small and medium enterprises in various countries to make room for global monopoly and monopolistic competition. In the explanations of the models and the trade theories and the assumptions behind them, the GATT economists stress that the maximum gains come not by Adam Smith-Ricardo-Heksher and Ohlin models of free trade between countries based on comparative advantage, nor by the socalled intra-industry specialization among countries of near-equal economic levels, but by monopolistic competition with firm-based product differentiation -- what critics call the 'Coca Cola-Pepsi Cola' competition in global markets The study discusses liberalising effects of tariff reductions and bindings in industrial products, the agricultural rules, end to MFA in 2005 and safeguards -- but not effects of anti-dumping or subsidy rules etc where things could be liberalising or restrictive depending on how it would be implemented. It stresses that these tariff reductions, bindings and other liberalizing actions in the Uruguay Round package will stimulate world trade, investment and production, resulting in more efficient resource-use world-wide and creating larger world income than would be the case without the package. It is a computable general equilibrium (CGE) model with an added "dynamic effect" dimension based on the assumption that trade liberalization will result in a fixed share of additional income being saved and increased investment (through larger capital stock) causing a further rise in income. However, over the last decade short-term projections based on consumer and enterprise behaviours have all shown their uncertainties and potential for errors. The benefits of the liberalized trade, reduction in tariffs and end of quotas are assumed to result (in accord with the trade theory) in reducing prices and increasing the expendable income in the hands of the consumer who would spend the additional spending capacity on more consumer goods, increasing corporate profits, savings and investments. The sum total of the assumptions appear to be that if the price reductions as a result of the Uruguay Round package takes place under conditions of monopolitic competition among a few giant firms, and this results in increased production, there will be no demand problems and uncertainties arising from possible monetary stances of central banks and fiscal stances of treasuries. And by assuming constant unemployment levels -- they don't specify their 'natural' level of unemployment, but do refer to the World Bank's base line scenarios -- the GATT economists have got rid of the other uncertainty of increasing employment pushing wages and hence prices and needed monetary stance to preserve values of financial assets and help keep profits high for firms. Fortunately perhaps for the GATT, few will read all the footnotes and caveats; any event most of the econometrists and economists making these 'estimations' or those putting their weight behind it (like the GATT chief who released it Thursday at a press conference) would not be around at the GATT/WTO in 2005 -- when alone they can be proved or disproved. Moreover, the GATT economists have left themselves enough loopholes and escape hatches: "Models such as the one used in this exercise could, in principle, solve for the net result of all direct and indirect effects... In practice however the amount of detail that can be built into the model is limited, and only relatively broad-based effects can be estimated with any degree of confidence.. More importantly, it must be emphasized that estimated increases in trade and income are not forecasts.... by 2005 the structure of the world economy is likely to have changed considerably from these structure of the 1990 'benchmark' economy on which estimates for 2005 are based..." The higher economic gain estimates, favoured by the GATT economists, are based on monopolistic competition between firms producing differentiated products and having the market power to influence the market for their particular variety. As GATT economists explain it, in one version of their model, there is a two-way trade of say France and Germany each producing same or similar product, automobiles, but which in the eyes of the buyers are different, results in dampening effects of change in relative prices caused by the tariff cuts and other liberalization. In this model, when France and Germany exchange and trade such products with each other the income gains are much less because of the fact of competition between imperfect substitutes. In the second version of intra-industry specialization model, where countries exploit economies of scale in production and production costs fall with activity level of entire industry, there is still the assumption that buyers view products from different origins as imperfect substitutes which provides an incentive for geographically diverse production, despite the incentives for concentration flowing from scale economies. The percentage change in trade gains in the two models, over the 1992 actuals, turn to be only respectively 8.6 and 9.6. Only in their 'real world economy view' of monopolistic competition, the GATT modelists manage to get a 23.5 percent increase in world trade (and the corresponding higher income gains). It is an assumption of the global market and globalization built on the Triad based Alliance Capitalism theories that break down, in terms of assuming an equitable distribution of gains at global level because of absence of a global government. In a national market, a monopolistic competition say between Coca-Cola and Pepsi-Cola will have a price/quality competition effect that would benefit the consumer and create a virtuous circle of Corporate profits will be turned into increased savings and investments and new production and employment, more incomes and consumption etc. But under monopolistic competition, in Philippines or India, Coca-Cola (whether produced in US or Philippines or India as the case may) would still be able to compete with Pepsi-Cola (while driving out the domestic soft drink suppliers) for consumer benefit but the 'virtuous circle' has no similar results in Philippines or India. While there might be some value-added, in terms of the local labour used in mixing the concentrate (imported from the US) and bottled, distributed and sold, the cream on top of this entire activity (cost of inputs of concentrate, trade mark and/or patent licensing fees, share of headoffice and management expenditures etc) is skimmed off to the parent company and the virtuous circle takes place and benefits the home country. To take another example, as a result of end to MFA quotas (in 2005), Indian or Pakistani textiles and clothing may be exported and be available cheaper in say France, but will not necessarily be preferred by a French customer over a higher priced French equivalent product, because in the customer's eye the two products are not substitutable. But if Benetton or Pierre Cardin, take advantage of MFA abolition and source their purchases, through subcontracting or otherwise in India or Pakistan and market it in France, or buyers in a department store like Marks and Spencer do the same and sell the goods under their brandname, their market power enables this competition. But while India or Pakistan gain in some low-value added labour or subcontracting gains which may be reflected in their export earnings, the cream of this economic activity is skimmed off by Benetton or Pierre Cardin or Marks and Spencer etc, and the virtuous circle of the benefits of this capital accumulation process goes to the benefit of the home countries. In a monopolistic competition in a national economy, if the benefits don't trickle down fast enough and threaten to create social and political disorders, the State can compensate for the inequitable income distribution and inequity through its taxation and other instruments, including welfare. But in the Global 'real world' of the GATT economists, there is no need for such countervailing force, since the benefits will trickle down from the top of the global pyramid to the bottom. May be the prophets of the new Market gods might be able to deliver manna from heaven as another did in AD 29, though at that time he first put himself on the cross, where the new gods ask others to suffer now for benefits later.