European Affairs

Spring 2001

 

Leader In Focus
The Goal of Trade Must be to Create Jobs
Supachai Panitchpakdi
former Deputy Prime Minister of Thailand and Director-General Designate of the World Trade Organization (WTO)

 

One of the problems of the trade debate today is that it is only about trade. When you hear people discussing the benefits of free trade, or the reasons for a new round of world trade negotiations, they mostly emphasize the fact that trade liberalization leads to more trade.

People are still asking how much trade increased as a result of the last round of multilateral negotiations, the Uruguay Round, with the answers ranging from $60 billion to $150 billion a year.

Although I admit that this is an important issue, it does not say very much about the substance and content of trade, and how far it improves the lives of human beings. We should ask whether increased trade has improved skill levels and social welfare, or contributed toward the creation of jobs. Has it enhanced the industrialization process in developing countries?

If trade cannot help solve economic and social problems, if it does not lead to more income, more investment and more jobs, especially in poorer countries, then

further trade liberalization will not be widely supported. Most countries are faced with plenty of other pressing economic and political priorities.

We should not just say, for instance, that trade liberalization will lead to more trade in steel, clothing or shoes. We need to know whether it will also result in increased employment in the manufacture of these products. We need to know that increased trade will lead to more investment, and a more balanced international division of labor, allowing countries to specialize in areas in which they have comparative advantages.

The Uruguay Round, which began in 1986, was the first in which developing countries were actively involved from the very start. But when the negotiations ended in 1993, the final agreement paid much more attention to the interests of the advanced nations than to those of developing countries.

Since the end of the Uruguay Round, conditions in low-income countries have not improved in a way that would make them particularly enthusiastic about further liberalization. In fact, in many poor countries, economic conditions have deteriorated. Public and private indebtedness has been rising and prices of the world's major commodities have been falling.

Export subsidies for farm products have been rising in the more advanced economies, leading to a drop in the prices of commodities sold by the developing nations. Official development aid has declined, and although foreign direct investment has risen, most of it has gone to only a small number of countries. China probably accounts for more than a third of all foreign direct investment in Asia.

Meanwhile, health conditions have sharply deteriorated, particularly in Africa, where more than 30 million people are infected with HIV/AIDS. Also in Africa, there are still pockets of tuberculosis and malaria. Apart from its terrible human cost, the deteriorating health situation has also damaged economic productivity.

Structural unemployment remains pervasive, with average jobless rates reaching 30 to 40 percent in many African countries, including South Africa, one of the continent's most advanced economies.

Trade can play a role in solving these problems, for instance by promoting foreign direct investment. But unless we can establish clear-cut linkages between increased trade and higher levels of employment, it will be very difficult for those who want a new round to make a convincing case for it.

It will not be enough to demonstrate that trade leads to greater economic efficiency. One can also create efficiency by introducing new technology. But while new technology often increases productivity, it does not always increase employment. Technological advances also need to be considered in the context of job creation.

Another key issue is whether trade expansion should be linked to the enforcement of internationally agreed labor standards, an idea that has met strong resistance, particularly from developing countries.

In recent years, the Organization for Economic Cooperation and Development has published several good studies that demonstrate the complexity of this issue. The studies do not support the view that developing countries can improve their trade performance by violating core labor rights in a bid to reduce their labor costs and make their exports more competitive.

On the contrary, it has been found that those countries that do not embrace, or have not fully adopted core labor standards, cannot attract new investment, cannot enhance their productive capacities, and will mostly fail to advance or improve their trade performance.

On the other hand, countries that adopt core labor standards, such as the right to collective bargaining and freedom of assembly, are found to have strongly improved their trade performance in the last few years.

These findings suggest that there should not be a direct linkage between trade and labor standards, a position that was endorsed at the WTO's first Ministerial conference in Singapore in 1996. At that meeting, WTO members reiterated their commitment to core labor standards, but said that the issue should be handled by the International Labor Organization.

When the previous U.S. administration attempted to link trade and core labor rights at the WTO Ministerial meeting in Seattle in December 1999, there were a large number of objections, particularly from developing countries.

The European Union tried to offer a compromise by proposing that, instead of going to full linkage, there should be a prior consideration of how one can move in that direction. The EU proposed a joint ILO/WTO working forum to organize a high level meeting on trade and labor. But there are still many countries that do not support that proposal.

From the point of view of developing countries, there are many practical reasons why it makes no sense to link trade and labor standards. In many developing countries the unofficial labor market is very much larger than the official labor market, but the authorities only monitor conditions in the official market.

If you apply sanctions to countries that violate core labor rights, you will not solve the problem, because the violations will simply migrate into the unofficial market. Factories that exploit child labor, for instance, would simply go deeper underground.

A more effective approach may be to reward countries that enforce labor rights, rather than penalize those that do not. These countries could be given trade preferences and assistance, so that manufacturers would have an incentive to improve their labor standards still further.

One way to tackle the problem of child labor is to increase periods of compulsory education. In Thailand, for instance, we are expanding compulsory education to 12 years, from six years not too long ago. That in effect eradicates child labor because the children are obliged to go to school.

It seems to me, however, that more work is being done on trade and labor standards than on trade and employment. The more logical approach would be to look into the relationship between trade and employment first.

I would accordingly like to repeat a proposal I tried to introduce in Seattle on behalf of the Thai delegation. The idea is first to show that trade can create employment. Once that is established, we can discuss the rights of workers and the labor standards that have been adopted by the ILO.

My proposal is that we should convene a Ministerial meeting on trade and employment, but not in the WTO. Such a meeting could be arranged by the ILO, the United Nations Conference on Trade and Development, or the UN Economic and Social Committee. If it were held in the WTO, many countries would not participate, for fear that they were committing themselves to a link between labor standards and trade.

The meeting should be at a high political level because we need political guidance as to how we can make trade work for the creation of employment. It should be a one-off meeting, to avoid giving the impression that we are setting up a permanent body, and it should ask other competent authorities to continue work on the issue.

The meeting should not aim at reaching a preconceived conclusion endorsing the link between trade and labor standards. Various countries have rallied around this proposal, including some major developing countries, which have said they would like to participate.

The meeting would provide a forum for developing countries to explain how they think trade could help them to create new jobs, for instance by diversifying their economies away from the export of a single commodity, such as cocoa or coffee.

We should also examine how far industrialized and developing countries have benefited from the increase in world trade. Has enough investment gone to developing countries? Has trade helped them to create enough jobs? If the answer to these questions is positive, support for a new round will be assured.

We also need to discuss the relationship between economic and trade performance and the observance of labor rights in general and core labor rights in particular. It may be that the enforcement of labor rights has positive economic benefits for advanced countries, but less certain consequences in developing countries.

For advanced economies, however, the economic benefits may not be due just to the observance of labor rights but to other factors, such as the introduction of new technology that enhances skills. Skill enhancement, of course, can be facilitated because labor standards and core labor rights are being observed.

We also need to acknowledge that if labor standards are not supervised, there may be a "race to the bottom," in which countries seek to compete by lowering their standards. We still need to confirm, however, that there is, in fact, a race to the bottom with regard to wages and labor standards.

We should examine the widening wage gap in many developing countries to determine whether it is due to trade liberalization or to the wrong domestic policies. We should consider whether trade policies can be managed in a way that would narrow the gap.

The WTO cannot work to promote the cause of free trade and development alone. If trade is to be harnessed to the development process, the WTO must work with United Nations bodies, the World Bank, and the International Monetary Fund. We need to have so-called "ownership" of development programs by the recipient countries, so that they understand how the programs further their developmental goals.

At some point in the future, we may need to establish a UN-sponsored council on employment, or a world council on employment, that would permanently coordinate trade and employment policies and focus international attention on these vital issues.

If we can agree that trade helps to create jobs, particularly in developing countries, then we will not need to go around and convince people to join the new round. If trade has no positive impact on jobs, however, we should construct a different kind of round to meet the requirements of developing countries.

The single goal that trade should serve is the creation of employment. If we can address this goal in the new round, then I am sure we can start a new round promptly and complete it in a manageable period of time, instead of six, seven or eight years. My work in Geneva will be easier if I know that a new round is focused on achieving the laudable goal of helping mankind.