SOLVING THE GATT PUZZLE

The Uruguay Round of multilateral trade negotiations is entering its last phase: it must conclude at the end of the year. Reconstituting the General Agreement on Tariffs and Trade to accommodate the changed needs of the world economy is a task of epic proportions. It is a challenge we cannot fail to meet, because the alternatives are unilateralism, regionalism and other divisive tendencies in world trade. But how do we make a deal?

The core areas on which agreement must be reached provide the jigsaw pieces to be fitted together in an agreement. They include the new sector, services; the old sectors, textiles and agriculture; the new issues, trade- related intellectual property and investment measures; and the old issues, chiefly safeguards protection against market disruption.The traditional view is that a bargain is possible if the developing countries agree to concessions in the new sectors, by accepting obligations in the area of services, for example, and trade them for concessions by developed countries in the old sectors, agriculture and textiles, and safeguards protection. This conception would have bargains cut across sectors and issues.

It also would require the developing countries to exercise discipline in the new areas with complex non-trade dimensions, such as foreign investment and infrastructure control. Governments undertaking reforms in those areas will face acute political difficulties. Hence a deal along this scenario may be elusive.

Even so, all is not lost. There is an alternative means for striking a bargain. An agreement could be reached using a multi-tiered approach. On one level, a binding agreement could be reached within the traditional province of GATT - the trade of goods. But on the new issues, a more flexible approach could be incorporated into the GATT constitution, allowing different layers of commitments and rights in services, investment and intellectual property.

In goods, both developing and developed countries suffer from systemic failure of GATT discipline. But the failures differ sharply. The developing countries, implicitly or explicitly, invoke a GATT article that provides a balance of payments rationale for imposing trade and exchange restrictions. But this precludes effective access to their markets under a rules-based trading system.

The developed countries undermine GATT discipline in other ways. They exclude agriculture, limit textiles to the Multi-Fibre Arrangement framework and use voluntary exports restraints and the like to avoid the non- discrimination and discipline required by the GATT rules on safeguards protection. These practices certainly harm developing countries.

A bargain within goods therefore can be proposed. The developing countries would agree to discontinue their reliance on the balance of payments loophole within GATT in exchange for the liberalization of agriculture and textiles and the acceptance of safeguards discipline by developed countries. Huge gains in trade and in welfare would result from such a trade.

For the new sectors and issues, a flexible, multilayered approach can be taken. For example, in services, a compromise is possible.

In exchange for welcoming services into GATT, the developing countries would be offered atwo-step deal. For an agreed period, varying by sector and country, they would accept "quantity" obligations to increase imports. For example, they might be required to allow five more foreign banks into their country annually.

But they wouldn't have to accept the feared "rules" obligations, that might force them to allow all banks in, subject to regulatory rules. At the same time, the developing countries would enjoy rules-based access in developed countries.

At the end of the "breaking-in" period, however, they must shift to rules-based obligations or lose their rules-based rights in developed countries. The GATT Negotiating Group on Services virtually has adopted this proposal, which I put forward in The Financial Times 18 months ago.

In the so-called Trade-Related Intellectual Property talks, or TRIPs, the continuous talk of "piracy" creates gratuitous conflicts. In fact, the real issue dividing developing and developed countries is a difference of opinion about the socially desirable length of patents and their design. But again, a compromise is possible.

I would urge the developing countries to accept TRIPs into GATT, but with one proviso: the pact would apply only to signatories. GATT-legal trade retribution against offending signatories would then become available. Non- signatories would be immune, but neither would they receive the benefits. Thus, if India abstained, its software would be subject to unprotected ''theft," just as India offers limited protection to our pharmaceutical patents.

Accepting this flexible approach would require creative leadership from all negotiators, most of all from the developing countries and from the United States, where militant positions are pushed energetically by powerful lobbies and by a turbulent Congress.

But U.S. Trade Representative Carla Hills has shown great political acumen to date. Getting Congress to accept this flexible deal, on which further progress can be built down the road in this century, is not beyond her skills.

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