Wealth for the World

Policies on International Trade and

Investment

Policy Paper 65

Contents

Summary 3

1 Introduction 5

2 The Liberal Democrat Approach 72.1 The aim of trade and investment liberalisation: sustainable development 82.2 Trade and investment and developing countries 9

3 International Finance 103.1 Capital flows and developing countries 103.2 Capital flows from source countries 113.3 Managing after-effects 123.4 Reforming the IMF 123.5 Tax evasion and tax competition 13

4 International Investment 154.1 An international investment agreement 154.2 Export credit agencies 16

5 International Trade 175.1 The Doha Round 175.2 Agriculture 175.3 GATS 185.4 TRIPS 185.5 Reforming the WTO 195.6 EU trade policy 20

6 Enabling and Regulating Enterprise 236.1 Global competition policy 236.2 Corporate accountability 236.3 Corporate responsibility 25

7 Trade, Investment and Environment 27

8 Trade, Investment and Labour 30

Summary

Under the right conditions, trade and investment liberalisation can reduce poverty, extend choice andopportunity, improve environmental standards and reduce the likelihood of conflict between nations.However, liberalisation has been pursued to a much greater extent than any other global public good,resulting in an unbalanced world economy, with insufficient attention paid to the impacts ondevelopment, environment and the interests of local communities.

Liberal Democrats call for trade and investment liberalisation to proceed as long as it contributes tonational and global sustainable development; this requires:

• The balancing of economic imperatives with environmental and social requirements.

• Reform of the key international institutions to fully integrate these priorities, and to improve theirtransparency and democratic accountability.

• A sustained effort to ensure that developing countries can benefit from trade and investmentliberalisation to a much greater extent that they currently do.

Liberal Democrats propose to regulate the international finance system to reduce instability andsupport development, including:

• Establishing a new International Financial Authority to assist developing countries in reducingtheir exchange - and interest-rate volatility; investigate means of implementing, when politicallypractical, international taxes on foreign exchange transactions; lead negotiations to reform thefinancial policies of the richest countries to introduce greater stability to capital outflows; and helpdeveloping countries manage their debt.

• Reforming the IMF to render it more responsive, effective and accountable by: improvingtransparency and ensuring that decisions in all committees are taken by majority voting, andincreasing its resources and ensuring that funding is independent of individual members’ economicand political influence.

Liberal Democrats will encourage flows of foreign direct investment (FDI), in particular to support thepoorer developing countries and improvements in environmental standards, through:

• Calling for a new international set of negotiations within the UN on the creation of a multilateralregulatory framework to encourage FDI, balancing additional rights for investors againstadditional responsibilities, and replacing current bilateral investment treaties by the newmultilateral agreement.

• Privatising the Export Credit Guarantee Department and transferring support for export creditguarantees for investments in the poorest developing countries to DFID.

Liberal Democrats will support continuing attempts to salvage the WTO Doha Round as long as theoutcome is positive for developing countries; in particular, we call for:

• A substantial reduction in agricultural subsidies, including the elimination of CAP productionsubsidies and trade barriers.

• Major revisions to the General Agreement on Trade in Services (GATS), allowing countries toreverse their original decisions on liberalisation and/or add new derogations.

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• The establishment of a royalty-based system for fair reward of harvested genetic or biologicalmaterials, and the creation of a system by which countries in genuine medical need are allowed tomanufacture or procure royalty-free drugs.

Liberal Democrats would work to increase WTO transparency and accountability and reform itsinternal procedures in order to redress the imbalance between developed and developing countries by:

• Providing support to the poorest member countries to enable them to participate fully in WTOnegotiations and conduct WTO disputes, and extending the structure of ‘special and differentialtreatment’ through which the poorest countries can open their markets over a much longertimescale.

• Appointing an independent Advocate General to represent the public in trade disputes, andestablishing an annual assembly of Parliamentarians to scrutinise the work of the WTO.

Liberal Democrats will work to reform EU trade policy and processes by arguing for the right of theEuropean Parliament to veto all international trade and investment agreements, and reformingEconomic Partnership Agreements established under the Cotonou Agreement to ensure that developingcountries can take longer to open their markets to EU exports.

Liberal Democrats will enable and regulate enterprise at the international level by:

• Promoting greater market competition and anti-monopoly policies.

• Ensuring that enterprises benefiting from open markets are required to behave responsibly, bystrengthening the OECD Guidelines for Multinational Enterprises and incorporating them in tradeand investment liberalisation agreements; legislating to make it clear that parent companies can besued in UK courts for the behaviour of their overseas affiliates; extending the liability of companydirectors to make them responsible for the social and environmental impacts of their companiesand subsidiaries; and requiring corporations to report on their environmental and social impactsand reforming stock exchange listing rules to require full reporting.

• Encouraging corporate responsibility initiatives and socially responsible investment.

Liberal Democrats will ensure that trade and investment rules support environmental regulation bycalling for a new sustainability clause to be added to the GATT, including:

• Incorporation of the Precautionary Principle and the Polluter Pays Principles into the GATT.

• Making it clear that discrimination on the basis of production processes is permitted where theenvironmental damage caused is transboundary.

• Recognising and permitting trade measures within multilateral environmental agreements.

• Allowing subsidies designed to make environmentally friendly technologies more affordable andaccessible.

Liberal Democrats will work to improve international labour standards by setting a minimum floor ofbasic global labour standards through the extension of Article XX of GATT to allow discriminationagainst products produced with forced labour; and supporting the framework established by theInternational Labour Organisation and giving it a major role in negotiations in the WTO and on theproposed international investment agreement.

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1.0.1 This paper deals with the topic ofinternational economic activity: internationaltrade in goods and services, cross-borderinvestment activities and international flows ofcapital. The rapid expansion of international tradeand investment has been one of the definingcharacteristics of the world economy since 1945,and a key factor in the complex of processesknown as ‘globalisation’.

1.0.2 For example, international merchandisetrade (primary commodities and manufacturedproducts) has grown twenty-fold since 1950, to atotal value of over $6 trillion. Twenty-five yearsago one-eighth of world product was traded; nowthe proportion is one-fifth. Flows of foreign directinvestment (FDI) increased fivefold between1990 and 2000, to $1.15 trillion. Much of thisgrowth took place in international trade withinfirms; indeed, one-third of the total trade of boththe US and Japan takes place within transnationalcorporations (TNCs) and their affiliates. Thestock of cross-border portfolio investment - bondsand shares - was some $12 trillion at the end of2001, while the worldwide stock of cross-borderbank loans and deposits reached $9 trillion.

1.0.3 One of the principal reasons for thisexpansion of cross-border economic activity hasbeen the steady removal of government-imposedbarriers to international trade and investment:tariffs, non-tariff barriers such as quotas oradministrative requirements, foreign exchangecontrols and limitations on foreign ownership ofdomestic enterprises. This process has proceededfurthest and fastest in the area of trade in goods,where the world-wide removal of trade barriershas been coordinated and promoted under theframework of the international agreement knownas the General Agreement on Tariffs and Trade(GATT), overseen since 1995 by the World TradeOrganisation (WTO).

1.0.4 First adopted in 1947, GATT has beenaugmented through successive rounds ofinternational negotiation, of which the DohaRound, currently under way, is the ninth. WTOagreements now cover areas such as agriculture,textiles, services, intellectual property, and healthstandards - a significant extension in scopecompared with their predecessors. This means

that international trade regulation increasinglyimpinges on other areas of public policy, such ashealth, environment and labour.

1.0.5 Similar processes are under way in thearea of international investment, where thederegulation of financial markets from the 1970son has led to a vast increase in the volumes offinancial capital traded internationally. Despitethe rapid increase in volumes of foreign directinvestment, however, successive attempts atnegotiating a global investment agreement haveso far failed, an indication of the greater degree ofcontroversy raised by questions of cross-borderinvestment and foreign ownership of enterprises.Even more than trade policy, investment policyinteracts with other areas of public policy. And, ofcourse, investment and trade policy inevitablyinteract with each other.

1.0.6 The framework set by international tradeand investment rules increasingly constrains theactions of national governments - but is it the rightframework? The expansion of trade andinvestment has led to new stresses, from growingeconomic inequality to concern over transnationalcorporate behaviour to fears of culturalhomogenisation and a loss of independence andidentity. One does not have to sign up to the anti-globalisation agenda to be rightly concerned overthe impacts of global economic deregulation onthe natural environment, labour standards, ordeveloping countries lacking strong regulatorycapacity, and the lack of democracy andtransparency exhibited by the WTO and theInternational Monetary Fund (IMF).

1.07 At the same time, however, internationalinstitutions and processes find themselves underthreat from a new quarter, of a return tobilateralism at the expense of multilateralagreements. The current US administration isthreatening to sideline multilateral institutions -notably the UN, but also the WTO - and is usingbilateral trade agreements as a weapon ofdiplomacy. The EU’s own long-standing networkof bilateral agreements, while they do not possesssuch political overtones, are similarly inimical tomultilateralism; bilateral agreements may beeasier to agree, but they are often one-sided anddiscriminatory.

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1 Introduction

1.0.8 This paper sets out Liberal Democratproposals for a new international framework togovern international trade and investment.Chapter Two sets out the principles that underlieour proposals, while Chapters Three, Four andFive examine in turn issues of internationalfinance, investment and trade. Chapter Six looksat the critical topic of regulating and enablingprivate enterprise at the international level, andChapters Seven and Eight examine thecrosscutting issues of environment and labour.

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2.0.1 The arguments around trade andinvestment liberalisation have generally beenconducted in terms of their economic,environmental and social costs and benefits.There are indeed major benefits, including theremoval of the distortions in the market created bytrade barriers, and resulting lower prices, andaccess to a wider range of markets, extendingchoice for firms and consumers alike. Alleconomies develop by exporting the goods andservices they produce best in exchange for othergoods and services they need. The various formsof trade protectionism - subsidies, tariffs,dumping, and so on - generally benefit elites andvested interests, restrict choice and opportunityand raise prices in particular for the poorestpeople and the poorest communities.

2.0.2 Alongside the economic benefits of tradeliberalisation, however, Liberals - the historicdefenders of free trade throughout the nineteenthand twentieth centuries - always saw a morepowerful case. The dismantling of protectionismwas part of the assault on privilege and on thecontrol of the state by vested interests, a liberationof individuals’ talents and the creation of whatwould, in modern parlance, be called a ‘levelplaying field’. In addition, the extension of tradepromoted interdependence and a sense ofinternational community, building links betweenpeoples, communities and nations and renderingarmed conflict less likely. Liberal Democrats haveconsistently upheld these arguments, still relevantin the early years of the twenty-first century.

2.0.3 The world of the Doha Round, however, isvery different from that of the repeal of the CornLaws. Any functioning economy needs to balancethe benefits of free trade with wider public needs- a clean environment, civil liberties, theprotection of local culture, safe workplaces,effective public health regulation, socialinfrastructure for those suffering from ill-healthor disability and a strategy to reduce poverty, allsubject to democratic accountability and redress.At the national level this can be achieved withvarying degrees of success.

2.0.4 At the global level, however, theinternational institution that governs trade - theWTO and its range of trade agreements - is far

more effective and powerful than those thathandle environmental protection, health, humanrights or social development. International tradehas been pursued and developed to a much greaterextent than any other global public good. This hasresulted in an unbalanced world economy, wherethe interests of exporters and big companiesusually seem to be given a higher priority thanenvironmental protection, for example, or theinterests of local communities.

2.0.5 Similar arguments can be applied tocross-border investment. Opening borders toforeign investment can, if regulated appropriately,extend choice and opportunities to nations andcommunities. Furthermore, it will only bethrough investment in new technologies andservices that environmentally sustainabledevelopment will be achieved. However, theopening of opportunities to foreign investors hasalso sometimes led to the exploitation of localenvironments and communities in the interests ofowners and shareholders situated thousands ofmiles away. The competition for foreigninvestment can also lead to a ‘race to the bottom’,as countries seek to attract investors by offeringever-lower standards of regulation. And althoughdeveloping countries need external investment todevelop out of poverty, the poorest amongst themattract almost no investment capital. Again, webelieve that an international framework whichpromotes a more balanced approach to globalpublic policy objectives needs to be created.

2.0.6 International capital movements cansimilarly widen choices for individuals andnations. Trade in capital makes it possible forcountries to invest more than they save byborrowing the difference from abroad, or investless than they save by lending out the surplus. Butthe experience of recent financial crises hasdemonstrated that capital markets can be highlyvolatile, leading to recurrent financial calamitiesand stock-market crashes. Very few economieshave the strength to withstand major adversecapital flows, and international financial marketsare far less regulated than are those in goods andservices. The World Bank and the multilateraldevelopment banks provide only a limitedcounter-balance, and IMF prescriptions oftenfurther reduce nations’ control over currency

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2 The Liberal Democrat Approach

flows. There is a lack of effective regulation and,again, of balance.

2.0.7 It would be simplistic to blame therelevant international institutions - the WTO, IMFand so on - for this imbalance; it is their memberstates - national governments - which are to blamefor affording a much greater priority to trade andinvestment liberalisation than to any otherobjective. And the institutions do offer clearbenefits: the WTO provides a rules-based andnon-discriminatory structure for the resolution oftrade disputes in which every country, at least inprinciple, is treated equally. There have beenmany disagreements between WTO membersover the conduct of trade policy over the years,but there has been no return to the downwardsspiral of protectionism that characterised the1930s, which would harm the poorest people andpoorest nations the most.

2.1 The aim of trade and investmentliberalisation: sustainable development

2.1.1 Liberal Democrats believe, therefore, thatunder the right conditions, and if governed byeffective international institutions, trade andinvestment liberalisation can reduce poverty,extend choice and opportunity, improveenvironmental standards and reduce thelikelihood of conflict between nations. However,we recognise that trade and investmentliberalisation are not ends in themselves, and donot, by themselves, always lead to positiveoutcomes. They are valuable in so far as theycontribute to national and global sustainabledevelopment - as the 1987 Brundtland Report putit, development which ‘meets the needs of thepresent generation without compromising theability of future generations to meet their ownneeds’.

2.1.2 Sustainable development, which appliesequally to industrialised as well as to developingcountries (all economies develop) has threedimensions, economic, social and environmental,which must all be addressed equally ifdevelopment is to be successful. In the currentset-up, however, we believe that the keyinstitutions - the WTO, IMF and others - pay toomuch attention to the economic dimension ofsustainable development, at the expense of socialdevelopment, environmental protection, humanrights, and all the other components of quality oflife. They therefore need rebalancing. The rest of

this paper outlines ways in which we believe thisrebalancing should take place.

2.1.3 As well as trying to ensure that theprocess of globalisation works with, rather thanagainst, the principles of sustainabledevelopment, such a reordering of globaleconomic priorities would also strengthen thepolitical acceptability of these organisations. Asdescribed in Chapter One, internationalinstitutions find themselves under threat bothfrom the anti-globalisation movement and from areturn to bilateralism in international economicrelations. Liberal Democrats believe firmly in theprinciple of multilateralism in trade andinvestment regimes, protecting weaker countriesfrom the untrammelled exercise of power bystronger partners. Such a principle will be easierto defend if the objective of global sustainabledevelopment can be located firmly as the guidingaim of the key international institutions.

2.1.4 The principle of multilateralism will alsobe easier to defend if institutional shortcomingscan be addressed. The WTO, IMF and WorldBank are still excessively secretive, undemocratic,prone to poor decision-making and unaccountablefor their actions or their outcomes. Theirlimitations are caused primarily by the pressureput upon them by wealthy members, but areaugmented by undemocratic managementprocesses and weak monitoring by membernations. Proposals for reform of the IMF andWTO are outlined below in Chapters Three andFive; the World Bank is dealt with in Policy Paper64.

2.1.5 Institutions at home need reform just asbadly as those in the international arena, andreforms of EU processes are described in ChapterFive. In the UK, trade and investment policy iscurrently handled by the Department of Trade &Industry, but, as explained in Policy Paper 59,Setting Business Free, Liberal Democrats aim toabolish this department, thus simplifying andclarifying the role of government in relation tobusiness. Its valuable functions would betransferred elsewhere, and as part of this reformwe believe that trade and investment policyshould transfer to the Foreign & CommonwealthOffice - helping to ensure that it is pursued withwider public policy goals firmly in mind.

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2.2 Trade and investment anddeveloping countries

2.2.1 Liberal Democrats have consistentlyargued that the current system is stacked againstthe poorest countries. No country has ever beenlifted out of poverty through development aidalone; developing countries need the access tointernational markets and foreign investment thatallows their economies to develop and diversify.Yet the process of trade liberalisation has beendeeply uneven, benefiting rich economies morethan the poorest, and the gains from trade have notbeen distributed evenly throughout the globaleconomy.

2.2.2 Industrialised countries still maintainhigher trade barriers against many developing-country exports than they do against each others’.Flows of foreign direct investment are highlyunevenly distributed, and many of the poorestnations lack the investment capital and politicalcapacity to diversify and adjust to newopportunities, remaining dependent on a smallnumber of primary commodity exports liable towide price fluctuations. Further, while theinternational movement of goods and financialcapital has been liberalised, movement of labour -a major export of poor countries - has not.

2.2.3 As above, rebalancing is needed, in theinterests of the world’s poor. This includes asustained effort to dismantle the remaining tradebarriers against developing-country exports andan attempt to construct international agreementson investment which will make developingcountries more attractive to foreign investors, andforeign investment of much more lasting value todeveloping countries.

2.2.4 Even if all these proposals are adopted,though, development assistance still has a crucialrole to play. Many poor countries lack thecapacity fully to benefit from trade andinvestment liberalisation, which needs effectivegovernance structures such as a lack ofcorruption, trade-friendly customs agencies, anindependent judiciary, a tax system that does notneed to rely on import and export duties, and soon. Furthermore the deregulation andprivatisation that often accompanies trade andinvestment liberalisation opens developingcountry economies to new stresses and newrequirements for government regulation andenforcement for which they would benefit fromcapacity-building assistance. Developmentassistance should be designed, therefore, to enabledeveloping countries to benefit from openmarkets and new investment opportunities,themes which are explored in more detail inPolicy Paper 64, A World Free from Poverty.

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3.0.1 We now live in a world dominated byfinancial markets operating seamlessly around theclock. Over the past three decades, theliberalisation of international capital markets hasbeen reinforced by the deregulation of domesticfinancial markets, the arrival of powerfulcomputers and telecommunications, and rapidfinancial innovation. The argument forderegulated international capital markets,promoted by the IMF and others, has been that, byanalogy with free trade in goods, free capitalmarkets would lead to a better use of resourcesand greater stability. The experience of the lastfew decades, however, has comprehensivelyundermined this point of view: the exchange ratesof the major currencies have continued to moveabout with little regard for underlying economicdevelopments, and capital flows have been amajor source of instability, especially fordeveloping countries. Risks associated withliberalised trade in capital include sovereign debtdefault, capital flight, currency crises, bankfailures and stock-market crashes, all with thecapacity to project their effects across domestic,regional and even global economies - the processknown as contagion.

3.0.2 Very few controls now restrict capitalflows. Whereas long-term capital flows havemany benefits and should be encouraged (seefurther in Chapter Four), short-term capitalmovements have a high propensity to be harmful,undermining the financial and economicsovereignty of national governments. LiberalDemocrats, therefore, argue for the need tocontrol currencies and capital flows to ensure thatcapital supports the real economy, not vice versa.

3.0.3 Although the G7 group of nations wasinitially established, among other things, tomanage the global economy, its successor, the G8,has persistently failed to respond to majorexchange rate misalignments. This is anincreasingly important failing, with the advent ofthe euro creating the possibility of a new globalreserve currency as an alternative to the USdollar. We therefore believe that discussionsshould take place between the major currencyblocs - at a minimum the US and eurozone (a‘Finance G2’), and possibly the UK and Japan aswell - to establish the principle of intervention tokeep their currencies within target zones.

3.0.4 We also recommend a thoroughevaluation of the governance of internationalfinance, a ‘new Bretton Woods’ examination ofthe roles of international financial institutions in aworld vastly different from that in which theywere created sixty years ago. The IMF, inparticular, was set up to administer a fixedexchange rate system that has not existed fordecades. While it has found a new role as a short-term financier of developing countries it is not theappropriate institution for many of theinternational regulatory functions that are nowneeded.

3.0.5 We therefore call for the establishment ofa new International Financial Authority (IFA) tocoordinate aspects of the regulation of theinternational financial system. Opening talks onthis proposal should be a key priority for the UKduring its presidency of the G8 in 2005. The newauthority would deal with regulation of:

• Capital flows to and from developingcountries.

• Capital flows from source countries.

• The after-effects of inappropriate capitalflows.

We deal with these functions in turn.

3.1 Capital flows and developingcountries

3.1.1 As indicated above, short-term banklending - ‘hot money’ - can be highly volatile,contributing to economic instability, particularlyin developing countries. Many such financialcrises, however, are exacerbated rather thanreduced by the countries’ own borrowingstructures, magnifying the effects of exchange-and interest-rate and commodity price volatility.Borrowings are often short term and usually inforeign currencies. The IFA should provide adviceto developing countries on their exchange - andinterest-rate volatility exposure, and assistance inusing and, where necessary setting up,international derivatives markets to minimise thisexposure.

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3 International Finance

3.1.2 In addition, however, there may be a needfor additional measures to reduce speculativemovements of short-term financial flows,especially in emergencies. Examples include:

• The so-called ‘Chilean tax’ on capitalinflows and outflows. In 1991 Chile imposedan implicit tax on inflows of short-termcapital by requiring 30 per cent of all inflowsto be deposited with Chile’s central bank fora year. While total investment was notchanged much, the pattern of inflows shiftedaway from short-term debts.

• The use of temporary capital controls in theevent of currency crisis: the so-called‘Malaysian option’, used by Malaysia tocontrol capital outflows during the Asianfinancial crisis in 1997-99. The danger tocountries employing this measure is oflocking themselves out from theinternational financial system.

3.1.3 We believe that the IFA should provideadvice to developing countries on the suitableapplication - and withdrawal - of measures suchas these, or other options. The Authority shouldalso assist developing countries to withstand anyrequirements in bilateral agreements that wouldreduce their freedom to control capital flows.

3.1.4 In addition, the IFA should investigatemeans of implementing, when politicallypractical, international taxes on foreign exchangetransactions. This idea behind this - the ‘TobinTax’ - is to discourage destabilising speculationand thus make foreign exchange markets lessvolatile; rates would need to be set relatively lowto avoid penalising capital flows for normaltrading or investment purposes. Since every majorforeign exchange trading centre would have toagree to implement such a tax for it to beeffective, it is not a realistic option in the shortterm, but we believe that it would be a valuableinstrument in limiting speculation. (It would alsogenerate substantial sums of revenue, which couldbe used, for example, to finance internationalenvironment and development goals, but this issuch a distant prospect that it would be dangerousto rely on this as a realistic funding mechanism.)

3.1.5 All these measures would help preventtemporary liquidity difficulties becoming full-blown financial crises. In addition, in the absenceof an international ‘lender of last resort’, the

IMF’s resources should be enlarged (see para.3.4.6) to allow it to organise and fundsignificantly the necessary refinancing fortemporary liquidity crises.

3.2 Capital flows from source countries

3.2.1 While developing countries themselves,and the international financial institutions, canimplement various measures to reduce theadverse impact of capital flow volatility, evidenceshows that the financial crises of the 1980s and1990s were caused as much by mistakes made byrich-country institutions under the supervision ofrich-country regulators as by inadequateregulation and macroeconomic policies in poorcountries.

3.2.2 We therefore support reform of thefinancial policies of the richest countries, mostparticularly in the prudential regulation of privatebank lending. This would not only help avoidfinancial crises, but also reduce the possibilitiesof financial losses to the banks and subsequenttax revenue losses to the governments. The newIFA should lead negotiations to:

• Harmonise national bank and accountingregulations and supervision.

• Harmonise and promote consistency andtransparency in national accounting.

• Extend capital liquidity regulations beyondthe banking sector to other financialinstitutions, such as US money marketmutual funds (unit trusts), an increasingsource of international short-term moneyflows. This would reduce the need fordistress selling by these funds to meetredemptions at the onset of a liquidity crisis.

• Introduce more sophisticated measures ofbank risk, e.g. by formally noting individualcountry risk in terms of macroeconomicpolicy, volatility exposure etc.

These measures may lead to a short-termreduction of capital flows, but should, in thelonger term, mean that they would be a morestable, and therefore more productive, element indeveloping country funding.

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3.3 Managing after-effects

3.3.1 At present the costs of adjustment after afinancial crisis are largely borne by the citizens ofthe country involved as its economy is reshaped topay off the debts incurred by their government.These adjustment programmes protect externaldebt and do not distinguish, for instance, betweenlending to:

• Oppressive regimes that are using theirposition purely for personal gain (‘odiousdebt’), where the lenders are complicit in themisappropriation of national resources.

• Incompetent regimes with economic policiesthat are only going to pay back if the debt is‘worked out’ after adjustment programmesare imposed.

• Governments that are unlucky, say withmajor and unpredictable changes in the termsof trade, wars, natural disasters, and so on.

• Stable economies that suffer a liquidity crisisthat is then turned into a self-fulfillingfinancial crisis by outflows of short-termcapital.

3.3.2 We believe that the new IFA shouldpursue the quasi-judicial function of:

• Determining the causation of debt in times ofcrisis.

• Assessing whether debt has been incurredcriminally, irresponsibly or just mistakenly,and identifying debts that can be paid back.

• Making clear that ‘odious debt’ will not besupported.

• Supervising an ‘administration/bankruptcy’procedure for sovereign nations that cannotrepay all their debt.

(Policy Paper 64, A World Free from Poverty,contains more detail on our proposals for dealingwith developing countries’ existing debts.)

3.3.3 The last proposal would ensure that thedeveloped country creditors shared theadjustment costs with the defaulting country - aswould happen if a company goes bankrupt and isput under administration - with the degree of cost

sharing being partly dependent on thecompetency of the economic policy of the countryconcerned.

3.3.4 An immediate improvement can be madewithout international action by insisting on‘collective action’ clauses in sovereign bondissues. These clauses, which are standard in UKbond issues but not in the US, allow for formalprocedures for bondholders to negotiatesettlements with borrowers, analogous tocreditors’ committees in private administrationproceedings. Given the overlapping claims ofdifferent bonds, however, a formal sovereignbankruptcy procedure administered by the IFAwould still be preferable.

3.4 Reforming the IMF

3.4.1 The International Monetary Fund was setup to provide short-term emergency assistance forcountries in severe balance-of-paymentsdifficulties. In recent years, the conditions it hasplaced on its loans, in the form of structuraladjustment programmes, intended to establishconditions for long-term development, have led itto become more and more directly involved in themicromanagement of national economies - and inpractice, its form of assistance has too oftenretarded recovery and damaged the recipientcountry. Structural adjustment has been imposedregardless of the impact on countries’ growthrates, job creation or wealth distribution, andfrequently at the expense of public services.Developing countries which have rejected IMFconditions, such as China, Chile, India andVietnam, have often performed better than thosewhich have accepted them.

3.4.2 The IMF has remained unresponsive tothese outcomes, a situation which may relate bothto its funding and to its personnel. It is funded bymember nations according to their GNP andtrading volume, and decisions are taken by theIMF Board of Directors. The USA’s contributionto IMF funds is such that it can de facto exercisea veto on any decision. National representativestend to be financial experts accountable only totheir ministers of finance and central banks; theyare appointed in secrecy and are not required tohave any particular knowledge of the countrieswhose applications they consider, resulting in atendency to impose ‘one size fits all’programmes.

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3.4.3 The task of helping nations to recoverfrom financial crisis remains important, but webelieve that there is an urgent need to review theremit of the IMF and to render it more responsive,and its activities more effective, transparent andaccountable. The establishment of the IFA wouldenable the IMF to focus more on its original roleof short-term assistance in emergencies. Longer-term interventions in national economies shouldcontinue only in exceptional circumstances,where economic strategies have been scrutinisedand approved by receiving governments’ nationalparliaments, and social and environmental impactassessments have been carried out on all loanconditions. Even in crises, it should be required towork closely with the governments of applyingcountries to ensure that programmes for recoveryare appropriately timetabled and adjusted in thelight of experience.

3.4.4 In common with other institutions, itshould improve its transparency, with greaterdisclosure of decisions and background papers.Decisions in all committees should be by majorityvoting, and the names of all representatives andtheir backgrounds should be published, alongwith their attendance and voting records.

3.4.5 The basis of IMF funding also needs to bemodified. Funds need to be assured at asustainable level and made independent ofindividual members’ economic and politicalinfluence. In the short term, the UK shouldencourage greater collaboration amongst EUmember states in order to increase Europeaninfluence on the IMF. Total EU funds already wellexceed those of the US and a combined approachjust by UK, Germany and France would besufficient to modify the impact ofconditionalities.

3.4.6 The IMF’s lending resources have failedto grow in line with international trade flows, withthe result that the pace of change for countriesreceiving assistance is now much faster than itused to be, with accompanying much greaterstresses, as governments are required to reduceimports and cut government spending overrelatively short periods. IMF resources thereforeneed to be greatly increased, for example throughincreasing special drawing rights, in order toprovide more effective assistance to economies incrisis in the current climate of instability.

3.5 Tax evasion and tax competition

3.5.1 The global freedom of movement ofcapital has increasingly placed pressure ongovernments’ capacity to tax income and capital:

• Money can be illegally hidden abroad due tolow-transparency financial systems andsecrecy laws (tax evasion).

• Overseas countries can be used forconstructing schemes artificially to reducetax liabilities (tax avoidance). While these‘tax havens’ may be small states, they mayalso be specifically ring-fenced areas(geographic or legal) in larger states.

• Nation states may feel constrained to reducetheir tax rates on capital to prevent it movingabroad (tax competition).

3.5.2 The worst fears of erosion of the tax basehave not, however, been realised, as the share ofdeveloped-country tax revenue taken up by taxeson capital has not significantly changed in recentdecades. However, it could be argued that theproportion of revenue raised by taxes on capitalshould in fact have risen with the increasing shareof profits in recent years. Furthermore, as the UKexports capital-intensive goods and importslabour-intensive goods, international trade itselfwill tend to increase the return on capital relativeto labour. There is also a strong argument that areduction in taxes on labour, relative to taxes oncapital, is justified to reduce unemployment,including that caused by adjustments resultingfrom international trade (see further in ChapterEight).

3.5.3 We therefore:

• Support the OECD’s ‘Project on HarmfulTax Practices’ in endeavouring to deal withthe lack of transparency and lack ofinformation exchange for tax purposes, thatundercut the ability of OECD countries toenforce their own tax laws.

• Would go further than the OECD, insupporting UN moves to reduce harmful taxcompetition itself.

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• Concentrate particularly on the tax havens inBritish overseas territories, such as theCayman Islands.

It should also be remembered that LiberalDemocrat policy on gradually shifting the taxbasis to taxes on resource use (land, pollution,etc.) would reduce the scope for such taxavoidance, as these factors tend to be immobile.

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4.0.1 In contrast to the short-term capital flowsconsidered in the previous chapter, on a globalscale longer-term capital flows are smaller inmagnitude but considerably more important inachieving the goal of sustainable development.Flows of foreign direct investment (FDI) inparticular are critical to this objective, especiallyfor poor countries aiming to develop new forms ofeconomic activity. Recent OECD researchsuggests that a rise of one percentage point in theratio of the stock of FDI to GDP will raise GDPby 0.4 per cent. FDI also tends to be longer lastingthan other forms of cross-border investment (bankloans and portfolio investment) and investors areless likely to withdraw when times are bad.Considering the environmental dimension ofsustainable development, it is clear that thedevelopment and spread of new, less-pollutingand resource-intensive technologies andprocesses - through FDI - is vital to the future ofthe planet.

4.0.2 FDI has grown substantially in recentdecades, and for the developing world as a wholeis worth more than ten times as much as overseasaid. Yet this is very heavily skewed towards thericher developing countries; in recent years Chinahas been overwhelmingly the most importantdestination, and throughout the 1990s the top tendeveloping-country recipients together receivedmore than 70 per cent of total flows to thedeveloping world. For the bottom 70 countries onthe UN’s Human Development Index, FDI wasgreater than overseas aid for only nine of them -yet no countries have ever been lifted out ofpoverty through aid alone. Poor countries enjoyleast access to FDI primarily because of structuralproblems in their economies: a shortage of skillsneeded to convert the capital, political risk, andrestrictions on capital inflows.

4.0.3 Developing countries themselves cantherefore do much to attract FDI, but often tend tofind themselves at a disadvantage whennegotiating with the TNCs which are the majorsources of FDI. Not all cross-border investment isbeneficial to the host country in the long - or evensometimes the short-term. Particularly in theextractive sector (mining, oil and gas) there aremany examples of investments which have causedsignificant environmental damage and disruption

to local communities and their way of life, havefailed to transfer skills and have been associatedwith corruption and bribery. A recentdevelopment has been the spread of ‘host countryagreements’, through which major projects suchas oil pipelines are explicitly excluded fromnational government regulation.

4.1 An international investmentagreement

4.1.1 There is therefore a strong case for amultilateral regulatory framework to securetransparent, stable and predictable conditions thatwill encourage FDI, protect investors’investments and enable host countries to regulatetheir conditions. Previous attempts to negotiatesuch an agreement have not, however, beenencouraging. The OECD’s proposed MultilateralAgreement on Investment (MAI), which wasabandoned in 1998, was widely seen as failing tobalance investors’ rights with responsibilities, forexample for environmental and social standards.This danger has become real in North Americathrough the investor-state provisions in the NorthAmerican Free Trade Agreement (NAFTA),which has seen courts interpreting the term‘expropriation’ (of investments) as including anygovernment regulation (for example on wastedisposal or pollution) which affects a company’sprofits or even its share price.

4.1.2 The inclusion of a possible internationalinvestment agreement in the WTO’s Doha Roundproved deeply unpopular with developingcountries, and was one of the reasons behind thefailure of the Cancun WTO ministerial inSeptember 2003. We believe that the WTO modelof liberalised trade in goods is not in generaltransferable to cross-border investment, whichinvolves longer-term and closer relationshipsbetween economic actors, and therefore welcomethe EU’s indication that it is prepared to withdrawthe topic of investment from the Doha talks. TheWTO principle of non-discriminatory treatment,however, should clearly be retained in the newagreement.

4.1.3 Liberal Democrats therefore call for anew international set of negotiations on thecreation of a multilateral framework that

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4 International Investment

liberalises FDI where it contributes to the widerpublic policy goals inherent in the achievement ofsustainable development (see above, ChapterTwo). This should be defined more precisely inthe agreement itself, but definitions are availablethrough, for example, the UN MillenniumDevelopment Goals and the many multilateralenvironmental agreements. Additional rights forinvestors guaranteed by the agreement (access tocontracts, protection from expropriation, etc.)must be balanced by additional responsibilities,for example to high environmental, social andlabour standards. This could most easily beachieved through incorporating a bindingcommitment to the OECD Guidelines forMultinational Enterprises into the agreement (seefurther in Chapter Five).

4.1.4 The negotiations should be held under theauspices of the UN Commission on SustainableDevelopment; several UN agencies, together withnon-UN bodies like the World Bank, will haveuseful input. Laying the groundwork for thesenegotiations should be a key objective for the UKduring its presidency of the G8 in 2005.

4.1.5 Once such an international investmentagreement is in place, it should in due coursesupersede all the 2000 or so bilateral investmenttreaties (BITs) which have grown up since the1970s. Despite their number, research suggeststhat the treaties have been of little, or no, benefitto sustainable development or even to thenarrower goal of facilitating cross-borderinvestment more generally. Instead, BITs betweenrich and poor countries have sometimes been usedto impose unfair conditions on the weaker partner.

4.2 Export credit agencies

4.2.1 Export credit agencies (ECAs) are publicor semi-public agencies that provide government-backed loans, guarantees and insurance tocompanies seeking to do business in countrieswhere the investment climate is judged to be toorisky for conventional corporate financing. Mostcountries of the OECD possess at least one ECA.Worldwide in 2002, ECAs supported an estimated$432 billion in trade and investment - nearly 10per cent of world exports.Yet, despite some recentimprovements, most ECAs are not subject to anybinding environmental, human rights ordevelopment guidelines and their activities dolittle to promote the wider agenda of sustainabledevelopment we support; indeed, their primary

purpose is to provide support to home businesses,and much of their assistance, particularly in thecase of the UK, has been allocated to armsexports.

4.2.2 We therefore reiterate Liberal Democratpolicy (in Policy Paper 59, Setting Business Free)of privatising the British Export Credit GuaranteeDepartment (ECGD). Since it claims it breakseven (though it is highly untransparent in the wayin which it operates) it should be able to conductits activities in the private sector without any needfor public support.

4.2.3 There is still a case, however, forproviding export credit guarantees which dogenuinely support sustainable development, andwhich help to increase flows of FDI to the poorestcountries. We believe that this function should betransferred to the Department for InternationalDevelopment (DFID), which has much widerpublic policy goals than the ECGD, or any ECA.The UK should also take the opportunity of itspresidency of the G8 to argue for similardevelopments in other countries’ ECAs.

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5.1 The Doha Round

5.1.1 The Doha Round is the latest in the seriesof wide-ranging trade negotiations that beganwith the creation of the GATT in 1947. Oftenreferred to as the ‘Doha Development Round’, itwas initially hoped that the talks would focus onthe needs and perspectives of developingcountries, and, in particular, the least developedamong them. Yet in reality, the richer countriesdominated the agenda-setting process in Dohaand have similarly set the pace - or failed to - inthe talks to date. The unattractiveness to poorercountries of the deal on offer at the ministerialconference in Cancun in September 2003,together with the increasing assertiveness of thedeveloping world, were the main reasons why thatconference ended without agreement.

5.1.2 While regretting the delays in reachingfinal agreement, Liberal Democrats view therejection of the Cancun deal as, on balance, apositive outcome. A major cause for division arethe so-called ‘Singapore issues’ (agreed fordiscussion at the WTO ministerial in Singapore in1996): investment, competition, governmentprocurement and trade facilitation. Alwaysfavoured far more by the richer countries, mostdeveloping countries saw these as inappropriateextensions of the WTO mandate when more basicquestions, for example of protectionism againsttheir exports, remained unresolved. We believe itright for these issues (with the exception of therelatively uncontroversial issue of tradefacilitation) to be withdrawn from the talks. Wedeal with our proposals for investment in ChapterFour and for competition in Chapter Six.

5.1.3 The Doha agenda also includes, for thefirst time in a WTO negotiation, an importantcomponent on trade and environment (see furtherbelow in Chapter Seven). We regret the fact that itseems likely that this component will beabandoned, and call for its reinstatement (in animproved form) in future negotiations. It isimportant, however, for eventual agreement to bereached in the Round, as a total failure wouldopen the door to a return to bilateral agreements,which generally see negotiating pressure appliedby the richer countries to the detriment of thepoorer. We are therefore in favour of continuing

attempts to salvage the Doha Round, as long asthe outcome is positive for developing countries.Some of the key elements of the Round aretouched on below.

5.2 Agriculture

5.2.1 Three-quarters of the world’s poor live inrural areas. Agriculture accounts for about 27 percent of GDP and export earnings in developingcountries, and 50 per cent of employment. Yet atthe same time, agricultural markets around theworld are the most heavily protected; in OECDcountries, the average tariff rate for agriculturalproducts is 60 per cent, twelve times the rate forindustrial products. Developed countries alsoprotect their agricultural sectors through a $1billion a day worth of subsidies, more than theentire GDP of sub-Saharan Africa. Every dairyfarmer in the EU receives $2 a day per cow, higherthan the income of nearly half of humanity.

5.2.2 This structure of tariffs plus subsidies hasresulted in a hugely distorted world market foragricultural products. Developing countries aresystematically prevented from benefiting fromtheir comparative advantages of cheap labour andland; many potential food exporters in fact rely oncheap imports because their domestic productionhas been destroyed by subsidised exports fromOECD countries. Consumers in almost everycountry pay more for food than they should do,and many agricultural subsidies result in hugelyenvironmentally damaging farming practices.

5.2.3 Liberal Democrats have consistentlyopposed the current structure of support foragricultural production in the developed world, inparticular through the EU’s Common AgriculturalPolicy (CAP) and its US and Japanesecounterparts. We call for the elimination of CAPproduction subsidies and trade barriers, bothdirect and indirect, and the conversion of the CAPto a countryside support policy with the emphasison maintaining biodiversity (as described in detailin Policy Paper 52, Rural Futures). This should bea major component of the Doha negotiations, buteven if they do end without agreement, CAPreform should proceed regardless. We alsowelcome recent indications that the WTO mayrule against US cotton subsidies in the dispute

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5 International Trade

case brought by Brazil: if confirmed, this wouldbe of major benefit for some of the poorestcountries, as well as consumers and theenvironment.

5.3 GATS

5.3.1 The General Agreement on Trade inServices (GATS) is a WTO agreement coveringnearly all internationally traded services. Itencourages countries to make individualcommitments to liberalise trade in servicesthrough a ‘bottom-up’ approach, allowing eachmember to determine the sectors it will open up toforeign service providers. Under a framework ofrules based on the core WTO principles of non-discrimination and transparency, members arerequired to give immediate and unconditionalequal treatment to other member countries in anysector they have chosen to list. Exemptions arepossible, but usually only for new members, andthey should in principle last not longer than tenyears.

5.3.2 Expansion of the GATS is a major featureof the Doha Round. WTO members are beingencouraged to widen the list of activities forwhich they are prepared to offer market accessand non-discriminatory treatment to foreignproviders. National governments retain the rightto choose whether or not to open up particularsectors to competition, however - though once adecision is taken it is effectively irreversible - andderogations from market access and non-discriminatory treatment are permitted, based onthe number of suppliers, operations or employeesin the sector, the value of transactions, the legalform of the supplier, or foreign capital. Despite anactive NGO campaign against the GATS, nothingin the agreement compels government to privatisepublic services (such as water supplies), andexamples of detrimental privatisations indeveloping countries cited by critics of GATSgenerally have nothing to do with the agreement.

5.3.3 Despite the theoretical ability to applysafeguards, however, there is considerable uneaseabout the likelihood in practice of developingcountry governments being able to imposeconditions - for example, for high environmentalstandards or local employment requirements - onforeign service providers, and in practicedeveloping countries have come underconsiderable pressure, not least from the EU, notto implement such derogations. The irreversibility

of sector liberalisation, and the difficulty inprojecting exactly what is likely to happen, hasled to calls for a review of the GATS before itsfurther expansion, which we share. We alsorecognise that the privatisation of importantservice sectors, such as water or energy, requiresa level of monitoring and regulation bygovernment that may well be beyond the currentcapacity of many poorer countries (see above in2.2.4). Even developed countries have haddifficulties establishing adequate regulation ofprivatised utilities.

5.3.4 We therefore believe that the GATSshould be subject to major revisions before it isextended:

• Countries should be able to review theirjudgements on the sectors to be offered forliberalisation after a number of years(perhaps ten), at which time they should beable to reverse their original decision and/oradd new derogations.

• The least developed countries should beafforded the greatest flexibility in applyingderogations and in reversing originaldecisions should the impacts prove negative(see further below in para 5.5.5).

• In order to ensure that service deregulationleads to positive outcomes, companiesoffered new opportunities by GATS-ledderegulation should be subject to a bindingcommitment to the OECD Guidelines forMultinational Enterprises (see further inChapter Six).

At the same time, developing countries should beassisted in building the capacity required tomonitor privatised services sectors. The EU (andother countries) should immediately ceaseapplying pressure to developing countrygovernments not to implement derogations.

5.4 TRIPS

5.4.1 Intellectual property (IP) rights providethe legal basis for recognition of the value ofindividuals’ innovations, ideas and creativity.They take various forms - copyrights, patents,industrial designs, and trademarks - depending onwhat is being protected. The first three providethe owner a time-related exclusive right to controltheir IP’s use; trademarks guarantee origin and

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protect reputation. The objective of the IP systemis a balance between the public good and theinterests of the creator. Disclosure of technologyvia patents allows more rapid developments thanthe alternative of industrial secrecy. Intellectualproperty law has developed over centuries and isterritorial rather than global.

5.4.2 The enforcement of uniform intellectualproperty standards, through the WTO Agreementon Trade-Related Aspects of Intellectual PropertyRights (the TRIPS Agreement) was introducedinto the GATT Uruguay Round by the developedcountries as a quid pro quo for reductions in theirtrade barriers of interest to the developingcountries such as agriculture and textiles. Settingup patent systems, in a few years, of a type andstandard that took the US or Europe centuries hasresulted in major problems for developingnations. Capacity building is of prime importancein this area (see further below) and we alsobelieve that the TRIPS Agreement should bereformed to allow further time for implementationby developing nations.

5.4.3 In environmental policy, there is agrowing concern over instances of ‘biopiracy’,where traditional medical or agriculturalknowledge, or genetic resources, in developingcountries are ‘discovered’, patented, and marketedby developed-country industries without anycompensation for the real inventors of thesetechnologies. Such knowledge or resourcesshould receive a fair share of the benefits of theircommercialisation, and we therefore propose thata royalty-based system should be established forthe fair reward of harvested genetic or biologicalmaterials, in place of the patenting of naturallyoccurring genes, which Liberal Democrats havealways opposed. This would also help bring theTRIPS Agreement into line with the provisions inthe UN Convention on Biological Diversity onfair and equitable sharing of the benefits ofgenetic resources.

5.4.4 In the high-profile area of health, patentsallow pharmaceutical companies to make drugsvery expensive, which they claim is justified bythe costs of research and development. Even indeveloped countries this has a major impact uponhealth-care costs, and in developing countries ithas prevented access to essential medicines. InDoha, it was agreed in principle that countriesunable to pay for patents to manufacture essentialdrugs for their populations should be allowed to

procure ‘generic’ drugs from other countries.However, the US has blocked this agreement,arguing that developing countries cannotdetermine unilaterally which medicines areessential to their public health needs. We supportthe EU’s proposal that the World HealthOrganisation (WHO) should adjudicate in suchcases, establishing a system by which a countrycan demonstrate genuine medical need and beentitled to make or procure royalty-free drugs.

5.5 Reforming the WTO

5.5.1 The procedures of the WTO itself -described as ‘medieval’ by EU TradeCommissioner Lamy - are in urgent need ofreform. Despite some improvements, the WTO iswidely criticised as undemocratic and secretive inits processes, favouring developed overdeveloping countries in its decisions, failing toenforce compliance of wealthy members toagreed terms and ignoring non-trade issues vitalto global well-being. As we identified in ChapterTwo, WTO member states have effectively createdan organisation which pursues trade liberalisationin isolation from other public policy goals. Ourproposals throughout this paper should help torebalance the system, but the internal proceduresof the WTO itself need reform.

5.5.2 The most important set of proposals wemake relate to developing countries’ participationin the WTO. We welcome the emergence, atCancun, of stronger negotiating groups amongstthe developing world, though the most effective,the G20, primarily represents middle-incomeagricultural exporters and includes none of theleast developed countries. Most of thenegotiations, however, take place in betweenministerial conferences at WTO headquarters inGeneva, where representatives of wealthycountries are supported by teams of experts,which many poor countries cannot sustain.Indeed, thirty-seven WTO members cannot afforda permanent office in Geneva.

5.5.3 To redress this imbalance, we support:

• Financial assistance to the poorest membercountries to enable them to maintainadequate, permanent delegations in Geneva(perhaps on a regional group basis).

• The establishment of a pool of legal andtechnical experts available to assist members

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in negotiating, to train delegations innegotiating skills and to provide legalassistance in conducting WTO disputes.

• Making mandatory the WTO’s ownguidelines proposing preliminary assessmentof the impact of GATS agreements beforefinal negotiations; currently, these aregenerally ignored.

5.5.4 The most important thing industrialisedcountries can do to assist the developing world, ofcourse, is to reduce their trade barriers againstdeveloping-country exports. As noted above inSection 2.2, however, many poor countries lackthe capacity fully to benefit from tradeliberalisation and require assistance with buildingthe necessary institutions and enterprises. This isa partly a job for WTO technical assistance, whichwe believe should be increased, and partly fordevelopment assistance policy. As pointed outabove (in para. 5.3.3), trade and investmentliberalisation, and the deregulation andprivatisation that usually accompanies it, opensdeveloping country economies to new stressesand new requirements for government regulationand enforcement for which they would benefitfrom capacity-building assistance.

5.5.5 In addition, we believe that the currentstructure of ‘special and differential treatment’,through which developing country markets maybe protected more than their counterparts indeveloped countries, should be extended andmade more sensitive, with a graduated scale oftreatment depending on the GNP of the countryconcerned; this is of particular relevance to GATSand TRIPS commitments.

5.5.6 More broadly, WTO decision-makingprocesses suffer from a lack of transparency andaccountability. The WTO General Council meetsin private. Outside the Council, a great deal ofnegotiation is undertaken through informalmeetings from which developing nations are oftenexcluded. Decisions also tend to be excessivelyinfluenced by TNCs and industry groups. In theUK, for example, GATS documents which are notgenerally available have been released to theLiberalisation of Trade in Services (LOTIS)group. WTO staff have acknowledged that the USfinancial sector has been the prime mover inpromoting GATS.

5.5.7 The WTO does now make most of itsinternal documents available to the public, butvery few organisations are accorded observerstatus at its meetings and its debates remainclosed to civil society. This combination ofisolation and secrecy, plus the absence of anymonitoring authority, mean that its decisions andactions are accountable only to some of itsmembers. To increase WTO transparency andaccountability, Liberal Democrats propose:

• Extending observer status to all internationalinstitutions concerned with the impact oftrade, such as WHO and UNEP. There is anargument, also, for extending observer statusto significant international commercialorganisations and NGOs.

• Opening all general meetings to the public,except where this would endangernegotiations.

• Appointing an independent AdvocateGeneral, to represent the public in tradedisputes, with powers to interrogate officialsand delegates.

• Allowing and encouraging ‘amicus’interventions in dispute cases from civilsociety organisations.

• Establishing an annual assembly ofParliamentarians, to scrutinise the work ofthe WTO.

• Requiring the WTO, IMF and World Bank toconfer regularly to ensure that their policiesare compatible and supportive of their(reformed) remits.

• Encouraging national parliaments, includingthat of the UK, to find time regularly toreview the work of the internationalinstitutions and their impact on world tradeand well-being.

5.6 EU trade policy

5.6.1 The EU, operating through its CommonCommercial Policy, is the only trading bloc withthe potential to counterbalance US influence onthe international institutions regulating trade andinvestment. In recent years its record has beenmixed: it has proved readier than other WTO

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members to consider issues such asenvironmental protection and standards ofemployment, but it has failed to dismantle its ownenvironmentally and economically damagingsubsidies, particularly for agriculture. It has alsopushed for conditions which would further itsshort-term economic interests but damage thelong-term development of sustainable markets,for example in seeking to remove India’srequirement that foreign countries should workthrough a local counterpart, a requirement whichstrengthens the country’s ability to hold TNCS toaccount and to retain their assets if necessary. Ithas also applied pressure to developing countriesfor service sector access under GATS (see abovein Section 5.3).

5.6.2 Trade is a matter of exclusive EUcompetence: the European Commissionnegotiates on behalf of member states, in regularconsultation with the Article 133 Committee(named after the relevant article of the Treaty), aworking group of the Council of Ministers. Thismakes it essential that the European Parliament isenabled to give EU trade policy full democraticoversight. In 1990, the European Parliamentsecured the right to veto any multilateral tradeagreement negotiated by the Commission, whichsomewhat redressed the balance of power infavour of the elected representatives andincreased the accountability and transparency ofEU trade policy-making. EU trade policy,however, is not regularly scrutinised by allnational parliaments.

5.6.3 Liberal Democrats would press for thefollowing reforms in EU trade negotiatingprocesses:

• The right of the European Parliament to vetoall international trade agreements(multilateral and bilateral) should beconfirmed by the EU constitution.

• The full text of all EU requests in WTOnegotiations should be made available to allMEPs, except where negotiations are at astage where transparency could damage theoutcome.

• Outcomes should be published on theinternet.

• A preliminary environmental and socialsustainability impact assessment of any newproposed agreement should be madeobligatory, and all developing countries’conditions for trading should be acceptedand reviewed only in the light of impactassessment findings.

• The UK Parliament should set aside timeregularly to scrutinise EU trade policy,agreements and proposals.

5.6.4 The EU’s trade relations with developingcountries are also in need of reform. Cooperationbetween the EU and the ‘African CaribbeanPacific’ (ACP) group of developing countries(mostly former colonies of EU member states) isgoverned by the Cotonou Agreement (thesuccessor to the Lomé Agreements) signed in2000; this creates Economic PartnershipAgreements (EPAs) which are currently beingnegotiated and should be concluded by the end of2007. The ACP group contains many of thepoorest and most vulnerable developing nations,and their trade and development relations with theEU are of considerable importance to their futuredevelopment.

5.6.5 The proposed EPAs, however, have anumber of flaws. Under WTO pressure, theunilateral trade preferences granted to the ACPcountries under the Lomé Agreements are to bereplaced by WTO-style free trade areas, implyingthe elimination of duties and other regulations onessentially all trade in both directions between theEU and the ACP group. While we do wish to seetrade barriers against ACP exports removed, theopening of ACP economies to all imports fromEU countries (including heavily subsidisedagricultural and other products) over a very shortperiod is likely to have a devastating effect,particularly on the least developed countries. Inaddition the EPAs are to contain elements of theWTO ‘Singapore issues’ of investment,competition and so on (see 5.1.2) which havebeen strongly opposed by developing countries inthe Doha Round.

5.6.6 Liberal Democrats therefore call for:

• The introduction of far greater flexibilityinto trade preferences in the EPAs, retainingthe removal of EU trade barriers to ACP

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countries’ exports but allowing them to retaincontrols on EU imports, if they so wish.

• Accompanying the negotiations on tradepreferences with generous capacity-buildingassistance (see Section 2.2).

• The withdrawal of the wider elements of theEPAs, including negotiations on investmentand competition.

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6.0.1 This paper deals with the regulation, byinternational institutions and nationalgovernments, of international trade andinvestment. It should not be forgotten, of course,that the entities that actually trade and investunder these rules are not governments, but privatecompanies. The processes of trade and investmentliberalisation, coupled with advances intechnology, mean that many enterprises, evensmall ones, can now operate on an internationalscale. We believe that enterprise works best,however, when it operates within communities,and that it often works most effectively when itarises out of local roots.

6.0.2 Enterprise is an integral part of anyliberal society. Liberal Democrats regard openmarkets as a means to participation andinvolvement, and as a way to reward fairly work,effort and innovation. A logical corollary of thisposition is that we must make sure that marketenterprise really meets these goals. Genuinelyfree enterprise requires effective regulation;unregulated capital flows, a lack of social andenvironmental rules, or concentrations of power,all work against open markets. Increasinglyglobalised economies, however, mean thatregulation of corporate behaviour poses difficultquestions; there are as yet few effectiveinternational regulatory bodies, and closecooperation between nation states is still required.Individual countries, such as the UK, can oftentake a lead in establishing best practice inenabling and regulating enterprise.

6.0.3 Our proposals therefore centre on threecore elements:

• Improving competition on a global scale, andacting against monopolies and cartels, whichconcentrate power.

• Ensuring that enterprises benefiting fromopen markets are required to behaveresponsibly, even where governmentregulation in the host country is weak; thisincludes developing the OECD Guidelineson Multinational Enterprises, introducingrules for ‘foreign direct liability’, requiringtransparent reporting requirements andreforming accounting practices.

• Encouraging companies to go beyondgovernment regulation and behave in anethically responsible manner, contributing tosocial and environmental improvementswherever they operate.

6.1 Global competition policy

6.1.1 The transnational nature of manycompanies means that they can escape nationalregulation on competition by shifting theiroperations between national jurisdictions. Globalmarkets can encourage private monopolies,especially if these are supported byinternationally enforceable intellectual propertyrights. What is needed ultimately is a globalcompetition policy enforced by effective anddemocratically accountable global institutions.Yet there are steps that can be taken even withoutthis. National competition and anti-trust agenciescan improve their links with each other, sharinginformation and experience in the enforcement ofexisting law, leading in due course to thedevelopment of common global competitionstandards.

6.1.2 The EU is large enough to be able toimpose competition conditions not just oncompanies based in EU member states but also oncompanies trading into it. Yet its standing isharmed by its failure to impose fair competition insome internal sectors, such as agriculture, wheregovernment subsidies are prevalent, or defenceequipment, which is usually not open tocompetition. The UK should take a lead inpromoting better market competition and anti-monopoly policies both within the EU and theUK, and in encouraging greater internationalcooperation between competition authorities.

6.2 Corporate accountability

6.2.1 At an international level, the mosteffective instrument for regulating corporatebehaviour is the OECD Guidelines forMultinational Enterprises, recommendationsaddressed by governments to TNCs operating inor from adhering countries (the OECD’s thirtymember countries plus a few others). TheGuidelines provide relatively detailed guidanceon good business conduct in a wide range of

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6 Enabling and Regulating Enterprise

areas, including human rights, accountability,disclosure, employment, industrial relations,environmental protection, bribery, consumerinterests, competition, taxation and science andtechnology. They are reviewed every six years; thenext review is due in 2006.

6.2.2 At present the Guidelines are a voluntarycode, and have not been applied particularlyconsistently or rigorously within the adheringcountries. We believe that if codes are based on astrong regulatory framework, they can beenormously beneficial - not just in reducing thenegative impacts of corporate behaviour but alsoin encouraging innovation and establishing a levelplaying field for all competitors. The Guidelinestherefore urgently need more teeth and betterenforcement.

6.2.3 In the short term, we will argue for:

• Incorporating adherence to the Guidelines asa requirement of companies benefiting frommarkets opened up through, for example,GATS (see para 5.3.4) or our proposed newinternational investment agreement (see para4.1.3).

• Linking export credit guarantees, where theystill exist (see Section 4.3) to meeting therequirements of the Guidelines.

• Ensuring that government procurementcontracts are limited to companies that areworking within the Guidelines.

• Strengthening the national contact points(NCPs) responsible for overseeingimplementation of the Guidelines in eachcountry (the UK NCP currently consists ofjust one member of staff).

6.2.4 We will use the 2006 review of theGuidelines to argue to expand their reach, forexample by incorporating other internationalcodes, such as International Labour Organisation(ILO) core labour standards. In the long term wewish to see the Guidelines become legally bindingin all circumstances, giving companies duties toreport, consult with stakeholders and carry outimpact assessments. This will probably need aphased approach, applying the most stringentrequirements to the largest companies first.

6.2.5 Corporations should also be legally liablefor violations of national law carried out by theirsubsidiaries abroad; this is especially importantwhere justice is not easily accessible in thecountry where the violation took place. This is theconcept of ‘foreign direct liability’ (thecounterpart of foreign direct investment); anumber of cases have already been brought beforecourts in the US, under the Alien Torts ClaimsAct, and in the UK, US, Canada and Australiaunder general principles of civil liability (e.g.negligence) and the principle has now beenestablished in the UN Convention on Corruption.Nevertheless, the idea is controversial and itsapplication still disputed. We will:

• Legislate to make it clear that parentcompanies can be sued in UK courts for thebehaviour of their overseas subsidiaries (i.e.entities directly or indirectly controlled by orin common control with them).

• Institute preliminary hearings to excludefrivolous or malicious claims to ensure thatthese cases do not bring the new practice intodisrepute.

• Extend the liability of company directors tomake them responsible for the social andenvironmental impacts of both theircompanies and their subsidiaries.

• Make it explicit in domestic regulation thatcorporations based or operating in the UKhave a ‘duty of care’ in their social andenvironmental impacts wherever they mayfall.

6.2.6 We also believe that corporations shouldbe required to report on their environmental andsocial impacts, both on staff and otherstakeholders (such as local communities), just asthey do on their financial performance. It is ironicand anachronistic that rafts of regulation andrequirement (however imperfect) exist to informand protect shareholders, while broaderresponsibilities remain undefined, vague andlargely voluntary. In recent years voluntaryinitiatives and codes have proliferated, butinevitably, behaviour and reporting is patchy andinconsistent, and it is usually impossible todistinguish consistently between genuine effortsat accountability and corporate ‘spin.’

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6.2.7 Our aim is to give ordinary citizens theright to access information on the environmentaland social impact of companies’ operations. Wewill therefore:

• Amend the reporting rules for listedcompanies to incorporate accountability andreporting standards for social andenvironmental impacts. Just as there arefinancial audits, so considerabledevelopment work has been done in the areaof environmental and social auditing.

• Identify best practice in reporting standardsin order to codify them through regulation.We will support and draw on the work of theGlobal Reporting Initiative, which works todevelop sustainability reporting guidelines.

• Reform stock exchange listing rules torequire full reporting of environmental andsocial impacts.

• Work to see these initiatives adoptedthroughout the EU and beyond.

6.2.8 Transparency is also needed to combatcorruption. Some TNCs and developing-countrygovernments hide behind confidentialityagreements to conceal billions of dollars ofpayments annually that ‘disappear’. We believethat declaring details of such payments, togetherwith particulars of institutional lending andtechnical assistance programmes, will encouragegovernments to invest more widely in publicservices and infrastructure. We will work throughinternational institutions to achieve a multilateralagreement on a mandatory protocol for paymentdisclosure which does not competitivelydisadvantage UK businesses.

6.2.9 Finally, fraud and corporate failure inglobal organisations such as Enron, Tyco andWorldCom demonstrate that the regulation of theaccountancy profession, which as the standardmonitor acts as the guardian of financial probity,requires further reform. Consequently, we will:

• Support the creation of common cross-border accounting practices to bring US andEuropean standards into line.

• Legislate to: restrict accountancy firms fromworking for audit clients in any othercapacity; require firms to de-merge their

accounting business units and managementconsultancy practices; require the rotation ofauditors for UK-registered companies atleast every five years; and establish a three-year ‘cooling off’ period before auditors canbe employed by former clients.

• Request European competition authorities toinvestigate the accounting sector, in order, ifnecessary, to take action against anyevidence of market abuse.

• Support moves to curb intra-companytransfer pricing, where it is used by TNCs tolimit tax liability, effectively by shiftingreported profits to low tax regimes or taxhavens. (See also in Section 3.5.)

6.2.10 These reforms must be proportionate, sothat small businesses and professional servicefirms do not suffer unduly from additionalbureaucratic and financial burdens. We willtherefore establish appropriate thresholds for bothaccounting firms and their small- and medium-sized enterprise clients, below which these de-merger, rotation and ‘cooling-off’ requirementswill not apply.

6.3 Corporate responsibility

6.3.1 The burgeoning ‘corporate socialresponsibility’ or ‘corporate responsibility’movement seeks to encourage companies to movebeyond government regulation in theirenvironmental and social impacts. By definitionthese are voluntary initiatives, but governmentcan play a role in encouraging and facilitatingthem. We will therefore:

• Encourage initiatives such as the EthicalTrading Initiative and the Fair TradeFoundation, which aim to increase the shareof products’ purchase price which flows backto the producers (generally small companiesand individuals in poor countries). (Forfurther details, see Policy Paper 64, A WorldFree from Poverty.)

• Promote voluntary labelling schemes whichinform consumers about the conditions inwhich end products are produced, to enablethem to make enlightened choices. (Formandatory ecolabels, see below in para7.0.8.)

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• Encourage socially responsible investment,through which investors choose companieswith good records of corporateresponsibility.

• Launch an international policy dialogueaimed at implementing the World Summit onSustainable Development commitments oncorporate responsibility.

• Support the UN Global Compact, avoluntary initiative which seeks to advancegood corporate citizenship by encouragingcompanies to work with UN agencies,governments, labour organisations and civilsociety to advance a number of universalprinciples in the areas of human rights,labour and the environment.

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7.0.1 Trade liberalisation impacts theenvironment both positively and negatively. It canhelp to ensure that resources are used efficiently,it can spread the use of more efficient and lesspolluting technology and it can generate thewealth to pay for it. On occasion, tradeliberalisation has been used directly to reduceenvironmentally harmful activities, such as thereduction in agricultural subsidies stemming fromthe Uruguay Round. Conversely, however, tradecan also magnify problems of pollution andresource depletion caused by unsustainableeconomic activity - and in addition, transportinggoods around the world, particularly by air, hasdirect environmental costs.

7.0.2 With the exception of transport costs,however, at base, environmental problems arecaused by environmentally unsustainable patternsof production and consumption, not by tradeitself. A fall in levels of trade will not stop these,and may in many cases make them worse.Nevertheless, the current trade rules administeredby the WTO are often insensitive toenvironmental objectives, and attempts to modifythem, through the WTO Committee on Trade andEnvironment, have so far achieved nothing. Thetrade and environment components of the Dohaagenda are highly limited and have failed togenerate support outside the EU; it seems quitelikely that they will be abandoned before the endof the Round. However, recent dispute settlementcases have led to a number of significantreinterpretations of WTO rules, resolving sometrade–environment tensions.

7.0.3 Nevertheless, it is clearly unsatisfactorythat the relationship between trade rules andenvironmental regulations rests on theinterpretation of texts written over fifty years ago,before most major environmental problems evenbegan to emerge. To ensure that trade rules reallydo support genuine environmental regulation, wecall for a new ‘sustainability clause’ to be addedto the GATT, setting out agreed principles ofenvironmental policy - such as the Polluter PaysPrinciple and the Precautionary Principle -against which trade measures can be judged. Thisis similar to provisions in the EU treaty whichenable EU institutions to pursue both tradeliberalisation and environmental sustainability as

objectives; it should ensure both that trade rulesdo not undermine environmental protection andthat environmental regulation is not used as adisguise for covert protectionism. In particular,we want to see the modification of existing WTOrules in four key areas.

7.0.4 First, in the area of product standards.The WTO encourages the use of internationalstandards - for example, for health and safety, orlabelling requirements - in order to reduceunnecessary barriers to trade. It has consequentlyproved difficult for countries to set higherstandards - for example on the presence ofhormone residues or GM products in food -without providing compelling scientificjustification, which is often difficult orimpossible to obtain for new technologicaldevelopments. Recent WTO dispute cases havesuggested, however, that WTO rules are beinginterpreted in a more precautionary manner,accepting lower levels of scientific proof, which isclearly sensible in relation to emerging and oftenpoorly understood environmental threats.

7.0.5 We believe that explicit incorporation ofthe Precautionary Principle into the GATT, as wecall for above, will strengthen this development.We recognise also, however, that the adoption ofhigher standards in developed countries maycreate barriers to developing country exportersunless significant assistance is made available toenable them to improve their product standardsand to submit them to the testing and certificationprocedures necessary. Such assistance shouldtherefore be made available through support forinstitutions such as the Sustainable Trade &Innovation Centre, a new global partnershipdesigned to help developing country producers tobenefit from growing market pressures tointegrate environmental and social factors intotheir export strategies.

7.0.6 Second, where production processes areunsustainable, because, for example, theygenerate transboundary pollution or depletenatural resources such as timber or fish.International trade rules used not to allow tradediscrimination on this basis, but more recentWTO dispute settlements, with newinterpretations of the text of the GATT, suggest

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7 Trade, Investment and Environment

that in some cases this should be permitted. Webelieve that the new GATT sustainability clauseshould make it clear that discrimination in tradeagainst products on the basis of the processes bywhich they are produced is permitted, undercarefully defined circumstances, such as wherethe environmental damage caused istransboundary in scope (in other words, pollutionrestricted only to the country of production wouldnot be sufficient for a trade barrier). Inclusion ofthis provision in the GATT would ensure that themeasures taken would be non-discriminatory asbetween foreign and domestic producers, andwould of course be subject to the normalprocedure of appeal.

7.0.7 Third, on multilateral environmentalagreements (treaties), such as the Convention onInternational Trade in Endangered Species(CITES), or the Cartagena Protocol on trade inGM products. Several important agreementscontain trade measures, such as a requirement forlicences before trade can be permitted, orcomplete bans on trade in controlled productswith non-parties or non-complying parties to theagreement. Such trade measures have provedessential to the success of treaties where trade is amajor cause of environmental damage or wherethere are no alternative compliance mechanism,yet at least in theory they could still be challengedat the WTO. We believe that trade measureswithin multilateral environmental agreementsshould be recognised and permitted under WTOrules, through the new GATT sustainabilityclause.

7.0.8 Fourth, the status of ecolabels underWTO rules is not always clear, and it hassometimes been suggested that trade rules do notpermit mandatory labelling for environmentalpurposes. Yet the use of informational tools suchas labels is an essential component in allowingconsumers an informed choice over whether topurchase more or less unsustainable products. Thenew GATT sustainability clause should clarify theacceptability of non-discriminatory product - andprocess-based labels. Efforts should also be madeto ensure that labelling rules are developed on aninternational basis, where possible, and thatdeveloping country exporters are provided withassistance in subjecting their products to thetesting and certification procedures necessary(see above, 7.0.5).

7.0.9 Many of the policies we outline elsewherein this paper will of course contribute toenvironmental improvements, including thereduction of subsidies for unsustainableagricultural practices. Similarly, we believe thatsubsidies designed to make environmentallyfriendly technologies more affordable andaccessible should be excluded from the operationof the WTO Agreement on Subsidies andCountervailing Measures. A global agreement toremove the tax-exempt status of aviation fuel (asdescribed in Policy Paper 46, Transport forPeople) would help to reduce the environmentalimpact of trade.

7.0.10 Individual governments can take actionsby themselves which can help build sustainabletrading patterns. In particular, governments aremajor purchasers of goods and services, andgovernment procurement policy can be used togrow the markets for less environmentallydamaging products, such as sustainably harvestedtimber, or energy-efficient equipment. The UKshould take the lead, within the EU, in developinggreen procurement strategies and ensuring thatEU procurement directives support them.

7.0.11 The liberalisation of cross-borderinvestment also raises environmental issues.Environmentally sustainable development willnot be possible without very substantialinvestment in new, less resource - and pollution-intensive technologies and practices around theworld, and anything that increases the ease withwhich investment capital can flow to suchactivities is very welcome. A number of keyenvironmental agreements - such as the MontrealProtocol on ozone-depleting substances, or (whenit enters into force) the Kyoto Protocol on climatechange - create mechanisms to facilitate thesecross-border flows, but many important activitiesare not governed by such agreements,highlighting the need for a more generalapproach.

7.0.12 There are also dangers, however, inunregulated cross-border investment flows. Sinceenvironmental regulation proceeds at differentrates round the world, resource- and pollution-intensive firms may migrate to less regulatedlocations - the so-called ‘pollution havens’. Veryfew bilateral investment treaties containprovisions dealing with environmental standards,and one of the reasons for the collapse of the MAIin 1998 was its failure to deal adequately with

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environmental policy. In the NAFTA investmentprovisions, the increasingly wide interpretationgiven to the concept of expropriation has led tocompanies challenging NAFTA governments’legitimate environmental regulations on thegrounds that they might affect the companies’profits, or share prices. This kind of investmentliberalisation, which gives rights to investorswithout any accompanying responsibilities, is notacceptable - which is why we call, in ChapterFour, for a new international framework forinvestment liberalisation which reinforcesenvironmentally sustainable development ratherthan undermines it, and allows solutions toenvironmental problems to spread around theworld as quickly as possible.

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8.0.1 The inter-relationship between trade andinvestment liberalisation and labour standards is acontroversial one. On the one hand, trade andinvestment help economies to grow and develop,generating prosperity and creating newemployment opportunities. On the other hand,poor countries, exploiting their competitiveadvantage of cheap labour, invariably experiencelower wages and poorer working conditions thanthose of the richer countries. The spread of tradeand investment makes it much easier for TNCs tomove their operations to take advantage of theselower labour costs, sometimes with severeimpacts on unemployment and local prosperity intheir former host countries, and not always to thebenefit of workers in their new host countries.And while the movement of goods and capital isincreasingly easy, the movement of labour,particularly of economic migrants, is heavilyrestricted.

8.0.2 The movement of jobs from developed todeveloping countries is not in itself undesirable -indeed, it is part of the process by whicheconomies develop. In the richer countries,however, it requires active government, preparedto create the conditions - such as investing ineducation and promoting a culture of innovation -by which new jobs, and sometimes entire newindustries, can be continuously created to replacethose lost. It also requires active local andregional development policies, particularly forareas overly dependent on declining industries(such as the coal-mining areas of Britain in the1980s).

8.0.3 The activities of TNCs in poorer countriescan often be positive: they usually pay higherwages than local firms, and can provide usefultraining and technology transfer, thus assistingdevelopment. Further, working conditions in paidemployment are usually better than alternatives inthe small farming and informal sectors.Nevertheless, some TNC operations do notcontribute to sustainable development, andrelocation of their activities to countries lackingstrong regulatory systems may be pursued simplyto enable them to drive down wages, avoid decenthealth and safety provisions and boost theirprofits.

8.0.4 The challenge is therefore to find areasonable balance between the concerns ofdevelopment and of labour, between thecontinuing liberalisation of flows of goods andservices to encourage the creation of employmentopportunities and wealth in developing countries,on the one hand, and protection of thefundamental rights of workers, on the other. Weaim to achieve this in three main ways:

• Setting a minimum floor of basic globallabour standards.

• Supporting the framework established by theInternational Labour Organisation.

• Regulating to improve corporate behaviour.

8.0.5 Minimum global labour standards areclearly desirable if they protect workers fromexploitation without at the same time impedingthe process of development, or providing anexcuse for protectionism against developing-country exports. An extremely careful approachneeds to be taken, then, to identifyingcircumstances in which products produced underpoor labour conditions can be lawfullydiscriminated against in trade.

8.0.6 We will therefore widen the scope ofArticle XX of the GATT (‘General Exceptions’),which already contains a clause allowing WTOmembers to discriminate against productsproduced with prison labour. Although countriesmust themselves decide the labour standards theydesire, we believe that participation in thatdecision is a basic human right. The prison labourclause should therefore be extended to allowdiscrimination against products produced withforced labour. This represents an extension of thecurrent clause to include slave and bonded, aswell as prison, labour, and would cover, forinstance, many of the worst cases of child labour.This new provision would, of course, be subject tothe normal procedure of appeal under the WTOdisputes resolution procedure; WTO panelsshould have recourse to international agreementsoutside the GATT system (such as ILOconventions) in deciding its applicability.

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8 Trade, Investment and Labour

8.0.7 The widening of this GATT clause canonly, of course, affect traded products. For thewider promotion of high labour standards, welook to the International Labour Organisation.The ILO was created in 1919; it has subsequentlyassisted in the establishment of some 174conventions setting various internationalstandards of employment, and has developed aneffective monitoring system, underpinned by itstripartite structure of governments, employers andunions. Labour standards have undoubtedly beenraised in many countries as a result. Its coreconventions, which include demands for theabolition of forced labour, freedom of association,the right to organise, collective bargaining, anti-discrimination and equal remuneration, arecollectively described by the ILO as ‘fundamentalto the rights of human beings at work irrespectiveof levels of development of individual memberstates’.

8.0.8 We wish to see the ILO strengthened,through the provision of greater resources, so thatit is better able to enforce these conventions. Itshould also have a major role in negotiations inthe WTO and on our proposed internationalinvestment agreement, in order to represent theinterests of workers and thereby to ensure morebalanced agreements. The UK should play anactive role in the ILO, and follow the example ofother EU countries, with parliamentaryconsideration of ILO proposals and much widerpublic awareness and debate.

8.0.9 The companies involved in employingworkers in developing countries of course have acrucial role to play in improving labour standards.We deal with this topic above in Chapter Six; ourproposals include making adherence to the OECDGuidelines for Multinational Enterprises (whichinclude consideration of labour standards)mandatory for companies benefiting from openmarkets and investment opportunities; legislatingto ensure that UK companies are liable for theactivities (including conditions of employment) oftheir subsidiaries overseas; and ensuring thatcompanies report fully on labour standards andconditions of employment. To encouragetransparency, we also call for the establishment ofan internationally recognised labelling systemguaranteeing that goods have been producedunder decent working conditions.

8.0.10 Finally, an important part of theglobalised economy is the freedom of movementof labour - yet, as mentioned above, this is farmore tightly constrained than movement of goods,services and capital. We believe that immigrationis generally of substantial benefit, to the recipientcountries (in terms of new skills and workers), tothe immigrants themselves, moving in search ofnew opportunities for their talents, and often tothe countries of origin of the immigrants, whichmay benefit from remittances sent back tofamilies left at home (for some countries,remittances far exceed the value of developmentaid). Nevertheless, there is also clearly a limit onthe extent to which recipient countries can absorbimmigration, a topic which raises questionsbeyond the remit of this policy paper. In the WTOcontext, we will seek to meet the concerns ofdeveloping countries in the negotiations overGATS ‘Mode 4’, which deals with the rights oftemporary workers supplying services in foreigncountries.

8.0.11 Steps can be taken, however, to improveconditions for migrant workers. We believe thatthe UK should ratify the UN Convention onMigrant Workers, which entered into force in July2003. Persons who qualify as migrant workersunder its provisions are entitled to enjoy theirhuman rights regardless of their legal status andshould be given due legal protection and otherassistance. The Convention also containsmeasures to combat illegal trafficking of labour.

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This paper has been approved for debate by the Federal Conference by the Federal Policy Committeeunder the terms of Article 5.4 of the Federal Constitution. Within the policy-making procedure of theLiberal Democrats, the Federal Party determines the policy of the Party in those areas which mightreasonably be expected to fall within the remit of the federal institutions in the context of a federalUnited Kingdom. The Party in England, the Scottish Liberal Democrats and the Welsh LiberalDemocrats and the Northern Ireland Local Party determine the policy of the Party on all other issues,except that any or all of them may confer this power upon the Federal Party in any specified area orareas. If approved by Conference, this paper will form the policy of the Federal Party, except inappropriate areas where any national party policy would take precedence.

Many Liberal Democrat policy papers contain proposals which would change the way public money isspent. Many also involve passing new primary legislation. Clearly, in a single parliament, it might notbe possible to implement all of our policies. Therefore, at the time of a General Election, the LiberalDemocrats produce a manifesto which details specific spending and legislative priorities should theparty be elected to government. This means that no proposal in this paper should be taken as a guaranteeor as a spending commitment for a first parliamentary term until it has been published in a fully costedmanifesto containing our priorities and guarantees.

Working Group on International Trade & Investment

Duncan Brack (Chair) Derek HoneygoldJames Cameron (Chair) Gary LawsonJohn Allen Ferris MoussaNick Ashton-Hart Keith SharpSharon Bowles Elizabeth SidneyDavid Boyle Steve SmithDr David Hall-Matthews Staff:Andrew Hudson Helen Banks

Note: Membership of the Working Group should not be taken to indicate that every membernecessarily agrees with every statement or every proposal in this Paper.

Comments on the paper are welcome and should be addressed to: Policy Unit, Liberal Democrats, 4Cowley Street, London SW1P 3NB

ISBN: 1 85187 721 5 © June 2004

Further copies of this paper may be obtained, price £4.00 plus £1.00 postage and packing from:Liberal Democrat Image, 11 High Street, Aldershot, Hampshire, GU11 1BH, Tel: 01252 408 282.

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