2019 ASSA Annual Meeting Atlanta, GA. January 4-6, 2019 Industrialization and structural change of the periphery in the global world Margarita Olivera – IE/UFRJ margarita.olivera@ie.ufrj.br My thanks to CAPES and the PAEX Program 2018/2019 by their financial support to participate in ASSA 2019. (EDITAL Nº 15/2018)

Eternal debate: Free Trade vs Industrial Policy Nowadays even if the participation in global value chains (GVC) appears as a modern development strategy, it share the well-known neoliberal ideas . In order to be included in the international vertical integration of the production, underdeveloped countries should follow free trade policies, good government policies and the investment agreements, going in line with the comparative advantage principle.

Where the free trade took us… Evolution of GDP per capita (USD 2010)

Uruguay Round: WTO, TRIPS, TRIMS and Subsidies. “In 1995 the Uruguay Round of talks by the GATT (General Agreement on Trade and Tariffs) resulted in worldwide tariff cuts, tougher restrictions on trade-related subsidies, strengthening of trade-related intellectual property rights, and, most importantly, the transformation of the GATT into the more powerful World Trade Organization (WTO)” (Chang 2003, 267). To achieve free trade of goods, services and capital (to “level the playing field”) the most controversial agreements have been: investment agreements (TRIMS), intellectual property rights (TRIPS) and subsidies.

Doha Round Developing countries’ claim development topics: elimination of agriculture subsidies in EU, Japan and the US that harm dC trade. TRIPS that limit access to medicines and technology Developed countries’ claim market access: reduce tariffs on a line-by-line basis; improve TRIPS; include technological services; liberalize services and the access to industrial goods’ markets (NAMA)

NAMA (Non Agricultural Market Access) Adopting a more uniform and lower line-by-line tariff structure would prevent countries from requiring any kind of differentiation among imports of key commodities for production (basic inputs and capital goods) and/or consumption on the one hand, and luxury goods on the other hand. The same would happen with the capacity of following differential treatments on high and low technological manufactures. It deepens the static comparative advantages in dCs. This not only shrinks room for industrial policies but also exacerbates the external constraint.

The rise of China and international negotiations In 2000s China enters to MTS and to WTO. Lack of consensus in the Doha round and opposition from the countries of the South, led by China, India and Brazil (for example in terms of generic drug policy and discussion of patents), frustrated the attempts to advance in these dimensions of control and monitoring by the WTO.

The rise of China and international negotiations Even within the existing system of rules , there is still some remaining policy space to improve industrial production (public procurement, non-agricultural markets access, subsidies to science and innovation through National Innovation Systems, stimulus to private consumption, among other). This policies have been used in East Asia and especially by China to promote their industrial development in a sort of “hidden protectionism” in what Alice Amsden (2002) called “new mechanisms of resistance”.

WTO-plus and WTO-extra GATS - property rights on internet, software and IT services, regulation of e-commerce, NAMA - elimination of the remaining protection for industrial products Environment - National States are responsible for environmental conditions (NAFTA) Investment agreements with ISDS Public procurement

OMC plus-extra and Investment Agreements Investment Agreements and ISDS. Objective: end with the hidden protectionism (CHINA, INDIA) reminiscent of the industrial policy that OMC allows. They are "DEEP" agreements because they address also various internal regulatory aspects ("behind the border") that may represent barriers to the functioning of value chains. These issues include the treatment of foreign investment, trade in services, protection of intellectual property and technical norms and standards, among others. (ECLAC, 2015)

ISDS as the end of industrial policy space ISDS (Investor-State Dispute Settlement System): implies a total loss of sovereignty (Akyuz 2015, Khor 2015), This is a major gain for TNCs, since with an investment agreement any investor (without distinguishing between productive, portfolio or speculative origin of FDI) could take an ISDS case against the government. The motivation could be either that TNCs consider that investment was harmed either because it suffered discrimination with respect to a local competitor or because the government changed the macroeconomic conditions compromising its gains and profits.

ISDS as the end of industrial policy space ISDS have severe implications: (a) onerous implications, due to the costs of litigate in an international court; (b) discouraging effects on the government by applying new economic policies, since it never knows if the effects of these policies can lead to litigation; (c) loss of sovereignty. (Khor 2015).

Some final thoughts In the context of the new international configuration, with GVC dominating commercial relations and capital movements, industrial policy space continues to shrink, limiting the possibilities of transformation of the productive structure for underdeveloped economies.

Some final thoughts The mega regional agreements not only enhance specialization in commodities and/or in sectors with low added value (i.e. maquiladoras) for the periphery, but also impose a regulatory framework that limit any possibility of local industrial development, extending to unusual levels the gap between the north and the south (while some countries focuses on developing artificial intelligence to command factories, ports, houses, operations, etc., others discuss how to increase the exports of lemons)

Some final thoughts The sectoral development strategy must look not only to the transformation of the productive structure (to get out of the logic of the comparative advantages and limit the external constraint) but also to the transformation of the levels of consumption and domestic demand, to guarantee levels of growth compatible with external constraint.