Select Committee on International Development Minutes of Evidence

Examination of Witness (Questions 120 - 134)



  120. You have talked about labour standards and the control of multinationals. One of the things which came up in Doha, and other colleagues will bring up other areas, was of course international investment agreements, and part of that is labour standards. This is obviously part of the Singapore Work Programme which kicks in in 2003, 2004. You mentioned disciplining multinationals within the European Union within trade policy as to how in fact they should act across the world on the same standards, do you think that there is a basis where DG Trade will be in fact working to develop and establish international investment agreements which would have development outcomes integral to them? We all know the MAI broke down some three years ago because people thought that development was not part of the multilateral agreement on investment at that time with the OECD, do you see DG Trade having a role to push the concept of international investment agreements with development firmly embedded there in terms of ensuring their concerns are met?
  (Mr Defraigne) Yes. The idea, as you know, is to start off the negotiation on those two Singapore topics, investment and competition, after the Fifth Ministerial, which is due to take place hopefully in the first half of 2003. So we are now in the process of preparing this. The idea in a way is to negotiate an investment framework which would be multilateral, which makes a difference with the OECD where it was discussed first. We do not rule out that it could become plurilateral within the WTO as a first step towards complete extension to all members. This is a question which remains open, the possibility that we would proceed in two steps, coming out of the negotiation with agreements on investment and competition but which would include both north and south partners but not necessarily all of them. So there would be a sort of opt-out clause for those who do not feel like joining that sort of agreement from the start, but it would be open to further accession. It is very important to have the two of them together because competition is the way to make investment effective in the services sector, for example. From our standpoint it is not the way to bring back the labour standard; it is indeed impossible to address the labour standards in an effective way through the investment agreement. I think it would be a non-starter. What we have to convince the developing countries of is that there is for them of course disciplines but also benefits, that our view is not only to protect our investors, which of course we are looking at, but that a true competition agreement will mean overcoming private barriers to entry, very clearly, but at the same time we want to show them we want to defend them against some restrictive business practices of the large companies. So it should be a two-way street, a very balanced deal. So it is not a re-make of MAI within the WTO framework, it is a genuine north-south discussion.

Hugh Bayley

  121. You just said we need to convince developing countries of the benefits as well as the disciplines coming out of these agreements and globalisation, one of the big demands from the south is access to medicines, which was reinforced in Gro Harlem Brundtland's report just a couple of weeks ago, which started talking about rights to basic medicines as being a human right. How do things stand now with TRIPS, in particular in relation to medicines but more generally too?
  (Mr Defraigne) First of all, we believe TRIPS are there to stay as they are. That is our starting point. We believe that TRIPS is central to the progress of technology and the world needs technology to advance, and intellectual property is the only way to ensure that companies will get the benefits back from their investment in R&D. Having said that, we have identified within TRIPS the flexibility which is needed to reconcile that intellectual property with the needs, the most pressing needs, of developing countries, for example with regard to access to essential medicines, especially for the three epidemics—TB, malaria and AIDS. Here the agreement we have been able to put on paper in Doha said explicitly that countries which have production capacity can ensure compensatory production licences to produce at home and have a better price than of course would come from imports from developed countries. This is a possibility which is open to them without exposing themselves to litigation. The pharmaceutical industry can opt for an alternative route if they want to, which is to bring down the price to such a level that the practical use of those production licences would become senseless, but then we have to help by making it impossible for parallel imports to bias the whole mechanism, which we are ready to do.

  122. Surely that is the absolutely key point, is it not? If you have production at lower consumer costs in some developing countries, it raises the question of what is the position of those developing countries without production capacity and what the price would be for them.
  (Mr Defraigne) Exactly.

  123. Unless we resolve the parallel import problem, you are going to make basic health provision unaffordable for the poor, and there is no ethical justification for intellectual property which kills many people in developing countries, or fails to save their lives. I do not need to tell you.
  (Mr Defraigne) In a way it is a way to levy a tax on rich countries' patients to pay for the poor countries' patients.

  124. I am not sure it is a tax.
  (Mr Defraigne) It is a way of setting up solidarity. Instead of using taxes you use price differentials.

  125. With respect, within the Union the prices of some drugs are three times as high in some countries compared to other countries, which is why we have the issue of parallel imports in the EU. I do not know the figure, you probably do, but no more than 5, possibly 10, per cent of the income of the major pharmaceutical companies would come from the developing world.
  (Mr Defraigne) Yes.

  126. Of course I agree with you that pharmaceutical companies need the income to fund the research to produce the technological benefits, the new medicines, which the whole world wants to see, but surely you can do that so long as you crack the problem of parallel imports? Surely you can do that in a way which means that countries which can afford and want to pay for the development of new medicines do so, but the benefits are not lost to the many people who could not afford to pay what you might call an economic price. Is that not the key?
  (Mr Defraigne) Yes, yes.

  127. So what work is the Commission doing on providing a solution which would allow differential pricing, especially for those countries which cannot produce under licence?
  (Mr Defraigne) We are still in the process of discussing and the pressure on the pharmaceutical industry must go on to get them at a level of prices which would make a difference. The truth is that in a country like Brazil, where they are actually producing, the costs are extremely low compared to the tier pricing which the pharmaceutical companies are willing to agree upon for Africa, for example. So we can only put into place a parallel import framework if it is worthwhile. If it is just to cut the price by 40 per cent or 60 per cent, it is not enough. So Doha has now put on paper a principle which we are all agreed upon now. The question is to turn it into reality, bring down the effective supply at such a price level that it would justify that we come up with an effective parallel import system, which is going to be difficult to implement by the way, because as the price differential increases, the temptation to throw it is enormous, of course.

  128. I accept the problem, but it is a problem we must solve. Could you finally say a word about the current status in terms of practical consequences of the Everything But Arms initiative, where do things stand at the moment?
  (Mr Defraigne) It came into force a few months ago but for the three projects which are still under Common Market organisation in the framework of the CAP—rice, sugar and bananas—it will be implemented from 2006 until 2009, because that was the price to pay. In the case of sugar, it is very obvious from the industry standpoint that this change in the imports regime is a blow for the Common Market organisation. We have to change it. Those who analyse the situation, and it is not an official comment because we have never said that in that language, but when we talk to the farmers, when we talk to the sugar industry, they have all drawn the conclusion on the need to reform the sugar CMO and that was the very reason why they were so much against this proposal: they realised that you open up, in an extremely close market, a hole, and nobody knows what is going to be the size of the hole, because nobody knows what is going to be the export capacity of Bangladesh, for example, or from some African countries. It is impossible to see at this stage. Something which is important, for example, is whether those countries would export what they are producing for their own needs today and buy on the world market at world market prices what is needed for internal consumption, so you would have a trade diversion, which would make a lot of sense because by substituting they would gain the price differential which is enormous. But this raises extremely difficult questions and frankly we will have to address that. Should we encourage this? Shouldn't we look carefully at who is going to benefit by the end of the day? Is it the farmers, the local farmers, or are they multinational groups who are going to take advantage of the new possibility? When we grant trade preferences, I think we should not ignore the distribution issue, especially when the preferences have such a high cost for our own people. It is the same with, for example, the GSP. We have changed the GSP legislation, opening up for the first time the possibility of withdrawing the GSP if a country were to infringe in a systematic and severe way the quality standards of ILO. It is a new provision. Why did we do that? Of course, to force those countries to improve their record but also to explain to our textile workers that if we impose sacrifices on them, at least it will benefit other workers in the developing countries. If you can do that with the sugar beet farmers, it is the same. If you need the consensus of the people, you have to tell them it is development led, it is not just a matter of opening up your market and then forget about who is going to benefit in the exporting country, but it is a tricky issue. Another issue which is as tricky is the environment aspect, because if in some countries they start to tear down the forest, slash and burn the forest, to grow sugar cane so as to export more to the EU, through EBA, I am not sure we will have done a great job. So the monitoring of those policies is going to become I think more and more important. Do not forget that the GSP is an autonomous instrument which means we can take it away at any time from the beneficiary, of course if we have good reasons for doing so.

Mr Colman

  129. In Doha a number of southern governments said that the Everything But Arms initiative was very hollow indeed, because the non-tariff barriers for entry were so great, particularly the phyto-sanitary conditions you have mentioned. Are you providing training in the countries affected by the Everything But Arms initiative in terms of exporting to the EU to meet those conditions, because at the moment they feel they have been sold a pup frankly?
  (Mr Defraigne) You are absolutely right. This is the meaning of the task force we have set up with AIDCO, DG Development, RELEX and ourselves, to implement that huge technically related trade assistance programme, which is endowed with—I do not have the figure now—depending on the definition you give it, hundreds of millions of euros over the period. This is aimed at different aspects of the trade policy issue ranging from the capacity to negotiate, their capacity to use the dispute settlement understanding in the WTO, to conformity to SPS standards, sanitary and phyto-sanitary, and the like. Frankly, this is the most difficult issue I think we will have to handle in this area. It is awfully complex. Why? You are familiar enough with the problem of developing countries to understand we are talking of a set of institution practices, expertise, which are highly sophisticated, and to build up these in very poor countries is extremely difficult. Just to have the people stay in the job once you have trained them is difficult enough.

Mr Robathan

  130. Mr Defraigne, you have been very frank and extremely interesting, and I was particularly encouraged by what you said about the new Trade Round being developed as a strategic objective of the EU, and I would like to probe you a little further on that and in particular take you back to agriculture, which I think is probably the biggest issue in the Trade Round in many ways; liberalisation and all of that. There will have to be massive reductions in our subsidies, eventually I guess phasing out subsidies in the CAP altogether, would that not be true? That is the way the language is going. Do you see a genuine appetite amongst the countries of the EU, particularly if I may say so France, to phase out these subsidies, because that is surely crucial?
  (Mr Defraigne) It is a complex matter to the extent that at the time we are speaking now the Americans are going the other way, building up aid for agriculture, which complicates the matter a lot because it sort of reduces the pressure on our own farmers. They say, "Look at what the Americans are doing." Let us leave that aside. My Commissioner's judgment is that the internal dynamics of the CAP is such that the pressure for getting rid of the most distorted forms of subsidies, namely the exports, will be enough to allow us to negotiate within the WTO, and that the pressure will not come from outside but inside. In a country like France things have changed a lot and here you have to bear in mind the Franco-German relationship and look at what is happening in Germany. They are very much divided. They have now a Green Minister at the head of what is not called any more the Agriculture Ministry, it is Protection of the Consumer, Food Security and Agriculture. They might not win the election, so then we will have Mr Stoiber, who is a Bavarian and much more traditional in his views on farming. But when one of the two partners in the CAP who have always been helping each other has opted already for a new approach to agriculture, it is very clear that in France something is changing too. They know they have to change. The public's expectations are changing a lot. People are worrying a lot about the environment, to an extent they have never done in the past. For a long time farmers were perceived as friends of the environment, now they are rather perceived as abusing water resources and so on and so on. So the relationship has changed. The unfair distribution of subsidies is shocking, shocking, because it is a subsidy for the rich, and poor farmers are leaving. The statistics are incredible but it still goes on. So after the presidential election, where it will remain of course one of the important items, I think whoever wins you will have a sea change in France on the agricultural front, moving towards greener agriculture, more social agriculture, where rural development is going to be the focus, food security, quality of food, and this will bring down over-capacities in the critical sectors, easing our task as negotiators. We might be wrong, but we think agriculture will not be as difficult as it was in the Uruguay Round.

  131. That is encouraging. If I can lead you on from that, you have mentioned food security and quality, we have of course just had this ghastly outbreak of foot and mouth in Britain and previously we had BSE. It is more than possible that foot and mouth was brought in from food imports from infected countries. You have talked about your task force, but what can we absolutely do to prevent similar outbreaks in a country like Argentina, which has always exported beef, where foot and mouth is endemic? How do you see in this detailed area, but it applies to many others, the regulations working?
  (Mr Defraigne) There is a limit to what you can do through a TRTA programme, because the difficulty of course is where do you stop upstream of the export to eradicate it. I am not a specialist myself so I do not know whether it makes sense to speak of the eradication of foot and mouth disease. I do not know whether you can say a country will be forever immune from that plague. It could be a valid objection to Argentina but frankly these are rich farmers, they can afford to pay the price to get rid of the foot and mouth disease if they want to. I make a difference between Argentina and, let us say, Zimbabwe, where if it were not for the present predicament we would help Zimbabwe of course. You have to put a limit on what you can do for a developing country. If not, the sky is the limit in terms of expenditure. We have to forge the TRTA with the immediate action on trade policy.

  132. I am sorry, we have to do what?
  (Mr Defraigne) For example, certification, which is extremely important to make sure we import safe food from Argentina. Do we have to go upstream in the chain of producing meat to make sure that their herds are safe from contamination? Frankly, for me, it is an issue for the country.


  133. Thank you very much. We are grateful to you for your time. I think what this session has shown to me, and I suspect others, is how incredibly complex this area is. As an international community we have set ourselves targets to reduce the number of people living in poverty by the year 2015, and listening to your answers this morning I think I am slightly left with the impression that the danger about trade policy so far as the poor are concerned is that at every step forward the rich just re-write the rules viz agricultural subsidies in the United States. I do not know about other colleagues but I suspect that trade policy and development is a topic that we as a Committee will want to return to in considerable detail in the not too distant future. If I was a banana grower in the island of Dominica at the present moment, I would be pretty apprehensive about what the future will bring for me and the Caribbean. We are all very grateful to you for the time you have spent with us this morning and I am sure all these issues are incredibly complex but, for my part, I think I leave this session slightly more pessimistic than optimistic.
  (Mr Defraigne) It is funny you say so, Chairman, because we here are quite the contrary, we feel that for once the focus has changed from arranging business among rich countries to integrating the developing countries. Of course, it is an extremely difficult task because we are all also emphasising the distorted role of, for example, agricultural subsidies or other forms of protection, but you have to think of the benefits which we as developed countries enjoy just because we have been the first to produce—we have the largest companies, we enjoy economies of scale, we have dominant positions in many markets, we have formidable externalities. The City of London is an example of externality in the field of financial services; nobody can compete with such a layer of talent. So for developing countries, those other types of barriers to entry are going to become much more difficult than the so-called subsidies and official barriers to entry, and we have to address this. This is the reason why, by the way, competition is so important on our agenda. We think the competition policy is central now to achieving effectiveness of fair trade across the world and rebalancing the gains between developed and developing countries. So this is a lesson we draw but it will take generations and will take constant effort and, hopefully, on and off we will have success stories. They will not come altogether, I am afraid, but if we could have a success story in the Mediterranean countries, a success story in Latin America, a success story in sub-Saharan Africa, a real one and one which is significant and which lasts over a long period, it is worthwhile trying, and we should try very hard. But, and I insist upon this and remember it was my first sentence and it was so for a purpose, what makes a difference at the end of the day is the quality of their own policies. Frankly, Chairman, if there is something we can do for developing countries, it is to stop helping inefficient, corrupt and despotic regimes. Forget about aid—and I would say forget about trade but I believe in trade and investment—if we could stop supporting bad governments and concentrate our political and financial support on those who genuinely try to help their poor out of their predicament; the world would change. The world would change.

  134. Thank you for that final comment. We have a debate in the House of Commons tomorrow about Zimbabwe and some of us will have some interesting thoughts on all of that. Thank you very much for all the time you have spent with us and for answering our questions so fully and so frankly. I very much hope that the hard work of your Directorate General will merit your optimism and I am sure we all wish that is the case. Thank you very much for your time.
  (Mr Defraigne) Can I just say for your information that we are spreading here a book which has been written at the initiative of DFID, which we consider one of the best handbooks we have ever seen on trade and development. You must know that. We are going to buy a hundred copies to circulate among our staff because it is extremely helpful. You must know that.

   Chairman: Thank you very much.

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