The success or failure of the Uruguay Round of the GATT negotiations will depend critically on the political issue of the readiness of the European Community to reduce its levels of agricultural support. In the absence of an acceptable compromise on agriculture, the progress of negotiations on other matters is likely to be limited and the prospects of increased protectionism, bilateralism and managed trade in the world economy will increase. Even if such a compromise is reached for agriculture, difficulties will remain concerning both `traditional' items for negotiation such as textiles, clothing and tariff reductions and new items such as intellectual property rights and trade in services. These issues have implications not only for the major contracting parties to GATT that have traditionally dominated negotiations but also for the developing countries which have played a greater role in this Round than in previous negotiations and for the newly liberalized economies of Eastern Europe.

Many of these issues were discussed at the second biennial International Seminar on International Trade, held in Cambridge, Massachusetts, on 2-3 August. This year's Seminar was devoted to `Analytical Issues and Developments in the Uruguay Round'. The conference was co-sponsored by the National Bureau of Economic Research and the Centre for Economic Policy Research and organized by Robert E Baldwin, Director of the Trade Relations project at the Bureau, and L Alan Winters, Co-Director of CEPR's International Trade programme. CEPR is grateful to the UK Department of Trade and Industry and Foreign and Commonwealth Office for the financial support provided as part of the Centre's research programme on `The Consequences of 1992 for International Trade'. This research is also funded by the Commission of the European Communities under the SPES programme. Financial support for the conference was provided to NBER by the Starr Foundation.

Reform Proposals
Bradley J McDonald (US Department of Agriculture) presented a paper on `Comparing the Effects of Alternative Uruguay Round Agricultural Proposals', in which he reviewed the slow and uncertain progress of the Uruguay Round negotiations and noted in particular that the negotiations on agriculture have endangered progress achieved in other areas. McDonald presented a nine- sector, four-region computable general equilibrium model which he then used to assess the effects of three broad categories of proposals for reform.

First, either multilateral or unilateral liberalization should result in modest welfare gains; the US farm sector stands to gain significantly more from multilateral than unilateral liberalization, whereas EC and Japanese agriculture were relatively insensitive to the type of reform. Complete liberalization should have a beneficial effect on world welfare, but the benefits will be unevenly distributed: the US will gain and Japan and the European Community would lose. Second, the US proposal to negotiate the eventual removal of all trade-distorting agricultural policies and the corresponding EC proposal to reduce aggregate measures of support by 30% seem to be well chosen, since each region would benefit more from its own proposal than from the other's. Third, the application of `formula cuts' to all support policies but at a deeper level than the 30% proposed by the EC may represent a viable compromise.

In the discussion that followed, L Alan Winters (University of Birmingham and CEPR) first noted that the use of a general equilibrium framework was necessary for considering large changes in policy. He commended the distinction made between agricultural and non-agricultural land, but he questioned the relevance of applying this distinction to capital. He suggested that the variable levy might be better modelled as a quota rather than a fixed tariff. Winters also raised doubts about the realism of the simulation scenarios, since neither the EC nor the US Congress has much sympathy for free trade in agriculture, and he questioned the small size of the welfare measures in comparison with those found in other simulation exercises.

Rachel McCulloch (Brandeis University and NBER) argued that the results ought to have been presented in terms of their impact on the balance of payments because political lobbying more commonly arises from budgetary pressures than from welfare issues; and a number of participants questioned the lack of attention paid to the rest of the world.

David Greenaway (University of Nottingham) presented a paper on `Trade-Related Investment Measures (TRIMs): Political Economy Aspects and Issues for GATT', in which he considered the economic effects of TRIMs and the prospects for agreement. Both `input TRIMs', such as local content requirements and equity requirements, and `output TRIMs', such as minimum export requirements, are of greater importance for developing than developed countries. They perform the role of an insurance policy and also enable rent-shifting to take place.

Greenaway addressed a number of issues facing the GATT negotiators. Some have argued that TRIMs are negotiated on an investment-specific basis and should therefore not be regarded as direct instruments of trade policy, even if they are sometimes similar to border measures in their effects. A number of GATT submissions that treat TRIMs as investment measures have sought to group them into two categories depending on whether or not their trade-distorting effects are sufficiently `adverse' to warrant action. Greenaway also noted that if TRIMs are treated in this way, it still remains unclear whether other investment measures such as investment incentives should be brought into the GATT process. Even if agreement were reached in principle that such interventions should be subject to the new disciplines, the negotiators would probably ignore them in practice, since they are not explicitly part of the GATT remit and are also more difficult to monitor than TRIMs.
If policy is intended to address TRIMs per se, then new disciplines will be required, whereas if the focus is simply on their trade-distorting effects, then existing disciplines may be sufficient. Finally, on the issue of uniformity of treatment, there appears to be a consensus among the contracting parties to GATT that infant-industry arguments have some justification, and consequently that there is a case for granting favourable treatment to developing countries. Greenaway concluded that there are grounds for optimism that agreement will be reached, although it is still hard to predict exactly what form this will take.

In his discussion, David Richardson (University of Wisconsin and NBER) argued that the border/investment distinction should be dropped and that GATT should broadened in its scope. The US wishes all investment measures to fall under GATT and has sought to present them as trade related in order to get them on the agenda. Robert Lipsey (Queens College, City University of New York, and NBER) suggested that TRIMs were endogenous and that only countries that were attractive to foreign investors made use of them. He also asked what was known about the empirical effects of TRIMs. Greenaway replied that these would be hard to establish since research would probably require the use of firm surveys which inevitably contain a large element of ex post rationalization. Jonathan Eaton (Boston University and NBER) suggested that the effects of quantitative restrictions could be replicated through the use of equivalent taxes, which are legal, so that the existence of many TRIMs in place should probably be attributed to their non-transparency.
Intellectual Property Rights

The next two papers considered intellectual property rights (IPRs). Keith Maskus (University of Colorado), in a paper on `Normative Concerns in the International Protection of Intellectual Property Rights: Implications for the Uruguay Round', noted that the agreement of some form of IPR protection for the `sunrise industries' would be necessary to obtain the support of the Congress for any general agreement. He then reviewed the welfare effects of extending the protection for IPRs offered by developing countries to levels approximating those applying in the US and other developed countries. His analysis of the available data showed that trade in IP-intensive goods grew rapidly during the 1980s and that comparative advantage in these products lay overwhelmingly with the industrial countries. Licence fees and royalties, although significant and growing, remain small in relation to other forms of appropriating the international returns to innovation.

Maskus then used a two-country model to demonstrate that the comparative static welfare effects of extending protection are ambiguous: the developing country becomes worse off because of terms-of-trade losses and the disappearance of producer surplus in the infringing industries, while the developed country may gain or lose, depending on the balance between the gains in monopoly profits and the losses in consumer surplus deriving from higher goods prices. He concluded by noting that the global distribution of the dynamic and external welfare effects of protecting IPRs remained uncertain, since there was little evidence on which to assess the desirability of upgrading levels of protection for IPRs by international agreement.

Paul Klemperer (St Catherine's College, Oxford, and CEPR) noted the merit of Maskus's two-country representation in demonstrating how the extension of rights over existing intellectual property could raise world welfare through mutually beneficial bargaining. He maintained, however, that the 12% normal price-cost mark-up assumed in the model was far too low and that a model of IPRs should include an incentive to innovate.

Michael Mussa (University of Chicago) argued that problems such as abuse of trade-mark were really matters of criminal law rather than economic analysis, but he noted that much of the economic growth in developing countries derived from their use of information already in the public domain so that it is in their interest to support developed countries' IPR systems to ensure its continued supply. Robert Baldwin (University of Wisconsin and NBER) expressed concern that the difficulties in securing agreement on IPRs might jeopardize the chance of agreement on other important GATT issues.

In the second paper on IPRs, `Models of Technological Competition for the Analysis of Intellectual Property Rights and the Uruguay Round', John Beath (University of Bristol and CEPR) sought to demonstrate how both `tournament' and `non-tournament' models can be used to analyse proposals on IPRs, with particular reference to their dynamic effects on the incentive to innovate.
In the non-tournament model, two firms engage in deterministic cost-reducing R&D, and differences in the tightness of IPR protection are made possible by differential spillovers of knowledge from one firm's R&D to the other's costs. Industry profits and total welfare are increasing in the degree of spillover, so some infringement is beneficial. If initial costs are asymmetric between firms, then for optimality to obtain the firm with the lower initial costs should be the greater infringer, because production must be concentrated in the lowest- cost firm if welfare is to be maximized.

In the tournament model, each firm's decision of how much to invest in R&D in each period is determined by its `profit incentive' (the return to innovation if the firm had a monopoly) and the `competitive threat' (the return to being the first firm to innovate). If IPRs are tight then both firms' R&D `reaction functions' will be positively sloped; while if they are weak so that imitation is easy then they may be negatively sloped. Hence if IPRs are protected asymmetrically across countries then reaction functions may be positively sloped in one country and negatively sloped in the other. According to Beath's model, harmonizing protection on the basis of the tighter set of IPRs will result in a `common pool' of excessive R&D effort; while harmonizing on the weaker set leads to a `free rider' problem. Beath suggested that an individual country might avoid this dilemma through a unilateral policy of subsidy to R&D.

In the ensuing discussion, Jonathan Eaton (Boston University and NBER) argued that IPRs contrasted sharply with tariffs, since no available theoretical framework would adequately and plausibly evaluate the welfare effects of their reform, at least in an international context. Eaton noted that the continued control of efforts to protect IPRs and public promotion of innovation in general at the national rather than international level leads to four forms of distortion. First, just as firms may over- or under-invest in R&D activity from a social standpoint, so may individual countries in relation to an optimal level defined in terms of global welfare. Second, the countries that provide the greatest support for R&D activity may not enjoy a natural comparative advantage in doing so: indeed the `brain drain' suggests the contrary. Third, innovations are most profitable where they receive the most protection: for example, the complaint that world R&D efforts have led to innovations ill suited to Third World countries may in part result from their relative lack of protection for IP. Fourth, innovations promoted as a result of national policies will not necessarily be used where they are most applicable, since differences in IP protection across countries can give rise to `artificial' comparative advantage.

Eaton also questioned the maintained hypothesis that tightening international rules against copying will necessarily reduce R&D spillovers: for spillovers that do not involve infringement, stricter protection may reduce secrecy and therefore increase the rate of innovation. Overall, while the gains from developing global protection of IPRs may be substantial, this need not be achieved through the global extension of existing US standards.

Keith Maskus noted the developing countries' concern about the monopolization of hi-tech production by the industrial countries, which may stem from natural factors rather than policy. William Branson noted that theorizing is a highly income-elastic activity, which therefore falls naturally to the industrial economies.

The Services Sector
Rachel McCulloch (Brandeis University and NBER) presented the first of two papers on services, entitled `Services and the Uruguay Round', in which she sought to provide a background to the incorporation of services as a `new' item in the Uruguay Round negotiations and to evaluate the prospects for agreement on services within and outside the GATT framework.

She noted first that the US and most of its trading partners have become service economies and employment is now heavily concentrated in the service industries, but international trade is still dominated by goods. Further, the services that currently absorb most of the labour force at the national level are not those that account for most international transactions in services, nor even those for which an expansion of international trade is likely in the foreseeable future.

Any pressing forward with the liberalization of services must therefore be justified for other reasons: for example, to ensure that the forward momentum in multilateral negotiations is maintained or to restore domestic US support for open international markets. Such arguments might become untenable, however, if services are allowed to displace important unfinished business in the traditional areas of GATT negotiations such as agriculture, textiles and clothing. Moreover, if service firms are principally concerned with expanding the sales of their foreign affiliates rather than with exports as such, then domestic support for the resulting agreements may be low.

McCulloch noted that the two-track negotiation employed in the Uruguay Round whereby services and other negotiations are formally separate was designed deliberately to limit explicit trade-offs between concessions on goods and on services. Nevertheless, future negotiations might benefit from expanded opportunities for such trade-offs: indeed, since goods and services are inextricably linked in international transactions, future progress will be slowed unless negotiators are able to include both elements in their deliberations.

Finally, she maintained that the consideration of services had forced the negotiators to take explicit account of the links between trade and direct investment and between trade and international movements of labour. Although this has further complicated negotiations in the Uruguay Round, it is likely to serve GATT's ultimate objective of pushing the world economy towards greater efficiency.

In his discussion André Sapir (Université Libre de Bruxelles and CEPR) sought to complement McCulloch's presentation with a detailed description of recent developments on services. He argued that the improved understanding of the policy issues underlying the Uruguay Round had not spread very widely beyond the negotiators themselves and that major difficulties may arise when the parties come to discuss the movement of unskilled labour. He also noted the increasingly active role taken by the European Community in negotiations on services (reflecting its realization of its real strength in this area) and India's isolation from the other developing countries in its total opposition to service negotiations.

Cillian Ryan (University of Wales, Bangor) presented a paper on `Trade Liberalization and Financial Services', in which he focused on the role of banking. He first noted the surprising enthusiasm of the US negotiators to include financial services in the Uruguay Round, given the secular loss in the US market share. Ryan argued that trade in services can be best explained by the traditional theory of international trade and that the principal source of comparative advantage in financial services is know-how acquired over time through learning-by-doing or education. In so far as this had been promoted by domestic regulation in the `proposer' countries in the past, they now have an interest in liberalizing trade in such services and hence in discouraging new entrants. Liberalization will not guarantee an increase in world trade, however, since trade patterns in the past may have been driven by differences in regulations rather than real factors.

David Richardson noted the importance of prudential regulation in banking, which should be negotiated through an agency such as the BIS rather than GATT, and argued for a clear distinction to be made between lending and trade in financial services (in the form of intermediation). Michael Mussa illustrated this point by noting that Japanese firms' comparative advantage in collecting funds in Japan does not necessarily indicate comparative advantage in moving these funds.

GATT and Africa
In the final paper delivered at the Seminar, `The Participation of Developing Countries in the Uruguay Round: An African Perspective', Ademola Oyejide (University of Ibadan) argued that the African countries had participated more fully in the Uruguay Round than in previous trade negotiations for three reasons. First, in earlier rounds they had tended to see themselves as part of a general under-developed group, whereas they are now taking greater account of their specifically African interests. Second, their views of their own best interests have changed in response to the failure of their earlier inward-looking development strategies and to encouragement from the World Bank. Third, 60% of their trade was with the European Community and they therefore felt that they had to defend their interests through negotiation so as not to risk sacrificing their preferential treatment.

Oyejide noted the importance to African countries of market access especially for tropical and natural resource- based products and for textiles and clothing and of the implications for their economic development of the outcome of the GATT negotiations on agriculture, TRIMs and services. He concluded that despite the more active African involvement in the Uruguay Round, there was still a great need to improve the inputs of human capital and other resources required for effective participation. African countries have not been able to put together negotiating teams to cover interests that will typically lie across the responsibilities of several ministries. GATT negotiations are an expensive process and African countries would greatly benefit from technical assistance in this field.

In his discussion Dani Rodrik (Harvard University, NBER and CEPR) welcomed Oyejide's conclusions concerning the increased divergence between African and other developing countries, their concern to protect their traditional exports, and the current negotiations' general neglect of developing countries' interests. He maintained, however, that more time spent on analysis and quantification would shed light on important issues such as the extent of African countries' loss from the erosion of trade preferences and the distribution of gains and losses from reductions in agricultural support.

David Greenaway noted the value of an African perspective on the GATT, in contrast with the prevailing focus on its implications for the newly-industrializing countries. He pointed out that trade liberalization in Africa had usually been undertaken as part of a conditional finance package from the World Bank.
André Sapir raised doubts concerning sub-Saharan Africa's ability to negotiate any more out of GATT on account of its close economic ties to the European Community.