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Contributions from
the Column
Focus
The risk of a rerun: little progress since Cancún
Business: chances for poor and rich countries alike
Rural development is not on the WTO agenda
Why NAMA threatens industrialisation
11/2005
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The risk of a
Cancún rerun
Most interim deadlines in the multilateral negotiations on liberalising trade have not been met. Nonetheless, there is scope for substantial progress at the Ministerial Conference of the World Trade Organisation (WTO) in Hong Kong in December. Governments of developed countries need to make more concessions. Otherwise there is the risk of the Ministerial collapsing the way the last one did two years ago in Mexico. Two eminent scholars from big developing countries assessed the situation for D+C/E+Z in mid-October.
[ By T.N. Srinivasan and Ernesto Zedillo ]
The declaration of 14 November 2001 concluded the fourth Ministerial meeting of the World Trade Organisation (WTO) at Doha, Qatar and launched a new round of multilateral trade negotiations called the Doha Round. It followed the failed attempt to launch a trade round two years earlier in Seattle, where developing countries (DCs) had expressed dissatisfaction with the decision making process as well as the results of the previous Uruguay Round. In Doha the concerns of developing countries were therefore reflected in a broad negotiating agenda which was called the Work Programme.
The emphasis on addressing DC needs was perhaps the main reason for the new round to be characterised as the “Development Round” although the Doha declaration does not use this phrase. The declaration set January 1, 2005 as the target date for concluding the round along with several intermediate deadlines to be met by the mid-term review at the fifth Ministerial in Cancún, Mexico in 2003. However, by the time the ministers gathered there, hardly a deadline had been met. Sharp differences between DCs and the industrialised countries on a number of issues such as agriculture had not even been narrowed down. The Cancún Ministerial collapsed, followed by accusations and recriminations among participants.
Picking up the pieces
After tempers cooled, attempts were made to put the negotiations back on track. They led to the so-called July 2004 package which provided a basis for subsequent negotiations. It reaffirmed the Doha declaration, and adopted a framework for negotiations on trade in agricultural products as well as on non-agricultural market-access issues (NAMA). Also the controversial “Singapore Issues” (including investment, government procurement and other issues dear to industrialised countries) were dropped, with the exception of trade facilitation.
In the following year, negotiations continued on the basis of the July package. There was consensus on the need for a substantial breakthrough at the Hong Kong Ministerial in five key areas: Modalities in Agriculture, Modalities in NAMA, securing a critical mass of market opening offers in services, making significant progress in areas such as Rules and Trade Facilitation and effectuating a proper reflection of the Development Dimension.
In his report of 28 July 2005, to WTO’s General Council, Supachai Panitchpakdi, then Director General of the WTO, noted that there remained an immense scale of work to be done and that the difficulty of resolving controversies should not be under-estimated. He also stressed that the participants had to start substantive negotiations in all areas immediately. He admitted that none of his earlier warnings seemed to have been well-heeded and concluded that, although there were some positive developments, the negative side of the ledger outweighed the positive.
Pascal Lamy, the new Director General, succinctly laid out on 24 September 2005 what remains to be done before the Hong Kong Ministerial:
„In agriculture, we need to set a date for the elimination of export subsidies, figures for slashing trade distorting farm support and a package of equivalent ambition on market access. We need to agree on the big numbers to cut substantially but fairly tariffs on manufactured products. In services, where developing countries have now become increasingly important players and which are an ever-increasing part of economies, we also need a big push. We need to arrive, as near as possible, to draft negotiated texts in areas such as anti-dumping and subsidies. Finally, on measures to cut down red tape at the border, Trade Facilitation in our jargon, the good progress achieved needs consolidation. Above all, we need to remember the development objective of this Round. It will be one of the benchmarks of success. By Hong Kong, substantial results must be in sight in each particular area of negotiations, if their sum is to deliver on the promise of the Doha Development Agenda.“
(www.wto.org/english/news_e/sppl_e/sppl03_e.htm)
Given the dismal state of the negotiations, are there any items on Lamy’s list that are realistically achievable in time? Before attempting an answer, a preliminary remark is in order. In retrospect, it seems unfortunate that the Doha Round has been called the “Development Round”. That characterisation may have created an unrealistic (and unintended) expectation that the successful completion of the Doha Round would also solve the problem of development. However, progress in addressing issues with potential development impact has been extremely modest – in large part because of resistance from rich countries. On the other hand, DCs insist on turning the system of special and differential treatment into a permanent entitlement that would exempt them from any significant WTO obligation. Consequently, any outcome of the Doha Round short of unrealistically rapid progress will have far too modest an impact to justify the term “Development Round.”
Domestic challenges
The problem of development lies at the centre of economic, social and political processes in the countries concerned. Not only are these processes deeply rooted and complex, but, more importantly, they vary immensely across the developing world. Certainly, greater integration of DCs with the global economy will contribute to their individual development. This will be the case to differing degrees depending on their stage of development. It is in their interests to pursue the goal vigorously. There is no doubt that greater and better access to global markets for goods, services and finance would open up significant opportunities for DCs and, if utilised, would accelerate growth and development. However, whether and to what extent DCs can benefit from these opportunities depends on how they address domestic political and economic constraints. While the direct and indirect contributions to development of integrating DCs with the global economy are, of course, relevant, the importance of domestic reform cannot be over-emphasised.
Calling a round of trade negotiations a development round can also lead to pressure on the WTO to become yet another international development agency, like the World Bank, UNDP and others. The Uruguay Round brought trade in services into the ambit of the WTO, thereby going beyond policy measures at the border to disciplining, in effect, domestic regulations. In addition, by calling them trade-related, intellectual property rights (TRIPS) and investment measures (TRIMS) were included, unwisely in our view, in the agreements of the Uruguay Round.
The WTO is already overloaded. Bringing aspects of development other than trade into the WTO would compound this problem and inevitably erode the WTO’s well-deserved reputation as the most efficient and cost-effective of international organisations.
The Tinbergen rule of policy assignment is relevant in this context: for achieving several policy goals efficiently, there have to be at least as many policy instruments as there are goals. This rule applies to institutional mandates as well. It is more efficient to have institutional specialisation – a World Bank for long-term development finance, an IMF for global financial system stability and short-term macroeconomic management, an ILO for labour issues, and the WTO for trade – than to have each of them involved in the mandate of one or more of the others. Unfortunately, there is a growing overlap of mandates between the World Bank and the IMF on poverty alleviation but no evidence of that producing better results. The ILO is also encroaching on trade issues.
The WTO is not a resource disbursing agency. Its primary role is to enable members to achieve whatever they have agreed on and abide by their own commitments. It would be unfortunate if the WTO were forced to mimic the IMF and the World Bank and started conditioning market access to reforms of domestic policies unrelated to trade.
Achievable results
Returning to Lamy’s list, it would seem that non-agricultural product market access (NAMA) issues are relatively simple to sort out. Tariff barriers on such products are already low in industrialised countries. In fact, the higher barriers in some developing countries affect other developing countries more seriously. A simple agreement on the part of industrialised countries to eliminate tariff and non-tariff barriers, and by the DCs to reduce tariffs considerably and bind them, should be possible to reach.
Textiles and apparel are, of course, manufactured products and unfortunately the United States and the European Union do not appear to have been chastened or to have learned from the disastrous episode of, in effect, returning to the bad old quotas and tariffs of the Multifibre Arrangement (MFA) to contain the surge of apparel imports from China. Neither did they learn from their egregious earlier failure to make their domestic industry competitive, or even to wind down during the long ten year period of MFA phase-out. Hopefully this will change.
The agriculture issues are more complex. There is enormous diversity among developing as well as among developed countries. An agreement on cotton should be reachable. Also, debates on food aid and food security should be easier to solve once it is understood that aid in kind, such as food aid, is not the most effective aid and that trade policy instruments are not the best way to address food insecurity. An agreement in agriculture that is confined only to cotton and food security, however, would not be attractive enough for DCs to engage in a serious give and take, abandoning demands for special and differential treatment and granting access to their markets for non-agricultural products. An agreement attractive to DCs will have to include credible and time-bound commitments by rich countries to reform seriously in agriculture. This was deemed an unreachable goal until recently. There is a ray of hope now that the US Trade Representative, Mr. Portman, produced an offer to reduce significantly both tariffs and subsidies. It is yet to be seen whether the European Union and Japan will match or even improve on the American proposal.
Tangible progress can also be made in services, particularly Mode 1 relating to arm’s-length supply of services, with the supplier and buyer remaining in their respective locations. Much of the recent growth of outsourcing/offshoring services falls under Mode 1. The possibility of agreeing also on a further liberalisation of Mode 4 services, in which the seller moves to the location of the service buyer on a temporary basis, exists, although in an increasingly xenophobic era this possibility is unlikely to be exploited.
All summed up, however, the objective of achieving a satisfactory agreement before or at the Hong Kong Ministerial according to Lamy’s terms seems hardly probable for two reasons. First, rich countries seem unwilling to commit to serious reform in agriculture. An earlier offer of President Bush to dismantle US protection of agriculture if others would reciprocate has been dismissed by Commissioner Mandelson of the EU as empty posturing. Second, DCs are not ready to consider giving up their demand for Special and Differential Treatment which in essence amounts to being exempted from some of the rules and disciplines of the WTO, not having to reciprocate some of the market-enhancing actions of developed countries, and to receiving tariff preferences for some of their exports to developed countries’ markets.
Indeed the fear that existing preferences would erode if there were a reduction in standard tariffs (called MFN tariffs in WTO jargon) has been one reason for the lukewarm attitude of some developing countries to trade liberalisation by developed countries, which have cut such tariffs. The available evidence suggests that the quantitative significance of the preferences and their contribution to development in the countries receiving them are very modest indeed; yet attachment to them persists. In the past, developed countries blunted opposition of developing countries to the egregious departure of the Multifibre Arrangement from GATT/WTO principles of non-discrimination by offering such preferences and also letting developing countries retain rents from quotas on their textiles and apparel exports. Any grand bargain between developed and developing countries remains unlikely until DCs change this mindset.
Support for reform
Some experienced policy makers, including one of the authors, and influential scholars have made a strong case for the creation of a dedicated fund to aid governments of poor DCs that undertake trade reforms. The aid would help such countries undertake complementary domestic reforms without which the benefits from their trade reforms would be much less. It would enable such countries to compensate losers from reforms, offset loss of tariff revenue from reductions in tariff rates, and in general help them meet the cost of adjustment and resource shifts that accompany successful trade liberalisation.
Critics of this proposal point out, first, that there are already IMF and World Bank programmes helping DCs to undertake trade reforms. Indeed, some prosperous WTO members have contributed resources to help DCs realise aspects of trade liberalisation. Second, critics argue that aiding countries to undertake reforms that are in their own best interest can only be rationalised if the beneficiaries cannot finance the up front costs of these reforms by borrowing against their future benefits. This was, indeed, the rationale for structural adjustments as well as policy-based lending of the past. The limited success of such lending suggests that aid from the proposed dedicated fund, albeit in the form of grants rather than loans, could run into some of the same problems. Third, leaving aside tariff revenue impacts, private individuals ultimately bear the costs of, and benefits from, reforms.
The case for aid is, nonetheless, based in part on the realistic assumption that the capacity for compensating those who bear the costs by taxing some of the benefits to those who receive them through the fiscal system is limited, assuming that there is even a willingness to do so. However, this limited fiscal capacity of governments could also limit their ability to use aid to overcome resistance to reform by private individuals and groups. All this said, we do not mean to convey the impression that the problems identified above are sufficient to make the case not to create such a fund, but we want to warn that possible problems should be anticipated and addressed in the design of the fund were one to be created.
Prof. Dr. T.N. Srinivasan
is Samuel C. Park, Jr. Professor of Economics at Yale University in the USA. He is a citizen of India.
t.srinivasan@yale.edu
Prof. Dr. Ernesto Zedillo
is a former President of Mexico. He now heads the Yale Center for the Study of Globalisation as Professor in the Field of International Economics and Politics at Yale University.
ernesto.zedillo@yale.edu
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