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 		 

Opportunities to be seized

The future of the World Trade Organisation (WTO) depends on the Ministerial Conference in Hong Kong next month. A failure of this summit would deal a major blow to the global economy. Small and poor countries with next to no bilateral bargaining power would be the worst affected.


[ By Ludolf von Wartenberg ]

Multilateral trade policy is facing some crucial decision-making. The upcoming Ministerial Conference in Hong Kong will deal with the future of the Doha Development Agenda and the political significance of the WTO in general. If WTO members manage to agree on substantial compromise, there is a good chance of concluding the negotiation round in the foreseeable future. If they do not succeed, the round will not have much chance of success. There is much at stake, for both industrialised and developing countries.

One important task of the negotiations is to make world trade more development-friendly. It should become easier for developing countries to integrate into the world economy. In this context, textiles and agriculture are cited time and again. The widely-held opinion is that industrialised countries are depriving developing countries of their chance to sell their products on the world market. But is that really so?

On closer inspection, it appears that one much-applauded goal of the Doha Round – the liberalisation of agricultural markets – would lead to gains as well as losses among developing countries. A few internationally competitive emerging market nations such as Brazil and Argentina would benefit most from an opening of the OECD’s agro-markets. However, up to now, numerous smaller agricultural exporters have been able to retain their niches within the framework of regulated market access. If the EU opened its common market, countries in Africa, the Caribbean and Pacific with special ties to their former colonial powers (ACP countries) may be among the losers.

Another example is the textile sector. Chinese manufacturers in the first instance took advantage of the removal of textile import quotas at the beginning of 2005, which had also been requested for a long time on development grounds. Chinese companies were able to dramatically increase their exports – but that happened at the expense of other Asian countries, for example Bangladesh and Indonesia.


Customs
The reduction in tariffs that the WTO is pushing for would lead to an erosion of tariff preferences, especially for the least developed countries. The gap between general tariff rates and preferential tariffs decreases, and therefore, viewed relatively, the position of the countries that until now had benefited from preferential tariffs worsens. All this means that the WTO can certainly make perceptible improvements in the framework for integrating developing countries into the world economy in general. But the removal of trade barriers has different impacts for different developing countries.

Should we therefore retain trade barriers for development reasons? Certainly not. After all, it is to be expected that trade liberalisation will benefit developing countries on the whole by creating market opportunities and triggering growth. But liberalisation also creates new development challenges. The ACP countries provide a good example. For decades, they have been enjoying generous trade preferences. However, they have not succeeded in significantly increasing their exports or keeping up with the dynamism of international trade.

The removal of trade barriers creates market opportunities. But those who actually want to take advantage of such opportunities need products they can market internationally and the infrastructure required to export quickly and cost-effectively. Therefore, improved market access for developing countries does not invariably translate into increased exports. Many developing countries are challenged to raise their product quality to an internationally competitive level, for instance, by meeting the import markets’ health standards. Furthermore, it is essential to increase export capability by improving the necessary transport infrastructure, in particular roads, ports and airports. Even in this context, trade policy must not be considered in isolation.

The world trade system can and must be made to be more development-friendly. The fact that the customs tariff structure of advanced countries penalises commodity processing in developing countries is counterproductive. The term “tariff escalation” refers to the phenomenon of lower tariffs being levied on raw materials than on processed goods. From an importing country’s point of view, this may make sense, by enabling access to reasonably-priced commodities and reducing competition in the finished goods sector. However, this approach is not in line with the objective of making it easier for developing countries to become part of supply chains. The Doha Round must set things right in the interest of the developing countries.


Non-tariff barriers

As important as tariffs continue to be – especially for goods that developing countries are interested in – non-tariff trade barriers are becoming more and more significant. They encompass a wide range of measures, for example regulations on product classification, a multitude of formalities for customs clearance, or product standards and technical regulations through to environmental and consumer protection. These regulations affect companies in developing countries. To a large extent, the EU and the USA apply varying technical standards. Companies in developing countries that want to supply both markets therefore have to build up the know-how for two standardisation systems and to gear their products to comply with both systems.

Furthermore, the products have to be certified in the respective target country, which is expensive. Remote developing countries face a big locational disadvantage in this respect. By their very nature, standardisation procedures are tied to high costs. The greater the level of production, the less impact these costs have, which means small and medium-sized enterprises and companies in developing countries are most affected. Therefore, the WTO should work on having only one standard the world over. To set this standard, there are recognised international institutions such as the International Organisation for Standardisation (ISO) and the Codex Alimentarius. The standards formulated by these committees should be used more at the global level. In this respect, the WTO has an important role to play. But unfortunately the negotiations over non-tariff trade barriers have been neglected to date. So far, hardly any tangible progress has been made in the Doha Round.

In today’s development debate, the importance of good governance and stable frameworks enabling business success are highlighted, and rightly so. The WTO’s rules and regulations can make a significant contribution. WTO regulations limit tariffs to a realistic level, making sure that customs duties are not used to conduct experiments in industry policy. Renouncing local-content conditions, such as the obligation to source domestically, gives investors the security that they can obtain the supplies they require from where it makes the best business sense. The improvement in the protection of intellectual property encourages the transfer of technological knowledge to developing countries. And the modernisation and acceleration of customs clearance procedures increases export capability and prevents corruption. All these areas are regulated in the WTO context, or at least could be in the near future. Thus, the organisation can make a significant contribution to good governance.

Of course, such obligations should not place too many demands on any WTO member either. Solutions must be found on a case-by-case basis for countries that are not in the position to implement WTO obligations straight away, and there is no doubt that appropriate transition periods and development support will be required. But the objectives should not be called into question. The discussions on special and differential treatment should be carried out bearing this in mind. Special rules for developing countries must not lead to postponing important structural reforms or neglecting steps towards better governance.


The example of India

The question is repeatedly asked whether developing countries benefit from opening their own markets. Is sealing oneself off from international competition a sensible developmental alternative? Nobody expects free market shock treatment from developing countries. But there are indications that the gradual opening of one’s own market is an important component of far-reaching development strategies. India provides a striking example. For decades, the country’s industries were protected from international competition behind prohibitive tariff walls. But this protection was not used to gradually develop products and become ready for the world market.

On the contrary, protected industries fell further and further behind in technological terms. They were content with the domestic market and did not mind being separated from world market trends. Only by opening its market did India develop the necessary economic dynamism. In the course of removing trade barriers and improving economic frameworks, the country’s economy has become one of the fastest growing internationally.

In this context, it is often argued that developing countries depend on their customs revenue. However, this does not take into account that prohibitively high tariffs restrict imports and lead to smuggling and corruption in customs clearance. By reducing tariffs to an economically justifiable level, customs revenue can actually be increased as a result of growing import volumes. In their own interests, developing countries should therefore analyse their tariff structure and carefully investigate whether they would not be better off with unilateral tariff reductions, or those negotiated in the WTO context.

The WTO is under pressure to succeed because liberalisation continues around the globe. Every month on average, a new regional free trade agreement has been concluded in recent years. Well over half of world trade is now regulated by regional agreements. This trend puts the multilateral structure increasingly into perspective. It has been apparent for a long time that negotiations over regional agreements tie up human resources of many WTO members and reduce the pressure to reach political agreements under the WTO umbrella. In many countries, regional agreements are perceived as an attractive alternative to the multilateral system. Both systems, WTO and regional agreements, can certainly complement one another with the WTO determining the rules for regional agreements and enforcing them in the liberalisation process.

In view of the dynamism in regional agreements, however, the WTO must now prove its ability to act. Otherwise it is at risk of losing political relevance. Its rules will only be respected if the WTO members feel politically bound by them. The WTO’s compelling dispute settlement procedure is only of relative help in this context, because it only works on a selective basis and with considerable time lags. Should the Doha Round fail, the competition from regional agreements will intensify. The relationship between the multilateral and regional systems would shift further. Naturally, strong economies would benefit from such a setting because they bring more weight into bilateral talks. Meanwhile, smaller economies and developing countries that rely particularly strongly on the WTO would be worst affected. In the end, however, all countries would suffer from unbridled rationalisation because – from an economics point of view – multilateral liberalisation is the better solution.

Time is pressing. WTO members must reach compromise on the most important areas of negotiation in Hong Kong at the latest. Mere rhetorical compromise won’t get us any further. Content is what we need. The Doha Round can only succeed if we make progress in terms of substance. What are the key tasks we are facing? Industrialised countries must do more in agriculture. By decoupling subsidies from production, the EU has noticeably reduced the trade-distorting effects of its common agricultural policy. Another important step was the willingness to completely drop export subsidies for comparable counter offers. Now, it will be instrumental to show a readiness to also compromise on cutting agricultural tariffs. The EU has made advance concessions in the agricultural sector. However, other OECD countries still need to catch up. Countries such as Switzerland, Norway and Japan must yet prove that they are prepared to adjust their agricultural policy to the requirements of the WTO talks.

There is also a question mark over the USA’s intentions, since an agreement under the umbrella of the WTO would demand structural adjustments in American agriculture. Some observers wonder whether the US Congress will be prepared to accept that. Without the US commitment, however, the Doha Round cannot succeed. Brazil and India, as driving forces of the G 20 in Cancún, made it emphatically clear that they are among the crucial actors in the circle of developing countries. A new group has formed during the negotiations in recent months, the “New Quad”, comprising the EU, the USA, Brazil and India. There is a lot of evidence to suggest that solutions reached by this group could be acceptable to other WTO members. One can only hope that this approach will make reaching agreement easier in Hong Kong. Beyond any doubt, WTO negotiations are a very difficult process to manage with 148 participating parties and the principle of consensus.

Nonetheless, the Doha Round must succeed. Should negotiations fail, the developing countries will be among the losers. The opportunities of the WTO must be seized in the interests of industrialised and developing countries alike.

Dr. Ludolf von Wartenberg
is the Director General of the Federation of German Industries (BDI).
http://www.bdi-online.de