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Developing Countries and the WTO: The Post-Seattle Agenda

Dr. Razeen Sally

The World Trade Organisation has been in a state of drift and deadlock since the débâcle at the Seattle Ministerial Conference at the end of 1999. Problems with US and EU trade policies, divisions among developing countries, and a globalisation backlash led by Western NGOs in alliance with a motley crew of single-issue groupuscules, have all contributed to this state of affairs. Both politicians and corporate captains in the West seem more concerned about pandering to anti-market NGOs than about making a clear, simple and straightforward case for freer trade.

Underlying these symptoms of the WTO’s malaise is a profound anti-liberalism in the rich, developed world, with politicians, bureaucrats, NGOs, many businesspeople (especially those facing competition from abroad) and international agencies (particularly within the UN family) harbouring a deep distrust of markets and a faith in government intervention. These circles now advocate co-ordinated government intervention at the international level - for which "global governance" is the modern catch phrase - to cure the perceived ills of globalisation.

A concrete expression of this pervasive anti-liberalism is a creeping "standards harmonisation" agenda in the WTO. Developed country governments, egged on by a diverse array of interest groups, have been trying to introduce new and complex regulation on a plethora of non-trade issues into the WTO, with the aim of raising developing country standards to developed country levels. This started with intellectual property protection in the Uruguay Round, resulting in the TRIPS agreement; and the same démarche has been applied to labour, environmental and food safety standards.

These trends are dangerous for the WTO system in general, and for developing countries in particular. They threaten to corrupt WTO rules by extending coverage to issues unrelated, or barely related, to trade, and by making the rules impossibly opaque and arbitrary. This would take the WTO ever further away from the original raison d’être of its predecessor, the GATT: the provision of simple, transparent and non-discriminatory rules for the progressive reduction and removal of trade barriers. The Most Favoured Nation and National Treatment principles are the constitutional foundation of the GATT (in Articles I and III) precisely because they are based on simplicity, transparency and non-discrimination, so that developed and developing countries alike can benefit from more open markets.

Background: developing countries in the global economy and their participation in the WTO

Many developing countries, and countries in transition from the early 1990s, have come round to the view that integration into the world economy is their fast track to higher growth and poverty reduction. They have been reducing barriers to trade and foreign direct investment (FDI) as part of a wider process of economic policy reform - although this shift has been patchy and uneven across countries and regions. The record of the last two decades demonstrates that developing countries with more liberal trade policies, in combination with policies of macroeconomic stability and institutional upgrading, grow considerably faster and have more success with poverty reduction than those with more protectionist policies.

Developing countries account for rising shares of world trade and FDI, not least due to dramatic shifts in trade policies since the 1980s. At the same time, they constitute a larger block in an expanding WTO: over 110 of 140 WTO members are developing countries - a four-fifths majority. Nevertheless, these headline numbers camouflage increasing divergences among developing (and transitional) countries. Firstly, only a small minority, mainly in East Asia, Latin America and Eastern Europe, have undertaken radical and sustained liberalisation; the majority, in Africa, the Middle East, South Asia and the ex-Soviet Union, have lagged far behind. Second, diverging policies and economic performance correspond to divergence in the WTO: only a small minority of developing countries (mainly from East Asia and Latin America, plus India and South Africa) play an active role in WTO negotiations and dispute settlement. The rest - the majority of WTO membership - have serious and seemingly intractable problems with policies at home, and lack the resources and expertise to participate effectively in the WTO.

The WTO is no longer the cosy US-EU duopoly of the old GATT. The active minority of developing countries mentioned above, joined by Australia and New Zealand from the OECD, have become much more important players since the mid-1980s. Having already gone far with unilateral liberalisation, they now view the WTO as an essential pillar of national trade policies. The WTO provides them with the protection of multilateral rules for export market access and against the arbitrary protection of others, particularly the EU and the US. Perhaps even more importantly, binding WTO agreements "lock in" and reinforce autonomous measures of trade-and-investment liberalisation, thereby imparting more coherence, clarity and credibility to national trade policies. Seen this way, the WTO can be a helpful auxiliary, or an external constitutional prop, to better national governance (much more important, arguably, than loose talk about the WTO’s role in global governance).

The state-of-play in the WTO and prospects for a new round

The WTO has been muddling through since Seattle: the "built-in" negotiations on agriculture and services have been treading water; and the "implementation agenda" (concerning the enforcement of Uruguay Round agreements in developing countries) has made precious little progress, despite taking up much WTO time. Now, with a new US administration in place, momentum is building up to relaunch a new multilateral round of trade negotiations, perhaps at the Qatar Ministerial in November this year or soon thereafter.

There are several arguments in favour of a new WTO round. Arguably, only a new round would be able to dig the WTO out of its present ditch and advance the trade liberalisation agenda; it would counter protectionist tendencies everywhere, particularly if the world economy slips into lower growth; and it would countervail the recent proliferation of discriminatory regional trade agreements, which, if not checked, could turn into exclusive and increasingly protectionist trading blocs. However, these arguments on their own are not sufficiently compelling to launch a new round. As far as developing countries are concerned, a new round is only worth the effort if it is launched on the right terms. If not, no round is better than a bad one - for the following reasons:

The EU is likely to push for the inclusion of "new issues" in the new round, most of which are not geared to advancing trade liberalisation. Its "comprehensive agenda" includes labour and environmental standards (although it seems willing to shunt the labour standards issue into an inter-agency forum with WTO participation), and competition and investment rules.

Developing countries have a strong stake in saying an unequivocal NO to the inclusion of most of these new issues. If tacked on to the negotiating agenda, they threaten to take the WTO further down the road of standards harmonisation. Ever-more complicated, discriminatory and costly WTO regulations, especially on labour, environmental and food safety issues, would then allow developed countries to keep out cheaper developing country exports based on their comparative advantages. This would only add to the EU’s and US’s arsenal of non-tariff, regulatory instruments to apply selective and open-ended protection - mostly at the expense of poor workers in poor countries. Furthermore, additional complex regulation is the last thing an already overburdened WTO needs; and it would impose an even heavier burden of enacting and implementing new legislation in developing countries with scarce resources and expertise.

The economic logic for WTO competition (antitrust) rules is dubious at best, and would needlessly impose an extra thick layer of international regulation on developing countries. In contrast, there is a stronger economic argument in favour of international investment rules to promote FDI on a transparent, non-discriminatory basis; but, after the failure of the Multilateral Agreement on Investment in the OECD, it is simply not worth the political candle.

• For developing countries, saying NO to standards harmonisation and dense, burdensome regulation on new non-trade issues also should mean saying YES to a new round that is strictly focused on market access, i.e. additional trade liberalisation. A less-than-comprehensive agenda should be centred on delivering substantially more liberalisation in the built-in areas of agriculture and services, and on two extra fronts: industrial tariffs and trade facilitation (simplifying customs procedures and assorted red tape). Rule-making negotiations should be equally market access-focused, especially in tightening anti-dumping procedures and making dispute settlement more user-friendly for developing countries. This is roughly the approach of Hong Kong, Singapore, Australia, New Zealand and some of the Latin American delegations.

The overall objective must be to refocus the WTO on simple, transparent and non-discriminatory rules for market access, which requires reversing the drift in the direction of standards harmonisation and complex regulation.

• If the leading powers are intent on undermining the WTO by cramming it with new non-trade issues and making it regulation-heavy, it is bound to hinder rather than help more rational and credible national trade policies, particularly in the developing world. It follows that if developed countries, and particularly the EU, are unwilling to restrict the new round to a market access agenda, then, to repeat, no round is better than a bad one.

Only a bureaucratic mind, keen on negotiating for the sake of it and on regulating anything that moves, would give a new round an unconditional imprimatur. A new round at any price is a stupid idea for one simple reason: despite the Asian, Russian and Brazilian crises, and despite the failure at Seattle, developing countries continue to liberalise trade and FDI unilaterally. This on-the-ground liberalisation at national level is actually and ultimately more important than negotiations among politicians and officials in the rarefied atmosphere of Geneva. Those developing countries with the domestic political requisites to go further with unilateral liberalisation should proceed in any case, with or without a new WTO round.

Issues for the post-Seattle agenda: an elaboration

An Australian government study estimates that halving global protection in agriculture, services and industrial products would deliver an annual gain of $400bn to the world economy, double the annual welfare gains from the Uruguay Round. The Tinbergen Institute estimates that developing countries would gain to the tune of $150bn annually. These figures are on the conservative side as they do not take account of the long-run, dynamic effects of trade liberalisation.

Market access issues:

1. Agriculture: Protection in high-income countries remains almost as high as it was at the end of the Uruguay Round; and serious distortions continue to plague agriculture in developing countries. Peak tariffs and domestic subsidies need to be cut substantially, tariff quotas increased, and export subsidies phased out. In addition, developing countries need to make sure that the agreement on sanitary and phytosanitary measures (SPS) does not become an ever-wider back door for protection: developed countries must not be allowed to restrict cheap imports through the application of scientifically dubious food safety and other standards. The EU’s Common Agricultural Policy is, of course, the main obstacle to overall progress. In the long-term, the objective must be to integrate agriculture fully into the GATT, so that it is treated no differently to industrial goods (the position of the Cairns Group of agricultural exporters).
   


2. Services: The General Agreement on Trade in Services (GATS) is complicated and messy, and so far has delivered modest market access commitments. Developed countries have most export advantage to gain from further services liberalisation. However, developing countries stand to gain substantially as well: they have export advantage in the temporary movement of low- and unskilled workers to developed countries; and, more importantly, own liberalisation will attract inward investment in key infrastructural services, such as financial, telecom and transport services, with potentially big economy-wide gains. Overall, developing countries need to make substantially more commitments, particularly on "commercial presence" (inward investment), and developed countries need to reciprocate with meaningful commitments on the "movement of natural persons" (cross-border movement of temporary workers).
   


3. Industrial tariffs: Firstly, developed countries need to phase out their textile and clothing quotas on time by 2005, as agreed in the Uruguay Round, and make sure they are not replaced by a cascade of anti-dumping and special safeguard actions. Then attention must be devoted to reducing high tariffs in these sectors. Peak tariffs and tariff escalation (higher tariffs on processed goods) also hinder developing country exports in, for instance, foodstuffs, leather goods and footwear. Trade among developing countries is severely hampered by their own high and differentiated tariff schedules. Developing countries must also narrow the gap between unilateral tariff liberalisation and their (higher-tariff) GATT bindings in order to give greater credibility to national trade policies. A classic GATT-style negotiation is therefore needed to reduce tariffs across-the-board.
   


4. Trade facilitation: Bureaucratic and corrupt customs procedures constitute one of the main barriers to trade, particularly in developing countries. These and other "red tape" obstacles to market access need to be tackled urgently.
   

Rule-making:

Tightening the loose anti-dumping provisions in GATT Article VI is a priority for developing countries, who face the brunt of arbitrary anti-dumping actions by developed (and increasingly other developing) countries. However, this is going to be a very difficult political nut to crack, mainly due to US opposition. Tightening the provisions relating to regional trade agreements (in GATT Article XXIV and GATS Article V) is also important. Finally, dispute settlement needs to be made more amenable to use by developing countries, who lack the legal resources and expertise of developed countries to take maximum advantage of what is an increasingly legalised WTO. A "fast-track" dispute settlement procedure for developing countries could be one way forward.

Even more worrying, however, is the tendency of the EU and the US to politicise the dispute settlement process, especially on environmental and food safety issues. Pressure is increasingly brought to bear on panels and the Appellate Body to make dubious policy choices by "creatively interpreting" what are often vaguely crafted rules. This kind of political pressure and judicial activism is bad news for developing countries. They need to do their utmost to make sure that simple and clear rules are negotiated, which then give clear and explicit guidance to dispute settlement interpretation according, as far as possible, to the "letter of the law". This presupposes significantly greater developing country participation both in negotiating the rules and in dispute settlement itself.

New issues:

There is absolutely no sound political or economic rationale for discussing labour standards in the WTO. As argued earlier, competition rules should not be a subject for negotiation; nor should investment rules, given the political sensitivity of it in some developing countries and the fact that unilateral liberalisation is in any case continuing apace.

The environmental standards issue is somewhat more complicated. In a sense, it is already "built-in" to the WTO: the GATT agreement allows for import restrictions to safeguard human, animal and plant health and safety, provided there are justifiable scientific grounds for so doing (Article XX); environmentally damaging agricultural, fishing and energy subsidies should be reduced in relevant WTO negotiations; environment services should be a legitimate area for liberalisation commitments in the GATS; and there is scope for agreement on eco-labelling procedures.

However, developing countries need to keep the broader environmental standards debate out of the WTO. In particular, they must hold the line on preventing national regulations from discriminating between products on the basis of how they are produced (i.e. their production and processing methods), which offends against the GATT’s non-discrimination ethos and, if sanctioned, would be a wide-open door to protection against developing country exports. Furthermore, developing countries should be sceptical about any WTO agreement to allow (often badly designed) Multilateral Environmental Agreements the right to impose trade sanctions.

The implementation agenda and "confidence-building" measures:

Many developing countries, and particularly the least-developed countries (LDCs), are overburdened with the task of implementing complicated Uruguay Round agreements, especially on intellectual property protection (TRIPS), sanitary and phytosanitary measures (SPS) and technical barriers to trade (TBT). Implementation should be dealt with sympathetically on a flexible, case-by-case basis, with substantially increased technical assistance. There is a strong argument for the latter to be made a binding commitment in future WTO agreements.

The other "confidence-building" issue is that of duty-free access to all exports from the LDCs. This might build confidence (so to speak), but care must be taken to ensure it does not divert trade from those very poor countries who risk being left out of the LDC qualifying basket.

Other issues:

WTO decision-making has been a hot topic after Seattle. Modest reforms to accommodate the weaker developing countries may be in order, but not too much time should be spent on this issue: it could easily distract everybody’s attention from the more pressing market access and rule-making issues highlighted above.

In terms of dealing with NGOs, developing countries need to make sure that the WTO remains a strictly intergovernmental decision-making mechanism. Better information disclosure and communication is one matter; but NGOs, like other private parties, should not be allowed into the WTO’s decision-making structure.

The politics of a new round

The necessary, but not sufficient, condition for the launch of a new round is for the major players, the EU and the US, to get their domestic acts in order, defuse bilateral conflicts and co-operate intensively. This would send the right signals for the 25 or so other active developed and developing country members of the WTO to start forming informal coalitions to help launch a round.

Once a round is launched, small, discrete, issue-based developed-developing country coalitions on market access and rule-making issues are likely to play a more important role than ever before in GATT/WTO negotiations. The Cairns Group in agriculture is the pathfinder and role-model in this regard, although one cannot expect such formal and tight-knit coalitions in most other negotiating areas. More probable are looser, informal coalitions along the lines of the recently established Really Good Friends of GATS on services issues.

This still leaves about 80 or more developing countries, including a block of almost 50 LDCs, who do not have the administrative capacity and expertise to participate effectively in a new round. They have understaffed WTO missions, and in many cases no WTO mission at all. More fundamentally, they have huge decision-making, policy and institutional deficits at home (e.g. corruption, weak enforcement of property rights and contracts, a weak lead ministry on trade policy, bad inter-ministerial co-ordination, weak private sector input, not to mention macroeconomic instability and continuing high protectionism). Their problem is that they have little idea of own interests in trade policy (or in economic policy more generally), let alone any idea of how to go about achieving them in the WTO.

These countries, an absolute majority of WTO membership, will have to be consulted more widely and actively, and with more tact and sensitivity, which is bound to complicate and delay effective decision-making. However, they are unlikely to be proactive until they get their domestic houses in order - easier said than done and inevitably a longer-term proposition.

Last but not least is the issue of Chinese accession to the WTO. China will in all likelihood become a WTO member before a round is launched, and upon accession it will overnight become the WTO’s leading developing country. It is bound to play a major role in the new round, although what it will do is impossible to predict at this stage. China faces the monumental task of implementing WTO rules domestically - in a country that still does not have a Rule of Law compatible with a market economy. If China flouts WTO rules other developing countries will follow, with potentially devastating consequences for the WTO system. Nevertheless, there is a silver lining: Taiwan ("Chinese Taipei" in WTO-speak) should join soon after China, and is in a good position to play an active and constructive part in WTO deliberations.

Conclusion

The WTO is drifting in the wrong direction, which could continue if a new round were launched on the wrong terms. Essentially, it is up to the more active developing countries from Latin America and East Asia, in alliance with Australia and New Zealand, to make sure the new round is strictly market access-focused. Only these countries (and even then not all of them), with the benefit of substantial unilateral liberalisation behind them, seem to realise that the WTO should be concerned solely with simple, transparent and non-discriminatory rules for market access. Only then can the WTO do its bit to help improve the economic policy environment and business climate within nations, particularly by buttressing the protection of private property rights and the enforcement of contracts in international transactions. This is first and foremost a national task - "from below" as it were - and not a task for "global governance" (whatever that means). However, the WTO, with the right sort of attitude and rules, can be of some second-line constitutional assistance in promoting what Adam Smith called "natural liberty --- upon the liberal plan of freedom, equality and justice".

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