MEMORANDUM SUBMITTED BY THE INSTITUTE
OF DEVELOPMENT STUDIES (IDS)
INTRODUCTION
IDS welcomes the inquiry of the International
Development Committee as timely. The system of multilateral trade
rules faces a crisis of governance. Developing countries are central
to achieving a resolution—and will be affected profoundly
by a failure to do so. The fracas over selection of a new Director-General,
which took many months in 1998 and 1999, was a foretaste of problems
to come. The inherent tensions within the WTO have been crystallised
by the Seattle Ministerial. The antics of some of the Seattle
demonstrators obscured the fact that the immediate cause of the
failure to adopt an agenda for a new Round of multilateral negotiations
was the lack of consensus among delegates. Although there were
a host of cross-cutting differences apparent at Seattle, making
it wrong to portray the impasse as simply a developed-developing
country split, there is no doubt that this was a part of the equation.
The Uruguay Round was a watershed of GATT negotiations:
developing countries that had been mistrustful of the GATT as
a rich man's club played a much fuller role than in any of the
preceding Rounds. Of the 135 members of the WTO, 99 are classified
in the UN as developing countries.
This change resulted partly from the economic
conversion of many governments during the 1980s and also from
a reassessment of the relative advantages of legally binding international
trade rules. The new commitment to the multilateral system is
more likely to be followed through if the system is seen to support
development.
The evidence from Seattle is that this is not
the perception that is paramount in many developing countries
and among broad swathes of "the development community".
Since a consequence of a weakening in the current system could
be to expose developing countries to more arbitrary behaviour
by their stronger trade partners, it is important that the reasons
for these perceptions are understood and remedial action taken.
Like other WTO members, developing countries
need to balance the benefits of rules restricting protectionist
and arbitrary behaviour against the costs of compliance and the
penalties for non-compliance. As relatively weak players, they
are likely more often to be the victims rather than the perpetrators
of global protectionism and anti-competitive behaviour and could
therefore expect to gain most from the rules. On the other hand,
as numerically strong but technically weak members, they may regard
the design or application of the rules as biased towards the interests
of the developed states that drafted them.
THE NEED
FOR INSTITUTIONAL
REFORM
The institutional framework for multilateral
rule-based trade since the establishment of the GATT in 1948 has
been spectacularly successful. Traditional barriers to trade have
fallen, the boundaries for agreed rules have been widened, and
the growth of world trade has fuelled global economic development.
But new challenges emerge all the time. As traditional
trade barriers fall, so new ones arise. New rules may be needed,
but since the "new protectionism" is often more opaque
than the old they can be difficult to administer. As international
commerce increases in complexity, so the range of trade-related
policies broadens—as does the desirable scope of multilateral
rule-making.
This introduces international trade rulings
into areas traditionally considered a national preserve, with
controversial consequences. It complicates achievement of the
key requirement for continued success of the multilateral institutions,
namely that all members recognise a self-interest in the efficiency
of the multilateral framework even when they are faced with short-term
"defeats".
There are two key areas in which institutional
reform is required, in addition to the problems of implementation
that are covered in subsequent sections of this submission. They
are decision-making and dispute settlement.
Decision-making
Decision-making in the WTO is a human-resource
intensive process. And this is necessarily the case as the issues
that are dealt with are highly technical. An accusation made by
protestors in Seattle is that the WTO is undemocratic. This is
surely off the mark: the WTO, like the UN, is not a directly elected
body, but its formal decision-making is by consensus with one
vote per country, however large or small. There is no "Trade
Security Council"—although some have called for one
to be created—and so in that sense the WTO is more democratic
than the UN.
But the WTO is not transparent—and the
effective, as opposed to the formal, powers of members clearly
vary widely. The bigger countries are more powerful because:
— within the WTO they have greater
capacity to participate effectively in the minutiae of decision-making;
— outside the WTO they can exert commercial
and political leverage on recalcitrant states to toe the line.
The second of these is a reflection of the disparities
in global economic power which provide the backdrop to discussion
about the effectiveness of the WTO. The first is amenable to palliative
action.
It is desirable from all perspectives for developing
countries to be assisted to play a full role in WTO decision-making.
Assistance measures could include:
— technical assistance to provide background
information on the issues being negotiated (provided bilaterally,
through other multilateral or plurilateral organisations such
as UNCTAD and the Commonwealth Secretariat, or through issue-specific
organisations created for the purpose);
— the opening up of WTO deliberations
to enable countries with weak public administrations to make greater
use in their delegations of private sector expertise;
— restraint by the more powerful WTO
members to match the pace of negotiation to the capacities
of developing countries (which is not necessarily the same as
limiting the scope of negotiations—see below);
— alliance building among developing
countries so that states with similar interests on some issues
can distribute among themselves the task of keeping abreast of
the technical issues.
Some combination of all these measures is required;
more problematic is the suggestion that the "mediaeval"
structure of the WTO (in the phrase of the EU Trade Commissioner,
Pascal Lamy) should be modernised by the creation of a formal
inner decision-making circle, a so-called Trade Security Council.
Such a body, by formalising the requirement on developing (and
other) members to create sub-groups, would certainly reduce the
technical pressure on the weakest members. But it would do so
at a cost. And, given the other problems of WTO governance, this
cost may well be too high a price to pay.
Dispute Settlement
The current system of dispute settlement is
one such problem of governance. The majority of members involved
in dispute settlement since 1995 have been developing countries.
The old GATT system, whereby one party could block the adoption
of a dispute panel report, was evidently open to an unacceptable
degree of abuse. But there are two major problems with its successor.
The first problem is that it operates in a quasi-legalistic
manner. In this it is not unlike the European Court of Justice
(ECJ), which has played a major role in pushing the European Governments
towards a Single European Market. But there are two key differences.
One is that the EU members form a much more homogenous group than
do the members of the WTO and the benefits they derive from their
membership of the EU are considerably more obvious and substantial.
Whilst no Member State is happy if it loses a case at the ECJ,
the "cost" is usually demonstrably small in relation
to the gains of EU membership and there will often be offsetting
gains in the form of more successful ECJ rulings.
The second difference between the WTO's dispute
settlement system and the ECJ (and other "domestic"
courts) is that it is considerably easier to amend unsatisfactory
EU legislation than it is to change the WTO texts. To do the latter,
it is necessary to obtain a consensus for change—after at
least one party (and probably several) have just had their position
vindicated by a "victory" under the dispute settlement
procedure.
The problem is the more severe because the WTO
texts contain considerable areas of vagueness. They are vague
not by accident but by design. These are areas in which the negotiating
parties could not reach a detailed agreement because of differences
of interest between them. The irony is that it is precisely in
these areas of vagueness—which, by definition, are the most
sensitive—that the dispute settlement mechanism is being
asked to make judgements. As quasi-legalistic forum is being called
upon to settle issues that are more appropriate to resolution
at a political level.
There is a further aspect to this legal-political
distinction. The political negotiations take place in Rounds precisely
so that no party will consider itself, or portray itself, as an
absolute loser. It is most unlikely, for example, that France
would ever have agreed to the 1993 Blair House accord on agriculture
negotiated between Europe (represented by the Commission) and
the USA. This paved the way to the final conclusion of the Uruguay
Round. But France was never asked to approve it. Instead, together
with the other EU Member States it was requested only to pass
judgement on the entire Uruguay Round Agreement in which "concessions"
on agriculture had to be set against "gains" in other
areas for which non-agricultural interests in France were lobbying
hard.
Dispute settlement throws such a "safety
in numbers" approach out of the window. Disputes are over
a single issue and unless they are resolved by mediation (as,
in truth, the majority are) there is always a "winner"
and a "loser". Perhaps the most remarkable feature of
the banana dispute, which has provoked as much acrimony as any
other during the past decade, is its marginal importance for both
the principal protagonists. Whilst of considerable significance
for the Caribbean banana producers, who were bystanders caught
in the cross-fire, neither the EU nor the USA could claim that
their economies would be affected in any way other than the most
minor by the outcome of the dispute. Even when account is taken
of the larger issues of hormone-treated beef and genetically modified
organisms—the spectres haunting the end-game of the banana
dispute—the issues are of considerably less than a major
importance. What will happen when a major WTO member finds one
of its more important economic policies struck down through the
dispute settlement mechanism?
This problem is likely to become more intractable
as the WTO is called upon to adjudicate in areas such as standards,
where each party may call upon "science" to support
its case. As the EU disputes over mad cow disease have illustrated,
it is often the case that either there is no single scientific
answer or that, even if there is, the public will not necessarily
accept it. Is there a formula that will allow the WTO to rule
against the misuse of science for protectionist purposes (as when
the Japanese excluded imported skis because of claims that the
quality of their snow differed from that in the West, where the
skis had been tested) whilst also allowing deeply held consumer
concerns (even if wrongheaded) to be accommodated?
IMPLEMENTATION OF
THE URUGUAY
ROUND MEASURES
The common description of the WTO as a free
trade organisation overlooks the many restrictions on international
trade that are applied by all countries and, in some cases, are
explicitly sanctioned by the WTO. There remain many areas in which
the Uruguay Round failed to establish rules that would effectively
limit the ability of governments to favour one group of producers
over others. Developing countries are often the victims of such
discrimination.
These include sectors in which protectionism
clearly limits developing country development. In the area of
clothing and textiles, for example, the Uruguay Round established
a timetable for the removal of the extensive array of quotas under
the Multi-Fibre Arrangement that have stymied the growth of developing
country exports. But even when that process has run its course
(not until 2005), developing country exports will still face heavy
tariffs (up to 12 per cent in the EU) and the proliferation of
new protectionist schemes. Most notable is the misuse of anti-dumping
operations. The EU has seen the emergency of "chain complaints",
whereby an unsuccessful complaint is followed immediately by a
virtually identical one, creating uncertainty for user industries.
Agriculture is of particular concern. The Uruguay
Round Agreement on Agriculture merely established the foundations
for a rule-based system of trade, but at the price of leaving
many developed country protectionist measures largely untouched.
In consequence, developing countries with the potential to expand
their agricultural production (either for domestic consumption
or for export) are hindered by competition from heavily subsidised
OECD output. Past form suggests that progress in the negotiations
commencing in 2000 will be limited if there are no opportunities
for offsetting trade-offs in other areas.
NEW AREAS
SUCH AS
TRADE-RELATED
ASPECTS OF
INTELLECTUAL PROPERTY
RIGHTS (TRIPS)
An innovation of the Uruguay Round was to extend
the scope of multilateral rules to policies beyond the traditional
ones of tariffs and quotas, in recognition of the broad range
of public regulation affecting trade. The WTO has competence in
some of these new, trade-related policy areas, such as TRIPs and
there is active discussion on others, such as environmental regulation.
But as the boundaries between domestic and international actions
become increasingly porous with globalisation, so the spread widens
of policies with an impact on international trade.
Public health, labelling, production methods,
testing procedures could all influence trade flows through either
policy or implementation. In principle, therefore, they might
be subjects for multilateral rules. Such rules would cover not
only areas of policy hitherto considered the preserve of national
government but also their administrative and judicial systems,
and this could be even more controversial.
Disputes over TRIPs have already included complaints
about the alleged inadequacies of a member's administrative system.
Henceforth, countries can be held to be in breach of their WTO
obligations (and, hence, open to the imposition of trade sanctions
against them) if their general administration and judicial systems
do not meet internationally set standards. To avoid anti-developmental
bias all such rules must take account of developing country administrative
needs and capacities. Already India has lost a dispute against
the USA on TRIPs because its system of administrative instructions
was deemed to be an inadequate legal basis for the preservation
of novelty and priority in relation to product patents for pharmaceutical
and agro-chemical inventions. But disputes could range much more
widely than this.
It is within the bounds of possibility that
developing countries with weak administrations could find themselves
on the losing end of a dispute not because of anything that they
have done, nor even because of any particular foot-dragging in
respect of WTO commitments. Rather, they could be found to be
in default simply because of broader inadequacies in the general
administration of commerce and justice: such inadequacies, moreover,
might apply equally to domestic producers and traders. Their resolution
might not be considered to be a development priority, given the
other administrative and judicial problems facing the country.
Just as the WTO is encroaching upon areas of
domestic policy so, at the same time, its wider mandate has implications
for relations with other international bodies. There are about
200 international agreements currently in force that deal with
environmental issues, about 20 of which include trade-related
provisions. They include The Convention on International Trade
in Endangered Species of Wild Fauna and Flora (CITES), 1973,
The Montreal Protocol on Substances that Deplete the Ozone
Layer, 1987 and Amendments of 1990, 1992 and 1995 and The
Basel Convention on the Control of Trans-Boundary Movement of
Hazardous Wastes and their Disposals, 1989.
Perhaps the most prominent area of overlap is
between TRIPs and The Convention on Biological Diversity
(CBD). Concern has been expressed that some of the provisions
in these two agreements may be in conflict, eg the CBD's recognition
of the sovereign right of states over their own biological resources
implies a right to prohibit intellectual property rights on life
forms. Both the CBD and TRIPs are framework agreements requiring
further development to achieve full implementation of all their
objectives. Because of their overlapping subject such developments
need to be mutually supportive, but there is no institutional
mechanism in place to ensure that this occurs.
POTENTIAL OPPORTUNITIES
AND THREATS
FOR DEVELOPING
COUNTRIES
A narrow or a broad Round?
Even though Seattle did not provide an agenda for
a Development or Millennium Round, under the in-build agenda from
the Uruguay Round countries return to the negotiating table on
services (in February) and agriculture (in March). Developing
countries have to weigh up the advantages and disadvantages of
keeping the negotiation limited to these areas. The broad issues
are clear—but it is not yet possible to weigh them. This
requires:
— evidence of progress in helping developing
countries to play a more effective role in WTO negotiations;
— more precise detail on the areas
of interest to developing countries for which a consensus in favour
of reform exits among developed countries.
If the agenda remains the narrow "in-built"
one there is a danger that impasse will be reached because there
are insufficient areas for all major participants to secure trade-offs.
Hence, for example, negotiations limited to agriculture could
well run into the buffers if the EU refuses to contemplate fundamental
reform of the Common Agricultural Policy (CAP). In such circumstances,
other members might seek recourse to dispute settlement to push
their case after the expiry of the so-called Peace Clause in 2003.
But this would be just the sort of fundamental challenge to a
central economic policy that might provoke disintegration of the
WTO system.
If, by contrast, the negotiations are widened
to facilitate trade-off and compromise they are likely to encroach
upon areas in which important developing countries have an established
position opposing change. Given the substantial majority that
developing countries have in the organisation, it would be impossible
to push through changes that were actively opposed by even a significant
minority of them.
This sharpening of friction could lead to one
of two outcomes, both of which would undermine the multilateral
rules-based system. It could provoke a violent rupture in the
organisation. Faced with a fundamental challenge for the CAP and
the prospect of substantial sanctions by a large group of trade
partners, the EU might simply refuse to accept the results of
a dispute settlement panel and threaten retaliation against any
sanctions that were imposed. Or, frustrated by developing country
refusal to countenance environmental criteria or stringent rules
on trade-related investment measures, the USA might simply pull
out of the organisation.
Alternatively, and probably more realistically,
such failures might lead to a proliferation of deals made outside
the WTO framework. Whilst developing countries can prevent the
developed states steamrollering the agenda, they cannot prevent
them responding by agreeing new rules among themselves in more
restricted fora, such as the OECD. Such rules would be formally
binding only upon the participants, but in practice there would
be a tendency for them to influence the behaviour of non-participants
too. The proposed Multilateral Agreement on Investment, for example,
would have been formally binding only on OECD states, but it was
widely perceived that it would effectively determine global rules.
Developing Country Interests
The outlook for the WTO's role as the key multilateral
forum for trade policy formation is bleak unless a clear consensus
can be built on sufficient issues of interest to developing countries.
The proposal to "bind" (ie legally guarantee) duty-free
access to developed country markets for all exports by the least
developed states (LLDCs) is important. But its significance is
more as a bellwether of developed country bona fides than
because of the action itself. This is because the great majority
of LLDC exports already enter free of major restrictions. The
move is widely supported by OECD states, but not by all. The USA
is one of those opposing.
Given the very limited nature of the change
implied by the LLDC proposal, a failure to make progress on it
would undermine the credibility of WTO commitment to reform. It
would be unreasonable for developing countries to expect any significant
progress to be made on the broader agenda.
The broader agenda needs to include several
ingredients missing in the current accord. One is international
competition policy. As technical and policy barriers to trade
come down, so the ability of governments to protect their domestic
markets from the anti-competitive behaviour of foreign firms dwindles.
Within customs unions competition policy is important (as in the
case of the EU), but there is no multilateral counterpart. The
effect is starkly illustrated by the case of pharmaceuticals.
Within the EU it is illegal for companies to
coerce consumers and intermediaries to accept differential pricing
in separate sub-markets. The efforts by the EU Commission to prevent
car companies restricting trade between higher and lower-priced
national markets are a case in point.
Internationally such behaviour is not only legal,
but is actually supported by governments that identify with the
multinational companies. South Africa has tried to buy its pharmaceuticals
in third markets where they are cheaper than those supplied through
the firms' official marketing channels. These are not counterfeit
goods: they are products originally sold by the pharmaceutical
companies to the third market at a price that was deemed acceptable
and which the purchasers wish to on-sell to South Africa. Yet
the US Government has used its commercial diplomatic muscle in
a prolonged attempt to prevent South Africa following course.
The future of special and differential treatment
(SDT) is another missing element. Current provisions are the leftovers
of old debates and no longer have much economic or practical logic.
They primarily involve least developed countries being relieved
of obligations and other developing countries accepting the obligations
that apply to developed states but in a slightly diluted form
over a longer transition period.
For some new issues, this is not appropriate.
Experience with implementing the TRIPs Agreement, for example,
suggests that it may be simply inappropriate for countries with
poorly developed administrative and judicial systems to accept
the same obligations as are adopted by OECD states. Even in diluted
form, the cost to the country of complying with the WTO obligations
may be completely disproportionate either to the country's other
administrative and judicial efforts or to the costs to the international
community of imperfect compliance. The concept of SDT should be
reconsidered, on an issue-by-issue basis. Objective differences
between developing countries should be recognised through clearly
differential treatment.
This will be practical only if the developing
country group is, itself, sub-divided more clearly. At present,
the group ranges from Botswana to the United Arab Emirates (even
if the least developed countries are excluded). The administrative
capacities of India are very different from those of Nigeria.
Both Burkina Faso and Tunisia are classified as net food-importing
developing countries, but their capacity to sustain a substantial
increase in world food prices is very different.
Dr Christopher Stevens
Institute of Development Studies
March 2000
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