Select Committee on International Development Minutes of Evidence



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


 
previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2000
Prepared 29 November 2000