Select Committee on European Communities Tenth Report


160. The invitation to submit evidence for this inquiry (reproduced at p 221) was deliberately couched in very broad terms, so that witnesses could comment on the issues of most concern to them. In this Part, we examine the EU mandate for the issues in which witnesses—and the Committee—felt most interest.

Trade in services

EU negotiating position

"Negotiations should be comprehensive and bring about a deeper and broader package of improved commitments from all WTO members to market access and national treatment. Current imbalances in commitments across countries and service sectors should be reduced. Negotiations should also aim at strengthening of GATS disciplines with the aim of ensuring [a] transparent and predictable regulatory environment. Any unfinished business (for instance safeguards, subsidies, government procurement) should also be absorbed in the negotiations. Other aspects of the functioning of GATS which have been subject to inconclusive discussion on interpretation or implementation could be reviewed. The participation of developing countries should be facilitated by exploiting fully the opportunities offered by the GATS. For the efficiency of the negotiations and in order to maximise the results while at the same time ensuring coherence of commitments by sectors and by mode of supply, horizontal formulas, when appropriate, should be considered as a useful tool for the negotiations. This would apply across the board to sectors committed, except where expressly indicated" (paragraph 11b).

"Negotiations [on government procurement] should be engaged with the objective of a multilateral agreement providing for transparency and non-discrimination with a broad sectoral coverage. The results should take account of national policies and practices as well as the different levels of development of WTO members. They should apply to the procurement of both goods and services and to all levels of government. On the Agreement on Government Procurement, the current work should be continued to improve it further through expanding its scope and coverage as well as to attract new members" (paragraph 11i).

161. The WTO's General Agreement on Trade in Services (GATS) sets out a framework of legally binding rules covering the conduct of world trade in services (which according to Mr Buxton, Chairman of the European Services Forum, represents only some 20 per cent of total world trade, even though the economies of developed countries are dominated by services (Q 222)). The Agreement was negotiated in the Uruguay Round, and came into force in January 1995. Further specific agreements for telecommunications and financial services were signed in 1997. The Agreements on Sanitary and Phyto-Sanitary measures (SPS) and on Technical Barriers to Trade (TBT) are also relevant.

162. GATS covers all internationally-traded services[121] (except air transport[122]), defining four ways of providing such services:

  • "cross-border supply", where a service is supplied from one country to another (for example, international telephone calls);
  • "consumption abroad", where consumers or firms from one country make use of a service in another (for example, tourism);
  • "commercial presence", where a foreign company sets up subsidiaries or branches to provide services in another country;
  • "presence of natural persons", where individuals supply services in a country other than their own.

163. However, unlike the GATT[123], the GATS is not automatically of general application. Individual countries' commitments to open markets in specific sectors are the outcome of negotiations. These commitments are listed in "schedules", which show for each sector the extent of market access being given (for example, whether there are any restrictions on foreign ownership) and any limitations on national treatment (that is the extent to which foreign companies will be treated differently from local companies).

164. Another difference between the GATS and the GATT is that trade in services is an area where competence is shared between the European Community and its Member States[124]. This competence is exercised in accordance with a Code of Conduct informally agreed among Member States, under which, although Member States have a place at the negotiating table, the European Commission acts as lead negotiator speaking on behalf of the Community as a whole. We are advised by DTI that in practice the Code is also applied to negotiations on bilateral trade in services agreements.

165. Because the GATS incorporates requirements for successive rounds of negotiations to achieve a progressively higher level of liberalisation, services form one element of the "built-in agenda", so new negotiations are starting—albeit with a limited agenda[125]. Mr Buxton predicted that the built-in agenda negotiations were bound to stray into other areas because member countries would want trade-offs, and meanwhile individual countries would move forward in individual sectors: "the whole process will gradually move forward because the benefits are so obvious" (QQ 279-280).

166. Our witnesses supported increased liberalisation of services, in some cases with great enthusiasm. British Invisibles argues that open markets in services are beneficial to the global economy (as well as to the UK as one of the largest suppliers), and that these benefits

    "can only be assured through multilateral agreement to remove the remaining pockets of protectionism in the industrial world and to encourage countries in the developing world progressively to open up their markets to foreign service providers and to international competition and expertise"(pp 115-116).

This is strongly supported by the joint submission from the Association of British Insurers, Lloyd's and the International Underwriting Association of London, who urge the need for negotiations not only to extend the GATS to new service areas but also to deepen liberalisation in areas (like insurance) where a start has already been made (p 223). The British Bankers' Association[126] expresses its wholehearted support of further liberalisation of financial services, as "the lubricant of economic growth" (p 226). PricewaterhouseCoopers wants to see "the creation of a genuinely open, global market for professional services", on the basis of evidence suggesting that "over-regulation and restrictions on market entry invariably lead to low quality, high cost and outdated services" (pp 273-274). The Management Consultancies Association says that the views of PricewaterhouseCoopers are shared by all its members, "who encounter barriers to trade in professional services, particularly in relation to the movement of management and IT consultants across national boundaries"; the Association is "extremely concerned to see the discussions on liberalising trade in services progress" (p 263).

167. Sir Nicholas Bayne (Chairman of British Invisibles' Committee on the Liberalisation of Services) spelt out the "pro-competitive regulatory principles" which the European Services Forum advocated:

    "Non-discrimination between foreign and domestic suppliers; transparency; the right of consultation when new rules are being introduced by the authorities; openness to innovation and new products; qualification and licensing requirements which are not unduly onerous; regulatory authorities which are as far as possible independent of the industry that they are regulating; and safeguards against monopolies and abuse of dominant positions" (Q 271).

Various aspects of regulation which could interfere with the ability to provide services efficiently were also highlighted in evidence[127]. They included the use of professional regulation as an excuse for protectionism, the need for mutual recognition of professional qualifications, the need for free temporary movement of business personnel and the right of establishment (p 274 and QQ 250 and 276).

168. The WTO Agreement on Financial Services (an Annex to the GATS) allows countries to maintain restrictions for prudential reasons. British Invisibles explains that

    "because financial services are so central to the economy, governments and monetary authorities subject them to supervisory régimes, intended to protect consumers, depositors and policy-holders and to preserve the stability of the financial system" (p 116).

Witnesses recognised that national supervisory authorities must retain a role, but urged that the so-called "prudential carve-out" must not be used for protectionist purposes.

169. We noted with interest that those who supplied evidence on this topic dealt almost exclusively with financial and professional services. The European Services Forum represents service providers of all kinds[128], but Mr Buxton agreed that providers of other types of services made little input to its work; he wondered whether they had not realised that it was possible to influence an intergovernmental process of this kind (Q 253). In his view, the most important candidates for liberalisation apart from financial services were telecommunications[129] and power distribution. We also noted that the evidence we received on the GATS aim of free movement of natural persons[130] related only to professional staff, whereas Wang and Winters suggest that "developing countries have much to gain … with regard to the temporary movement of natural persons to supply services in a foreign market". They note "the current bias towards higher-level personnel", arguing that

    "it is important to include middle- and low-skill level providers and make the commitments more relevant to the interests of developing countries with capacity in these areas … With suitable provision for short-term mobility of workers (not migration) … many more developing countries could export services such as construction, distribution, environment and transport"[131].

170. We took the point that in Seattle, "while almost every other subject was hotly debated, services were not a source of controversy. Neither were services, in general, targeted for attack by NGOs" (British Invisibles, p 118). Mr Buxton suggested that this was because developing countries did not feel threatened by the GATS approach, which allowed them to liberalise at their own pace (Q 222). Interestingly, Sir Nicholas Bayne said that this observation had caused British Invisibles to suggest that the European Services Forum should draw back from its initial position that the régime for services should be as open as that for goods:

    "While it would remain the ultimate objective to bring the services régime and the goods régime together, this is not the moment to push it to the limit" (Q 277).

171. Within the WTO, public sector procurement is currently covered by the Government Procurement Agreement (GPA), a plurilateral agreement (that is, an agreement among only some of the WTO member countries, not all of them)[132]. However, this is one of the topics included in the built-in agenda. It is being proposed that the next Round should cover the extension of the GATS itself to public purchasing, where there is any degree of commercialisation, user-charging or partnership with the private sector.

172. We recognise that public procurement is an important area (it accounts for between 8 and 15 per cent of GDP in WTO member countries), but we were offered little evidence on it. Sally and Woolcock argue that because of the extent of public purchasing the "loophole" under which it is currently excluded from WTO requirements should be closed (p 284). A number of witnesses support this proposal[133]. But others see it as a threat, which could force the privatisation of sectors like health care and housing. For example, the TUC insists that countries should retain the right to exempt public services from GATS agreements, especially in the health and education sectors because they "contribute to national and local economic and social development" (p 22). CAFOD (p 229) and the Green Party (p 257) are concerned that extending the GATS in this way would benefit developed countries at the expense of developing countries.

173. On trade in services, we note that regulation can easily be used as a protectionist measure. We recognise that some controls may be necessary, but we emphasise particularly the importance of applying the principle of national treatment (so that the same rules apply to both foreign and domestic firms). We also note the comparative success of the "opting-in" approach in the General Agreement on Trade on Services (GATS), and consider that the EU should support its application in other sectors where full liberalisation is likely to take time.

174. On public procurement, we note that the EU negotiating position recognises the need to "take account of national policies and practices as well as the different levels of development of WTO members". We underline this, and with it in mind, broadly endorse the substance of the mandate on this point.

Investment and competition rules

EU negotiating position

"The WTO should begin negotiations aiming at establishing a multilateral framework of rules governing international investment, with the object of securing a stable and predictable climate for foreign direct investment worldwide. Such a framework should focus on foreign direct investment to the exclusion of short-term capital movements, and has to ensure the right conditions for international investment to be conducive to sustainable development, and preserve the ability of host countries to regulate the activity of investors on their respective territories, in accordance with basic WTO principles, also taking into account the concerns expressed by civil society, including those regarding investors' responsibilities. Negotiations should address the issues of access to investment opportunities and non-discrimination, protection of investment, and stable and transparent business climate" (paragraph 11c).

"The WTO should begin negotiations on a basic framework of core principles and rules on domestic competition law and policy and its enforcement. The WTO principles of transparency and non-discrimination would provide key foundations for the development of such core principles and rules. The WTO should also aim at developing common approaches on anti-competitive practices with a significant impact on international trade and investment as well as on the promotion of international co-operation. The development dimension should also be at the centre of the considerations of such a multilateral framework by combining possible transition periods together with technical assistance and flexibility in the rules" (paragraph 11d).

175. When the GATT was established, the intention was that there should be rules on investment and competition policy alongside those on trade in goods, but those two agreements fell when the attempt to create an International Trade Organisation failed[134]. However, an agreement on Trade Related Investment Measures (TRIMs) was reached as part of the Uruguay Round, and subsequently the 1996 Singapore Ministerial Conference set up WTO working groups on the relationship between trade and investment and on the interaction between trade and competition policy.

176. The WTO told us that direct foreign investment was running at about $700 billion a year, growing much more quickly than trade in goods or in services. Mr Eglin said:

    "The case for bringing [direct foreign investment] under WTO rules is exactly the same as the case for bringing trade in goods and services under multilateral rules, that is to say, increased stability and predictability both for investors and for governments."

As far as governments were concerned, it would be primarily the smaller and weaker members of the WTO which would benefit, because the others "can swim without the need for multilateral rules" (Q 404).

177. There is widespread agreement that a new WTO agreement on investment would in principle be desirable. There is also widespread recognition that the negotiation of such an agreement would be made very difficult by the unfortunate legacy of the Multilateral Agreement on Investment (MAI), on which negotiations were launched by the OECD in 1995. The intention of the MAI was to facilitate foreign investment, by providing high standards of investment protection and liberalisation of investment régimes, backed by effective dispute settlement procedures, on the basis of non-discrimination. But there was considerable opposition to the proposals, both from NGOs involved in development issues and the environment and from developing countries, which felt that it was being imposed upon them[135]. France eventually withdrew from the negotiations in October 1998[136], and when they were abandoned "the internet-borne element of global civil society" claimed a great victory[137].

178. Witnesses favouring a new agreement on investment were at pains to distinguish it from the MAI. Commissioner Lamy has said[138] that it would be "quite different", because it would deal with foreign direct investment, not with short-term capital movements: "we are not asking for a right to invest; … what we want is transparency and non-discrimination". For DTI, Mr Hutton assured us that an investment agreement in the WTO would not run into the same problems as the MAI; it would start with simple principles (like transparency) rather than trying to achieve a complete package in a single agreement, and it would be built upwards from the bottom rather than imposed from the top (Q 24).

179. As Mr Ian Wilkinson, the EC Deputy Permanent Representative in Geneva, put it, although investment is already included in WTO agreements,

    "we have it in a partial way—and I mean partial in both senses of the word—and unfairly because we give to our service providers, our insurance companies, banks and so on, greater guarantees for their investments in other countries than we give to manufacturing industry" (Q 310).

The TUC recognises the need for global rules, and the desirability of a multilateral approach rather than a network of bilateral agreements (pp 21-22). The CBI considers that a high priority should be given to rules on foreign direct investment, because access to markets increasingly involves investment in some form (p 33), and a plethora of bilateral or regional agreements[139] increases the likelihood of companies having to face increased costs arising from varying requirements (pp 36-37). The Food and Drink Federation points out that the industry it represents is "very significant in expanding the benefits of liberal trade to least developed countries", and would therefore welcome an investment agreement in the WTO (p 251).

180. In his submission (pp 243-250), Dr EVK Fitzgerald (Director of the Finance and Trade Policy Research Centre at the University of Oxford) finds it inevitable that the issue of investment will arise in planning for any future WTO Round, because trade and investment are complementary. To avoid falling into the same trap as the MAI, the "development interest" should be built in from the beginning. Foreign direct investment is crucial to developing countries, and steps to encourage it could also help domestic investors by reducing uncertainty. A WTO agreement should not encroach on the rights of governments to regulate investment and the behaviour of investors, but simply ensure that such control would not be discriminatory:

    "The objective of the negotiations at the WTO would be to establish a common set of binding multilateral rules providing a simplified, secure and predictable framework for international investment encompassing existing bilateral agreements and practices".

The core requirements would be to provide for asset protection and for national treatment[140], and to apply the dispute settlement procedure[141].

181. Mr von Moltke (for the International Institute for Sustainable Development) recognises the need for a multilateral agreement on investment, not only to make the risks associated with investment in developing countries more predictable, but also to ensure "that investment fosters sustainable development in a broader range of countries, and that it does not lead to environmental degradation" (pp 290-291). But he considers that, because the requirements for an investment régime are structurally different from those for the liberalisation of trade in goods or services,

    "the international community should find a forum other than the WTO for the negotiation of a multilateral framework of rules governing international investment. The European Union has been mistaken in pursuing this goal" (p 291).

182. Dr Holmes and Professor Rollo take a realistic attitude: there are good economic arguments for an investment agreement, but there is little political case for trying to impose binding rules on those who do not want to accept them (p 92). The CBI recognises that free access to markets for investment is not a realistic short-term objective for the WTO, but would welcome a step in the right direction (p 37). CAFOD sees the problems of the MAI legacy, but suggests that negotiations might be worthwhile in the medium term (p 229). Friends of the Earth consider that developing countries need to keep control of foreign investment themselves (p 52), but do concede that there might be an argument for negotiating a balanced agreement under the auspices of the UN (p 53).

183. Mr Eglin told us (QQ 404-405) that in Seattle about 45 countries wanted negotiations on investment; these included the EU and other European countries, Japan and some wealthier developing countries "who are beginning to have foreign investors of their own but who are also big host countries to everybody else's foreign investment". The US was opposed, preferring to maintain discriminatory, preferential access because it is able "basically to go around and negotiate a bilateral agreement that is attractive from its point of view"; it would favour an agreement only if it included the sort of measures (such as arbitration procedures protecting the rights of investors) which were likely to be quite unacceptable to other member countries. The opposition among developing countries was led by India, Pakistan, Egypt and Malaysia, which preferred bilateral agreements which did not force them to offer MFN treatment to investors, seeing this as part of their industrial policy which involved controlling foreign investment "in a very managed fashion". Most developing countries were not opposed in principle, but considered that they would need time to prepare for negotiations—in particular to prepare their public opinion domestically[142]. All in all, Mr Eglin concluded that negotiations would be premature now, but could be expected in "a few years". He believed that the WTO would ultimately get to where the EU wanted it to be, on the same sort of basis as for services (that is, opting in not opting out), but he urged that liberalisation should take place at a pace acceptable to the countries which were doing the liberalising, even if that took "twenty, thirty, forty years".

184. The position on rules for competition is very similar to that on rules for investment. For DTI, Mr Hutton told us that the intention was modest: not to set up the WTO as a competition authority, but simply to establish some broad principles for competition policy and the application of competition law (Q 23)[143]. Commissioner Lamy has said[144] that he seeks agreement on a basic framework of rules so that

    "all [WTO] members would have a competition law and policy, there would be due process and transparency, and there would be co-operation between authorities … Surely, if we are to counter accusations that the WTO is the lap-dog of the multinationals, what better way than by starting to work on ensuring fair competition and a level playing field for all, large and small?"

Winding up for the Government in the recent debate on globalisation, Lord McIntosh of Haringey said:

    "The more economies are integrated into the global system the more they need competition rules to control the power of global businesses in their markets. It is argued that the absence or inappropriate enforcement of competition rules can create barriers to trade. That is certainly true. A commitment by WTO members to a common set of competition law principles would be a helpful way of addressing both issues. Countries also need to have measures to control restrictive business practices in order to reap the full benefits of trade liberalisation"[145].

And Clare Short told us that competition policy would benefit developing countries by allowing them to open their markets without becoming subject to monopoly behaviour (Q 547).

185. Once again, our witnesses gave broad support to the proposal. The CBI "could support a set of principles within the WTO designed to shape national competition laws" (p 39). Mr Johnson[146] believes that there is international agreement on the basic principles which are needed in the light of globalisation, even though for practical reasons the policy would have to be implemented at national (or EU) level (p 254). CAFOD agrees that negotiations might be worthwhile in the medium term (p 229). But they emphasised that ambitions must be modest. Dr Holmes said:

    "International competition rules of some sort are desirable but, sadly, over the last few years I have come round to the view that there is not enough support to put them in place … It would be absolutely unthinkable … that an agency within the WTO should be given the exclusive right to decide what mergers on a global scale should be allowed" (Q 180).

A centralist approach of this kind has in any case been ruled out because the US would not even discuss it. But the US seems almost as strongly opposed even to international agreement on competition principles, preferring to attempt to solve any problems by the extraterritorial application of its own competition laws. Moreover, developing countries have insisted on linking negotiations in this areas with provisions on anti-dumping which the US is not prepared to contemplate (Holmes and Rollo: p 92).

186. So, for competition as for investment, there seems little realistic chance of achieving early agreement on even a minimal framework of rules. Only the EU, and to a lesser extent its individual Member States, are said to be really enthusiastic (Dr Holmes: Q 180). Mr Eglin suggested that competition rules went with investment rules:

    "I do not think you can do investment very well without doing competition too. That to me is one of the principal reasons for doing competition. I am not sure if competition on its own needs to be done" (Q 409).

It followed that since he did not expect early agreement on investment, he saw no need for haste on competition.

187. Investment and competition rules are linked. We see no realistic expectation of early agreement on either, even though we believe that such agreements could potentially be of benefit to all member countries. But in such controversial areas we believe that progress is likely to be possible in the short run only through an approach similar to that of the GATS, allowing member countries to liberalise at their own pace. The current EU negotiating position looks extraordinarily ambitious; we think that it should be read as placing emphasis on the need to "begin" negotiations—or at least to begin informal discussions. We should not expect more than that to be achieved in the near future, and we believe that the EU should not allow the prospect of advancing on other fronts to be jeopardised by failure to achieve its long-term objectives in these areas.

Intellectual property

EU negotiating position

"It will be necessary to take decisions on the follow-up of the 'built-in agenda' in TRIPs … New developments which have taken place outside the WTO, in particular in WIPO, and on which international consensus has made progress should also be taken into account in the WTO" (paragraph 11h).

188. The international organisation with lead responsibility for the protection of intellectual property rights is the World Intellectual Property Organisation (a UN specialised agency). However, the WTO Agreement on Trade-Related aspects of Intellectual Property rights (TRIPs) is one of the three pillars of the WTO[147], and its further development forms part of the built-in agenda.

189. Mr Adrian Otten, Director of the Intellectual Property Division at the WTO, gave us a helpful explanation of the background (QQ 427-428). TRIPs had been added to the framework of WTO agreements during the Uruguay Round[148] because differences in levels of intellectual property protection were giving rise to trade tensions:

    "For some countries … their competitive position in international trade is very much related to the knowledge-related goods and services which they offer. The issue of what level of protection should be accorded internationally to the fruits of intellectual labour, whether it is in the form of inventions or new works protected by copyright, literary and artistic works or industrial designs or even trade marks … became a very important issue in international trade relations."

Developing countries were prepared to accept patent rules only in return for benefits in other areas, which they could achieve through trade-offs in the context of the WTO.

190. TRIPs builds on the pre-existing WIPO conventions. It has three elements:

  • minimum standards of protection in each of 7 major areas
  • rules to govern domestic procedures and enforcement
  • making disputes subject to the WTO dispute settlement procedure[149].

Its implementation timetable is staggered. Developed countries were given one year to adopt its provisions; transition periods were allowed for developing countries until 1 January 2000, and for least developed countries until 2006 (with a possible extension). There were also special arrangements for member countries (such as India) which did not currently provide patent protection for pharmaceuticals, which would be required to comply by 2005.

191. As Dr Holmes pointed out, "the intellectual property rules were devised … for the people who are owners of intellectual property" (Q 177). As might be expected, those people support TRIPs. For example, the CBI attaches great important to its full and timely implementation, without weakening the present text either on the substance or on its implementation provisions or deadlines (p 39).

192. But it does not necessarily follow that intellectual property rights act to the detriment of those who are users rather than owners of intellectual property, insofar as patent protection is necessary to ensure that research and development takes place in areas which are likely to be of benefit to all. Mr Byers argued that developing countries "have to demonstrate they recognise the importance of intellectual property rights" if they want to attract investment themselves (Q 556). Mr Otten said that without such protection the market could not function (QQ 441-442). And without protection local product development may also be inhibited. In an advertisement in the Economist[150], Dr Barun Mitra of the Liberty Institute, New Delhi argues that because developing countries tend to regard knowledge as free, and intellectual property rights as an instrument for restricting access to knowledge, there is no incentive for local companies to use "the traditional knowledge systems" in India, so "a lot of them have decayed or died".

193. An article in the same issue of the Economist[151] sets out the counter-argument. The study which prompted the article[152] had argued that there was a strong case for enforcement of intellectual property rights within the WTO, because weak intellectual property standards could harm trade, discourage foreign investment, and prevent innovation by removing incentive. But the author of the article hesitates:

    "And yet, and yet. Raising intellectual property standards is fundamentally different from lowering trade barriers".

All parties gain from the liberalisation of trade, so total welfare is increased. But the same may not be true in relation to the protection of intellectual property rights, where poor countries lose and it is not clear that anyone makes significant gains:

    "Suppose poor countries were obliged to extend the validity of patents from five years to 20. That would undeniably hurt those poor places that do little domestic research. They would have to suffer the inefficiency of monopoly pricing for longer. Moreover, they would have to hand over more in patent fees to rich countries. But what of the benefits to the world? It is difficult to argue that Microsoft will stop producing new software and Merck anti-AIDS drugs if, say, Burkina Faso does not enforce their patents. Quite possibly, then, since there has been a loss of efficiency in poor countries and no corresponding gain in rich ones, the world as a whole will lose out"[153].

194. Moreover, Friends of the Earth claims that TRIPs threatens the culture and livelihood of communities in poorer countries, "by imposing intellectual property rights systems that blatantly disregard local agricultural knowledge and tradition and [that] discourage production of cheap pharmaceuticals" (p 47). Both of these charges have provided ammunition for the NGOs and attracted considerable media attention; we consider each briefly below.

195. In relation to local agricultural knowledge and tradition, it has been claimed that the US and the EU want the system extended to cover all products from plants and animals[154]. CAFOD argues that the uniform systems for the patenting of plant varieties proposed by UPOV[155] under Article 27 of TRIPs would inhibit the conservation of seed by farmers (pp 230-231). Suggestions of this kind receive wide publicity, though Clare Short dismissed them as "terrible myths" current amongst NGOs (Q 556). But Dr Robert Black[156] claims that these conflicts indicate the power that large corporations appear to have under WTO rules to monopolise resources which actually belong to nation States or to communities (p 225).

196. As to cheap pharmaceuticals, Article 31 of TRIPs prevents the use of a patented process or product without the authorisation of the owner of a patent, except "in cases of national emergency or other circumstances of extreme urgency or in cases of public non-commercial use". This exception (known as the compulsory licensing provision) should allow developing countries to manufacture drugs to combat life-threatening diseases. There is also a provision permitting "parallel importing", allowing a member country to import drugs from the country where they are sold most cheaply. The owners of patents do not of course welcome the use of these exceptions. Pharmaceutical companies reportedly argue that using them does little to help people in developing countries because poor nations lack the basic infrastructure to deliver medicines effectively, and warn that weak patent laws can be used by traders who buy up the cheaper drugs and sell them back into more lucrative markets in richer countries, hitting the profits of firms which have invested in developing new products[157].

197. Mr Otten considered that the problem of patents on pharmaceuticals was being exaggerated. The only countries really affected were those without existing patent protection, of which there were about 20 (including India, Egypt and Pakistan), although the provisions might increase the period of patent protection in others (QQ 430-431). There was however an issue over differential pricing, with EC companies wanting to charge lower prices in developing countries, of which the US was fearful (Q 432). He considered that protection for intellectual property rights ensured that the burden of providing incentives for research and development was shared, but that there should also be sharing of the results (so that, for example, pharmaceutical companies would finance research into treatments for diseases prevalent in developing countries[158]) (Q 436).

198. On intellectual property, the EU mandate is unusually non-committal, perhaps reflecting the difficulty of balancing opposing arguments, as well as recognising the challenge faced by developing countries when they are required to set up their own patent organisations. In principle, we support the universal application of patent rights as the only way of encouraging investment and innovation. In practice, developed countries may well find humanitarian grounds for making concessions to developing countries. The recent move by US pharmaceutical companies is encouraging in this respect, and we consider that it would be beneficial if EU companies followed suit. But such concessions should be made through the use of explicit exceptions to the normal rules, rather than by turning a blind eye to failures to observe them.

Environmental issues

EU negotiating position

"The Council underlined the need to ensure that an appropriate balance between the further liberalisation of trade and the strengthening of multilateral rules contributes towards sustainable development, environmental protection, social progress, the reduction in poverty and consumer health" (paragraph 4).

"Trade and environment policies should play a mutually supportive role in favour of sustainable development. Environmental considerations should be taken into account throughout the negotiations with a view to achieving by the end of the Round an overall outcome where environmentally friendly consequences can be identified in the relevant parts of the final package. In order to meet every participant's trade interests, in particular the legitimate interests of developing countries and to promote sustainable development, the new Round should maximise the potential for positive synergies between trade liberalisation, environmental protection and economic development. Specifically a set of issues should be included in the negotiations aiming at greater legal clarity on the relationship between WTO rules and trade measures taken pursuant to provisions of Multilateral Environmental Agreements to the effect that the WTO should accommodate the use of such globally agreed instruments, and at a clarification of the relationship between WTO rules and non-product related process and production method requirements with regard, in particular, to eco-labelling schemes, at examining the role of core environmental principles, notably the precautionary principle, in WTO rules and encouraging co-operation between WTO and relevant international bodies" (paragraph 11g).

"Negotiations should aim at … expanding the scope of certain provisions with special consideration to the development of multilateral guidelines on labelling. The EU also sees the need to address in this context health, consumer safety and environmental issues in a manner that ensures an appropriate balance between the right to take action to achieve those objectives, and the obligation to avoid disproportionate restrictions" (paragraph 11j).

199. Predictably, we received a great deal of evidence on environmental issues, since this is an area of intense public concern. After looking at the EU's overall position, we identified a number of specific issues, which we discuss in turn below.


200. In its evidence, DTI expresses the Government's belief that protecting the environment is compatible with maintaining an open, non-discriminatory and equitable multilateral trading system (p 3). Mr Duncan Brack, Head of the Energy and Environmental Programme at the Royal Institute of International Affairs, agreed that there need not be a conflict:

    "The debate is often viewed as though there is some opposition between trade liberalisation and environmental protection but I think, and most of us who work in the area think, that it is possible to construct a régime which is beneficial both to trade and to the environment. The danger, at the moment, is that the WTO and the agreements it oversees do not provide that degree of environmental sensitivity, and, also, that it is increasingly perceived by civil society, by the public at large, that the WTO threatens the environment in some way. This perception is growing and, if it is widely believed, undermines the whole basis of the WTO and all the beneficial elements of trade liberalisation. So it is important to reach some kind of resolution on the various issues in the trade and environment debate" (Q 186).

In its Strategy on Sustainable Development, the Government says:

    "Liberalising trade can help to ensure that resources are used efficiently, to generate the wealth necessary for environmental improvement, for development for the spread of cleaner technology and for improved social conditions. On the other hand, where economic activity is unsustainable, trade can act to magnify this, increasing pollution and depletion of natural resources such as forests, fish and other wildlife, and minerals"[159].

201. There are varying views on the extent to which environmental issues should be considered within the framework of the WTO itself. Commissioner Lamy has said that the present relationship between WTO rules and environmental goals is unstable and driven by DSU panels, asking:

    "Do we want our trade relationships determined by panels, by litigation? Or do we want to determine ourselves the relationship …? Surely the latter. That's why we want clarity on the relationship between the WTO and Multilateral Environmental Agreements, on eco-labelling, and on the precautionary principle"[160].

202. As Mr von Moltke (speaking for the International Institute for Sustainable Development) points out, the Preamble to the WTO Agreement specifies that its member countries' relations should allow "for the optimal use of the world's resources in accordance with [inter alia] the objective of sustainable development, seeking both to protect and preserve the environment". He suggests that

    "unfortunately the WTO has done little in its first four years to ensure that its actions match these aspirations, to ensure that trade liberalisation leads not just to enrichment for some but to sustainable development for all".

The WTO has set up a Committee on Trade and Environment (CTE), established to examine the relationship between trade rules and the environment and, if necessary, to make recommendations on the need to change trade rules—but its mandate does not extend to examining the effect of trade on the environment. He argues that there would be a significant effect on public trust if the WTO adopted its own explicit "sustainable development agenda" (pp 288-289).

203. Developing countries suspect that there is a protectionist wolf lurking in environmental sheep's clothing. For DTI, Mr Hutton claimed that

    "one of the real problems at Seattle was persuading the developing countries to respond at all to the need to take environmental considerations into the WTO. We are going to have a major problems in that respect. They are deeply suspicious of the developed countries' aims in terms of bringing environmental issues into the WTO because they very much fear that this will create discriminatory and protectionist instruments" (Q 19).

Mr Jan-Eirik Sorensen, Director of the WTO Trade and Environment Division, said that developing countries were interested in the environment, but reminded us of the words of the Brundtland Report[161]: that poverty was the main cause of environmental degradation (Q 385). According to Friends of the Earth, the position of the developing countries does not imply that they are not concerned about the environment; they are not interested in bargaining over "Northern environmental concerns" (p 51), "but they do have a very clear environmental agenda of their own" (Q 66). For the World Development Movement, Mr Coates suggested that developing countries used their apparent disinterest in environmental matters as a bargaining counter (Q 107). Mr Brack claimed:

    "There is no reason to fear under MEAs that developing countries will suffer. Indeed, the financial mechanisms and technology transfer mechanisms that are built into agreements like the Montreal Protocol and the Kyoto Protocol provide assistance for them" (Q 196).

He hoped that the failure of Seattle would provide a breathing space in which developing countries could be helped to understand this, and capacity building could take place.

204. We considered whether the EU's specific proposals favoured the objective of sustainable development. The Institute for European Environmental Policy points out (pp 251-252) that sustainable development is explicitly included in the EU's basic principles[162] (as well as being reiterated in the EU negotiating position), and that the EU has a strong internal environmental agenda. Yet, it suggests, the EU needs to do more to convince its own citizens that sustainable development concerns really are systematically integrated within its trade policy (the Commission's apparent willingness to compromise on biotechnology issues in Seattle fuelled doubts[163]). And the EU should reconsider its own subsidy policies on agriculture and fisheries, which are "widely perceived as environmentally destructive"[164]. The Government does not dissent from this final point: the Minister for the Environment is on record[165] as saying that the EU's "deplorable" record on agricultural and fishing subsidies has fuelled international concerns that its demands for the WTO to tackle trade-related environmental questions were "eco-protectionism".

205. The EU mandate refers to "achieving by the end of the Round an overall outcome where environmentally friendly consequences can be identified in the relevant parts of the package". To this end, it has commissioned a Sustainability Impact Assessment Study[166], whose objective is "to develop a methodology for carrying out a sustainability impact assessment and to use this methodology to make a broad assessment of the potential impacts (positive and negative effects) upon sustainability of the proposed new Round". Mr Brack approved of the principle of such a study, but commented that the present work did little more than flag up the issues where there could be interactions; in his view, a retrospective assessment of the impact of the Uruguay Round on environmental standards might have been more useful (Q 205). English Nature welcomes the study, but considers that it should include a wider range of scenarios (p 238). Mr Viganó of the WTO Trade and Environment Division commented that a number of member countries were undertaking such studies, but that it was difficult to get a consensus on methodology (Q 390), which would be essential if the results were to be agreed and to influence joint action.

206. We believe that increasing trade can be compatible with sustainable development. We support the need for studies to examine the actual and potential effects of trade on the environment, and we are glad to note that the EU is one of those to have commissioned such a study. But for these studies to carry credibility, they should not only be thorough, but should be based on a tried, tested and generally accepted methodology.


207. The EU mandate speaks of the need to aim "at greater legal clarity on the relationship between WTO rules and trade measures taken pursuant to provisions of Multilateral Environmental Agreements (MEAs) to the effect that the WTO should accommodate the use of such globally agreed instruments". The Government considers that MEAs with global membership are the best way to tackle international environmental problems, though it can see the danger that they could be used to justify protectionism. It sees no hierarchy at present between the rules in MEAs and WTO rules, but believes that greater legal clarity would reduce the potential for conflict, and should therefore be on the WTO agenda (p 3). Mr Hutton explained that Article XX of the GATT allowed exceptions to the principle of non-discrimination on the grounds of health, safety and so on. Because MEAs were not explicitly recognised as providing grounds for exception, there could be disagreements on the interpretation of trade provisions of MEAs between WTO member countries which had subscribed to the MEA in question[167]. The Government's preferred solution would be to clarify the extent of Article XX to ensure that it allowed exceptions on environmental grounds. It would then be necessary to lay down clear principles of non-discrimination in application and of proportionality which "would provide some protection against … measures which effectively were … taken for protectionist reasons under the general rubric of an environmental objective" (Q 19). The CBI supports this view (p 38).

208. ODI does not acknowledge that there is a problem, arguing that if all WTO member countries are party to a MEA, none can challenge restrictions under it. If some WTO member countries have entered into an MEA to which not all are party, "obviously they cannot use this to rescind obligations already undertaken under the WTO", except by the normal method of negotiated compensation (p 268). Mr Brack disagreed:

    "There is no statement in international law that I am aware of that says the WTO is superior to an MEA, or, indeed, vice versa" (Q 190).

Some witnesses argue that MEAs should take explicit priority over WTO rules (For example, Green Party: p 256). CAFOD maintains that the WTO has been seen as taking precedence among other international bodies on trade-related issues, with the others being expected to become "WTO compatible"; it suggests that instead the WTO should be subordinated to the UN system, deferring to the relevant specialist agencies when disputes arise (p 227). English Nature criticises the EU's approach as too narrow, arguing that the EU should be aiming to ensure that trade negotiations take account not only of the specific provisions of MEAs, but also of their overall objectives[168]. It suggests that the two should be reconciled as follows:

    "First, the specific provisions of MEAs should be subject to the test that there are not more obvious ways of achieving the objective which are less trade distorting, or less unfairly distorting[169] … Where MEAs pass this test, trade policy should not be allowed to overrule them. Secondly, all trade measures, individually and as a whole, should be assessed in terms of their likely effect on the overall objectives of MEAs … Where adverse effects are potentially likely, the provisions of MEAs should prevail" (pp 237-238).

Carrying out this broader evaluation could be difficult, in view of the lack of agreed methodologies.

209. In his helpful submission to us, Mr Brack examines the problem of potential conflicts, and suggests how it might best be resolved[170]. In summary, he argues that a number of MEAs contain trade measures[171] because the parties see them as the most effective way of enforcing the agreements. The use of these trade measures could be held to conflict with WTO rules prohibiting discrimination in trade. This creates uncertainty because of the possibility of direct conflict between two international régimes, makes the negotiation of further MEAs more difficult, and damages the image of the WTO. The present position gives de facto superiority to the objective of trade liberalisation over that of environmental protection, which is undesirable if the two are considered to be of equal validity. The option of creating a superior body to resolve conflicts is not realistic, at least in the short-term[172]. So, Mr Brack suggests, systems of international law do need to be modified to ensure that existing and future MEA trade measures are deemed to be compatible with WTO rules, provided that the measures are necessary to the fulfilment of the objectives of the MEA and that they do not give an opportunity for protectionism. Mr Brack is not convinced by the Government's view that this could best be done by treating action on environmental grounds as an exception under the existing GATT Article XX, because this would appear to give supremacy to the WTO by allowing it to decide what was acceptable under that Article on an "agreement-specific" basis. He would prefer a "criteria-specific" approach: an explicit modification to WTO rules to exempt action taken in pursuance of MEAs, through a new WTO agreement creating specific rules as to what measures should be exempted (which would include special provisions for developing countries if necessary, and would define dispute settlement procedures).

210. Mr Brack recognises that no conflict has yet reached the dispute settlement procedure, but he considers that

    "a failure to resolve the potential conflict between [WTO rules and MEAs] can only lead to actual conflict, undermining both. The time to act is now".

In every trade-environment case to date under the WTO dispute settlement procedure, countries which were applying trade restrictions for environmental reasons had been forced to change them. This was usually for good reason, because the restrictions were being applied in a discriminatory way, with protectionist intent—but it was difficult to envisage any measures which would definitely be judged acceptable in WTO terms. And the dispute settlement procedure had no mechanism for looking behind the facts of a particular case to the fundamental objectives of the agreement (unlike, for example the ECJ, which could look at Treaty objectives). He wondered whether there might be recourse to the International Court of Justice, as had been proposed in the Charter for the abortive International Trade Organisation[173] (Q 194).

211. Mr Sorensen confirmed the potential problem, saying that (speaking personally) he agreed with Commissioner Lamy that the present relationship between WTO rules and environmental goals was unstable and driven by the dispute settlement procedure. Not all member countries would share that view; developing countries did not see clarification of the WTO/MEA relationship as a priority (QQ 376-378). However, he added:

    "I think that there has been a development in the Appellate Body which shows that when you interpret WTO law you will take into account other international agreements and conventions to try to avoid conflict between them, and that this is something that is laid down in the Vienna Convention on the Law of Treaties[174] … We go in an environment friendly direction but we do it perhaps … on this somewhat unstable basis because it is case by case" (Q 382).

212. It has also been suggested that it would be easier to avoid potential conflicts if trade and environmental issues were better co-ordinated at national and international level. Mr Brack said that the fear was always

    "that you can create a good position with good inputs from environment civil servants and environment ministers, but because it is trade ministers who do the negotiations, they just do not come from the background that thinks environmental protection is important. They come from a background that is socialised into thinking that trade liberalisation is the only goal" (Q 207).

And Friends of the Earth alleges that "the issues of environment and development are taken on board [by the EU] when there is a happy convergence with commercial interests, but abandoned when there is a conflict of interests" (p 60).

213. In the UK, Mr Coates of the World Development Movement described the Government's policy as "basically a trade and industry policy with a little bit of greening … at the edges" (Q 103), whereas Mr Hutton claimed that co-ordination within the Government was

    "intense, as indeed it is bound to be, because I do not think anybody recognises the supremacy of the DTI in areas which touch on their own business, such as the environment …" (Q 18).

As for the EU, some witnesses had expressed concern that the lead within the Commission in WTO negotiations rested with the Trade Directorate General, which might be insufficiently concerned with environmental issues. Mr Carl (the Commission's chief WTO negotiator) reassured us that there was co-ordination within the Commission as a whole, and that about half the Commission team in Seattle came from Directorates General other than Trade (Q 113). In other WTO member countries, Mr Sorensen suggested that there was often a lack of co-ordination at national level between trade policy and environment policy, particularly in developing countries (QQ 376-378). And there was also a need for co-ordination among international organisations. This existed at Secretariat level between the WTO and the United Nations Environment Programme (UNEP)[175], but it might be useful if there were a single body with all MEAs "under its wing"(QQ 382-383).

214. We consider that it is only a matter of time before a case arising from a conflict between WTO rules and the provisions of a Multilateral Environmental Agreement (MEA) is brought for resolution to the WTO dispute settlement procedure. This could well result in a decision which would be undesirable in the broader context, and would inevitably lead to adverse publicity for the WTO. So we think that it is important to prevent such a conflict from happening. The EU went to Seattle committed to a "clarification" of the relationship between WTO rules and MEAs, but without any stated policy on how this should be achieved. We urge the Government to press the EU to come forward with concrete suggestions, preferably involving explicit modifications to WTO rules to allow action taken in pursuance of obligations under an MEA, with an appropriate dispute settlement procedure. And we also urge that the Government and the EU should ensure coherence between their trade policies and their environmental policies.


215. The EU mandate refers to "examining the role of core environmental principles, notably the precautionary principle, in WTO rules". Placing more emphasis on the "precautionary principle" in those rules would permit member countries to ban imports "where scientific evidence is insufficient, inconclusive or uncertain and where there are indications that the possible effects on the environment, or human, animal or plant health may be potentially dangerous and inconsistent with the chosen level of protection"[176]. Winding up for the Government in the recent debate on globalisation, Lord McIntosh of Haringey said:

    "We … want a new Round of negotiations to … examine the scope for precautionary action within WTO rules. It is important in the interests of all governments to be able to take measures under the precautionary principle which are science based and proportionate in protecting their environments"[177].

We wrote on 4 April to Mr Michael Meacher, the Minister of State for the Environment, asking whether in his view the approach being advocated by the Commission in its Communication[178] was consistent with WTO rules, and if not whether the Government would be seeking changes in the EU negotiating mandate to achieve the objectives set out in the Communication. Two months later we have still received no reply to this letter.

216. Mr Joao Magalhaes, a Counsellor in the WTO Agriculture and Commodities Division, described the Sanitary and Phyto-Sanitary Agreement (SPS) in the Uruguay Round as a newcomer "in a trade system like the GATT system because … for the first time science has been acknowledged as having a role to play in the trade policy area". Article XX(b) of the GATT had already allowed countries to take measures to protect health. SPS spelt these out to avoid such measures being used for protectionist purposes, specifying that measures claimed to be introduced to protect health must have a scientific basis, being based either on the Codex Alimentarius[179] or, failing that, on a risk assessment[180] (Q 445).

217. Mr Magalhaes said that (contrary to press reports) the WTO had so far made no statement on the Commission Communication on the precautionary principle, but the Communication had stimulated the first-ever discussion on the principle in the SPS Committee (Q 447). He understood Article 5.7 of the SPS Agreement to cover the precautionary principle, because "if scientific evidence is insufficient, a member [country] has the right to act to introduce a measure". But there was a corresponding obligation on that member to continue to look for scientific evidence, and to adapt the measure to reflect new information as soon as such evidence was available (Q 448). He suggested that the beef Hormones case between the US and the EU could not be described as an example of scientists disagreeing, since "the EU has been unable to date to bring in any scientific evidence of the risk" (Q 449).

218. Dr Razeen Sally and Mr Stephen Woolcock (of the International Trade Policy Unit, London School of Economics) consider that the EU should "seek to reverse the process in which the legitimate interests of consumers cannot be reflected in regulation", by using an expansive definition of the precautionary principle (though they recognise that this could open the door to protectionism); by introducing specific schemes for biotechnology products; or simply by allowing member countries to ban products in return for compensation (in line with existing GATT practice) (p 285). English Nature argues that the reasonable operation of the precautionary principle should be recognised as a key WTO principle, suggesting in particular that countries should be allowed to adopt a precautionary approach to GMOs until the effects on wildlife had been established (p 237).

219. According to Mr Brack, with the TBT and SPS the WTO had moved beyond questions of preventing discrimination into the area of setting global standards, by apparently treating standards set by the ISO or Codex as maxima above which countries were not allowed to go. Mr Brack said:

    "I do not think that was the intention of those bodies when they were set up in the first place and I think that it is dangerous" (Q 215).

There was room for argument as to the extent to which the precautionary principle was built into SPS, but there was certainly a stronger version in the Biosafety Protocol. He thought that the EU should seek to clarify this issue[181].

220. We did not address the fundamental issues on GMOs, because we have already reported on them in relation to agriculture in the EC context[182]. But we were given information on the current state of play in the broader international context. Mr Magalhaes said that discussion had started in the Codex task force, with a 4 year mandate. It was not clear whether GM products were covered by the SPS Agreement as currently worded, which referred to measures "to protect human life or health from risks from additives, contaminants, toxins or disease-causing organisms"; and he suggested that GM products in general probably did not fit into any of these categories. However, the agreement also allowed measures to "prevent or limit damage within the territory of a member country from the entry, establishment or spread of pests", which might be held to allow measures relating to GM seed (Q 448).

221. Before Seattle, Japan (supported by Canada) had proposed the setting up of a WTO working group to consider GMOs. The EU opposed discussion of the Japanese proposal. The Government's position is that this is not an issue which the WTO should address "as a specific issue in its own right"; it considers that there are other more suitable fora (p 4). The Green Party (p 257) and Friends of the Earth (p 51) argue that these matters should be left solely to the Biosafety Protocol. However, Mr Hutton recognised (Q 22) that the WTO would be forced to consider the issue if there was a dispute (which could arise for example over the application by WTO member countries of the Biosafety Protocol[183]). Mr Magalhaes feared that this approach left member countries open to the danger of creating the jurisprudence by default (Q 449).

222. We applaud the EU for having prompted discussions in the WTO on the precautionary principle, but we have not ventured far into this complex area. We look forward to the Government's overdue reply to our letter on the issues raised by the recent Commission Communication.


223. One of the basic principles of the WTO is that member countries may not discriminate between "like products". This has hitherto normally been interpreted as preventing discrimination between goods on the basis of how they are produced. Since the EU's declared objective is sustainable development, we considered whether the "clarification" of rules referred to in the EU mandate should involve the EU in arguing for WTO member countries to be allowed to give preference to goods which have been produced using environmentally-friendly methods.

224. To allow discrimination on the basis of production and processing methods (PPMs), there would have to be a re-interpretation of the crucial term "like product". There is no formal definition of this term in the GATT, which as Mr Brack pointed out does allow discrimination on the basis of process mechanisms in some instances (for example against products produced using prison labour or misappropriated intellectual property) (Q 210). English Nature is clear that the definition should allow distinctions based on PPMs, to encourage the use of environmentally sustainable methods (p 238). But it is not immediately apparent how this can be done without risking protectionist abuse. And, importantly, Mr Sorensen pointed out that it would be difficult to introduce a new basis for distinctions when a whole network of agreements (with mutual concessions) had already been agreed on the basis of the existing understanding of the term; a change could contravene the basic WTO principle that the trading system should be predictable[184] (Q 391).

225. The importance of being able to discriminate on the basis of PPMs is not confined to broad environmental issues. Compassion in World Farming claims that the EU's animal welfare achievements (in relation to leghold traps and cosmetic testing) are already being weakened because of fear of WTO challenge. WTO rules do not allow discrimination against the import of meat derived from animals reared by systems banned in EU, and it foresees future conflicts on battery hens and sow stalls. Since distinctions based on PPMs are legal in relation to domestic production, the effect is that imported products are treated more favourably than domestic ones (pp 233-235). The Government says that it "strongly supports the further improvement of animal welfare standards in the EU", and that it has therefore backed calls to include animal welfare standards in a WTO Round[185] (p 265).

226. Developing countries are concerned that discrimination on the basis of PPMs could put their products at a disadvantage. But they are not the only ones to be concerned about unfair treatment. The British Ceramic Confederation argues that

    "the UK is in the final stages of implementing its climate levy. The need to impose similar arrangements in other countries is obvious. Similarly, the nature of the provisions would need to be transparent. Finally there must be an over-riding requirement to impose a similar levy or surrogate on goods from countries that clearly do not take up and honour the same commitments" (p 226).

While sympathising with the Confederation's objective, Mr Brack pointed out that discriminating (by imposing a levy on imports not complying with the Protocol) would not be acceptable under the current definition of "like products" if the difficulty related to the method of production (for example, the energy used) (Q 201).

227. Distinguishing between products on the basis of the method of production is a very sensitive matter. It is essential that the approach adopted should both be consistent and reflect the legitimate interest of consumers, and we believe that the EU should press for the issue to be explicitly considered in the WTO.


228. Even if it is not permissible to discriminate on the basis of PPMs, there is popular support for the view that governments should be allowed to insist that goods are labelled to show what methods have been used in their production (eco-labelling). In our Report on EC regulation of genetic modification in agriculture, we concluded:

    "Once the regulatory process has ensured safety, the success or failure of the technology must be left to consumer choice in the market place … We welcome the requirement for the explicit labelling of GM products in order to help provide consumer choice. We agree with the Commission and the Government that only products where the transgene or its product are detectable should be labelled. To demand labelling where detection is impossible would be meaningless".

We recommended a policy requiring "any ingredient or additive to a product to be identified as GM when the presence of GM material can be detected above an established threshold", and took the view that "information supplementary to that provided on the label of GM foods must be available to the consumer"[186].

229. In a House of Commons debate in November 1999, Mr Caborn (the Minister for Trade) said[187] that the EU's objective in relation to the WTO was now

    "to seek clarification of the terms of the WTO agreement as concerns labelling, so that it is clear that labelling requirements can be used as a means of responding to consumer demands for information, where appropriate and without placing excessive burdens on, and unfairly restricting, export opportunities for our trading partners. On the specific question of genetically modified food, the Government are committed to labelling where there are measurable differences between GM and non-GM products, to allow consumers to make informed choices".

230. There has not yet been a definitive answer to the question of whether the TBT Agreement allows eco-labelling (voluntary or mandatory), and if so on what basis. According to Mr Brack:

    "The general belief at the moment is that voluntary eco-labelling schemes are probably not subject to WTO challenge, but mandatory eco-labelling schemes which governments require would be because they are a way of discriminating in trade between like products. But … that is not known and is one of the issues which are being discussed (Q 214).

Mr Magalhaes took the view that labelling for environmental reasons was allowed under the Technical Barriers to Trade Agreement, but labelling in relation to GMOs was still under discussion. A distinction was allowed only between products which were not "substantively equivalent", and the question was whether products containing GMOs were "substantively equivalent" to those produced without GMOs. He foresaw "very difficult negotiations" on this issue (Q 451). The CBI suggests that mandatory schemes should be allowed, but should be notifiable to the WTO to enable them to be scrutinised, to ensure that they are not being used for protectionist purposes (p 38).

231. Eco-labelling responds to questions of immense popular concern. In view of this, we think that governments should be allowed to make it mandatory. It is not clear whether WTO rules permit this at present. If they do not, we think that the EU should press for them to be changed to allow mandatory eco-labelling. We see no reason to give the WTO a scrutiny role over the use of this power, though misuse of it would of course be subject to challenge through the dispute settlement procedure.

Core labour rights

EU negotiating position

"The Council agreed that the EU should strongly support the protection of core labour rights. In this context, the Council discussed in detail the role that the WTO should play to promote the observance of core labour rights as well as the implications of an EU initiative to this end in the WTO. The Council recalled the importance of the Singapore declaration and agreed that additional initiatives should be taken along the following lines:

"The WTO should, in co-operation with other relevant international organisations, encourage positive incentives to promote observance of core labour rights. For this purpose the EU should undertake a continuous dialogue with partners in the WTO and the ILO as well as civil society, in order to define and agree approaches which would be in the best interests of those who are really affected by these issues. The European Union will advocate the following measures for progress on the issue of trade and labour rights:

·  Enhanced co­operation between the WTO and the ILO and their Secretariats;

·  support to the work of the ILO and its observership in the WTO;

·  creation of a joint ILO/WTO Standing Working Forum on trade, globalisation and labour issues to promote a better understanding of the issues involved through a substantive dialogue between all interested parties (including governments, employers, trade unions and other relevant international organisations). This dialogue should include an examination of the relationship between trade policy, trade liberalisation, development and fundamental labour rights. This Forum would also prepare for a ministerial-level meeting which should take place no later than 2001. The EU will propose to host such a meeting;

·  pursuit and encouragement of further positive measures building on the incentives already applied by the EU for the enhancement of labour rights, in particular through additional improvements in market access for developing countries exports and not through trade-restrictive measures.

"The Council confirmed the EU's firm opposition to any sanctions-based approaches. The Council also agreed to pursue international consensus through discussions and negotiations with its partners. The EU will oppose and reject any initiative to use labour rights for protectionist purposes. In addition, the Council agreed that the comparative advantage of countries, particularly low-wage developing countries, must in no way be put into question" (paragraph 13).

232. In a useful historical account (pp 258-259), Professor JC McCrudden, Professor MR Freedland and Dr ACL Davies of the University of Oxford explain that after the Second World War "trade, financial and social issues were seen as part of a harmonious package that would underpin the post-war world order". But this package was never tied up. The GATT was set up in a form "largely stripped" of labour linkages, and the ILO was "immobilised by Cold War tensions", lacking enforcement powers or the ability to ensure that other international organisations took account of labour standards in their work. During the 1990s there was renewed interest in trying to combine the issues, with the US and France favouring "building labour rights into the new architecture of world trade, particularly to lessen domestic concern that competition from developing countries would undercut their own social standards". The reaction of nearly every developing country was to see this as protectionism, so the most that could be agreed in the Uruguay Round was to keep the linkage under review. At its first Ministerial Conference, the WTO had recognised the lead role of the ILO: the December 1996 Singapore declaration said:

    "We renew our commitment to the observance of internationally recognised core labour standards. The ILO is the competent body to set and deal with these standards, and we affirm our support for is work in promoting them … In this regard, we note that the WTO and ILO Secretariats will continue their existing collaboration"[188].

Yet attention had never shifted entirely away from the WTO, largely because it was the only international organisation with a fully operational sanctions mechanism[189].

233. Despite the terms of the Singapore declaration, there has been continuing controversy over the nature of the WTO's role in promoting core labour standards—sometimes, we believe, arising from lack of clarity of language. It is first necessary to clarify the definition of core labour standards[190], and then to examine the degree of WTO participation which is being advocated by various parties.

234. Mr Juan Somavia, the Director General of the ILO, told us that it was the ILO which had performed the crucial functions of bringing social issues on to the table, introducing the notion of international rules, and involving social partners (Q 314). In his written statement to us, Mr Somavia says:

    "The Copenhagen Summit in 1995 agreed [as follows]: 'We commit ourselves to promoting the goal of full employment as a basic priority of our economic and social policies, and to enabling all men and women to attain secure and sustainable livelihoods through freely chosen and productive employment and work. To this end, we will … pursue the goal of ensuring quality jobs, and safeguard the basic rights and interests of workers and to this end, freely promote respect for relevant ILO Conventions, including those on the prohibition of forced and child labour, the freedom of association, the right to organise and bargain collectively, and the principle of non-discrimination'" (p 137).

This was one of the Commitments endorsed by 117 Heads of State and Government, and it defines the meaning of core labour standards. Mr Somavia explains that these

    "are enabling rights which where observed give working people the means to win for themselves a share in the benefits of globalisation and deal with some of the problems it can cause. They do not specify a global minimum wage or any of the specific elements of a remuneration and benefits package. The terms and conditions of employment can and should vary. However, the right to [a] say in those terms and conditions should apply to all workers" (p 137).

As McCrudden et al observe, these are "rights to a process, not rights to a particular outcome" (p 259).

235. In its submission to us, the TUC argues that "the key issue in order to rebuild support for the multilateral trading system is the need to make progress at the WTO on the issue of basic human rights at the workplace". International trade has caused downward pressure on labour standards in developing countries, especially in export processing zones where workers (mostly young women) are denied rights to join trade unions. The aim is not to remove the comparative advantage of cheap labour costs, but to protect the rights of all workers (pp 20-21). Mr Ricupero, the Secretary General of UNCTAD, confirmed that the ILO definition of core labour standards had general acceptance, and that any opposition from developing countries to proposals that core labour standards should be treated in the context of the WTO could not be attributed to a misunderstanding of what was being proposed (QQ 509-511).

236. There is a spectrum of views on the role of the WTO in the promotion of core labour standards. At one end of the spectrum is the argument that the long-term goal should be for non-observance of these standards to render member countries liable to WTO sanctions. In his evidence to us, Mr Bill Jordan[191], the General Secretary of the ICFTU, said:

    "We want eventually a procedure that would be WTO and ILO combined working together, with the ILO effectively setting the standards and having the procedure, and then for the WTO to make sure that world trade proceeds on a fair basis, that they can do something with the persistent offender … We believe that if they sit down in a working party, the developing and developed countries would develop a foolproof procedure which would involve both the ILO and, as a court of last resort, the WTO" (Q 34).

An article sent to us by Dr Rorden Wilkinson (of the Centre for International Politics, University of Manchester) suggests that the goal should be a WTO agreement on trade-related labour issues to introduce minimum levels of national protection for labour in all member countries. Such an agreement would be designed to reduce the distortions and impediments caused by international trade to the rights of workers, provided that these measures should not constitute barriers to trade. In the authors' view, it would not be inconsistent with the body of WTO agreements, and "as a collaboration between the WTO and the ILO, it could actually enhance the process of multilateral commercial regulation"[192]. The British Ceramic Confederation also considers that core labour standards should be included in WTO agreements (p 226).

237. Even those witnesses who did not accept the application of WTO sanctions as the long-term goal still saw the need for WTO involvement in this area. The Government is opposed to the use of trade sanctions to impose labour standards, and concerned not to undermine the comparative advantage of developing countries (p 4). But Mr Hutton confirmed that

    "the Government fully supports the EU proposal, as set out in the [EU negotiating position] for a joint WTO/ILO forum, also involving other relevant international organisations, to discuss the relationship between trade policy, trade liberalisation, development and fundamental labour rights" (letter of 7 February 2000: p 32).

Winding up for the Government in a debate on globalisation, Lord McIntosh of Haringey said:

    "We need to ensure greater co-operation between the WTO, the ILO and UN bodies so that global problems are addressed coherently. Specifically we do not think that restricting imports would be an effective way of tackling issues such as child labour … The primary cause of child labour is poverty … If developing countries are to grow they must have access to world markets" [193].

238. Mr Anderson, the Chairman of the CBI's Trade Policy Working Group, said:

    "The trade unions are not the only people who are very keen on core labour standards. Within my working group the labour intensive industries are also very sensitive and feel they are competing on very unequal terms. In the apparel industry for instance they are against countries using child labour in the clothing industry, which quite a number of countries do" (Q 49).

And in its written evidence the CBI makes it clear that

    "UK business … supports active promotion of the respect of basic human rights. Adequate solutions need to be found in discussions between industrialised and developing countries to combat the non-respect of core labour standards throughout the world" (p 39).

239. There have been a number of suggestions as to how discussions in an international forum might best be organised, and what the exact role of the WTO should be. Speaking for the TUC, Mr Bickerstaffe said:

    "It was agreed at the [June 1999] Cologne European Council that 'negotiations covering a broad spectrum of topics, including labour standards, environment, development and transparency, are the most appropriate approach for achieving substantial and balanced results for the benefit of all WTO members'. Within that, of course, there is a range of possibilities as to how to introduce consideration of labour standards within the WTO context" (Q 29).

In its written evidence the TUC says (pp 21-22) that it would prefer this consideration to take place under the auspices of the WTO:

    "The priority for the WTO should be to set up a formal, permanent working group … that would be part of the WTO's follow-up to the Singapore declaration commitment on labour standards and would therefore report back to the WTO General Council with proposed recommendations concerning WTO procedures, mechanisms and regulations".

Such a group should allow for the participation of the ILO, which should be given formal consultative status at the WTO. Its work programme should include the possibility of using positive incentives rather than sanctions[194], "the consideration of measures to be taken where trade liberalisation was associated with violations of core labour standards", and a review of the mechanisms of the WTO to ensure a consistent approach). McCrudden et al also support the idea of a Committee within the WTO (analogous to the present Committee on Trade and Environment), for which they suggest that the EU should argue (p 261).

240. However, there might well be opposition from developing countries to the WTO's taking the lead in discussion of core labour standards, for fear that the discussion would be then motivated by protectionism rather than by a genuine concern about workers' rights. The World Development Movement argues that

    "given the record of the industrialised countries in twisting the WTO rules to their advantage (including through the agreements on textiles and clothing, agriculture, subsidies and anti-dumping) … [the concerns of developing countries] are fully justified … It is unlikely that labour standards in the WTO would result in protection of the rights of workers or improvements in working conditions" (p 63).

Mr Coates said that

    "the submissions from developing countries to the WTO secretariat were over-whelmingly, if not quite unanimously, against the introduction of labour standards in the WTO … The position of most developing countries is not that they are against labour standards, but they are against labour standards being enforced through the WTO" (Q 101).

CAFOD agrees that "the WTO, as currently constituted, does not deserve to be placed in charge of monitoring labour standards", suggesting instead that the ILO should be made more effective, and that developing countries should be offered incentives rather than having sanctions imposed on them[195] (p 229).

241. The TUC argues that the opposition of developing countries in Seattle to including discussion of core labour rights on the agenda for the Round was not as strong as some had claimed. Mr Jordan, who was present in Seattle, said that

    "there was unanimous belief that the question of labour standards had to be addressed … It seems to me that progress was being made … There were countries involved in signing up to a form of words that was going to take this issue another step forward—countries that publicly prior to Seattle had been most uncomplimentary about the need for such a link—but they were acknowledging privately in the Green Room that something had to be done … The trade union movement wanted only the setting up of a working party. Remember, this was not a demand for the implementation of a specific clause with specific sanctions. We are very, very far from that process" (Q 31).

However, Mr Donald Anderson, Chairman of the CBI's Trade Policy Working Group, who was also present at Seattle, disagreed with the suggestion that agreement had been near:

    "The impression we had in Seattle was that the members of civil society were much keener on including labour standards than the governments of the countries concerned … The impression we had was that at government level virtually every developing country was against the inclusion of labour standards in the WTO".

And since the WTO was an organisation of governments, it was their views which mattered (QQ 56-57).

242. For DTI, Mr Hutton maintained that developing countries had made it clear that they would be unwilling to see discussion exclusively in the WTO, or to form a WTO working party. They were thus not willing to accept the EU proposition of a joint ILO/WTO forum with the participation of other relevant international institutions, but wanted to see other institutions in such a group on the same terms as the WTO and the ILO. It had been suggested that UNCTAD might be a better host for this kind of dialogue (Q 17).

243. Asked in February 2000 whether there had been progress since Seattle, Mr Carl said:

    "We have made progress on this but at the same time I have no doubt that there are still countries like India in particular, or Pakistan or Egypt, who are very, very suspicious of our motives and of the motives of other important members of the WTO".

Contrary to the view of Mr Ricupero[196], he claimed that these countries perceived the proposals as the beginning of a process which would introduce a wider range of minimum standards. This had to be seen in relation to "the atmosphere that was generated by the declarations of President Clinton in Seattle"[197], but "the Community's basic approach … to establish some kind of joint organ between the ILO and the WTO has found a lot of favour", with support for example from Brazil and Thailand (Q 120).

244. The question now is how to take matters forward. In his written statement to us, Mr Somavia says:

    "As I have said repeatedly, I am committed to taking whatever may eventually emerge from the WTO in relation to the ILO to our Governing Body for decision and action. I meet with Mike Moore on the normal development of our work and so do our staff. The WTO has observer status in the ILO and participates in our meetings" (p 138).

DTI tells us that it intends to maintain the line which it took in Seattle: that labour issues should be pursued through a joint Forum (p 4).

245. The US also maintains its view. In her evidence to the House of Representatives Committee on Ways and Means[198], Ambassador Charlene Barshefsky said:

    "We believe the WTO can contribute to the advance of internationally recognised core labour standards. Its current refusal to discuss the links between trade and labour cannot be justified. It can also co-operate more actively with the International Labour Office on a number of issues … [In Seattle] we received at times intense criticism for pressing to open a discussion of trade and labour. If we are to move forward, I believe we must address more effectively the reasons many developing countries are suspicious of these discussions. Few want to specialise in low-wage industries; almost all would prefer highly skilled, healthy and prosperous work-forces. But most also fear discrimination against their products that would block development and perpetuate poverty. Clearly, our proposals in this area have no such intention and would have no such effect" (p 206).

246. The TUC supports the suggestion in the EU negotiating position that the EU should itself convene the high-level meeting on trade, globalisation and labour issues which it had hoped for as part of the Seattle conclusions, involving governments, trades unions, employers and NGO representatives, "with very close involvement of both the WTO and the ILO" (Q 29). Mr Bickerstaffe believed that such an initiative could bring all the developing countries on board:

    "The developing world has taken a position that they have publicly resisted the question of this going to the WTO because they fear protectionism. It is also that they believe that any restraints deter inward investors … The British Government should … build on the positive stance it took at Seattle, give a lead in the EU on having a text that bridges the gap between the developing world's fears and the developed world's need to have globalisation go forward … [The WTO] can run into the buffers unless people of the world feel that its leaders are addressing this problem. If you say nothing else from this hearing you will have made a major contribution to the need for this issue to be dealt with" (Q 41).

247. We note that the definition of core labour standards has been agreed by the member countries of the ILO. These standards are defined by the "relevant ILO Conventions, including those on the prohibition of forced and child labour, the freedom of association, the right to bargain collectively, and the principle of non-discrimination". They do not include such matters as a global minimum wage or other elements of a benefits package, since the ILO recognises that the terms and conditions of employment can and should vary. We also note that the ILO works by promoting respect of its Conventions, not by applying sanctions. It is therefore understandable that some should wish to call the powerful sanctions mechanism of the WTO to the aid of the laudable objective of ensuring that core labour standards are respected. It is also understandable that developing countries may have fears as to how this mechanism might be used, fuelled by the utterances and protectionist behaviour of some developed countries. We agree that an early ministerial-level meeting should be convened to consider these issues.

The dispute settlement procedure

EU negotiating position

"Decisions could also usefully be taken on improvements to the Dispute Settlement Understanding" (paragraph 12).

248. According to Mr Philip Lee, the lawyer who represented the Eastern Caribbean States in the now notorious Bananas dispute:

    "The single greatest achievement of the Uruguay Round was the agreement on the Dispute Settlement Understanding. This provided, for the first time in the history of international trade negotiations, for the strict application of the rule of law with the obligation to remedy breaches or to allow the complainant to impose sanctions where the breaches had not been remedied" (p 87).

We were struck that he should continue to applaud that achievement despite all the difficulties which his clients encountered in the course of the case. Yet he also saw

    "growing concern that the WTO favours free trade at any cost, that commercial interests take priority over development and the environment, and that small countries are powerless in the WTO" (p 87).

The Caribbean Banana Exporters Association[199] (p 80) illustrates this from the Bananas case, saying that Caribbean banana producers

    "cannot compete with the vast plantations in Central America, controlled by major US trading corporations, which enjoy great economies of scale. The Caribbean therefore depended entirely on special provisions made by the EU, which implemented guarantees to traditional ACP suppliers under the Lomé Convention".

The dispute settlement procedure had concluded that the EU support given was consistent with the aims of the WTO, but that the mechanisms used did not conform to WTO rules. According to the CBEA, the detailed rulings "made it virtually impossible [for the EU] to operate any adequate support system for the ACP".

249. The new WTO dispute settlement procedure works as follows[200]. Countries are initially encouraged to reach a settlement through conciliation. Mr Kingery, a Counsellor in the WTO Legal Affairs Division, explained that although the formal conciliation procedure had not yet been used, a lot of negotiation went on (outside the system, but with the pressure of knowing that the system was there) before a formal dispute was reached. This was fortunate:

    "The system would break if all disputes got to us … The goal of the system is not to litigate. The goal of the system is to settle disputes. The more that can be settled outside the system the better" (QQ 369 and 373).

If a dispute goes ahead, it is heard by an independent panel of experts, from which there is an appeal to the Appellate Body. If the parties still fail to settle, the WTO can authorise retaliation in the form of trade sanctions equivalent in value to the impairment of trade which the complainant has suffered. Mr Kingery explained that implementation of decisions was supposed to be immediate, but in practice rarely was. Speed was important: "no damages are available, so justice delayed is justice foregone" (QQ 356-357).

250. The Government believes that the dispute settlement procedure generally works well, though it is seeking some changes (p 4); this is also the EU negotiating position. The CBI agrees that there is scope for "clarification and improvement" of the procedures (p 35). Mr Ricupero confirmed that although some developing countries were concerned about the dispute settlement procedure, others welcomed it: Costa Rica had "made a very impassioned intervention" in its favour at UNCTAD X (Q 519). With the help of detailed evidence on the Bananas dispute (and bearing in mind the injunction from Mr MacVay[201] that one should be careful not to upset the legitimacy of a system which is "very effective and very new" (p 262)), we considered what improvements the EU should support.

251. The crucial new element in the WTO procedure (as compared with the arrangements under the GATT) is that if the dispute settlement body finds in favour of sanctions the finding can be set aside only by the consensus of all member countries, including the complainant, whereas previously a proposed penalty could be imposed only by the consensus of all member countries, including the one to be penalised. It is in this sense that the WTO has created a "court of justice", a mechanism which, as Dr Holmes and Professor Rollo say, is "extremely powerful and to a degree unaccountable" (p 92). The Caribbean Banana Exporters Association suggests that

    "for this reason equity and natural justice demand that [the] deliberations and conclusions [of the dispute settlement procedure] be tempered by logic and common sense, rather than the rigid application of the rules. It is not easy, however, to see how to legislate for this" (p 81).

One suggestion was that decisions to set aside Appellate Body findings might be taken by some form of qualified majority, rather than by consensus. Mr Lee said that he would have doubts about that, since it might endanger the benefits gained by smaller countries from the rules-based system (Q 162). Mr Giles Chichester MEP rejects the suggestion, on the basis that it would alienate developing countries, present problems over how to weight the vote of the EU, and probably not result in any significant improvement: "it is the disputes that are the problem, not the settlement procedures" (p 232).

252. One requirement of a judicial mechanism must be transparency. Mr Lee says that hearings should be held in public:

    "Dispute settlement hearings are complicated legal trials, the outcome of which can have enormous impact for citizens of [member countries] of the WTO. It is a fundamental principle of most legal systems that legal tribunals are open to the scrutiny of the press. There is no reason … that the same should not apply here. The cases may, on occasion, be technical and of no great interest to the press, but their right to attend should be provided for. NGOs in particular are highly suspicious of the secrecy of the [procedure]" (p 88).

253. Consideration should also be given to the rights of parties and potential parties to a dispute. In the Bananas case the US (which does not export bananas) played a central role, while the Windward Islands (which depend for their livelihood on banana exports) were relegated to third party status[202]. The Caribbean Banana Exporters Association suggests that the role and participation of countries needs to be related to the extent of their trading interests (p 81). Mr Lee accepted that the US did have an interest in that part of the case which related to GATS, since US companies distribute bananas[203], but this seemed almost coincidental:

    "It was quite clear this was a superpowers dispute between the US and the EU and really we were not actually wanted in that dispute".

It seemed to him extraordinary that the Appellate Body gave definitive interpretations of the Lomé Convention, without one of the parties to that Convention[204] being represented, and "in total disagreement with the parties who signed that agreement and had applied it" (QQ 150-151). He suggests that this problem could be solved by giving rights to third countries which are directly and substantially affected by the outcome of hearings (especially if they are parties to the international agreement being interpreted) (p 88).

254. Our witnesses had some concerns about the composition and conduct of the first level panels[205]. The WTO explains that the panellists are "usually chosen in consultation with the countries in dispute. Only if the countries involved cannot agree does the WTO Director General appoint them. This only happens rarely"[206]. His Excellency Edwin Laurent, Ambassador to the EU for the Eastern Caribbean States, said that because they were treated as a third party the Caribbean States had no influence over the choice of panellists in the Bananas case (Q 153).

255. More generally, the Caribbean Banana Exporters Association comments that

    "panellists have hitherto come predominantly from developed countries, even when the issue relates to the development of poor countries … Such composition certainly sends the wrong signal and fails to assure developing countries that issues of concern to them will be judged by a panel having real experience and appreciation of the issues involved" (p 81).

Mr Gordon Myers (the European representative of the Caribbean Banana Exporters Association) suggested that in a case involving a member country depending on a single product the panel should include people with understanding of that situation (Q 153). As Ambassador Laurent pointed out, most WTO members are developing countries, but most panel members are not (Q 156). It might help if independent specialised witnesses were allowed; perhaps specialised UN agencies might be involved in disputes involving human rights, environment, development, health and other concerns (RSPB: p 279 and Oxfam: p 273).

256. Mr Lee proposes that "properly trained or experienced trade specialists, lawyers or economists must be recruited to work on a semi-professional basis as panellists" (p 88), and the Food and Drink Federation suggests that the use of professional arbitrators might be considered (p 251). Holmes and Rollo agree that there is a need to increase the professionalism of the panellists (p 92); Dr Holmes thought that establishing a permanent roster of panellists would help (QQ 178-179), but Mr Kingery said that member countries had shown no interest in the proposal when it had been put forward as part of a review of the dispute settlement procedure in 1998 (Q 358).

257. Bringing in specialised witnesses and establishing a permanent roster of panellists would both increase costs, but Mr Kingery did not see this as the major problem. Although overall the WTO was suffering from a shortage of resources, priority was given to the dispute settlement procedure:

    "We have never felt that our work was being hampered by a lack of resources. If however the workload increases dramatically then the members are going to have to make some decisions … If the members wish as a policy matter to set up something like a standing panel body, the budgetary implications are not that large … At this point the system is stretched but not broken" (Q 362).

However, Mr Stoler, one of the Deputy Directors General of the WTO, explained that the funds to top up the financing of the dispute settlement procedure had come from elsewhere within the Secretariat (for example, resources had been switched from official travel on missions in order to pay for bringing panellists to Geneva) (Q 490).

258. The role of the Secretariat in the dispute settlement procedure was also questioned. Mr Lee said that because "the panels are non-professional, often non-jurists, [and] do not have the time to give to a particular complicated dispute, [they] rely to a large extent on the legal secretariat of the WTO to write their reports. It is a bit like having the prosecutor write the judgment for the judge". He considered that there should be a clear separation of powers between the legal and executive functions of the WTO (Q 163). Dr Holmes agreed that the panels were heavily dependent on the legal expertise of the WTO Secretariat (QQ 178-179). Mr Kingery saw no problem with this, saying that it was part of the function of the Secretariat to provide research assistance. He agreed that sometimes the Secretariat drafted the texts of decisions (because the panellists did not have time), but underlined the fact that "at all times the substantive decision is made by the panellists themselves" (QQ 359-360).

259. Even though it seems that developing countries are making as much use of the dispute settlement procedure as might be expected[207], it is clear that they need more legal support to ensure a level playing field. That is the purpose of the Advisory Centre on World Trade Law, which is being established by a number of WTO member countries to provide training and specialised expertise to developing countries and economies in transition in WTO law. The proposal document says that the Centre "will contribute to prevent marginalisation of [these countries] and will support the rule of law and the credibility of the WTO"[208]. Mr Junior Lodge (Executive Director of the Jamaican Marketing Organisation in the UK) said that enormous resources were needed in a developing country to take a developed country to task in the WTO:

    "That is why we welcome the establishment of an international law advisory centre which can facilitate and help developing countries such as ourselves to mount a successful challenge in the WTO" (Q 158).

Mr Lee joins in the welcome for this centre, hoping that it will advise more generally within developing countries, not merely during disputes, and he suggests that it might attract private finance too (p 89). Mr Kingery said that the WTO Secretariat fully supported the establishment of an advisory centre, which would be particularly welcome as protecting the neutrality of the Secretariat (Q 372). Clare Short was proud that the UK had been one of the founder members of the Centre, although there had initially been "enormous resistance to having that advisory centre, enormous resistance to any EU Member States backing it" (Q 557).

260. Mr Lee also considers that all member countries should be allowed representation by lawyers of their choice[209]. Even the EU has said that it has insufficient legal resources to cope with WTO cases, so he cannot see how developing countries can be expected to manage. There should also be a legal aid fund for developing countries, which the UK could take the lead in establishing (pp 88-89). Mr Ricupero suggested a need for "avocats sans frontières" (Q 521).

261. The dispute settlement procedure might be more generally acceptable if its decisions could be enforced in some way other than through sanctions. As CAFOD points out, these put developing countries at a disadvantage because they have a narrower range of trade (p 228). It has been suggested that the remedy could instead be in terms of compensation by the loser being compelled to provide increased access to its markets (Sally and Woolcock: p 283 and Holmes and Rollo: p 92). The problem with this, as Dr Holmes recognised, is that putting the incentive into effect would depend on action by the losing party, rather than the winning party as under the present system (Q 182)[210].

262. There is a recent example of the difficulty a small country may face in applying sanctions. Following the decision in its favour in the Bananas case, the Ecuadorian Government successfully argued that it could not apply the full amount of sanctions without cutting off essential imports and investment and damaging its own economy. It was given "cross-retaliation" rights involving intellectual property, but has said that it would prefer a compensation package under which the EU would buy more of its bananas and provide new economic aid and debt relief[211].

263. At various points during our inquiry, witnesses suggested that too much was being loaded on to the dispute settlement procedure. Sally and Woolcock emphasise that it should not be used to solve political differences[212]: "nothing could be better designed to undermine the legitimacy of the WTO" (p 283). Dr Holmes said that the Appellate Body "is facing challenges which go well beyond what is reasonable for a body of that sort to handle". Things have been left for the dispute settlement mechanism to decide which should have been settled by negotiators:

    "Sometimes the agreements themselves are ambiguous because they were diplomatic language negotiated with fudges at the last moment. Sometimes the members of the WTO thought they had negotiated something only to discover that the Appellate Body, taking a very strict reading of the words, finds that the agreement does not mean what a lot of people thought it meant" (Q 166).

Mr Vigano of the WTO referred to the possibility that agreements might contain "constructive ambiguities", when the negotiators had not wanted to be more clear (Q 403).

264. Dr Holmes explained that, unlike the European Court of Justice, the WTO panels and the Appellate Body cannot find help by referring back to the original philosophy, because the principle enshrined in that philosophy was free trade; the WTO agreements which are being tested are about the circumstances in which member countries are allowed to depart from that principle (QQ 169-172). Moreover, the decisions of the system (as Mr Kingery explained) are not seen as providing interpretations of agreements which then create precedents, but as applying the law in specific cases (Q 357).

265. The WTO's dispute settlement procedure is a crucial element in the rules-based system. It is still novel, but to date it seems to have worked quite well. We were however surprised at a number of features which emerged in the evidence presented to us on the Bananas case. Even if the difficulties reported are teething troubles, it is important that they should be sorted out as soon as possible, both for the sake of parties to disputes and because the outcomes of dispute settlement cases form one of the most public faces of the WTO. In particular, we think that hearings should be held in public, and that consideration should be given to improving the position of third parties, to establishing a permanent and more representative roster of first-level panellists, and to allowing evidence from specialist witnesses. Some of these changes may require revisions to rules already agreed in the WTO, but we urge the Government to press the EU to make constructive proposals on them as a matter of urgency. As to the provision of help to developing countries in making use of the procedure, we congratulate the Government on its material support for the Advisory Centre on WTO Law, which we see as an important contribution, and we suggest that it might also take a lead in establishing a legal aid fund. Finally, we urge that the dispute settlement procedure should not be used to resolve issues which should properly be the subject of decisions in negotiations between WTO member countries.

121   Including among others the following services: accountancy, audio-visual, construction and engineering, courier, distribution and marketing, education, electricity, environment, financial, gas, health, legal, postal, shipping, telecommunications, and tourism. Back

122   Mr Byers said that he did not think that the WTO was the organisation best placed to deal with air transport (Q 552). Back

123   Covering trade in goods. Back

124   For more detail, see Appendix 4. Back

125   The three specific areas where there is a requirement to continue negotiations are emergency safeguards (the issue of whether a WTO member country should be able to take action to support domestic firms in the face of an unforeseeable influx of foreign services); government procurement; and subsidies to service industries. Back

126   "The principal trade association within the UK financial sector, representing over 300 banks from more than 60 countries which operate in this country". Back

127   Dr Holmes and Professor Rollo suggest that as traditional barriers fall domestic régimes are increasingly being used as protectionist devices (p 92). Back

128   A list of its members is at p 130. Back

129   Where there is already an initial agreement.  Back

130   One of the ways of providing a service included in the GATS: see paragraph 162. Back

131   Op cit, pp 7-9.  Back

132   In force since 1981, and last modified in 1995; one of the two plurilateral agreements still in force (the other covers trade in civil aircraft.) Back

133   Including the Food and Drink Federation (p 251), Dr Holmes and Professor Rollo (p 92), and Mr Michael Johnson (pp 254-255). Back

134   WTO, op cit, p 50. Back

135   Dr Mahathir Mohamad, Prime Minister of Malaysia, was reported by the World Development Movement as saying: "Developing countries must reject this proposal. Otherwise they will be colonised by the Western world. That is what the developed countries intend" (House of Commons Library Research Paper 98/31, 4 March 1998). Back

136   The French Prime Minister attributed the withdrawal to the desire to limit attacks on sovereignty by private interests, but various other motives have been suggested, including "placating left-wing allies in his government, defending the French film industry whose protection would have had an uncertain future under the MAI, and allowing negotiations to move to the WTO where the political costs would be borne more by Europe-wide institutions rather than the French government" (Julian Blake, Power, money and the people: the challenge to democracy from the new alliance between States and transnational corporations, unpublished thesis, Monash University, November 1999, p 30). Back

137   Ibid, p 32. Back

138   Speech to Confederation of Indian Industries, 6 March 2000. Back

139   According to British Invisibles, there are some 1600 bilateral agreements already in place (p 117). Back

140   That is, applying the same rules to foreign investors (once established) as to domestic investors. Back

141   In principle, such an agreement could also include a requirement to comply with other international treaties (for example on core labour standards and environmental protection), but there was a risk that requiring these conditions might be divisive (proposed by developed countries and opposed by developing countries). Back

142   See paragraph 272. Back

143   Wang and Winters argue that "what developing countries do not need is an obligation to create complex competition authorities: they will typically have the resources neither to create nor to run them" (op cit, p 18). Back

144   Speech to Confederation of Indian Industries, 6 March 2000. Back

145   HL Deb, 19 April 2000, col 787. Back

146   Who submitted evidence through the World Trade Law Association. Back

147   Together with the GATT and the GATS. Back

148   Mainly, we understand, at the prompting of US pharmaceutical companies. Back

149   There have so far been 21 complaints about 17 separate issues (Q 438).  Back

150   15 January 2000: the advertisement was financed by Pfizer ("a research based, global pharmaceutical company"). Back

151   15 January 2000.  Back

152   Maskus, Regulatory standards in the WTO: comparing intellectual property rights with competition policy, environmental protection and core labour standards", unpublished Institute for International Economics working paper, January 2000. Back

153   There are also high implementation costs; Wang and Winter suggest that "an extra dollar in most poor countries might be more productively spent on health care or education than on implementing intellectual property rules" (op cit, p 15). Back

154   Guardian, 27 November 1999. Back

155   The international union for the protection of new varieties of plants, linked with WIPO. Back

156   Who submitted evidence through the World Trade Law Association. Back

157   European Voice, 9 March 2000.  Back

158   According to the WHO, less than 10 per cent of the world's medical research finance is directed at the health problems which afflict 90 per cent of the world's population (Guardian, 24 May 2000). Back

159   Sustainable Development: the UK strategy, Cm 2426, January 1994; quoted by English Nature (p 237). Back

160   Speech to Confederation of Indian Industries, 6 March 2000.  Back

161   Our Common Future, report of the 1987 World Commission on Environment and Development, chaired by Gro Harlem Brundtland (Oxford University Press, 1987). Back

162   EC treaty, Article 6: "Environmental protection requirements must be integrated into the definition and implementation of the Community policies and activities referred to in Article 3, in particular with a view to protecting sustainable development". Back

163   See paragraph 67. Back

164   The RSPB extends this criticism to cover also the EU's stance on forests and on intellectual property rights (p 278). Back

165   Financial Times, 28 March 2000, reporting speech by Mr Michael Meacher at the Royal Institute of International Affairs. Back

166   Being carried out by Colin Kirkpatrick and Norman Lee of the Institute for Development Policy and Management and Environmental Impact Assessment Centre, University of Manchester.  Back

167   Trade provisions in an MEA could also be challenged by a WTO member country which was not party to that MEA; this would present a different problem. Back

168   For example, the "public good" subsidies envisaged in the Biodiversity Convention could be seen as conflicting with trade liberalisation objectives.  Back

169   Giving the benefit of the doubt to MEAs. Back

170   See pp 99-103, explored further in Mr Brack's oral evidence (QQ 187-204). Back

171   Mr Brack says that more than 20 of the 200 MEAs currently in operation incorporate trade measures in the form of restraints on trade in particular substances or products, between parties to the MEA (to control trade itself, where this is perceived to be the cause of environmental damage) and/or between parties and non-parties (to encourage others to join the MEA, and to prevent "leakage"). He quoted two particular examples: the 1973 Convention on International Trade in Endangered Species (CITES), which requires licences before trade can proceed and bans signatories from trading with countries which do not comply with CITES, and the 1987 Montreal Protocol on trade in ozone depleting substances, signatories of which are required not to trade in defined products and substances among themselves, or with countries which are not signatories (Q 187). Back

172   Dr Holmes and Professor Rollo suggest that such a body might be "yet another supranational Frankenstein's monster" (p 92). Back

173   See paragraph 58. Back

174   Convention based on the work of the International Law Commission and two sessions of the United Nations Conference on the Law of Treaties held in 1968 and 1969, which entered into force in January 1980. Back

175   See paragraph 59. Back

176   See 6055/00, Commission Communication: The Precautionary Principle, February 2000, p 7. We have already given some consideration to this Communication in our recent Report on A European Food Authority, HL Paper 66, 7th Report Session 1999-2000, May 2000 (paragraphs 82-88 and 93). Back

177   HL Deb, 19 April 2000, cols 787-788. Back

178   Op citBack

179   The joint FAO/WHO body named in the SPS agreement as having responsibility for food standards. Back

180   See the submission to this inquiry from Dr Robert , Principal Scientist (Plant Quarantine and Regulatory Affairs), Natural Resources Institute, University of Greenwich, who submitted evidence through the World Trade Law Association (p 224). The topic is also addressed in our Report on A European Food Authority, op cit (paragraphs 79-81 and 89). Back

181   The US was recently reported to be challenging the EU's claim that the precautionary principle was enshrined in international agreements (Financial Times, 31 March 2000). Back

182   EC regulation of genetic modification in agriculture, HL Paper 11, 2nd Report Session 1998-99, December 1998. Back

183   According to CAFOD, the Biosafety Protocol leaves grey areas where governments may be able to challenge the scientific basis of GMO regulation through the WTO disputes procedure (pp 227-228). Back

184   See paragraph 43. Back

185   As well as pursuing "a parallel track of building up support for wider international acceptance of higher farm welfare standards outside the WTO". Back

186   Op cit , paragraphs 187-192. Back

187   Official Report, 30 November 1999, col 154W. Back

188   According to Ms Westin (p 196), this was a rejection of "attempts led by the US to establish a [WTO] working group on trade and labour". Mr Viganó at the WTO told us that the US had been proposing such a working group since 1984 (Q 395). Back

189   Although recently in relation to forced labour in Burma the ILO governing body has decided to activate Article 33 of the ILO Constitution, which is the first step towards a multilateral decision to authorise action (Q 316). Wang and Winters suggest that "the ILO's traditional mechanism of naming and shaming transgressors has increased greatly in effectiveness with the advent of the internet and the increased influence and ability of the NGOs" (op cit, p 17). Back

190   Or "core labour rights": we have used the terms interchangeably, though we note that McCrudden et al distinguish between labour "rights" and labour "standards", saying that the latter might include matters such as minimum wage, maximum hours, paid holidays and so on (p 259). Back

191   Now Lord Jordan. Back

192   Steve Hughes and Rorden Wilkinson, "International labour standards and world trade: no role for the World Trade Organisation?", New Political Economy, Volume 3, No 3, 1998, pp 375-389. Back

193   HL Deb, 19 April 2000, col 788. Back

194   See also paragraph 261. Back

195   A view for which it claims support from the Department for International Development. Back

196   See paragraph 235. Back

197   See paragraph 90. Back

198   Statement before the House of Representatives Sub-Committee on Trade of the Committee on Ways and Means on 8 February 2000, provided to us by DTI with Mr Hutton's letter of 6 March 2000, and reproduced in full at pp 201-207. Back

199   Which "represents the banana growers of the seven Caribbean States that have traditionally exported bananas to the EU, namely the four Windward Islands (St Lucia, Dominica, St Vincent and the Grenadines, and Grenada), Jamaica, Belize and Surinam". Back

200   For a fuller account, see WTO, op cit, pp 38-42.  Back

201   Senior WTO Counsel, Rowe and Maw, who submitted evidence through the World Trade Law Association. Back

202   Which meant, for example, that they were not invited to organisational meetings, and were not able to appeal when members of their delegation were rejected (Q 153). Back

203   Mr Kingery said that the US also had legal standing in the part of the dispute which fell under the GATT, since there was no requirement to show actual trade damage in order to bring a case (Q 363). Back

204   The ACP countries. Back

205   We did not receive similar general criticisms of the Appellate Body. Mr Lee said that it was "a quasi-professional body made up generally of eminent judges and, although we would have criticisms in relation to Bananas, in general they give good decisions" (Q 163). Back

206   WTO, op cit, p 39. Back

207   A recent study, having noted that the procedure had so far been used mainly by larger trading nations, examined whether this suggested that smaller and poorer ones were finding it harder to bring cases. In fact, it found that the number of cases brought correlated with the value and diversity of the exports of the countries bringing cases, as one would expect (Horn, Mavroidis and Nordström, Is the use of the WTO dispute settlement system biased? CEPR Discussion Paper no 2340, December 1999, reported in European Economic Perspectives No 25, March 2000). Back

208   An Advisory Centre on WTO law, April 1999, p 24 Back

209   Whether or not employed by government: a point of dispute in the Bananas case. Back

210   This "incentive approach" would resemble the proposal by the EU to offer additional preferences (under the Generalised System of Preferences: GSP) to imports from countries which apply the international standards on labour rights agreed in the ILO, and the standards on the use of tropical timber drawn up by the International Tropical Timber Organisation (ITTO): document no 11923/97.  Back

211   Financial Times, 19 May 2000. Back

212   For example, a crucial issue in the Shrimp-turtle case was the right of the US to apply its national environment regulations extra-territorially; they argue that issues like this require political consideration in the Committee on Trade and the Environment, rather than being taken to the dispute settlement procedure. Back

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