Building a Development-friendly World Trading System

1 August 2007

Although they are weaker partners in international trade than the major industrial powers, developing countries have an important stake in the multilateral rules-based trading system. The challenge before them is to make it serve their needs better.

The process of rule-making in the WTO has been dominated by a handful of industrialised nations that have conventionally set the agenda of multilateral trade negotiations in a manner that not only disregards developing counties’ genuine concerns, but also actively impairs their ability to implement development policy. Although the Doha Round was launched with the promise of placing the concerns of poor countries at the heart of the process, development is barely visible in the ongoing negotiations or the modalities under discussion. Instead, developing countries are being pushed to accept commitments to provide market access in agriculture and non-agricultural products on a more than full reciprocity basis. There has been little – if any – progress on issues such as making special and differential treatment for developing countries more ‘precise, operational and effective’.

Following are some specific proposals for how to build a more sustainable and developmentfriendly world trading system. The current impasse in the Doha Round talks should be seen as an opportunity for developing countries to work on building consensus within their ranks, so that agreed-upon development issues can be effectively brought to the table at the appropriate occasion.

Systemic Reforms Necessary

In order to arrive at ‘consensus’, powerful WTO Members sometimes push poorer states to accept the developed-country position by resorting to aggressive, or even coercive, tactics. To put an end to such bullying, the WTO should adopt a more democratic and participatory system of decision-making based on secret voting and decision by majority. Moreover, draft ministerial texts should contain proposals made by all Members, not simply those of developed countries, and all negotiating texts and drafts should be introduced in open-ended meetings. To compensate for the fact that developing countries usually have smaller negotiating teams than their developed-country counterparts, late-night meetings and marathon sessions should be avoided whenever possible.

Strengthening Special and Differential Treatment

The objective of special and differential treatment (SDT) provisions should be to retrieve the development policy space squeezed by different WTO agreements. SDT will need to be part of a broader approach that recognises the fundamental interests of developing countries in the trading system to seek fair trade, capacity-building, balanced rules and good governance in WTO. Aid and technical assistance for developing countries should be provided without any conditions and should not be a substitute for SDT.

One of the ways of compensating developing countries for the adverse effects of the strength- ened IPR regime is to provide increased technical assistance and international research and development funding to developing country enterprises to help them build local capabilities out of TRIPs dividends. A development-friendly outcome of the Doha Round could also provide flexibility from the TRIPS and TRIMS obligations for transfer of technology to developing countries.

Policy Lessons for Negotiations in Specific Areas

Agreement on Agriculture: A development friendly outcome of the Doha Round in agriculture would establish ad valorem tariffs as the main instrument of protection for agricultural goods, within an agreedupon timeframe, as well as a reduction in these tariffs so as to bring trade in agriculture in line with trade in industrial goods. This general goal should be adhered to subject to the food security, livelihood security and developmental role and large size of the agricultural economy in several developing countries with special consideration for the needs of least-developed countries (LDCs) and of small farmers. The reductions on domestic support should apply to existing levels of support rather than the levels bound at the WTO to achieve meaningful reductions and disciplines. There should be product-specific ceilings based on an agreed upon criterion such as percent or output but not the historical levels. Green Box payments, such as direct income support, insurance against income loss and investment should be permissible only for individual farmers earning an income below a specified level. Such support should exclude wealthy farmers and corporations.

Large cuts in bound rates are required to bring about any improvement in market access given the binding overhang in agricultural tariffs. Tariff peaks applicable to agricultural products should be subjected to caps of no more than twice the average tariff. Sensitive products should be restricted to no more than 1 percent in case of developed countries. In view of the development and poverty implications of agriculture in a large number of developing countries, developing countries should be able to designate an appropriate number of products as Special Products exempted from reduction commitments. An effective Special Safeguard Mechanism (SSM) applicable to all products should be established for use by developing countries.

Furthermore, developing countries should be free to use trade defence measures such as countervailing duties against dumped subsidised agricultural products. The WTO Agreement on Sanitary and Phytosanitary Measures should be reviewed with a view to obtaining universal application of international food safety standards evolved by the Codex Commission (see box on page 5).

Non-agricultural Market Access: A development- friendly outcome of the round would address tariff peaks in developed countries while leaving considerable flexibility for developing countries to employ tariff policy to develop their industries to create jobs and fight poverty and hunger. Such an approach could involve leveling developed-country tariff peaks that apply to products of export interest to developing countries and LDCs. The tariff reduction modalities should ensure the principle of less-than-full-reciprocity in market access provided by developing countries.

The way forward is to determine the extent of reduction by developed and developing countries and work backward to get a formula. An alternative is to use the average tariff rates of the country as the coefficient for applying the formula. Developing countries should also have the flexibility to identify an appropriate number of their tariff lines as sensitive and exempt these from formula cuts. Sectoral approaches for tariff reduction may focus on products of export interest to developing countries, with developing countries reducing their own tariffs to a level they are comfortable with in accordance with the principle on less-than-full- reciprocity.

In view of growing evidence that the flexibilities available in the WTO agreements on sanitary and phyto-sanitary measures (SPS) and technical barriers to trade (TBT) are being exploited for protectionist ends, developing countries should seek a review of both treaties to obtain a universal application of international norms such as Codex standards. Countries could adopt higher standards only with a legally binding commitment to financially compensate the affected developing countries.

Trade in Services: A development-oriented outcome of the Doha Round in the trade in services should focus on curbing the protectionist tendencies on Mode 1, as observed on outsourcing in a number of developed countries. Developed countries should also agree to make substantially improved offers under Mode 4 independent of inter-corporate movement of natural persons. They should also bring down limitations and other barriers to movement of natural persons to allow efficiency and welfare gains to be reaped. Besides, a significant liberalisation of movement of natural persons has the potential for increasing the development balance of the Doha Round.

Trade Facilitation: In the area of trade facilitation, there is an urgent need to check the tendency of some developed countries to expand the scope of current negotiations beyond the listed contents of the three Articles. Moreover, special and differential treatment provisions in trade facilitation need to extend beyond the granting of traditional transition periods for the implementation of commitments. In particular, the extent and the timing of entering into commitments should be related to the implementation capacities of developing and leastdeveloped Members. To enable the integration of experiences among neighbouring states, the Doha Round should encourage regional co-operation on trade facilitation – especially among developing countries – by involving regional organisations, such as ECOWAS, SAARC and ASEAN, as observers in the negotiations.

TRIPS and Biodiversity: In light of the ongoing resistance to key developing-country demands regarding both prior informed consent (PIC), as well as access and benefit-sharing (ABS), it is important for Member states to develop a strategic response that covers both international mechanisms and national policy initiatives. The spirit of the Convention on Biological Diversity may be incorporated in TRIPS and also in the bilateral trade agreements. In addition, developing countries should provide substantial evidence to support their proactive positions on issues related to PIC, ABS and indigenous knowledge systems. The Doha Round should work to restrict the granting of overly broad patents. It should also build a consensus to put a moratorium on further strengthening of IPR regimes for at least the next two decades in multilateral, regional, or bilateral contexts.

Dispute Settlement Understanding: The current structure of the WTO’s system of resolving disputes puts developing countries at a disadvantage. At present, the period between the start of a dispute and its final settlement can be as long as three years. This period is too long for complainant developing countries, as their capacity to absorb the adverse effects of measures taken against them is considerably low. This situation can be improved by making suitable amendments to the timeframe of the relevant provisions of Articles 4, 5, 6 and 12 of the DSU, especially with regard to complaints brought by a developing country against a developed country.

Developing countries that are dependent on a limited number of export products and markets may suffer heavy trade losses during the course of a dispute regarding a measure taken against them by a developed country. The damage is not limited to foregone exports; the market may be permanently lost to competitors and substitute products. To redress this situation, Article 22 (Compensation and the Suspension of Concessions) of the DSU should be extended to provide for compensation for the loss suffered by a complainant developing country during the pendency of a complaint against a developed country.

Finally, it is important to ensure that the costs associated with using the dispute settlement process do not act as barriers for gaining access to the process. At present, given their limited resources, hardly any developing country is in a position to take retaliatory action against a developed country, even if it is authorised to do so by the DSB. This seriously limits the implementation of the DSU rulings. The Doha Round should thus seek to ensure the provision of adequate legal assistance to both the complainant and the defendant developing countries by strengthening and expanding the coverage of Article 27.2 of the DSU.

Renewed Push for South-South Co-operation

Greater economic co-operation among developing countries can go a long way toward enhancing developing countries’ bargaining power in multilateral negotiations. Given that the process of decision-making in the multilateral trade negotiations is highly asymmetric, noninclusive and non-transparent, developing countries must find ways to band together in support of their mutual interests. In the Doha Round, developing countries have strengthened their participation in international trade talks through issue-based coalitions such as the G-20, and G-33 as well as the G-90. The success of these coalitions was evident in their ability to get three (investment, competition policy, and government procurement) of the four Singapore issues dropped off the negotiating agenda of the Doha Round.

More proactive South-South co-operation would be crucial in making the world trading system more responsive to the needs of the developing countries, especially the least-developed countries. As a first step towards greater co-operation, developing countries could set up a Consultative Group to establish a set of comprehensive proposals for ways that the decisionmaking process within the trading system might be made more equitable and transparent.

Developing countries have undertaken substantial commitments under different WTO agreements, yet they often lack the capacity and resources to implement those commitments. In addition, the proliferation of non-tariff barriers in the form of enhanced environmental and health-safety requirements in the developed countries are affecting a substantial proportion of developing country exports. The technical assistance promised under the SPS and TBT agreements has often proved to be both inadequate and ill-timed. Thus, developing countries should set up a trust fund for assisting Member countries in their compliance with WTO obligations. Such a fund could be augmented by contributions from developed countries and multilateral bodies in the interest of promoting a fair world trade system.

Promotion of South-South Trade and Investments

A broader and deeper approach to trade liberalisation within the South could further serve to promote the economic interests of developing countries. To achieve this, the ongoing third round of the Global System of Trade Preferences among developing countries (GSTP) negotiations could be transformed by adopting a negative list approach, whereby developing countries would offer concessions to other developing countries on an across-the-board basis, except for a small exclusion list of sensitive products. Also, since the agriculture sector in most developing countries sustains the livelihood of the bulk of the population, liberalisation of agricultural trade could be on a different track. The depth of concessions could be 50 percent of tariffs with eventual elimination subject to appropriate rules of origin. The least-developed countries could undertake tariff reduction of only 25 percent.

A successful outcome of the GSTP negotiations would depend not just on the extent of tariff concessions, but also on widespread participation of members of the G-77 and China. At present, of the 44 counties that have ratified the GSTP Agreement, only about 25 countries have been participating in the third round of negotiations, and just 13 countries have notified their products of export interest. The GSTP could also provide a framework for linking different regional trade agreements among developing countries and exchanging trade concessions to each on a reciprocal basis. In addition, the scope of the GSTP could be extended to cover trade in services, seeing as the service sector has emerged as the most dynamic sector in a number of Southern economies.

Nagesh Kumar is Director-General, Research and Information System for Developing Countries (RIS), New Delhi. This article is based on the RIS’ recent publication ‘World Trade and Development Report 2007: Building a Development-Friendly World Trading System’, (New Delhi: RIS and Oxford University Press). The usual disclaimer applies.

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