LDC Issues: Poor Countries Look for Progress in Bali

28 November 2013

Improving the trading prospects of developing countries was the Doha Round’s “raison d’être” when the negotiations began in 2001. Prior to the Round’s launch, the organisation had been subjected to harsh scrutiny by some critics who charged that its rules, in their current form, placed too much of a focus on rich country interests. The monumental task in updating such rules, however, has met repeated negotiating setbacks which the Round has yet to resolve. For a brief period at the WTO’s Eighth Ministerial Conference in Geneva, an “early harvest” for some LDC issues appeared possible, only for the process to be derailed weeks before the 2011 meeting. This year’s Bali process has aimed to bring some of these issues back to the fore, in hope of achieving deliverables for the organisation’s poorest members.

Advances since 2011

Despite the formal declaration that the Doha talks were at an impasse at 2011, ministers did adopt a waiver that would allow members to grant preferential treatment to services and service suppliers from least developed countries (LDCs). In the two years since, two of the other decisions that emerged from the 2011 conference - specifically involving LDC accessions and their implementation of intellectual property rules - have also seen advances at the global trade body.

WTO members at the 2011 ministerial had committed themselves to revising the accession guidelines for the world’s poorest countries, agreeing to strengthen, streamline, and operationalise a previous set that had been established in 2002. These revised guidelines were approved by the General Council in July 2012, just ahead of the mandated deadline. These revised guidelines establish a series of benchmarks, particularly with regards to goods market access, as well as elements on special and differential treatment (S&DT), transition periods, transparency, and technical assistance.

Ministers in Bali are now expected to formally sign off on the accession of Yemen - the seventh LDC to join the organisation’s ranks since 1995. Yemen will have until June of next year to ratify its accession package.

In June 2013, WTO members then agreed to extend until July 2021 the “transition period” for LDCs to implement WTO rules on intellectual property rights. The original transition period was set to expire this past July.

Priority issues

Last May, the LDC Group submitted a proposal outlining the priority issues that they wished members to consider for a potential Bali “early harvest” in December. Consultations since then have focused on developing draft texts regarding rules of origin, operationalising the services waiver, duty-free quota-free (DFQF) market access, and cotton.

These were originally designed as draft decisions for ministers to agree on in Bali, and currently contain no brackets. However, the impasse announced on 26 November by Director-General Roberto Azevêdo has - as with the rest of the Bali package - left the future of these texts an open question.

Rules of Origin

Rules of Origin (RoO) confer an economic nationality on products traded across borders, defining how much processing must take place locally before goods are considered to be the product of the exporting country. In the case of LDCs, preferential RoO are often considered too restrictive and inflexible, making it difficult for them to take advantage of the intended preference. Furthermore, these are currently designed on a unilateral basis, without any harmonised standard.

Several methodologies exist for establishing substantial transformation, which is designed to evaluate the extent of meaningful local production. Part of the complexity, analysts say, is that no single method stands out as being the most appropriate in conferring origin across all product categories.

Negotiators first attempted to address the issue in the context of the DFQF initiative introduced at the WTO’s First Ministerial Conference in Singapore in 1996. Little progress was made in the following decade, although the 2005 Hong Kong Ministerial Declaration does feature a brief reference calling for action to simplify preferential RoO processes, as well as making them more transparent. This text formed the basis for the more detailed proposals on RoO reform from the LDC Group.

In June 2006, the LDC group put forward a proposal aimed at promoting a focused debate on RoO and LDCs. However, this did not receive much traction from preference-giving countries. Emphasising that the responses to the 2006 submission “have not been encouraging,” the LDC Group highlighted in its May 2013 proposal various bilateral movements as an indication of the necessity for reform; examples include the EU’s decision in 2011 to recognise the specific needs of LDCs in RoO by differentiating them from other developing economies.

In an October 2013 submission, the LDC Group set out the technical aspects of preferential rules of origin and discussed different methodologies to determine when substantial or sufficient transformation has taken place. The draft decision also details provisions related to transparency and cumulation - the latter of which allows two or more parties to a preferential scheme to jointly fulfil the relevant local processing requirement.

Currently, this draft decision is in the form of non-binding guidelines, implying that developed country members are free to choose to adopt these guidelines or not. It states that “members should endeavour to develop or build on their individual RoO arrangements applicable to imports from LDCs in accordance with the following guidelines.”

Whether a product is eligible for any preferences offered under a trade agreement depends on the level of transformation. The submission therefore proposes that levels of substantive or sufficient transformation be determined using a percentage criterion based on the value of underlying materials.

Considering their limited productive capacity, LDCs wish to keep the threshold level of value addition as low as possible, and to allow foreign inputs up to 75 percent of product’s value in order to qualify for preferential treatment. However, they note that the choice of a single rule should not preclude preference for product-specific rules where these are in the interest of LDCs - for example, in the clothing sector.

Services waiver

Although the 2011 services waiver represented a significant step forward for LDCs, analysts have warned that the waiver will only confer economic benefits if it is operationalised in a commercially meaningful way. So far, no request to use the waiver has been made by LDCs, and no preferences have been granted by their trading partners.

The services waiver has its origin in the development provisions of the WTO’s General Agreement on Trade in Services (GATS), with Article IV calling on members to facilitate increased participation of developing countries in services trade through “negotiated specific commitments.” The text goes on to state that LDCs should be given “special priority,” instructing members to progressively agree on a set of LDC “negotiating guidelines” to pin-down the mechanics of granting this priority. The 2005 Hong Kong Ministerial Declaration affirmed the need to develop “appropriate mechanisms for according special priority,” and by 2008 it was decided that this mechanism would take the form of a waiver.

The 2011 decision provides a two-track approach. On the one hand, market access preferences of the type referred to in GATS Article XVI would be automatically covered by the waiver. On the other hand, non-market access measures are not automatic, but can be authorised by the WTO Council for Trade in Services (CTS). These can include, for example, regulatory preferences, preferential national treatment, and exemptions for quotas or taxes. Any preferences granted will apply immediately and unconditionally to all services and services providers from LDCs and will be annexed to the waiver.

In order to release the potential economic benefit of the waiver, the draft decision that was negotiated for the Bali ministerial would, if and when agreed, instruct the CTS to launch a process aimed at promoting ‘‘the expeditious and effective operationalisation” of the waiver, including a periodic review.

A high-level meeting of the committee would take place six months after LDCs submit a collective request to identify sectors and modes of supply of particular interest. Developed and developing countries ‘‘in a position to do so” would then be expected to indicate where they could provide preferential treatment to LDC services and services providers.

The LDC Group has also underlined the need for increased technical assistance and capacity building, such as through the Aid for Trade (AfT) initiative, in order to overcome their supply side constraints to services trade. The process of identifying preferences in services for LDCs has started, and efforts are underway to define the interests of the LDCs - sector by sector, export market by market.

Return of cotton

The controversial topic of cotton resurfaced just a few weeks prior to this year’s ministerial, after Benin, Burkina Faso, Chad, and Mali - a group of West African cotton producers collectively known as the C-4 - tabled a proposal on the subject in late October. Their proposal builds on nearly a decade of negotiations, dating back to the 2005 call by ministers in Hong Kong to address the subject “ambitiously, expeditiously and specifically.”

West African producers have long pushed for a change in the WTO’s rules on cotton, arguing that developed country subsidy schemes have kept global prices of the commodity artificially low, hurting their cotton-dependent economies.

The October proposal requested that cotton imports from LDC markets be granted DFQF market access from 1 January 2015 onwards, and called for the elimination of cotton export subsidies. The current draft text, however, no longer features to these specific requests.

Instead, it suggests that members hold bi-annual dedicated discussions, within the context of the broader Doha agriculture talks, that would focus on trade-related developments regarding export competition, domestic support, and tariff and non-tariff measures involving cotton trade.

Looking ahead, members are expected to continue on the work towards the previously agreed-upon 2005 objectives, using the 2008 revised draft agriculture modalities as a reference point.

Duty-Free Quota-Free access

The 1996 Singapore Ministerial saw the launch of discussions on an initiative aimed at providing duty-free quota-free market (DFQF) access for LDC goods. Five years later in Doha, ministers committed to providing products from LDCs with DFQF market access. In 2005, ministers in Hong Kong achieved a major break-through in this area, including an annex in their final declaration which stated that those members in a position to do so should implement DFQF market access for all products originating from LDCs.

The deadline was set for 2008, or for no later than the start of the implementation period. Members with difficulty meeting this requirement would have the option of providing DFQF access for 97 percent of LDC products, while working to progressively achieve full compliance.

However, the DFQF negotiations have seen little substantial progress since then, with the debate largely focusing instead on the potential gains that could be achieved under a 97 percent DFQF scheme as opposed to full coverage, as well as on related rules of origin.

Members have struggled with multiple hurdles in trying to achieve a concrete outcome in this area. It has even proven divisive within the LDC Group itself, given that some members fear the possibility of “preference erosion.”

The draft text being forwarded to ministers in Bali would, if agreed, further encourage developed countries to improve their existing DFQF coverage for LDC products in order to facilitate greater market access. Members would be instructed to notify DFQF for LDCs to the Transparency Mechanism for Preferential Trade Arrangements. The Committee on Trade and Development (CTD) would also conduct annual reviews on efforts taken to provide LDCs with DFQF market access, providing reports to the General Council for the appropriate action.

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