Special and Differential Treatment: A New Approach May Be Required

8 November 2017

Special and differential treatment provisions are an integral part of multilateral trade rules, but have not enabled the WTO’s poorest member countries to catch up with more developed countries and fully integrate into the global trade system. Could a new approach help developing countries, and especially LDCs, reap more benefits from international trade?

Special and differential treatment (S&D) has always been part of the WTO and its predecessor, the GATT. Its aim has been to help developing countries integrate fully into the multilateral trading system by providing certain advantages, tariff preferences, and derogations to foster their growth and ability to undertake appropriate rules and obligations. Such provisions continue to be important instruments of the multilateral trading system. However, time has come to adapt them to the new reality of both international trade and international politics.

Tariffs in developed countries have decreased dramatically over the last 30 years, which resulted in the erosion of preferences given to developing and least developed countries (LDCs). The result is that LDCs have or will have very soon virtually the same market access conditions for their key export products as their biggest, more developed and efficient competitors. The objective of allowing developing countries – and especially lower-income developing countries[1] – space to develop and strengthen their economic fabric continues to be valid. Protective tariffs for the local economy, however, is not the right means to achieve this goal. A major rethinking of how to realise this objective is required. This has to include a more pro-active approach to the negotiating process for lower-income developing countries, including LDCs, with a view to actively participating in defining development-friendly rules rather than requesting exemptions from rules.

Responding to a changing trade environment

Changes in the composition and destination of trade flows have transformed the negotiation environment. Emerging countries have replaced, or are in the process of replacing, the traditional destinations of exports from lower-income developing countries to the developed world. The rise of free trade agreements (FTAs), regional integration agreements, mega deals, and plurilaterals has also resulted in the increased isolation of LDCs and lower-income developing countries and the erosion of their preferences. At the same time, the political mood towards globalisation in some of the major trade powers has changed. As a result, the WTO is slowly losing its central global position in the world trade arena. It is in the interest of small developing countries and LDCs to help the WTO regain its pivotal role, as it remains the only forum where they can successfully defend their interests.

Development is, at least theoretically, the cornerstone of the Doha Development Agenda (DDA) negotiations. At the same time, a re-evaluation of the S&D concept has taken place both by developing and developed countries, albeit in different directions. Developing countries started to question the economic value of traditional S&D, considering that, given the evolution of the global economy, those benefits got more and more eroded. The thinking of developed countries evolved in the opposite direction. During more than 10 years of DDA negotiations, there has been a clear shift in the attitude of developed countries with regard to S&D. While all WTO members recognise the specific needs of LDCs for S&D – although their willingness to make economically meaningful concessions is less than evident –, they are not ready to grant S&D to emerging countries, which have become major trading powers over the last 10 years. There is no category in the WTO that permits discrimination between emerging economies and developing countries which have lower income and the creation of a new subcategory seems out of reach. There exists, therefore, a fundamental stumbling block in the DDA negotiations on the issue of S&D. New thinking is required to unlock the situation.

Traditional S&D provisions

It is undeniable that the usefulness of traditional S&D provisions has eroded due to the evolution of the global trading system and the way international trade is conducted today (i.e. towards trade in components, through global and regional value chains). The objectives of S&D are still essential and need to be preserved. However, the means to achieve those objectives have to be reassessed.

Preferential market access

Preferential access to markets for developing countries to assist them in integrating in the world economy remains an essential element of the global trading system. However, the value of the preferences may no longer be worth the efforts to fulfil the requirements to benefit from those preferences, such as on rules of origin. Other issues (such as domestic support in developed and emerging countries, standards, and antidumping and countervailing duties) have become more relevant for LDCs than tariff protection per se.

Duty free quota free (DFQF) market access has been provided for LDCs exports by the majority of developed economies, as well as by some major developing countries,[2] for a large number of products. However, excluded products often feature agricultural goods, textiles, or footwear, which are sectors where LDCs are competitive. For example, the US does not provide for the required 97 percent of DFQF coverage and, more importantly, does not cover certain products of important export interest to LDCs (textiles and apparel). Due to the high concentration of LDCs' exports on a small number of products, even a 97 percent DFQF coverage may be meaningless if the most important export products are not included, which seems to be the case in the current situation. Moreover, tariffs are no longer the major impediment to market access. Non-tariff barriers (NTBs) are much more important. There are practically no S&D commitments on NTBs. In particular, despite the WTO’s best-endeavour decisions on preferential rules of origin for LDCs, rules of origin continue to hamper exports from developing countries and LDCs and are undermining existing preference schemes.

Today, the growing demand for consumer goods, agricultural goods, and industrial inputs (and thus the future markets) is in emerging countries. South-South trade offers untapped potential for exports from poor developing countries and much higher growth opportunities. A fundamental rethinking of the preferential access to markets for developing countries, both in terms of content as well as regarding beneficiaries and preference-granting member states, is needed to make this essential tool of development relevant again.

Exemptions from tariff reduction commitments

Developing countries, in particular LDCs, are often exempted from commitments to reduce tariffs – or are allowed to schedule lower reductions. The basic concept behind this approach is development through import substitution and the idea that infant industries need time to develop production, scale-up, and become internationally competitive. While the objective continues to be valid, the instruments used to achieve this objective seem no longer efficient or appropriate.

The evolution of the global market requires the integration of different components into value chains which are sourced from different parts of the world where they are produced at the best value for money. Higher tariffs than competitors’ or protectionist regulations make it difficult for local producers to integrate into value chains, especially at their higher ends. A proof that tariff protection of the internal market is of limited interest to developing countries is the fact that nearly all of them – and in particular LDCs –  have lower applied tariffs than the ones they are allowed to have under their WTO commitments (bound tariffs). There are many other and more efficient ways to achieve the goals of maintaining a family-based rural development and developing an industrial base.

Exemptions from international rules

It has long been widely held that some international trade rules were too constraining for developing countries (in particular LDCs) and/or that they were not in line with their development needs. While it is true that today’s developed economies enjoyed long and stable periods of protection of their economies, requesting the same rights and flexibilities in today’s globalised world is no longer possible. Using the opportunities of the global economy for “leapfrogging” development requires other and new instruments and policies such as accepting best international practices and standards, embracing e-commerce and specialising for the export of niche services and products that will help developing countries integrate into global and regional value chains. In this context, S&D needs to be redesigned so as to meet today’s challenges. For developing countries and LDCs, this should imply full adherence to international rules and standards that are supportive to their development, albeit with transitional periods and support from more developed economies.

Towards a new approach

Developing countries, and especially LDCs, need policy space to kick-start their development. This, however, does not mean exemptions from inadequate rules, but rules that are conducive to development. Refusing to take commitments excludes, de facto, LDCs from defining the rules that will govern future trade. This means that developing countries essentially need three things: (1) international rules that are development-friendly, (2) time to adjust to the new rules, and (3) support in setting up the instruments that will allow them to follow those rules.

Lower-income developing countries, including LDCs, have a great interest in participating in the elaboration of rules on services and e-commerce and should not accept that those rules are defined without them in plurilaterals. If plurilaterals – such as TISA – are unavoidable, poorer developing countries should do everything in their power to ensure that they are concluded within WTO and not outside by defining the minimum development principles that they should follow and by accepting to integrate them into the WTO framework (through the Annex 4 procedure) if they follow this set of clearly defined development principles.

In the run up to the WTO’s Eleventh Ministerial Conference (MC11) in Buenos Aires, lower-income developing countries may consider the following approach.

First, their primary objective should be the defence of the inclusive multilateral trading system, which is under attack by some big trading powers. Repeating the same old requests that have not delivered so far leads to confrontation, not consensus. A MC11 that provides justification to the detractors of the inclusive multilateral trading system, and helps them argue that it is an ineffective way of negotiating, has to be avoided at all cost. The world has changed, the process of negotiation has become more complex, and the WTO is only one of many fora that are used to defend and promote trade interests. Developing countries have changed too and some of them have become major players in the world economy, creating new opportunities and new threats to the development of poorer countries. LDCs themselves have become more economically diversified and integrated into the world economy. Developing outside the global system is no longer an option: all countries are integrated, in one way or the other, into value chains – LDCs mostly by providing raw materials, i.e. at the bottom of the value chain. Their objective is, and has to be, to climb the value chain and to get a bigger share of the value added.

Second, this changed environment requires new policies and new approaches. This means that LDCs – and by the way also their partners – should consider redefining their negotiating strategies and, with that in mind, adjust their negotiation positions at the WTO and other regional and multilateral bodies when it comes to S&D.  Given that the S&D negotiations do not seem to be leading to a satisfactory outcome for developing countries and LDCs, some soul-searching and re-consideration of positions should be done. The Sustainable Development Goals (SDGs) will not be achieved by waiting for S&D to yield success. Simply restating positions – as justified as they may be – which have not produced results is not an option.

Third, to save the system, all members – and in particular those that depend on the multilateral trading system the most, i.e. lower-income developing countries – need to take a pro-active and consensus-oriented approach in Buenos Aires.

Fourth, to play an active role in the negotiations, lower-income developing countries have to accept to take commitments commensurate with their ability and development level. The so-called ”round for free” approach marginalises them in the negotiations and is not necessarily the best option for their development

Fifth, lower-income developing countries should vigorously defend the development objective of the DDA and the principle that their special needs and limitations should be taken into account: (1) reaffirming and strengthening the commitments taken in Hong Kong, Bali, and Nairobi remains a priority; and (2) reaffirming the development objectives of the round is essential.

Sixth, they may want to propose rules that are conducive to development, including special and differential treatment provisions that allow them to adopt best practices, rather than ask for exemptions from rules that are inadequate for their development needs.

Seventh, rather than refusing to discuss new topics, they could highlight how, from their perspective, they should be discussed, and what measures would need to be taken to ensure that they do not replace negotiations on the unresolved issues of the DDA. Indeed, the interests of poorer developing countries in the traditional areas of DDA should not be neglected.

Finally, lower-income developing countries may consider accepting plurilateral approaches to the negotiations as a second best solution – if for no other reason than the fact that they cannot block them – but insist on how they should be handled to ensure that development objectives are not forgotten and that they do not lead to a change in the objectives of the DDA.

It is uncertain whether such an approach could really help salvage MC11 and lead to a reinvigorated new negotiation round.  It is, however, certain that repeating old positions will not lead to results. Unless a new approach is tried, we will never know if it had a chance. There is nothing to be lost, as the alternative would further undermine the inclusive multilateral system and put at risk its pivotal role as the central rule-making body of international trade relations.

Author: Nicolas Imboden, Executive Director, IDEAS Centre

[1] By “lower-income developing countries,” I mean countries that fall within two of the World Bank’s income level categories, namely “low-income economies” and “lower-middle-income countries”. See: http://bit.ly/2otKj52. Low-income developing countries thus include LDCs, but not only.

[2] Australia, Canada, Chile, China, EU, Eurasian Economic Union, Iceland, India, Japan, Korea, New Zealand, Norway, Switzerland, Turkey, Chinese Taipei, Tajikistan, Thailand, and the USA

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