Including Developing Countries in a Consensus for the WTO

The failure of the WTO Ministerial meeting in Seattle to initiate a new round of world trade talks represented a severe setback to those who hoped to harness the trading system as a stimulus for economic growth and development. The developing countries felt excluded from the process in Seattle, both procedurally and because they were unable to make their voices heard in the substantive debates and preparations. In CEPR Policy Paper No.4, Zhen Kun Wang and Alan Winters argue that tying the developing countries more securely into the trading system is a key priority in repairing the damage done in Seattle.

The authors begin by noting that the developing countries comprise a large majority of WTO members and account for an increasing share of world trade and most of its growth. But over the last few years these countries have become increasingly frustrated with the operation of the WTO. Given these frustrations it was always going to be a challenge to bind the developing countries into a new round of trade talks. Since Seattle, this task has become both more challenging and more important. The failure has given ammunition to the critics of open trade within developing countries and has led even sympathetic commentators to argue that what the developing countries need from the WTO is special treatment - exemptions from the WTO's liberalization disciplines.

Yet Wang and Winters argue that rebuilding the legitimacy of the world trading system is not a matter of charity but one of self-interest for developed countries, which still have much to gain from the further liberalization of world trade. With this in mind, the developed world must work to address the substantive needs of the developing countries. Even more so than before Seattle, any forthcoming round of trade talks must be a 'Development Round'. In recognition of the fact that each side needs to 'buy' the concessions it seeks from the other by making its own, Wang and Winters outline an eight-point plan that they believe balances the needs of both the developing and the developed worlds.

Agriculture, Manufacturing and Services

Agricultural liberalization is predominantly a job for developed countries - particularly the EU and Japan, which, according to the authors, went to great lengths in Seattle to shift the focus elsewhere. Developing countries have a significant stake in the process of farm policy reform: estimates suggest that a reduction of 40% in the barriers to world farm trade will generate economic gains of at least $15 billion per year for developing countries and $55 billion per year for OECD countries by 2005. Specifically, the paper calls for the reduction of bound tariffs from their current 50-150% to the 0-15% range typical for manufactured goods; a complete ban on agricultural export subsidies that would bring agriculture into line with non-farm products; and the abolition of subsidies that expand agricultural output in developed countries, which wastes their resources and undermines efficient production and income generation in developing countries.

The share of manufactures in developing country exports has increased dramatically from around 30% in early 1980 to over 70% in 1995. Developed country tariffs on manufactured imports are quite low on average (1.5%), but they fall more heavily on exports from the developing world (3.4%) than on those from other developed countries (0.8%). However, of much more importance are the developing countries' own barriers to manufacturing imports - these average 10.9% for imports from developed countries and 12.8% for those from developing countries. Developing countries should liberalize these markets, this will provide immediate gains to consumers in developing countries and longer-term efficiency benefits as industry adjusts. This will stimulate growth in trade between developing countries and also create a position from which to 'buy' other concessions from developed countries in the forthcoming negotiations.

The developing world has been reluctant to liberalize services, fearing they have nothing to gain. This, say the authors, is simply wrong. As importers of services, a supply of reliable and cheap business services would aid efficiency in all sectors of their economies. As exporters of services, particularly through the temporary movement of workers to supply services in foreign markets, the potential gains are huge. The current success stories of developing countries exporting services, such as Indian software or Cuban health services, rely significantly on provider mobility, which at present is severely constrained. The fundamental problem is that developed countries make almost no distinction between temporary and permanent labour movement. With suitable provision for short-term mobility of workers (i.e. not migration), many more developing countries could export services to the great advantage of consumers and many businesses in the developed world. Preliminary estimates suggest that the gains from ordinary trade liberalization run into hundreds of billions of dollars per year.

Credit for Past Unilateral Liberalization

Developed countries should treat part of the developing countries' recent unilateral liberalizations as something to be reciprocated by their own concessions. This would not only recognize that developed countries have also benefited from these unilateral reforms, but would also reassure developing countries who feel that they often have to make concessions twice to persuade developed countries to liberalize. For their own sakes, developing countries should use this 'credit' not to avoid making cuts in actual tariffs but as a way to encourage deeper liberalization by developed countries.

Reinventing Special and Differential Treatment

Special and differential treatment, which excused the developing countries from many GATT obligations and offered them extended adjustment periods, has not been a constructive force in the past. It is in the best interests of developing countries that they stick with the basic rules of trade liberalization. There is, however, still scope for a new form of special and differential treatment that enhances effective liberalization. This entails recognizing that developing countries need cheap and effective institutional routes to allow them to implement liberalization and give them greater procedural flexibility in some areas.

Legally Binding Technical Assistance

The Uruguay Round is replete with promises of technical assistance to developing countries to help them undertake the agreed reforms, but most of these promises were not binding and many have not been delivered. Given their limited human resources and institutional capacity, many developing countries have had significant difficulties implementing the round and integrating themselves into the world trading system. The next round needs to find a means of making these promises of technical assistance binding - i.e. justiciable and subject to complaint and retaliation through the WTO. One solution might be to establish a fund from which developing countries could draw agreed amounts by right.

Phasing out the MFA

The Uruguay Round agreed to phase out by the end of 2004 the quantitative restrictions on textile and clothing trade (the Multi-Fibre Arrangement (MFA)). Citing the developed world's poor record in liberalizing this sector in the past and China's likely accession to the WTO, Wang and Winters voice doubts as to whether this would actually be achieved. They recommend that developing countries should make it clear that there will be no settlement to the next round unless the textiles and clothing agreement negotiated in the Uruguay Round is implemented in good faith. This means that quantitative barriers must be removed and not replaced by alternative restrictions such as anti-dumping duties. The intention of a three-year round that was floated in Seattle was never very plausible, but developing countries have a clear interest in postponing its conclusion well into 2005, well after the MFA quotas should have been removed.

Labour and Environmental Standards

The fear that introducing labour and environmental clauses into the WTO would foster protectionism is well founded. According to the authors, developing countries are right to resist these additions to the agenda. They argue that one of the reasons for the Seattle collapse was Bill Clinton's call for the adoption of labour standards with trade sanctions. It may be more constructive for developing countries and international organizations such as UNCTAD and the World Bank to invite their developed country partners to discuss the issue in the International Labour Organization (ILO). The ILO's lack of teeth makes it less attractive than the WTO to developed countries, but the agenda could include discussions on enforcement. Environmental trade policy should be permitted on the WTO agenda only when multilaterally sanctioned by an appropriate multilateral environmental agreement.

Investment and Competition Policy

Investment and competition policy will be contentious and will divert attention from the more straightforward and rewarding business of trade liberalization. Comprehensive rounds are desirable because they increase the opportunities for trade-offs, but in the aftermath of Seattle, it seems better not to burden developing countries with threatening and complex issues. The last thing the developing world needs is the external imposition of another set of institutions that they cannot operate effectively.

The Governance of the WTO

The negotiating sessions in Seattle were restricted to 30 participants, chosen from among the largest traders in each sector. Some countries attended all sessions; most attended none. By excluding most of the developing world from every single negotiating session, opposition to any deal was virtually assured. Means have to be found to involve developing countries more effectively in the WTO without allowing pressure of numbers to transform the organization into a mere 'talking shop'. This clearly involves strengthening developing country capacity to deal with WTO issues. In the WTO itself more streamlined governance would be desirable. This could be based on a smaller body with multi-country constituencies or revolving membership. However, given the high value that governments place on sovereignty and the domestic sensitivity of trade issues, such smaller bodies could only have exploratory and preliminary roles. Governments will accept only trade agreements that they have signed themselves.

The authors concede that there are no easy answers to the governance problem, but conclude with two observations. First, the answer probably lies in creating greater capacity for technical and non-negotiating discussions to map out alternatives and probe the boundaries of feasibility. Decision-taking seems likely to remain based on consensus among all members. Second, while there is plainly a case for wide debate on many issues and for hearing the views of many parties, there seems little virtue in allowing non-governmental actors into decision-making or adjudication, nor of allowing them to observe the Council or intergovernmental negotiating sessions.

CEPR Policy Paper No.4 'Putting Humpty Together Again: Including Developing Countries in a Consensus for the WTO' by Zhen Kun Wang (The Royal Institute of International Affairs, London) and L Alan Winters (University of Sussex and CEPR).