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Chapter 2

History and Evolution of the Trading System

FREE TRADE: MYTHS AND REALITIES

A number of myths and misconceptions surround the origins and evolution of the international trading system.  One such misconception is that the General Agreement on Tariffs and Trade (GATT) 1947 and its successor the WTO are based on the practice of 'free trade'.  The reality is that they regulate international trade on the basis of negotiated rules. Proponents of GATT/WTO often employ 'free trade' rhetoric, contributing to the public perception that the system uniformly maintains the principle and practice of free trade. But, as pointed out in an earlier era by Heckscher (1934), free trade theories have always been advanced by the major developed countries to further their own interests. 

The GATT/WTO system is governed by rules, which reflect the balance of power among members that adopt them. Throughout the post-war GATT/WTO system, decision-making power has been held largely by the major trading parties. The rules do not reflect free trade for all products.  Significantly, for most of the post-Second World War period till now, developed countries have maintained protection in two major sectors, agriculture and textiles, in which developing countries have a comparative advantage.  Thus 'free trade' has not been practised by developed countries in areas that matter greatly to developing countries, and this neglect has been facilitated by the rules of the system.

Mercantilists and free-traders both believed in and promoted exports; free-traders also believed in freeing imports, irrespective of what the other countries did.  To the extent that the post-war GATT system (and the exchange of concessions) has been based on the principle of reciprocity, it is mercantilist or neo-mercantilist. It has become even more so since the 1980s, with governments, and often their leaders personally, promoting the interests of their countries' corporations -- whether it be at the GATT/WTO, through bilateral influence and pressure or even through taking planeloads of business leaders along on state visits (Raghavan 2001g).

Another popular misconception is that today's developed countries were able to grow fast economically because they practised free trade.  The reality is that during their own development and industrialization processes, these countries protected their domestic industries behind tariff walls. Tariff liberalization took place when the home industries were sufficiently strong or efficient to stand up to competition from imports.  The industrial revolution began in Britain towards the end of the 18th century, under conditions of mercantilism, and provided the basis for the growing export trade for textiles and other industries. Britain did not adopt the laissez faire principles of Adam Smith's free market or Ricardo's free trade, until its manufacturing productive capacity was much greater than that of other countries.

In the second half of the 19th century, Britain was preoccupied with spreading the free trade doctrine in Europe. Starting with the Anglo-French trade treaty of 1860, and the subsequent treaties between France and other Europeans that incorporated most-favoured-nation treatment, there was a period of 'tariff disarmament' in continental Europe.  But this trend did not last long. In the three decades preceding the First World War, rising protection was the common trend in continental Europe, particularly after France and Germany found that 'free trade' benefited Britain but not themselves.  Both countries raised their tariffs, though gradually, also in response to the inflow of cheap grain from the United States and Russia and the Long Depression of the 1870s.  By 1913 all of the large countries had adopted protectionist policies. The United States, at the end of its Civil War, began import-substitution industrialization behind rising tariff barriers.  Historically from the time of the Revolution to the Civil War, the American States played a major role in promoting economic development (O. Handlin and M. Handlin 1947). Japan (after gaining autonomy over tariff policy) introduced tariff protection for its industries in the late 1890s. However, the British, French and other European colonies (in what is now the developing world) practised economic liberalism, under the rule of the metropolitan powers. These colonies suffered from arrested industrialization or, as in the case of India, de-industrialization.  The British established a market for its textiles and other products in India, firstly through the East India Company, and then in 1857 by direct British rule, thereby destroying the local textile industry (Raghavan 2001g).

The foregoing historical outline shows that industrialization and economic growth took place in the developed countries under conditions of protection, though this does not imply that protection always leads to or results in industrialization and growth (see e.g., Bairoch 1993; Bairoch and Kozul-Wright 1998; Hobsbawm 1994).

THE HAVANA CONFERENCE AND THE ORIGINS OF GATT

Following the creation of the World Bank in 1944 and the IMF in 1945, GATT 1947 was an offshoot of an attempt to create the third pillar of the post-war international economic system, the International Trade Organization (ITO). The ITO was to be embodied in the Havana Charter to result from the Havana Conference. Preparatory work was initiated by the UN Economic and Social Council (ECOSOC), but its origins go back earlier, to discussions and agreements between the United States and Britain during the Second World War. The U.S. position was that all non-tariff barriers should be abolished and tariff barriers reduced through international negotiations (Dam 1970: 12).  In the economic sphere, the two wartime allies agreed on common action (open to others of 'like mind') to expand production, employment and exchange of goods; elimination of all forms of discriminatory treatment in international commerce; and reduction of tariffs and other trade barriers. 

As leading industrial powers, both the United States and Britain saw their prosperity as dependent on the ready supply of cheap raw materials and expanding markets for manufactured goods. During and immediately after the war, the two governments advocated the worldwide reduction of tariffs, the removal of trade barriers and 'equal access to the markets and raw materials of the world.' Their discussions focused on the 'removal' of restrictions to trade by others, and there is very little reference in the discussions to the problems that would be faced by the 'undeveloped' (UN terminology of those times for what are now called 'developing') countries. Under pressure from its self-governing colonies (Australia, Canada, New Zealand), the UK made some half-hearted attempts to assert the right of undeveloped countries to apply tariffs for a limited period, under adequate safeguards, to protect their infant industries. The United States, however, was not willing to make even this concession. 

In talks relating to the Havana Charter, the United States proposed that all non-tariff barriers be prohibited forthwith, within a code for international trade that would limit the right of governments to interfere with the free flow of trade (Dam 1970).  The U.S. 'code' approach would establish a framework that included the reduction of tariffs, a flat prohibition of all non-tariff barriers, and severe limits on the right of governments to interfere with private trade.  It was the commercial policy framework formulated and pushed by U.S. diplomats in the 1940s, in the Preparatory Committee for Havana, that produced the General Agreement (the commercial policy chapter of the Havana Charter) and its provisional protocol of application pending the entry into force of the Havana Charter.  This approach did not change over time, and it has been very much evident through the twists and turns of the various rounds of GATT negotiations (and the changes made to the framework), culminating in the Uruguay Round and the WTO (Raghavan 2001g).

The United Nations convened the International Conference on Trade and Employment in Havana in 1948. The United States took the view that the less developed countries could best pursue economic development by participating in the multilateral trading system, and with the lowest possible level of tariffs. This view had the varying support of Canada, the UK and some others. India, Brazil and Australia took the opposite view, demanding special Charter provisions for economic development, and for flexibility to use tariffs and other barriers for infant-industry protection. The Charter chapter on economic development and reconstruction was based on the compromise that emerged.

The Havana Charter, drawn up at the Conference and signed by participating countries, included provisions on Employment and Economic Activity, Economic Development and Reconstruction, Commercial Policy, Restrictive Business Practices (of private parties), Intergovernmental Commodity Agreements and Institutional Provisions. It also envisaged the establishment of an International Trade Organization (ITO) with a comprehensive mandate and programme. However, after the Havana Conference, the U.S. Senate quickly made clear that it would not ratify the Charter and the then U.S. President Harry Truman in effect withdrew it from consideration rather than have the Senate vote to turn it down.  

With the U.S. decision not to ratify, the Havana Charter did not come into effect, and  the International Trade Organization was not established.  However, the provisions relating to tariffs and other matters on import and export had been finalized earlier in the preparatory process for the Havana Conference and were included in what was called the General Agreement on Tariffs and Trade, which was signed 30 October 1947.  Through a Protocol of Provisional Application, the signatory countries agreed to bring the GATT into operation provisionally from 1 January 1948, without waiting for the full Charter to come into effect. The GATT therefore came into operation as an interim step and continued until 31 December 1994, after which it continued as an annex to the Marrakesh Agreement Establishing the WTO (Das 2001d).

When the proposal for the ITO collapsed, so too did the Charter provisions on international commodity agreements and those relating to economic development. However, a very attenuated form of the latter crept into GATT in Article XVIII and Article XVIII:B,  which was added during the revisions to GATT that occurred in 1955.

Interestingly, as a point of historical comparison, no one at that stage seemed to have talked about the 'balance of rights and obligations' that had already been established, nor was it mentioned that those seeking a change in the rules would have to pay a price.  This contrasts with the present debate in the WTO, where developed countries appear to be asking developing countries to pay a price or to be prepared to give fresh concessions in return for recognizing their requests to interpret or change the rules in order to resolve problems of implementation of the WTO agreements.

THE HABERLER REPORT, UNCTAD AND AFTER

In the history of the post-war GATT/WTO system, there has been a major recurring theme: that the developing countries have not been able to obtain their fair share of benefits from the trading system.  Through the decades, from the 1950s to the present, developing countries have expressed dissatisfaction and frustration at the barriers placed on the products of export interest to them by the developed countries. Despite reports, processes and promises established to deal with this complaint, the same problems have remained and continue to plague the trading system.

In the 1950s, the complaints from the developing world that their interests were not adequately taken into account led to the establishment of an expert committee (comprising Professor Haberler as chairman, and Meade, Tinbergen and Campos as members) by the GATT Contracting Parties. The Haberler Committee Report of 1958 stated that the problems faced by the less developed countries were due to trade policies of the developed countries. The GATT Contracting Parties agreed to undertake a programme of action and set up three committees; one of these, Committee III, had the responsibility of looking at the trade measures restricting the trade of the developing world  (GATT Basic Instruments, 7th Supplement 1959).

The Committee III report showed that high tariffs faced the exports of developing countries over a wide range of products--vegetable oils, coffee, tea, cocoa, jute products, cotton products, leather goods and a variety of sophisticated manufactured products. The report also revealed that in addition, these exports faced domestic taxes and levies that in fact restrained consumption. Since there were no 'equivalent' domestic products, the internal taxes were not seen as a violation of GATT, and yet they came in the way of demand and hence imports. GATT agreed to deal with them.

However, over the years, the barriers to developing countries' products have remained.  Twenty years after the Haberler Report, this was the situation at the end of the Tokyo Round of multilateral trade negotiations in 1979 (GATT 1979). Under the category 'Tropical Products', there were 4,400 dutiable items at tariff-line level on which the developing world put in requests for tariff concessions. According to the official GATT report on the outcome, concessions were granted on 2,930. The secretariat data masks the smaller number of real concessions, since it combines together the Most Favoured Nation (MFN) concessions that were bound, and the Generalized System of Preferences (GSP) concessions that were not. The secretariat report says that concessions and contributions were granted more particularly on such categories of products as coffee and tea and extracts, spices, cocoa and cocoa products, and miscellaneous meat and meat products. There was less progress on areas of importance to the developing countries, including fishery products, honey, unprocessed and processed fruits and vegetables, vegetable oils and sugar and sugar products. This category of products still faces high tariff barriers and tariff rate quotas in terms of the WTO Agreement on Agriculture in the European Communities (EC), the United States and Japan.

The requests from developing countries in the Tokyo Round under Customs Cooperation Council Nomenclature (CCCN), chapters 25-99 focused on rubber and rubber products, leather and leather products (including footwear), wood and wood products, paper and paper products, textile fibres and textiles not covered by the Multi-Fibre Arrangement (MFA).  The GATT report notes that although there were some important concessions in some sensitive areas, such as leather products and footwear, the level of concessions in such areas was smaller than it was for others (GATT 1979).

Several of the 'barriers' identified at the time of the Haberler Report (1957-58) remained in 1979 at the end of the Tokyo Round, and, indeed, they so remained even after the Uruguay Round! The official report on the Tokyo Round also points out that on the issue of internal taxes-- sales or value added taxes, applied without discrimination and thus legal under GATT Art.III -- requests to remove selective taxes on items such as coffee, cocoa, tea (processed and unprocessed), spices, vegetable oils and tobacco were met only by an undertaking by some developed countries not to increase such taxes on beverage crops and spices.

The report on the Tokyo Round also noted discrimination on the basis of rules of origin and processing against developing countries' exports as well as quantitative restrictions against their agricultural exports. (After the Uruguay Round most of these primary products still face very high tariffs and also tariff quotas administered non-transparently, and sanitary and phytosanitary (SPS) measures used to restrict imports.)

The 1958 GATT Programme of Trade Expansion (a study programme of the Haberler Report) and the 1963 Action Programme called for standstill on all new tariff and non-tariff barriers, elimination within one year of illegal quantitative restrictions, elimination of duties on primary products, reduction and elimination of tariffs on semi-processed and processed products and elimination of internal taxes that inhibit consumption of these products. The ministers of all developed countries, except those from the European Economic Community (EEC), agreed to the work programme, and the EEC endorsed the objectives in principle. But by the end of 1963, the developed countries still refused to commit themselves to a programme to lower the barriers. Several of the trade barriers identified in the 1960s against exports of the developing world still remained as barriers in 2001  (Raghavan 2001g).

Concerns by developing countries over their lack of benefits in trade and other issues led to the creation in 1964 of the UN Conference on Trade and Development, at which these countries' demands were tabled. The following year, in response to the emergence of UNCTAD, the GATT Contracting Parties agreed through a protocol to the addition of Part IV (on Trade and Development) to GATT, which came into force a year later.  Part IV recognizes the need to provide 'more favourable and acceptable conditions of access' for developing countries' primary products, and increased access 'under favourable conditions' for processed and manufactured products of export interest to less-developed countries. But obligations in Part IV are not legally binding and have remained on the basis of implementation on a 'best-endeavour effort.'

The developed countries were never happy with UNCTAD and the UN becoming involved in economic and trade issues in order to fill in the gaps in the trading system. When Canada sought U.S. support for the Multilateral Trade Organization (MTO; renamed the WTO at the last moment) in 1993, a major argument was that this would put an end to UNCTAD involvement in trade matters.

This brief history shows that at every stage, GATT and the major trading nations moved only very reluctantly to enable developing countries to draw benefits from the trading system, and always without any contractual rights and obligations (Raghavan 2001g).

ACCOMMODATING MAJOR-POWER INTERESTS: TEXTILES AND AGRICULTURE

The outstanding examples of the way in which the principles and rules of the system have been bent to accommodate the interests of the major players are found in the treatment in GATT/WTO of two major sectors: textiles and agriculture. Although the developed countries took the lead in establishing the GATT framework for free trade across borders, and they constantly preach the virtues of free trade and demand that developing countries eliminate their trade barriers, they have themselves adopted highly restrictive policies to protect their agriculture and textiles sectors. To make possible these protectionist national policies, the GATT Contracting Parties (CPs) agreed to allow departures from the general GATT principles and normal GATT rules for these two sectors.

Textiles and Clothing

In the early 1950s, the extraordinary growth of manufacturing exports from Japan began causing apprehension among developed countries, most of which resorted to outright discrimination against Japanese products. This practice continued even after 1955, when Japan entered GATT, through invocation of Article XXXV (on non-application of the agreement between particular contracting parties) on the ground that Japan was a low-wage country. In the late 1950s, as some of the developing countries began exporting manufactured products (mainly textiles and clothing, and leather products), the instruments fashioned to keep out the Japanese products were invoked.

In 1959, at U.S. request, GATT Contracting Parties decided to consider the 'question of avoidance of market disruption'-an attempt to continue illegal quantitative restrictions. The working party sidestepped the argument that GATT had sufficient provisions to deal with the problem (e.g., the safeguards provisions in Article XIX), and instead advocated a procedural approach for (1) explicit recognition of the problem of 'market disruption,' (2) multilateral consultations for 'constructive solutions,' (3) procedures for 'orderly expansion of international trade' and (4) existing rights and obligations of GATT not to be prejudiced (GATT Basic Instruments, 8th Supplement 1960; 9th Supplement 1961). The Contracting Parties agreed to avoid 'market disruption.' Using a detailed definition (provided by the GATT secretariat), they decided to establish a permanent working party to consider 'market disruption' and, with the assistance of the International Labour Organization (ILO), to produce a report on the factors underlying this phenomenon.    Meanwhile, the Japanese government entered into a series of 'voluntary export restraint' agreements to avoid market disruption, under which Japan was to limit exports of  'sensitive' products and which enabled importing countries to take special measures. 

GATT then moved to give special attention to the products said to be causing the greatest market disruption--exports of cotton textiles from India, Pakistan and Hong Kong. And with the launch of the Kennedy Round came the short-term cotton textile arrangement (1 October 1961 to 31 September 1962), followed by the long-term arrangements (1962-67, later extended till 1973). This was replaced by the Multi-Fibre Arrangement (MFA) in 1973, initially for four years, but repeatedly extended until 1994, with more and more restrictions added on (through expansion of product coverage). 

The special restrictive regime for textiles involved fixed limits or quotas for the export of textiles and clothing from developing to developed countries.  Some of the textile fibres and products not covered by the MFA at the time of the Tokyo Round (1973-79) were brought under the MFA (and the discriminatory quota restrictions) in the successive protocols for extension, including one on the eve of the launching of the Uruguay Round. Thus, it also appears that every time GATT claimed it was launching a trade-liberalizing new round of negotiations, this was accompanied by more restrictions and 'authorized departures' from the GATT principles relating to the exports of the developing world.

Part of the Uruguay Round outcome was the Agreement on Textiles and Clothing (ATC), which came into effect in 1995. Under the ATC, quotas are to be progressively phased out over 10 years.  However, almost seven years later, and following three stages of its implementation, there has been little real liberalization, and restrictions could remain until the end of the 10-year period on 1 January 2005. Indeed, the question has been raised as to whether restrictions will be removed even then. (See Chapters 3 and 4.)

Agriculture Waivers

Although the United States took the position, in its negotiations with Britain preceding the Havana Conference, that countries should remove all quantitative restrictions, the U.S. Agriculture Department wanted the agriculture sector to be excluded. The result was the exception for agriculture and fisheries products in Article XI of GATT (dealing with general elimination of quantitative restrictions).  But the United States found that even this 'tailor-made' provision did not suffice to justify its quantitative restrictions on imports of dairy products. A complaint by the Netherlands was upheld, and the Dutch obtained permission to retaliate in 1953. The United States then enacted Section 22 of the U.S. Agriculture Adjustment Act, and quotas were imposed on imports of cotton, wheat, peanuts, oats, rye and barley and products made out of these, as well as dairy products. The GATT Contracting Parties gave a broad waiver to the United States over Section 22. Some of the European countries (Belgium, Luxembourg and Germany) that had been maintaining restrictions, citing balance of payments problems, faced difficulties when their currencies became convertible, and also sought waivers for agriculture (GATT Basic Instruments, 3rd  Supplement 1955;  4th Supplement 1956). In a sense the U.S. waiver led the way to and encouraged the EEC to launch its Common Agricultural Policy (CAP) as an essential element of the Rome treaty of integration  (Raghavan 2001g).

The U.S. waiver was maintained from the mid-1950s to 1995, when the Uruguay Round Agreement on Agriculture (AoA) came into effect.  The EEC system of high subsidies to protect European farmers was also built up and maintained during this period. While the AoA (which is supposed to impose disciplines on import protection and domestic and export subsidies) has been in operation for several years, developed countries still maintain high tariff protection, and the total value of their subsidies has in fact increased. (See Chapters 3 and 4.)

THE GATT ROUNDS

There were eight rounds of trade negotiations under GATT: Geneva (1947), Annecy (1948), Torquay (1950), Geneva (1956), Dillon (1960-61), Kennedy (1964-67), Tokyo (1973-79), and Uruguay (1986-94). The Uruguay Round resulted in the Marrakesh Agreement that established the WTO.  The first six rounds concentrated mainly on tariff reduction. The Tokyo Round also included other issues, resulting in codes applicable only to countries that accepted them. The Uruguay Round was very comprehensive, and included tariffs, several other trade areas, and two non-trade issues (services and intellectual property rights).

If the post-war history of business cycles of expansion and recession is examined, it is clear that there have been as many cases of recession after the conclusion of a GATT negotiating round as cases of expansion. Thus, economic expansion cannot be cited to applaud GATT, without also blaming it for the recessions.  While statistical analyses suggest that tariff reductions have a 'substantial economic effect,' assertions about a net positive effect and 'welfare gains' for everyone in a country or across countries differently situated, and about causation, are open to challenge (Raghavan 2001g).

In every round of multilateral trade negotiations, just before and after its conclusion, the GATT secretariat and its economists, as well as some other trade economists, usually produce projections of tariff cuts leading to the expansion of world trade valued at so many billions of dollars.  But as Kenneth Dam concedes: 'The effect of tariff reductions on promotion of world trade is problematical. No one has yet devised a satisfactory method of determining the economic effect of tariff reductions, since the effect depends on unmeasurable factors such as elasticities of supply and demand... Even after the fact, it is difficult to isolate the impact of tariff reductions from all of the other factors affecting the rate of importation....' (1970: 56-57).

There is a view that GATT was responsible for the post-war expansion of trade, production and employment, and that the seven rounds of GATT multilateral trade negotiations brought about liberalization of world trade and expansion of employment. However, an alternative view is that the post-war expansion of the world economy was due to the operation of a number of macroeconomic processes, including Keynesian economic policies, and that the expansion of trade was an effect rather than the cause of economic growth. In this view, the GATT processes merely facilitated the expansion of trade to accommodate the productive forces at work (Raghavan 1990; Kelkar 1986).

Until the Kennedy Round, the tariff negotiations in the GATT 1947 trade rounds were all bilateral, and based on reciprocal exchange of concessions. In fact, until Article XXVIII bis (on tariff negotiations) was added, the only basis for tariff negotiations in GATT was a product-by-product basis, and thus entirely based on 'reciprocity.' And thus too, the emphasis was on 'principal suppliers' and their rights when amendments to tariff schedules were sought. However, there is no definition of  'reciprocity' in GATT. It was only after Article XXVIII bis was added in the Kennedy Round that a linear approach for tariff cuts was added, and this was also adopted in the Tokyo Round.

A Ministerial meeting in Tokyo launched the Tokyo Round in 1972. The declaration (para 7) contained an announcement that the developed countries did not expect reciprocity from developing countries for commitments made to them, and the latter were not expected to make contributions inconsistent with their individual development, financial and trade needs. The developed countries also agreed to take special measures to promote the exports of the developing countries and recognized the importance of maintaining and improving the Generalized System of Preferences (GSP) and application of differential and more favourable treatment to the developing countries. They also decided to pay special attention to the problems of least developed countries.

Though GATT (in the secretariat report on the Tokyo Round) has made the claim that various steps had been made to give effect to the promises to the developing world in the Tokyo Ministerial Declaration, in fact the situation as assessed by these developing countries at the end of the Round was that there were more problems for them and no particular benefits. Even the GATT secretariat's report could claim only the legal basis for the GSP, rather than any bound tariff cuts and market openings, as a positive outcome of the Tokyo Round negotiations in response to the concerns of developing countries.

On industrial products, negotiations resulted in tariffs on all the products being reduced from the pre-Round 7.2 per cent weighted average to a post-Round 4.9 per cent. But products of export interest to the developing world did not fare well.  In terms of the tariff escalation with progressively higher stages of processing, the tariff barriers to developing countries' exports were not small. Moreover, their principal manufactures and semi-manufactures -- textiles and clothing, footwear and other leather and leather products, and other labour-intensive goods -- faced both tariff barriers and non-tariff barriers. The MFA covering their textiles and clothing exports was also tightened up.

Several of the issues that the developing world had identified as important remained unresolved: a comprehensive safeguards agreement, liberalization of the trade in tropical products and other agricultural commodity exports, tariff escalation and peaks, and so on. At the end of the Tokyo Round, these were put onto a work programme, which in fact was launched only at the 1982 GATT Ministerial meeting.

THE URUGUAY ROUND AND AFTER

Until the Kennedy Round, the major aim of the developed countries had been to enter the markets of other developed countries. The developing world was seen essentially as a source of raw materials. It was only after the Kennedy Round that the developed countries became interested in breaking into the markets of the developing world. This objective became even more evident in the Uruguay Round, preparations for which took place in the early 1980s.

At the conclusion of the Tokyo Round in 1979, U.S. negotiators said that they were to be the last major negotiations for the century. But two years later, they called for new negotiations and new issues -- and for greater integration of the developing countries, a code phrase for their assuming more obligations.  At a GATT Ministerial meeting convened in 1982, U.S. negotiators brought their new issues (investment, intellectual property rights, services and high-technology goods) onto the agenda.  They also sought to deal with agriculture, and proposed a new 'North-South Round' -- ostensibly to give more benefits to the South but in fact to gain access to markets of the developing world, particularly those of the newly industrializing countries.  The 1982 meeting resulted in a work programme, with services as a subject for exchange of information among interested parties; and the issue of intellectual property rights (IPRs) merely figured as 'counterfeit goods.' But from 1984, the United States began pushing for a new round that would include services, investment and intellectual property. It also intended to attack the protectionist agricultural policies of the EC.

At the outset, developing countries were fairly united, and did not want to enter into any new round until the unfinished GATT business of past rounds was taken up and resolved.  Unfinished business included improving market access for developing countries by reducing tariff and non-tariff barriers to their exports; clarifying and strengthening some of the rules, such as the comprehensive safeguards agreement; and ending voluntary export restraints. A preparatory process was set up in GATT, but it did not make much progress, and there was a sharp division along North-South lines. 

A break in the developing-country front came when Singapore used the opportunity of an Association of South-East Asian Nations (ASEAN) summit to convince other ASEAN members to agree to the U.S. demands for launching a new round, holding out the prospect of the ASEAN getting better market access (Raghavan 2001g).  After this, the United States, Japan, Canada and the EC began meeting with a group of developing countries, resulting in the Colombian-Swiss ('cafe au lait') text for the 1986 Ministerial meeting at Punta del Este. At the same time, a group of developing countries, led by Brazil and India, stood up against such a round.

A compromise brokered by the EC resulted in the launching of the Uruguay Round, with GATT negotiations in goods on one track and separate negotiations in services on another, with the stipulation that when the results were established in each, the Ministers would meet to decide on the implementation and institutional arrangements. At the time the Uruguay Round was launched, it was argued that such a large number of items for negotiations was needed, and that the bargain was that developing countries would agree to negotiate on the new issues of services, trade-related aspects of intellectual property rights (TRIPS) and trade-related investment measures (TRIMs) in return for better market access in goods.

Interestingly, before the Punta del Este meeting, the United States, as it had done in previous new rounds, had the Multi-Fibre Arrangement extended again, with even more restrictions.

At the time the Uruguay Round was launched in 1986, the U.S. administration had no fast-track negotiating authority, which came only in 1988. But the U.S. Omnibus Trade and Competitiveness Act that provided such authority, and set the negotiating objectives and mandate for the U.S. negotiators, also enacted the S.301 family of trade laws  (S.301, Special 301 and Super 301), each of which defined the obstacles to U.S. trade in other countries, and provided for investigations and actions to be undertaken by the U.S. Trade Representative. This threat of sanctions operated throughout the Round, which lasted through 1993, and was responsible for several of the developing countries yielding to the U.S. demands on TRIPS and in several other areas.

The Punta del Este Declaration treated negotiations on goods as a 'single undertaking' and those on services separately, with the Ministers agreeing (in Part III) that the two tracks should begin and end at the same time, and that when the results of both were established the Ministers would decide on implementation of all the results.  However, by the end of the Round, the two tracks had merged, with the Uruguay Round package of agreements treated as a single undertaking. Moreover, while the negotiating mandate on Functioning of the GATT System (FOGS) did not envisage the creation of what would ultimately become the WTO, the final package placed the agreements on goods, services and intellectual property all under the roof of the new WTO, and all subject to its integrated dispute settlement system, thus enabling cross-sectoral retaliation as part of the WTO enforcement mechanism.

Each part of the Uruguay Round negotiations was held among a small group of countries, in a highly non-transparent process known as the 'Green Room' negotiations, in which the developed countries confronted a few leading developing-country opponents and applied pressure on them to yield (see Chapter 4). Since relatively few developing countries were invited to the Green Room meetings, the developed countries enjoyed a level of participation and influence far greater than their share of the membership. 

When the 1988 Montreal mid-term meeting failed to settle the issues in agriculture, safeguards, textiles and clothing and TRIPS, GATT Director-General Arthur Dunkel, as chairman of the Trade Negotiations Committee (TNC), was asked to hold consultations to find a compromise. In fact, he presented a package of proposals that favoured the United States and EC over the developing world, which was forced through in subsequent negotiations  (Raghavan 1989a-k).

In 1990, the Brussels Ministerial meeting failed to reach conclusion. When the negotiations resumed in Geneva, negotiations in key areas followed the same pattern among small groups of delegations, with Mr. Dunkel, at the end of 1991, providing compromise texts in each of the deadlocked areas. While the Uruguay Round negotiations were launched on the basis that decisions would be taken by consensus, Mr. Dunkel, in December 1991, presented a package text (the 'Dunkel text') to a TNC meeting and announced that its parts could be reopened and changed only by consensus.

It must be noted that at the time the TNC met for this purpose, the compromise package text had not yet been distributed to the TNC members, and there had been no express decision that this would be the procedure to be followed. Comments on the text or the procedures were heard and recorded only when the TNC met in 1992.

In the subsequent talks, whenever developing countries raised questions about particular parts, Mr. Dunkel told them to talk to their 'partners' and create a consensus for reopening, a practice continued under his successor, Mr. Peter Sutherland. Wherever the United States or EC requested changes, negotiations were reopened, often in offices of some of the key delegations, and the resulting packages given to Mr. Sutherland, who then presented them to meetings of heads of delegation where they were deemed to have been accepted by consensus (Raghavan 1993c-g). 

During the period of negotiations, some fanciful figures of gains for the developing world were projected to result from the Uruguay Round, and these were used to induce developing countries to come on board.  However, the outcome, it is now recognized, was meagre (Raghavan 1992; 1993b). Another major premise used to induce developing countries to accept the Uruguay Round agreements and the establishment of the WTO and its integrated dispute settlement mechanism was that these would put an end to U.S. unilateralism.   But U.S. unilateralism continues, and whether or not any actual retaliation under U.S. S.301 would survive a challenge at the WTO, the United States still wields the threat of unilateral sanctions, to withhold or restrict market access on goods of countries it considers to have gone against its trade interests.  The chilling effect of this threat is very much part of the reason why so many developing countries have yielded in trade negotiations.

The Uruguay Round negotiations were concluded in December 1993 and the agreements were signed at the Marrakesh Ministerial meeting in 1994.  The WTO agreements include GATT 1994, 12 agreements in the goods area, the General Agreement on Trade in Services (GATS), the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) and the Dispute Settlement Understanding (DSU).

The Uruguay Round resulted in the transformation of GATT into the WTO. The GATT system expanded to incorporate new areas (including services, intellectual property and investment measures) and moved into 'new frontiers.' First, the new issues expanded the GATT mandate to make and enforce rules on issues beyond trade, thereby extending the WTO's authority to subjects beyond trade. Second, whereas the old GATT system made multilateral rules that only affected members' tariff and non-tariff measures (or trade policies 'at the border'), many of the WTO's agreements involve the domestic policies of members as well.  Thus, the 'trading system' has become invasive, in that it now affects some of the critical domestic policies that lie at the heart of development strategy and planning.  The WTO now places limits on whether a country can subsidize its local industries and whether investment measures to boost domestic firms and business can be used; influences the manner in which countries treat foreign investments and foreign investors (through the services agreement); and has also imposed on all members a minimum set of high standards for intellectual property protection.  Third, the WTO has a strong enforcement mechanism through its integrated dispute settlement system, which enables not only retaliation by one member country against another for failing to meet its obligations, but also cross-sectoral retaliation.  This means not only that its rules are more likely to be followed, but also that developed countries have looked on the WTO as a vehicle through which policies in their interest can be disseminated and enforced. 

Meanwhile, it has become clear that the commitments made to developing countries, to persuade them to make such heavy concessions in accepting the new issues, have not been fulfilled.  In the historical descriptions above, it was demonstrated that the products in which developing countries have a comparative advantage have consistently been protected in developed countries. It now appears that history has repeated itself.  The agricultural and textiles sectors continue to be heavily protected, and many other industrial products that the developing countries can export are still facing tariff peaks, tariff escalation and other trade barriers, including anti-dumping actions.

The establishment of the WTO has brought significant additions to the rules of the trading system, and these rules have a stronger enforcement system, thus reinforcing the claim that the WTO is a rules-based system.  However, having rules that can be enforced is one thing; and having good rules that promote balance and fairness in outcome is another.  As this study will show, there are many flaws in the rules of the WTO with serious implications and effects for developing countries.  A strong enforcement system for flawed rules cannot be said to be serving a good function.  Therefore it is of critical importance to assess the rules of the WTO and to rectify their weaknesses.

Following the Uruguay Round, major developed countries attempted to introduce more 'new issues' onto the WTO negotiating agenda. At the 1996 Singapore Ministerial meeting they succeeded in establishing working groups in four areas: trade and investment, trade and competition, transparency in government procurement and trade facilitation. Attempts by developed countries, led by the EC, to launch a new round that would include these issues have been opposed by several developing countries.  Meanwhile, many developing countries put forward a set of proposals to resolve the many problems arising from the implementation of the Uruguay Round agreements.  Failure by members to agree on the contents of a Ministerial Declaration led to the collapse of the 1999 Seattle Ministerial meeting.  In 2000 and 2001, discussions continued at the WTO, with major developed countries intensifying their campaign to launch a new round with the new issues, and many developing countries continuing to make clear their opposition or discomfort to taking on more obligations.  The developing countries have also been disappointed and frustrated that their requests for resolving the implementation issues have so far not been taken seriously by the developed countries.

 

 


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